Environmental campaigners and some lending groups are warning against a new euphoria on biofuels, and especially sugar cane ethanol, in the wake of US president George Bush’s tour of Latin America .
The search for alternative fuels and the reduction of dependency on oil has to be carefully planned, they say. Plans to invest billions in the sugar cane industry, especially in Brazil , have emerged within the past 10 days.
A $2 billion Brasil Energy fund to invest in ethanol is being launched by Henri Philippe Reichstul, former president of Petrobras , Brazil ’s state controlled oil company. Former World Bank president James Wolfensohn, Sun Microsystems founder Vinod Khosla, and AOL’s Steve Case are among the sponsors. The initial target is to invest $200 million in 10 plants within two years.
Private equity investors are rushing to invest in what is still a very fragmented market. “There is some kind of hype,” said Joseph Boven, first vice president of the German development financing group DEG. “We have some appetite, but you have to pick the right projects.”
Peter Pfaumann, an expert in rural development from the German development agency GTC who has been advising the IDB said: “It’s a bit like a gold fever.”
Alcides Faria, executive director of ECOA, a Brazilian environmental group, told Emerging Markets that ethanol “is being presented as a great solution, but we still need a rational debate”. There is “a lack of technical discussion on the way that South America should go”.
Potential side effects include an increase in food prices, and an expansion of the agricultural border towards environmentally protected areas. “Soon, you’ll see that deforestation will start to increase again, due to the indirect impact of sugar cane and ethanol expansion,” added Faria.
Sugar cane has already substituted soy plantations in some areas, which have pushed those further inland.
Meanwhile, Brazil , which is the main producer of ethanol in Latin America , expects the IDB to take an active part in financing the development of ethanol production. “The IDB is well capitalized and is in a position to help with new financing,” said Paulo Bernardo Silva, Brazil ’s planning minister.
“The IDB is considering financing such an alternative for the economies of the region.” Ethanol production would be required outside Brazil “if developed countries decide to use it on a larger scale”, he said.
Luis Alberto Moreno, president of the IDB, told Emerging Markets: “Biofuels is one the pillars of our sustainable development strategy.” Moreno , who is a co-chairman of the Interamerican ethanol commission, which promotes the expansion of ethanol in the region, added: “We intend to help countries to develop their own strategies on the use of biofuels.”