In this paper, we simulate the Brazilian agriculture and transportation fuel sectors using a price endogenous mathematical programming model to analyze the impacts of recent changes in fuel policies and strong demand in world sugar markets on producers’ supply responses, consumers’ driving demand, fuel choice, and ethanol trade with the rest of the world. We also determine the land use change, Greenhouse Gas (GHG) emissions, and economic surplus implications. The analysis considers various blending rates and taxation of different types of fuels. The model results show that when the ethanol blending rate is reduced in response to the increased sugar demand and resulting short supply of ethanol, the driving demand by conventional vehicles would be reduced significantly. When the tax rate is dropped by 7.5% and the blending rate remains at high levels, flex-fuel car users would switch from E100 to gasohol. Despite the reduction in driving demand, the total direct GHG emissions from Brazil would increase significantly due to the consumption of a more carbon intensive fuel blend.