Abstract:Petroleum may be replaced in the transportation sector by two types of fuels: those which have physical and chemical properties similar to petroleum (e.g. shale oil, tar sand, and directly liquefied coal liquids), or those which have dissimilar properties (e.g. ethyl and methyl alcohol, natural gas and hydrogen). The replacement of petroleum with a dissimilar fuel is much more complex and difficult because the different physical and chemical properties require extensive changes to the fuel distribution and end-use systems which were developed for petroleum. Thus, the acceptance of dissimilar fuels faces greater obstacles than petroleum-like fuels even when they are less polluting, have higher octane ratings, and/or are less expensive to produce. The cost and complexity of changes to the fuel distribution and end-use systems have been key factors inhibiting the introduction of dissimilar fuels in a number of countries. One country, Brazil, has introduced a dissimilar fuel (ethyl alcohol) into its transportation sector; its experience in dealing with the technological, institutional, and economic barriers to ethyl alcohol (ethanol) is the subject of this paper. The objective of this paper is to describe and analyze the events, motivations, and forces that led to the introduction of ethanol in Brazil, and to discern important lessons that might be relevant for other regions and countries as they contemplate a transition away from petroleum transportation fuels. It is shown that the pursuit of ethanol fuel in Brazil was not based on long term plans or deep-seated values, but was an ad hoc response to a particular set of circumstances: a large depressed sugar industry, an ambitious domestic auto industry, and mounting foreign debt. It is also shown that, as in the U.S. and elsewhere, the initial introduction of ethanol (in an ethanol-gasoline blend) was easily accommodated. Technological and institutional barriers were negligible. The next step, however, the use of straight ethanol, crosses a threshold into an inherently unstable situation. The principal cause of this instability is consumer uncertainty. It follows that the role of government is to reduce consumer uncertainty about the future; if it does not do this, the transition to non-petroleum fuels is delayed well beyond the time when the market would otherwise elicit investments.