Innovation subject to sustainability: the European policy on biofuels and its effects on innovation in the Brazilian bioethanol industry

Biofuels are a suitable complement for fossil energy in the transport sector and bioethanol is the main biofuel traded worldwide. Based on the assumption that innovation can be influenced by regulation, the Brazilian bioethanol industry is facing new requirements from external actors while reaching for international markets. Until 2010, national environmental laws were the main sustainability instrument that the biofuel industry faced. With the introduction of sustainability criteria for biofuels in the European Fuels Quality Directive (FQD) and Renewable Energy Directive (RED) of 2009, bioethanol producers have been pressured to innovate in respect of the requirements of future markets. Here, the aim is to analyse the case of Brazil, given the potential exports of sugarcane-based ethanol from this country to the EU. Brazil provides an interesting overview of how a bioethanol industry innovated while facing sustainability requirements in the past. A comparison between the European requirements and the industry ' s status quo is then explored. The EU criteria are likely to have effects on the Brazilian bioethanol industry and incremental improvements in sustainability levels might take place based on the sustainability requirements. In addition, the industry could follow two other paths, namely risk diversification by engaging in multi- output models; and market leakage towards less-regulated markets. At the same time, an environmental overregulation of the biofuel market may make it more difficult for emerging biofuel industries in other countries, especially in Africa, by creating a barrier rather than contributing to its expansion. The results of this analysis show the main challenges to be addressed and the potential positive and negative impacts of the European Union biofuels policy on the Brazilian bioethanol industry.