Brazilian diplomats, accustomed to hearing complaints about mismanagement of the Amazon, often seem perplexed when foreigners praise their country’s environmental leadership.

Leadership in what?

In replacing fossil fuels with cleaner renewable energy sources like ethanol from sugarcane, that’s what.

Laura Tetti, a consultant for Brazilian sugarcane growers, has seen the diplomatic puzzlement in sundry international forums. She believes it symbolizes Brazil’s strange attitude about what, from abroad, seems one of this South American nation’s greatest accomplishments.

“The Amazon traumatized [Brazilian leaders]. They don’t place value on positive initiatives,” says Tetti, a partner of JZL Consultoria in São Paulo. “They just don’t want anybody to bug them. They don’t see the environment as an advantage.”

The ambivalence shows. After peaking in the 1980s, Brazil’s sugarcane alcohol industry has declined due to low oil prices and government neglect.

That, however, may be starting to change.

Officials in the state of São Paulo, Brazil’s economic locomotive, have launched an effort to reverse the decline. In August they forged a tripartite, government-industry-labor agreement called Job Pact for Sugar-Alcohol Agribusiness.

The key elements of the accord include: state tax breaks for automobiles that run exclusively on alcohol, an agreement by two automakers (Volkswagen and Ford) to reactivate mothballed assembly lines for alcohol-fueled cars, and a promise from the federal government to boost the mandated proportion of alcohol added to regular petroleum-based gasoline from 24% to 26% and in diesel fuel from zero to 3%.

São Paulo state produces 60% of Brazil’s alcohol fuel. The sugarcane crop accounts for more than half of the local economy in 350 of its cities. Of the 1.2 million Brazilians directly employed by the sugarcane industry, half live in São Paulo. As its name suggests, the pact’s central goal is to preserve the jobs of those folks.

“The disintegration of the sugarcane-alcohol industry would create serious social problems,” said Lourival Carmo Monaco, undersecretary of the São Paulo State Agriculture Secretariat.

São Paulo hopes to export its tripartite model to other sugarcane producing states. Already, its southern neighbor, Paraná, has expressed interest.

Brazil’s biomass revolution can be traced to a now defunct federal program called Pro-Álcool. Brazil began adding traces of alcohol to its gasoline as early as 1924, but only in 1978, in reaction to the global oil crisis, did policy makers sense that sweet smelling resource just under their noses.

Launched during military rule, Pro-Álcool forced automakers to adapt engines to run on alcohol, required 26,000 state-owned filling stations to stock the alternative fuel and boosted the federally mandated amount of alcohol added to gasoline.

Under the old-fangled idea of import substitution, Brazil simply wanted to reduce both its dependence on foreign petroleum and the flow of hard currency to the Middle East.

The idea back then was to save money, not jobs—and certainly not the environment. And it worked. Brazil improved its trade balance to the tune of $37.5 billion from 1970 to 1998 (in 1998 dollars). Accounting for the additional savings on interest on foreign debt not incurred, the savings amounted to $84.3 billion, estimates Plinio Mário Nastari, who runs a consulting firm called Datagro.

Counting its use as an additive and as an exclusive fuel in specially designed cars, sugarcane-based alcohol provides 38.3% of the fuel used by Brazil’s cars and trucks.

To illustrate how far ahead of the rest of the world Brazil is, consider the second-ranking country, the United States, which uses biomass-based fuel for just 1.3% of its transportation-fuel needs.

The 3.6 billion gallons (13.8 billion liters) of alcohol fuel produced by Brazilian distilleries last year accounted for 58.4% of the world’s fermented-fuel production. The second-place United States, using Midwestern corn, produced less than half as much alcohol fuel as Brazil.

And alcohol producers have begun looking beyond automobile fuel. Thanks to the privatization of electrical generation and distribution systems, cane growers are now free to pursue co-generation projects to help Brazil avert looming brownouts.

Thus, Pro-Álcool achieved many of its economic goals. But the environmental side effects, however unintended, have been significant, too. So says a report sponsored by the International Sugar Organization, the Common Fund for Commodities and the Group of Latin American and Caribbean Sugar Exporting Countries.

One of the most important environmental dividends was that Brazil became the first country in the world to completely eliminate the use of lead as a gasoline additive.

Reductions in carbon monoxide, hydrocarbon and nitrogen oxide emissions, meanwhile, improved Brazilian air quality. And the use of sugarcane biomass to produce fuel reduces the burning of agricultural waste, and thus CO2 emissions, by an amount equal to 20% of the country’s fossil fuel CO2 emissions.

Duly impressed, governors from places like Nebraska and Wisconsin have trekked to Brazil for a look.

Despite its success, however, Pro-Álcool was built on a shaky institutional base. Auto manufacturers, service station owners, distillers and other economic actors went along with the program because the military government told them to.

“After [free market reforms] Pro-Álcool lost its base,” Nastari says. “To be self-sustainable, mechanisms must be found that are compatible with the free market.”

As petroleum prices returned to normal in the late 1980s and 1990s, Brazilian policy makers turned their attentions elsewhere. Modest but nascent co-generation efforts aside, Brazil seems to be heading in the wrong direction. Thirty-eight percent of vehicle fuel may seem impressive, but not in light of the 56.9% that alcohol represented in 1988.

And if you’re impressed that 4 million vehicles in the Brazilian fleet run on pure alcohol today, consider this: 96% of the 650,000 cars produced in 1985 ran on alcohol compared to just 0.1% of the 1.2 million automobiles produced last year.

These days, nobody in Brasília seems able to say who runs what’s left of Pro-Álcool. After a recent ministerial shake-up, the germane department was officially transferred from the Development Ministry to the Agriculture Ministry. Ring up the Agriculture Ministry, and they refer you back to the Development Ministry. Call the Development Ministry, and they inform you that everyone’s been laid off.

One can only imagine a flock of homeless bureaucrats camped out on the capital mall midway between the two ministerial towers.

Currently, federal alcohol initiatives are limited to one old and two new measures. An old cross-subsidy of less than 3 cents per liter on gasoline gives alcohol a competitive leg-up, but it faces certain death with the end of the state oil monopoly and the deregulation of the petroleum industry, both of which are scheduled for next year.

This year, the federal government is beginning to offer tax breaks for taxi drivers, who are independent operators, only when they buy alcohol-fueled cars. (Since taxi drivers have traditionally received write-offs for all types of vehicles, this means merely that the government eliminated tax breaks for gasoline-fueled cars.)

Brasília is also requiring that new cars in the federal fleet, with its 16,500 annual turnover, run on alcohol.

Hardly anyone is impressed.

“The federal government has been making fabulous promises for five years and they never do anything,” says Maurílio Biagi Filho, director-president of Usina Santa Elisa, one of the country’s biggest distilleries.

Says J.W. Bautista Vidal, godfather of Pro-Álcool as vice-minister of Industry and Commerce in the late 1970s: “The federal government talks and talks, but what it does is inconsequential.”

Ironically, members of Congress fail to move mostly because their constituents don’t want them to. Bautista estimates that about 180 senators and federal deputies favor biomass incentives, but that still leaves Pro-Álcool partisans way behind in the plenary.

The political problem is this: Sugarcane growers, with their historic links to slavery and rural paternalism, curry little favor with the public.

“Brazil was colonized by sugarcane and it has negative connotations,” acknowledges Tetti. “It is difficult for people to see how the focus has changed, and they forget about the issue of sustainable development.”

And Brazilians never forget the 1990 shortage of alcohol fuel and how their cars stalled in the middle of the road.

“There was no alcohol in Brasília for three days,” recalls José Carlos da Silveira Pinheiro Neto, president of the National Automobile Manufacturers Association (ANFAVEA). “Consumer confidence weakened, and we don’t make cars to sit on the shelf. ANFAVEA is in favor of a program to promote alcohol—to attend the market.”

A market is waiting in the sugarcane producing regions, argues distillery owner Biagi. Locals created an NGO called Aproverde to encourage the growth of the market and to push automakers to supply it.

In partnership with the distributor Esso, Aproverde offered 264 gallons (1,000 liters) of fuel, free of charge, to the first 100 buyers of automobiles with engines that run on pure alcohol. The next 500 would get 132 gallons (500 liters) and another 1,000 would be entitled to 53 gallons (200 liters) each.

Biagi claims that Aproverde discovered 100,000 individuals interested in buying alcohol-fueled cars. ANFAVEA disputes the numbers. Responds Biagi: “The automotive industry lays down the orders in Brazil, and they have other ideas.”

Indeed, critics fret that while France begins to add 5% sugar beet alcohol to its gasoline, California studies replacing the additive MTBE with alcohol in his state’s gas tanks, and U.S. President Bill Clinton announces a biomass program, trailblazer Brazil dithers.

Says Tetti: “Europe is talking about biomass. The United States is talking about biomass. But we don’t see anything along those lines here.”

As production of alcohol fueled cars has plunged, distilleries overproduce and, one by one, go out of business. Excess stocks now total 2 billion liters. With oversupply, the price of alcohol fuel has fallen to less than half of that for gasoline. The number of distilleries has fallen from 500 in the 80s to 400, Bautista says.

Warns Biagi: “Consumers shouldn’t fool themselves. At the current price (a little over 20 cents a liter), there will be shortages because nobody will be producing anymore.”

Biagi’s grim outlook helps explain why the São Paulo state initiative aims to boost the production of cars that run on pure alcohol to just 15% of the national fleet by the end of the agreement in 2005. “Our objective is to re-establish confidence,” says Undersecretary Monaco.

In what might be an early, albeit modest, sign of improvement, Volkswagen last month announced it had sold 3,199 alcohol-powered automobiles from January through August compared to only 710 during all of last year.

The São Paulo pact also aims to encourage the burning of sugarcane biomass for the production of electricity. Until the recent deregulation and privatization of most of Brazil’s power industry, independent energy producers were banned.

Cane growers could prove to be low-cost and efficient energy producers, predicts Nastari. “But it will take awhile until investments are made and come online,” she says.

About a dozen São Paulo distilleries already operate co-generation plants to supply their own energy needs. They’re awaiting the nod from regulators to sell their excess energy.

In August, Santa Elisa and a neighboring distillery, Vale do Rosário, joined forces to realize Brazil’s first energy trade from a co-generation plant. With help from the U.S. energy company Enron, the distilleries are selling energy to the aluminum company Elfusa.

The power is passing through São Paulo state’s newly privatized grid, and Biagi says there will be more to come. “We plan to invest in co-generation,” he says.

São Paulo faces a shortage if it fails to uncover new electricity sources by 2005, predicts Monaco. He also forecasts that the sugarcane industry has the potential to produce 3,000 megawatts—roughly, he says, the size of the projected state energy deficit.

On the face of it, the use of sugarcane biomass for energy avoids the ever-present issue of environment vs. jobs.

Yet most Brazilian sugarcane is picked by hand, thus boosting employment opportunities, especially for poorly educated and untrained workers. To facilitate the harvest, growers partially burn the cane stalks before field hands move in. During harvest season, the skies of many rural areas are thick with soot.

So São Paulo state proclaimed a gradual ban on burning. Given the difficulty of harvesting unburned stalks, growers will have to mechanize. The pact slows the pace of the burning ban, but ultimately thousands of workers will have to abandon the sugar fields.