FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL

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2 FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL Juliano Assunção Breno Pietracci Priscila Souza July, 2016

3 MOTIVATION Local Impacts of Large Investments Large private investments bring considerable economic and social changes to the hosting localities. Changes even more important in rural, sparsely populated and poor areas. Spillover channels rapidly develop. Climate Change Growing effort to decrease greenhouse gas emissions and shift towards renewable energy sugarcane and ethanol production forecast to expand worldwide. Contentious debate on how different energy sources affect producing areas. FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 01

4 MOTIVATION In , sugarcane area: 70% in Brazil 300% in Mato Grosso do Sul State (MS) Surge in ethanol demand Brazil Flexible fuel vehicles Boost credit for auto vehicles 1 st producer of sugarcane 1 st sugar producer and exporter 2 nd ethanol producer and exporter FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 02

5 THIS PAPER Studies the multiple local impacts of mills in MS on: Agricultural land use and Deforestation Economic growth Demography Labor market Financial services Number of sugarcane mills almost tripled in MS. Mills produce sugar, ethanol and bioelectricity. Investments are 130% of the average municipal GDP. Historically inefficient land use in Brazil ( 1/4 of the country is pastureland 1 head/ha). We find a myriad of positive effects related to the entry of sugarcane mills. We find positive spillovers on agriculture and investigate spillover channels. FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 03

6 PREVIEW OF MAIN RESULTS 3 YEARS AFTER THE MILL, IN HOSTING MUNICIPALITIES: GDP 30% Agriculture 65%, industry 45%, services 13% Public administration 10% and fiscal revenues 31% Population 10% Number of firms, labor force education, employment 40%, wages 49%. In particular, 4 industries: Manufacturing Mills Wholesale and retail trade and maintenance Hotels and restaurants Transport, storage and communications FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 04

7 PREVIEW OF MAIN RESULTS 3 YEARS AFTER THE MILL, IN HOSTING MUNICIPALITIES: Land use shifts from pastures to sugarcane. Deforestation Positive spillovers on agriculture Corn and soybean productivity Spillover channels: Larger and more educated labor force Better financial services Better transportation Better agricultural equipment and support activities FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 05

8 PUBLIC POLICY Most countries are currently undergoing major shifts in the energy mix and the impact on producing areas can be varied. Contributions to public policy: In 2015, 164 countries have renewable energy targets and 145 countries have renewable energy support policies (REN21, 2015). Contentious debate on how different energy sources affect producing areas. Which sources should be promoted? Growing policy efforts to both protect ecosystems and use land more productively to meet the increasing global demand for food. Brazil and several other developing countries: historically inefficient land allocation. Bioenergy investments may both substitute fossil fuels and improve land use. Local governments often give fiscal incentives to attract private investments. We examine the deep economic and social changes that large private investments bring to the hosting localities. FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 06

9 RELATED LITERATURE Impact of agricultural productivity on industrial development and effects new agricultural technologies in Brazil: Bustos, Caprettini and Ponticelli (AER, 2016). Environmental effects of ethanol production in Brazil: Sant Anna (2016). Spillover effects across sectors: Bleakley and Lin (2012); Greenstone et al. (2010); Kline and Moretti (2013); Redding et al. (2011); Severnini (2012)). Related policy implications discussed in Glaeser and Gottlieb (2008). In places where land allocation and agricultural production are still inefficient, positive spillovers generated by bioenergy production can potentially outweigh increased competition for land. Negash and Swinnen (2013) for small households in Ethiopia. We find displacement effect of sugarcane on cattle ranching. Parallel in Jia (2008) that describes how economies of scale related to large retail chain openings turn smaller stores unprofitable and driving them off market. Impact of different energy sources on producing areas: Allcott and Keniston (2014); Black et al. (2005); Muehlenbachs et al. (2014). FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 07

10 SUGARCANE INDUSTRY CONTEXT ETHANOL DEMAND BOOM: FLEXIBLE FUEL VEHICLES (FFV S): Technological innovation: 2003: Car could run any arbitrary blend of hydrated ethanol and gasoline Lower production cost Consumers can respond to prices of different fuels. Boost in credit for auto purchases. Fast market penetration in Brazil: 2003: introduction of FFV 2005: sales of FFVs > sales of petrol-only vehicles 2012: 87% of light-duty vehicles were FFVs GOVERNMENT POLICIES: Beginning of Brazilian ethanol: Pró-Álcool program. Currently: 2003: Federal law: gasoline must have ethanol blended (20% to 27%) Taxes on ethanol < Taxes on petrol (CIDE) Taxes on FFVs < Taxes on petrol-only vehicles (IPI e IPVA) FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 08

11 SUGARCANE INDUSTRY CONTEXT BIOELETRICITY: Renewable energy Additional revenue for mills Seasonality complementary to hydroelectricity Production is close to consumption areas (less transmission lines) INDUSTRY BOOM: INCUMBENTS BUT ALSO DOMESTIC AND FOREIGN ENTRANTS Attract investments from: the sugar and ethanol industry itself companies that operated in food processing, agricultural commodities trading, civil construction, oil and gas and banking FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 09

12 SUGARCANE INDUSTRY CONTEXT Sugar and ethanol industry concentrated in the Center-South (mainly in São Paulo). Further expansion opportunities in SP were becoming limited during this period increase costs of land. Investments spread to neighboring states. MS had the largest increase in sugarcane area from 2005 to 2012: number of mills increased 3X sugarcane area increased 4X Mills produce sugar, ethanol and bioelectricity 2,000 tons of sugarcane crushing capacity (2 million barrels of oil) Capital expenditure of USD 130 million employees Investments are 130% of the average municipal GDP FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 10

13 MILLS AND SUGARCANE CROPS IN MS 2005 (8 MILLS: 137 HA) 2012 (22 MILLS: 559 HA) FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 11

14 DATA Panel data: 78 municipalities, Data sources: Brazilian Institute of Geography and Statistics (IBGE): Population, municipal GDP and its breakdown by economic sectors. Municipal Agriculture Survey and Municipal Livestock Survey (IBGE): agricultural land use and output. Global Forest Change (Hansen et al., Science 2013): Landsat satellite data at approximately 30-meter spatial resolution to characterize deforestation. Annual Social Information Report (RAIS, Ministry of Labor and Employment): administrative data on labor force, income and education. Banking Statistics per Municipalities (ESTBAN, Brazilian Central Bank): assets and liabilities per branch. Geographic Data: agricultural suitability - topography, fertility, soil type (Ministry of the Environment), distance to São Paulo, distance to waterway (São Francisco River Basin Committee), river density and river extension (SIGEL, ANEEL), average rainfall and temperature data (Climatic Research Unit University of East Anglia).

15 EMPIRICAL STRATEGY Panel estimation with municipality and time fixed effects Where, = municipality effects = time fixed effects = dummy indicating mill entry Inclusion of leads to analyze pre-trends Inclusion of lags to analyze whether the treatment effect changes over time after treatment FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 13

16 EMPIRICAL STRATEGY Synthetic control method (Abadie et al (2010), Abadie and Gardeazabal (2003)) Method takes a weighted average of untreated municipalities as a synthetic control Weights W = (w 1,...,w J ) of each municipality: chosen so that the synthetic municipality most closely resembles the treated municipality before the new mill Vector of weights W* is chosen to minimize: (X 1 -X 0 W) V(X 1 -X 0 W) predictors where X 1 : (K x 1) vector of K pre-mill outcome predictors in the treated municipality X 0 : (K x J) matrix of the values of the same variables for the J controls V: diagonal matrix with nonnegative components reflecting the relative importance of the different Matrix V is chosen such that the real outcome path for the treated municipality before the mill is best reproduced by the resulting synthetic municipality FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 14

17 EMPIRICAL STRATEGY Evolution of the outcome for the resulting synthetic control group is an estimate of the counterfactual (it is an estimate of what would have been observed for the affected municipality in the absence of the mill). Then counterfactual outcome (in the absence of the mill) is: Y* 1 =Y 0 W* where Y 1 : (T x 1) vector with the values of outcome values for T years in the treated municipality country. Y 0 : (T x J) matrix whose elements are the values of the outcome variable for T years in the control municipalities Average effect over all treatments is G ˆ g j 1 G where g є [1,...,G] index treated units. For each treatment, generate a set of placebo effects PL is taken from each. ˆg PL ˆg. Construct all possible averages were a single placebo Inference: p PL i 1 value Pr( ) N PL 1( PL( i) N PL ) FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 15

18 IMPACTS ON SUGARCANE HARVESTED AREA AND OUTPUT FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 16

19 SYNTHETIC CONTROL SUGARCANE AREA TREATMENT AT T-2 TREATMENT AT T-3 Donor Poll: Municipalities Without New Mill Donor Pool: Municipalities Without New Mill, Excluding Those Affected Within 50 Km from a new mill

20 SYNTHETIC CONTROL SUGARCANE OUTPUT TREATMENT AT T-2 TREATMENT AT T-3 Donor Poll: Municipalities Without New Mill Donor Pool: Municipalities Without New Mill, Excluding Those Affected Within 50 Km from a new mill FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 18

21 AGRICULTURAL SPILLOVERS (LAND USE) FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 19

22 AGRICULTURAL SPILLOVERS (OUTPUT) FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 20

23 AGRICULTURAL SPILLOVERS (THOUSAND TONS) (THOUSAND TONS) NOTE: SIGNIFICANCE *** P<0.1, ** P<0.05, *P<0.01. NET RESULT 2 ASSUMES A PRODUCTIVITY RATIO OF ONE CATTLE HEAD PER HECTARE (1:1). 90% CONFIDENCE INTERVALS. FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 21

24 CATTLE AND PASTURELAND IN MS FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 22

25 AGRICULTURAL PRODUCTION VALUE FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 20

26 DEFORESTATION INITIAL FOREST COVER DEFORESTATION 2001 TO 2012 FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 22

27 TREE COVER AREA FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 20

28 FULL TREE COVER EQUIVALENT AREA FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 20

29 IMPACTS ON REAL GDP AND POPULATION GROWTH FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 23

30 SYNTHETIC CONTROL LOG OF GDP TREATMENT AT T-2 TREATMENT AT T-3 Donor Poll: Municipalities Without New Mill Donor Pool: Municipalities Without New Mill, Excluding Those Affected Within 50 Km from a new mill FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 24

31 SYNTHETIC CONTROL LOG OF POPULATION TREATMENT AT T-2 TREATMENT AT T-3 Donor Poll: Municipalities Without New Mill Donor Pool: Municipalities Without New Mill, Excluding Those Affected Within 50 Km from a new mill FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 25

32 IMPACTS ON GDP BY ECONOMIC SECTOR FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 26

33 IMPACTS ON NUMBER OF FIRMS AND EMPLOYMENT FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 27

34 IMPACTS ON WAGES AND EDUCATION FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 28

35 IMPACTS ON LABOR MARKET - AGRICULTURE FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 29

36 IMPACTS ON LABOR MARKET - INDUSTRY FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 30

37 IMPACTS ON LABOR MARKET - SERVICE FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 31

38 IMPACTS ON LABOR MARKET BY ECONOMIC ACTIVITY AT Τ+3 FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 32

39 IMPACTS ON LABOR MARKET BY ECONOMIC ACTIVITY AT Τ+3 FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 33

40 IMPACTS ON LABOR MARKET BY ECONOMIC ACTIVITY AT Τ+3 Increase in: Mining of chemical and fertilizer minerals Manufacture of sugar Cattle slaughtering Manufacture of fertilizers and nitrogen compounds Repair and maintenance of tractors and agricultural machinery Repair and maintenance of electrical equipment Production and distribution of electricity Repair and maintenance of motor vehicles Manufacture of other chemical products Production and distribution of electricity Wholesale of agricultural raw materials Wholesale of agriculture machinery and equipment Wholesale of fertilizers and agrochemical producers Restaurants, bars and canteens Freight transportation Warehousing and storage Renting of agricultural machinery and equipment Decrease in: Tanning and dressing of leather FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 34

41 IMPACTS ON PRIVATE DEPOSITS AND RURAL CREDIT FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 35

42 IMPACTS ON FINANCIAL SERVICES FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 36

43 ROBUSTNESS TO SPILLOVERS IN NEIGHBOURING MUNICIPALITIES Excluding from donor pool untreated municipalities within 50 km from new mills and with sugarcane fields in FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 36

44 CONCLUSION 3 years after the mill, in hosting municipalities: GDP 30%, Population 10% Number of firms, labor force education, employment, wages Land use shifts from pastures to sugarcane. Deforestation decreases. Positive spillovers on agriculture Corn and soybean productivity Spillover channels: Larger and more educated labor force Better financial services Better transportation Better agricultural equipment and support activities FUELING DEVELOPMENT: SUGARCANE EXPANSION IMPACTS IN BRAZIL 37

45 THANK YOU inputbrasil.org