Can Biofuels be an Engine for Growth in Small Developing Economies – The Case of Paraguay

Abstract

This analysis examines the feasibility of setting up a biofuels sector in Paraguay. As a small agriculturally-based country, Paraguay can serve as an interesting test case for the feasibility of creating ethanol in other small developing countries, such as those in Central America. Our analysis is inspired by previous work on the remarkable success of Brazil’s ethanol industry (Hira, 2009). More than 80% of Brazil’s cars can run on a spectrum of gas and alcohol blends based on local sugarcane supply and processing. Ethanol reduces dependency on politically volatile and expensive petroleum imports. The International Energy Administration, along with other recognized international energy institutions, states that while demand will continue to increase over the long-term, prospects for supply meeting that demand “are extremely uncertain (IEA, 2008, 3).” A viable biofuels sector could help Paraguay to improve energy security and reliability, spur economic growth and reduce external dependence, improve employment and rural development, possibly create a new export industry, and reduce greenhouse gas emissions. We focus here on sugarcane ethanol. Sugarcane ethanol is the most attractive option, the only feedstock currently providing an economically feasible substitute at an estimated oil price of $70/barrel, and is more environmentally friendly than other feedstocks as waste is burned for electricity cogeneration. Sugarcane ethanol also produces less carbon emissions than petroleum. As a recent report states, there is no explicit policy at present for biofuels in Paraguay (IICA, 2007, 54). This report is based on secondary analysis and field research conducted during July 2009. We note here the severe constraints on primary data, requiring a more qualitatively-oriented approach. We organize our analysis around an examination of the following factors: agricultural, economic, and governance. The problem of sustainability must be addressed by any plan along with economic/financial feasibility, however, we believe that this question is adequately answered in a number of analyses that demonstrate that sugarcane ethanol, if conducted with safeguards, is a net reducer of carbon emissions (Goldemberg, 2007).