Explaining the reductions in Brazilian sugarcane ethanol production costs: importance of technological change

Abstract

Over the period 1975–2010, unit production costs of sugarcane ethanol in Brazil declined by 67%, while the per-unit processing costs decreased by more than 70%. This article examines the role of various factors that lead to these cost reductions, including learning-by-doing (LBD), economies of scale, rising input prices, market competitiveness, and exogenous technological changes. Using the aggregate industry-level data, we show that the traditional experience curve approach will lead to biased estimate of the learning effect when economies of scale, rising input prices, market competitiveness, and exogenous technological changes are excluded as explanatory variables in explaining these cost reductions. With the inclusion of these variables and LBD, we find that the reductions in production/processing costs of Brazilian sugarcane ethanol were primarily driven by autonomous technological changes and unrelated to LBD. Economies of scale, market competitiveness, and rising input prices had insignificant impacts on the reductions in production/processing costs of sugarcane ethanol over the sample period.

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