Can Second-Generation Ethanol Production Help Decarbonize the World?

BRIAN KENNY: In December of 2023, over 200 delegates representing 32 nations gathered in Dubai for the 28th annual United Nations meeting on climate called COP28. As usual, the conference focused broadly on limiting and preparing for future climate change. So, staging it in a country whose economy relies on fossil fuel exports was either apropos or ironic, depending on your point of view. What everyone seems to agree on is that things are heating up. 2023 was the warmest year on record with temperatures nearly crossing the critical threshold of one and a half degrees celsius. The delegates also agreed that alleviating our dependence on fossil fuels could be a big part of the solution, and that is pretty much where the agreement ends. Leaving questions about how best to transition and how fast unanswered. Today on Cold Call, we welcome Professor Gunnar Trumbull and case protagonist Paula Kovarsky to discuss the case “Raízen: Helping to Decarbonize the World?” I’m your host, Brian Kenny, and you’re listening to Cold Call on the HBR podcast network. Gunnar Trumbull is an expert in political economy with a focus on consumer and regulatory politics. He currently focuses his teaching and research on climate change. Paula Kovarsky is the chief strategy officer at Raízen where she oversees strategy, sustainability, and mergers and acquisitions and she is the protagonist in today’s case. Welcome both of you.

GUNNAR TRUMBULL: Thank you.

PAULA KOVARSKY: Thank you.

BRIAN KENNY: It’s great to have you both here. We love having the protagonist in the room, Paula, so it’s great to have you here. We’re taking advantage of you being on campus for the Agribusiness Seminar, which I’m going to ask Gunnar to describe in a minute. But I think this case, like many others that we’ve discussed on Cold Call over the years about is sort of centers around sustainability and different methods of achieving that. And so, I think this case is going to be very interesting for people to hear because we’ve done many on EVs. That seems to be a really prominent theme, particularly in the US. We’ve never done one on the kinds of approaches that you’re taking, so I think people will be interested in hearing about that. Gunnar, let me ask you to begin by telling us what the central issue is in the case and what your cold call is to start the discussion.

GUNNAR TRUMBULL: So Raízen is the largest sugar producer in the world. They process a hundred million tons of sugar cane a year, and when you make sugar out of sugar cane, there’s enormous byproduct that’s called bagasse that’s mostly this kind of cellulose fiber. If you can imagine squeezing cane to get the sugar out. What’s left over is they, Raízen and other sugar producers, burn it to produce electricity, but it’s really just a byproduct. What this company is doing, they’re really out ahead of everybody else in processing this bagasse in using new technologies, enzymes, yeast that are specially designed to create an ethanol that has a very low carbon footprint. And that’s really exciting because as you think about the challenge of climate, having a very low carbon source of something that looks a lot like fuel or can be converted into different kinds of fuels easily is like a gold mine. And the other thing about this case is that it’s really expensive to do this stuff. And so Raízen is planning on spending almost $5 billion to develop 20 plants to do this. And I’m just fascinated by how a company makes that kind of decision and how they think through the risks and the opportunities. And so, it was really fun to have Paula join us in the classroom. The Agribusiness Seminar is a set of executives who come on campus every year. They’re up and down the agribusiness supply chain. In fact, even Ray Goldberg, who’s on our faculty basically invented agribusiness. He was there in the classroom with us as well.

BRIAN KENNY: Fabulous.

GUNNAR TRUMBULL: So, it was a great setting to talk about this.

BRIAN KENNY: Ray is actually, he was the guest on one of our most popular podcasts ever about a case that he wrote about Wegmans Supermarkets, and it’s still in the top five of all of our episodes. So, Ray’s great. So, one of the questions that I think would be interesting for people to know is how do you start the conversation? What’s the topic you’re trying to get at?

GUNNAR TRUMBULL: The cold call we have is I ask the participants to put themselves in the position of the board members of Raízen. They’re the ones who have to approve this venture and ask them whether they’d support it or not. And the real point is to get at just how hard these decisions are around new technologies related to climate change. There’s a lot of capital involved. The technologies are new. Other companies have tried similar things and not succeeded. And so, there’s some headwinds here, and yet the opportunity is also enormous. And those are the kinds of discussions I was hoping to stimulate in the classroom.

BRIAN KENNY: And you’re looking at a huge buy-in from up and down the supply chain. Like you mentioned, Raízen can’t just do this on their own. They’re depending on suppliers and other people to work with them. So, it’s pretty complicated, pretty fast. Paula, let me turn to you for a second and just ask you simply, how would you describe Raízen’s business?

PAULA KOVARSKY: Yeah, Raízen is actually third largest Brazilian company. It was formed back in 2011 in a JV between Shell and Cosan, which is one of the largest Brazilian conglomerates. So Cosan had mills and some fuel distribution. Shell had fuel distribution and was interested in green upstream. So that’s how we formed Raízen, which means roots and energy…free translation here.

BRIAN KENNY: That’s great. Tell us a little bit about the goal that you have to decarbonize, not just the company, but the world. It’s a very ambitious goal.

PAULA KOVARSKY: Yes, it is. Actually, ethanol is a pretty interesting success case in terms of decarbonization if you think about it. What we did in Brazil without any EVs whatsoever. But if you go to Sao Paulo, if you land in Sao Paulo compared to any city around the world, the air is cleaner. And that’s because we use the E100. So, we have cars running at a hundred percent ethanol and we have a 27 and a half blend of ethanol into gasoline. And when you think about sugarcane, sugarcane is probably the most efficient plant in converting solar energy into renewable carbon. And so, what we’re trying to do is go beyond the first third of the sugar cane, which is the juice of which we produce sugar and ethanol. Then we have the bagasse which we use a part of it for power generation to feed our meals, and then we have the straw. So, the idea is that we can use the other almost half of the energy of the sugar cane, which is unused. And that’s where the whole concept of using the byproducts or the wastes of the process comes in. We can produce 50% more ethanol with another 50% lower carbon footprint without adding a single hectare of land. So, there’s no competition whatsoever with food, which is another dilemma of this biofuels thing. So that’s kind of what we’re trying to do. We’re trying to extract the most out of the sugar cane, which is already the most efficient plant.

BRIAN KENNY: And it makes me wonder, again, I mentioned the fact of it, we’ve done a lot of EV cases here, why this isn’t a more prominent solution out there, why people aren’t talking about this approach more.

PAULA KOVARSKY: I wouldn’t call it a more prominent, I think it’s a solution that fits amazingly well to the situation in Brazil, and that will be a journey in which it will shift over time. Why am I saying that? If you compare 100% ethanol cars that we use in Brazil, carbon emission per square kilometer per kilometer run or per megajoule is pretty similar to an EV in Brazil if you go through the lifecycle analysis, the full life cycle analysis. So, Brazil has a bunch of other challenges, microeconomic challenges or budget challenges. So eventually putting a lot of money to work into EVs at this point in time might not be the ideal thing to do, which doesn’t mean EVs won’t happen or we are against EVs. But instead, for instance, we could use hybrid cars. If we use hybrid cars, they’re probably 30, 40, 50% more efficient. So that means the carbon footprint reduces accordingly. So, there might be a different journey. For other countries around the world where either you don’t have ethanol production or the easiest way to decarbonize is through the grid and then use EVs or in a country like China that is creating an automotive industry out of EVs, then it may make sense. So, the point to us is there’s definitely no solution fits all. We better use them all. The challenge is massive. And again, as in when electrification becomes really a mass thing, which according to the researchers that I’ve seen, it will take quite a long time.

BRIAN KENNY: It’ll take some time.

PAULA KOVARSKY: I would say biofuels have an important role to play, and even we are talking light fleet too now. But light fleet is just one part of the story. We need to think about the hard to abate sectors. What about sustainable aviation fuel? There seems to be no way there’s going to be long haul aviation running on electric or hydrogen until 2050 or so. So, we need the liquids. There’s petrochemicals, there’s even marine fuel. So, we think there’s a very interesting journey for ethanol regardless of how fast EVs progress.

BRIAN KENNY: In fact, an electric vehicle has to be built in a very different way than a carburetor, an ice vehicle. What’s the case with ethanol powered vehicles? Do you have to change the manufacturing process a lot or is it pretty much just retrofitted?

PAULA KOVARSKY: Yeah. One important thing for the blending, so the 27 and a half blending that we have in our gasoline in Brazil, tell you what, the same Land Rover that runs here in the US or the BMW is the very same engine that runs in Brazil at 27 and a half. So, the argument there is a corrosion or a maintenance issue is unproven.

BRIAN KENNY: Yeah, okay.

PAULA KOVARSKY: For the a 100% ethanol, there’s a lot of twist in the engine, but it’s not the big deal. It’s still a combustion engine.

BRIAN KENNY: Okay. That’s another point in favor of ethanol. I’m keeping score here. The case talks about this very, very ambitious effort to build 20 plants. I’m not sure how many plants Raízen had at the time that the case was written. But it makes you wonder, is this even possible? Even if you had the capital, how do you scale up that quickly?

GUNNAR TRUMBULL: They face a challenge that so many of these green transition technologies face, which is first they have to test the technology and get it operating. And then once we have the proven technology and it operates, then we have this massive scaling question. Because this product, if they can make this first commercial scale plant work, and they’re I think right, we’re in the middle of that process now. If they can make it work, it really is almost like gold because it’s a product that both is very low carbon that can go into existing equipment. So, we don’t need a bunch of new infrastructure. And because it’s made with a food byproduct, it doesn’t directly compete with the food supply. And that sort of checks all the boxes. When Europe, for example, is trying to figure out how they’re going to make this transition, they’ve set aggressive targets. It’s not obvious. So, they have aviation abatement targets, for example. It’s just not clear how they’re going to get there. And there’s going to be enormous demand for this product if they can show it works. And so, the scaling is the big deal and Raízen is a big company and they have access to capital, but they can’t do it alone. One thing that fascinates me thinking about this transition is that for companies like Raízen, they have to really do two things. They have to create and sell a product, but they also have to make a whole new market for that kind of product. And so, they’re in the business of creating a new marketplace, and they’re in a good place to do that because they already are the world’s biggest trader in ethanol in sort of general sugar produced ethanol. But to have a market, you need a bunch of actors. You can’t just have one firm making this stuff. And so, they’ve got to figure out how to get the technology out to other companies through joint ventures, through licensing agreements. And they are in the middle of discussions of that kind right now, even as they’re still proving the technology in this factory.

BRIAN KENNY: How much of this, Paula, is sort of an educational effort for you too? I mean, it almost seems like you need to teach people about what this is and why it’s so important. And particularly if your goal is to become this sort of global green energy champion, how do you go about educating the…

PAULA KOVARSKY: Education is a big challenge. We have to talk about something that is for the time being very unique of Brazil. So, sugarcane ethanol is very unique of Brazil. You have sugarcane sugar in other places and then you have corn ethanol in the US which has been somewhat criticized. And I spend a good deal of time here in the US talking to people, trying to talk about the sugar cane ethanol. And when I said ethanol, they say, “Oh, turn the page. Let’s talk about hydrogen.” So, it’s indeed a very important educational process. And more so one has to take care of the metrics to do the qualification on how much carbon are you reducing in fact? Which by the way means: how much should you be paid for? And the truth of the matter is that most of the intellectual developments happen in the northern hemisphere, which has temperate climate. And so, some of the calculations were done based on temperate climate, but we are a tropical country and the climate makes our agriculture a lot more efficient, which then means lower emissions. So, there’s a real task in terms of educating, creating the right metrics and so on and so forth.

BRIAN KENNY: And the efficacy sort of depends on where you are in the world.

PAULA KOVARSKY: To some extent that’s why it’s so important for us to be in this Agribusiness Seminar and get people from agribusiness to understand what we’re trying to do.

BRIAN KENNY: Yeah. Of course.

GUNNAR TRUMBULL: For me, this is really one of the learnings of this case. I think up until now we’ve often thought about climate as sort of driven by Europe and the US. So, the technologies come from there and then get disseminated to the world. We just don’t live in that world anymore. So, every country in the world, especially a lot of the important middle income countries and developing countries, Brazil, but also India, China are really innovating and pushing forward new technologies in this area, and we’ve got to start paying attention to what they’re doing going to be an important driver of the decarbonization formula.

BRIAN KENNY: The case does raise this ongoing debate about food versus fuel. And I wonder if either of you could just expand on that a little bit because we’re talking about biofuels here. You’re talking about sugar, which is a product that we consume, or corn, which is another product we consume. How do you wade into that debate?

PAULA KOVARSKY: To start with, when you think about what we call the first-generation ethanol, which is the regular energy crop. So, there’s actually a limit of maybe 15% that you can’t make into sugar. So, to start with, this little part is not competing, but that’s maybe hard to argue. But then when you go for the second- generation ethanol, the more sugar we produce, the more second-generation ethanol we will do, because there’s going to be more of bagasse and vice versa. So, it’s a great thing. And still when we think about the efficiency. Again, sugarcane planting is about 1% of the Brazilian territory, but the energy between the ethanol and the power actually accounts for almost 20% of the energy matrix. So, it’s massively efficient, and Brazil is responsible for maybe 50% of the global sugar trade. So, it’s kind of not food versus fuel, it’s kind of food and fuel in this case. And that’s what we are so positive about.

GUNNAR TRUMBULL: This potential tension is especially sensitive in Europe. So European policy makers and the general public are really concerned that if we start using food sources to convert to energy, that we’re going to be taking food away from growing populations of the world. And so for example, palm oil, which is another potential source of fuel, Europe, is about to shut down palm oil imports entirely because they think they’re taking away really the cheapest, best edible fat for developing countries in the world.

PAULA KOVARSKY: Deforestation issue, which also does not apply whatsoever. We are a thousand plus kilometers away from the Amazon, let’s be clear.

GUNNAR TRUMBULL: The sort of underlying economic logic of the project that Raízen is undertaking, it’s all really anchored in a set of sales contracts, off take agreements that they’ve signed with Europe. And you can see why Europe is so interested in this because it totally circumvents, it gets them away from this question about whether they’re competing with food supply or not.

PAULA KOVARSKY: Yeah. Maybe talking a little bit about the process. So, we formed Raízen in 2011, inherited the technology from Shell, but it was really the lab version of the technology. And then we decided to put on a kind of pilot plant of almost 40 million liters, we’re producing 30 million already, so this is up and running and selling. But we faced a bunch of challenges. Of course, starting from the fact that when you take the sugarcane to the lab, it’s pretty clean and neat and whatever. And then when you do it in real life and at scale, it’s a completely different story. So, you have to deal with the impurities, with rocks, with whatever. And so, we developed this thing and between 2015 and ’18, we improved the efficiency of the plant by about 80%. So, by 2018, we said maybe we’re ready to start thinking of scaling up. But at that point, the argument was still, we will only do it if we manage to prove that the second-generation ethanol can be, I mean, cost can be competitive to first generation, and it’s not, at least not in the first 10 years because of the capital commitment. But then we continue to develop the process. I mean, it’s unique. We are the only company around the world that managed to do it at industrial scale more because of the pre-treatment and the process than the enzymes per se, which seems to be more of other companies believe. And because we focused in a single biomass as opposed to trying to do for many, and it’s different. But then time evolves and we get to 2019, 2020, and we have the pandemic, and then we have the boom of we need to fight climate change and so on and so forth. And then we say, “Okay, let’s go out to the market and then let’s see if we can find a price that makes this thing fly.” And by the way, we need bankable contracts because the capital pile is huge, and we ended up being successful in signing long-term agreements, which is pretty unique in this kind of business. So, we have seven-to-10-year type contracts with the very usual suspects like the AAA energy companies, with a floor price that allows us to take that risk. As we move forward, we are pretty confident that we can improve further the efficiency of the process, and we are actually learning along the way. So, we have this 30 million production up and running, second one being commissioned now, another four under construction. Nine out of the 20 plants are sowed. And of course, as we manage to sign more contracts, we’ll kind of put on the queue, the next plans.

BRIAN KENNY: Are you limited by virtue of your geography to the extent that this works by and large, because you’re in a place with the right climate, with the right resources that are near you. But if you really want to expand this and scale it on a global level, is that supportable? Could you do this same thing, for instance, in another part of the world?

PAULA KOVARSKY: The answer is we’re starting in Brazil, but we have ambitions of doing in other parts of the world. So, India would arguably be the first candidate as sugarcane-based sugar producer. There’s a couple of challenges there given how fragmented the sugar cane industry is. Then you have a large production in Thailand, and even in the US we’ve been talking to sugar producers in Florida and Louisiana to see if there is a case for that here.

GUNNAR TRUMBULL: I just wanted to, let me just pull back for a moment and emphasize how different I think this story is that Paula just told, from how we used to think about the response to climate change. I think we used to imagine all of these kind of Silicon Valley startups with new technology coming in, disrupting sectors where the incumbent firms in the sectors would resist them because they were threatening their business model. And it turns out that big pieces of this transition don’t look like that at all. So Raízen for example, they already have the feedstock they need for this process. They already know the customers and have access to the customers. They run the ethanol marketplace. They can attach this facility to an existing sugar facility so that the capital cost is lower. They have all the engineers who know how to do it. So, these incumbent firms actually have real advantages. And I think one of the reassessments of how this decarbonization transition is going to happen is that we have to really start paying attention to the role that these old firms are playing in the process.

BRIAN KENNY: Yeah. It’s the whole idea of innovation really at work in large incumbent firms. So don’t count them out, I guess is the message there.

GUNNAR TRUMBULL: And even more than that for me, these are the firms I’m betting on. I think they really are the ones who are pushing this process forward.

PAULA KOVARSKY: Raízen is actually a pretty young firm. We are, like, 12 years old.

GUNNAR TRUMBULL: So how old are you? Oh, Raízen.

PAULA KOVARSKY: We’re founded in 2011. But there’s a bunch of Shell people and Cosan is ninety years old.

GUNNAR TRUMBULL: So, the sugar plant I visited is ninety years old.

PAULA KOVARSKY: Ninety years old, yeah.

BRIAN KENNY: Yeah, yeah. And so, you know how to do the agriculture part, and that is where it all begins is with the agriculture piece. And you have the right setup to do that, which is critically important. Gunnar, I want to come back to you again and talk about the options for expanding the market for E2Gs. What does that look like? What are some of the things that Raízen could be considering?

GUNNAR TRUMBULL: So first in just the sugarcane piece of it, which is really where their intellectual property matters. I think one thing that they correctly perceived is that different kinds of biomass require different technologies and capabilities. And so, their capabilities are really specialized on sugarcane, and it’s one of the reasons I think they’re kind of out ahead of other people. Just in sugarcane, there are enormous opportunities, so there’s excess bagasse that they won’t be processing of their own they can use. There are other sugar producers in Brazil that they can work with. Those sugar producers are sitting on the sideline right now watching what Raízen is doing. And if this works, and we’ll probably know that this summer they’re going to be ready to talk…there are sugar producers around the world. So already that’s a pretty big market. One thing that’s really exciting though is that there is almost a platform sort of play or possibility here because they’re the big ethanol trader in the world. If you want to go out and buy ethanol, you talk to Raízen and they’ll facilitate the transaction and there’s a real chance that they could become a kind of decarbonized or low-carbon ethanol kind of broker in the world, which would extend them beyond sugarcane to other kinds of ethanol, and they could set the standards in that market. We’re talking a little bit further out, but you can imagine really a pretty significant role in creating and running this marketplace.

PAULA KOVARSKY: And I think there’s a couple of ways in further expanding that. Because yes, first-generation ethanol is number one, second-generation ethanol is number two. But then we are pretty confident that ethanol is going to be a very important player in sustainable aviation fuel. Petrochemical seems to be a pretty interesting market for us. Marine fuel can be a very interesting market for us. So not only we want to be known and perceived by the ethanol player, but it’s also the low-carbon fuels possible supplier. And then back to the point of expanding globally. And indeed we need other sources of feedstock around the world. One for the very simple fact that maybe countries won’t be willing to depend or rely on a single country only. And so, the success of other stories and other companies around the world is actually a good thing.

BRIAN KENNY: Of course.

PAULA KOVARSKY: We’re not afraid of that. The opposite. The demand is so damn big that, knock on wood, others will be able to do it, or we will license our technology and do in other countries, and this is going to be a positive thing, you see?

BRIAN KENNY: The question of deforestation is one that also surfaces in the case and people’s concerns about what we’re doing to the environment in order to get where we want with our decarbonization goals. How do you address that at Raízen?

PAULA KOVARSKY: Yeah, no. Well, the first thing is we are way far away from the Amazon. It’s actually mostly in the southeast. In fact, we have data showing that in cities or municipalities where we have sugar cane production, the forested area has actually grown. In fact, there was a policy in Brazil in the fifties of deforestation because of malaria and things like that. So, the sugarcane industry actually helped reforest state if the word exists.

BRIAN KENNY: It does now. You said it.

PAULA KOVARSKY: Yeah, yeah. So that’s one point. The other thing is if we look at how much carbon we capture over the last 20 years, it’s going to be like 200 million tons of CO2 equivalent. That’s like a thousand soccer fields. A soccer field is a unit of measure in Brazil, as you can guess. So, a thousand soccer fields or 80 times the city of Paris in forest planted equivalent. So, it’s massive. It’s a very circular type of agriculture because not only we’re using the full content of the energy, but we also go back to the field with the vinasse and the filter cake and the fertilizer and it’s low intensity in water. So, it’s pretty sustainable thing that we are doing. And even, I would say, 99% of the planting has happened in areas that were already used for other things than forest over the last 20 years as well. So, this is something, the question will always come, but it’s something that is really not an issue.

BRIAN KENNY: Of course. This has been a great conversation as I knew it would. I’ve got one question left for each of you, and I’m going to start with you, Paula.

PAULA KOVARSKY: Okay.

BRIAN KENNY: I’m wondering how you think about success. If you were to look out over the next few years, what would success look like?

PAULA KOVARSKY: Yeah. We recently tried to do that exercise and tried to do that. Eliminating the restrictions, which doesn’t mean being a dreamer. It means let’s think big and then work backwards to see, how do we bridge the restrictions. And quite frankly, we would definitely like to be the reference in low-carbon fuels supplier globally. Big time.

BRIAN KENNY: Okay. All right. So, you heard it here first. Gunnar, let me leave the last word with you. I read the title, I think, correctly. It has a question mark at the end of it, so I’ll read it again just in case our readers forgot. But the title of the case is: “Raízen, Helping to Decarbonize the World?” So, I guess the question is, are they, and what would you like people to remember about this case?

GUNNAR TRUMBULL: What I find so fascinating about this case is that what Raízen is doing could be just one example of actually many different sectors and industries in Brazil to begin with, but we could also think about Indonesia and other countries that used to export all the commodities we need. So, the hardwoods, the energy. I can imagine as we go through this transition in Europe and the US and other countries are really pressed very hard to decarbonize, countries like Brazil could become big exporters of decarbonization services and products. And so, they could use the resource they have in the Amazon to capture carbon and sell offsets. They can generate bioproducts that are decarbonized, and that idea that they could export solutions to the climate problem, I think is really exciting. And it points in a direction where responding to climate can create real opportunity, not just in Europe and the US, but really in a bunch of countries around the world.

BRIAN KENNY: Yeah. Paula, Gunnar, thank you for joining me on Cold Call.

PAULA KOVARSKY: Thank you so much for inviting me.

GUNNAR TRUMBULL: Thank you, Brian.

BRIAN KENNY: If you enjoy Cold Call, you might like our other podcasts, After Hours, Climate Rising, Deep Purpose, IdeaCast, Managing the Future of Work, Skydeck, and Women at Work. Find them on Apple, Spotify, or wherever you listen, and if you could take a minute to rate and review us, we’d be grateful. If you have any suggestions or just want to say hello, we want to hear from you. Email us at coldcall@hbs.edu. Thanks again for joining us. I’m your host, Brian Kenny, and you’ve been listening to Cold Call, an official podcast of Harvard Business School and part of the HBR Podcast Network.