Demand for energy and transportation fuels in developing nations is increasing rapidly as a result of population growth and per capita energy use. There is evidence that policies that support sugarcane ethanol production and the use of sugarcane bagasse for fuel in energy co-generation plants in Brazil have resulted in positive economic, social and environmental impacts. Finding ways to ensure the positive impacts of biofuel production do not come at the cost of indirect land use change, either domestically or across international borders, remains a policy challenge. This research explores trends in direct and indirect land use changes in Brazil that are related to biofuel production; the current state of and potential for expansion of bagasse cogeneration facilities; and how best to promote a biofuel market so that cellulosic biofuels reach commercialization without furthering the negative impacts that can accompany the cultivation of first generation biofuels.