SAO PAULO (Reuters) - An overhaul of Brazil’s biofuels policy in coming days, aimed at cutting the country’s carbon emissions, should boost demand for cleaner fuels, stabilize the volatile industry and accelerate a recent wave of mergers and acquisitions in the sector.

Sugar cane is harvested at a plantation of Da Mata, the Brazilian sugar cane processor, in Valparaiso, 355 miles northwest of Sao Paulo September 18, 2014. REUTERS/Paulo Whitaker

The new federal program, called RenovaBio, will give fuel distributors targets to cut emissions, which will force them to gradually increase biofuels volumes, according to policymakers, executives and analysts following discussions of the new law.

President Michel Temer will soon announce the program via presidential decree, the Agriculture Ministry said this week, and the law could go into effect next year as soon as new regulations are established.

RenovaBio could be a lifeline to Brazilian ethanol producers who have struggled in recent years to compete with cheap gasoline. It could also bolster sugar prices by encouraging mills to produce more ethanol and less sweetener.

"Our company sees this program very positively," said Rui Chammas, chief executive of Biosev SA BSEV3.SA, the Brazilian sugar and ethanol unit of commodities trader Louis Dreyfus. "It could mark a relevant change in how ethanol is valued, recognizing positive aspects such as the low carbon footprint."

Ethanol production stagnated in recent years, as Brazil’s government, in a failed effort to fight inflation, held down fuel prices which led cane mills to produce more sugar instead.

Brazil’s ethanol industry complained that unpredictable fuel pricing policy distorted markets, discouraged investment and forced dozens of mills into bankruptcy. Cane industry group Unica said 80 plants have been idled in Brazil’s center-south region since 2010, or a fifth of all mills.

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Heavily indebted sugar and ethanol firms have been forced to sell assets to rivals with stronger capital structures, such as Glencore Plc GLEN.L and Raízen Energia SA, a 50-50 joint venture between Cosan SA Industria e Comercio CSAN3.SA and Royal Dutch Shell Plc RDSa.L.

2030 OUTLOOK

Plinio Nastari, a sugar and ethanol analyst at the Datagro consultancy and advisor to Brazil’s National Energy Policy Council, said investments may pick up as RenovaBio gives a better sense of the industry’s potential through 2030.

“Investors will have an idea of future size of this market to better plan their strategies,” he said.

Nastari estimated the new policy could result in domestic demand for as much as 40 billion liters of ethanol by 2030, up sharply from just over 26 billion liters in 2016.

According to preliminary information from the Energy Ministry, RenovaBio will force fuel distributors to show they are cutting carbon emissions based on certificates issued by biofuel producers. The certificates will estimate the emissions cut compared to equivalent petroleum products.

The new policy provides distributors to buy and sell the certificates on a secondary market to meet emissions targets that will grow stricter, tracking Brazil’s commitments within the Paris climate agreement.

“This program promises to boost investments in the current period of crisis,” said Marcelo Moreira, a senior researcher at agricultural trade think-tank Agroicone. “It is likely to spur (M&A) movements in the sector.”

Elizabeth Farina, head of cane industry group Unica, expects the policy shift to mark a return of more vigorous investments in the sector.

“New capital will be needed to expand production capacity and increase area under cultivation,” she said.