Beware the ethanol hangover

Ethanol is well and truly the flavour of the month among politicians with a taste for electoral advantage and businesses keen to drink from the taxpayers' trough.

Large production subsidies and suggested compulsory blending of ethanol,otherwise known as ethyl alcohol, in automotive fuel are the key ingredients of this intoxicating brew.

But before the rest of the community - motorists and farmers included - become just as intoxicated with ethanol-blended fuels, we need to take a closer look at the cocktail being offered as a saviour of the natural environment and sugar industry.

In the wake of the 1970s oil crisis, many governments tried to encourage greater use of alternative fuels by various means. The Australian Government exempted ethanol used as fuel from excise and customs duty.

Only in Brazil did ethanol become a major transport fuel. In the United States, only 1.2 percent of fuel used in cars is ethanol, mainly in a petrol-ethanol blend containing 10 percent ethanol (E10). In Australia, ethanol provides just 0.2 percent of all fuel for cars, but in specific areas ethanol content ranges up to 22 percent.

During the 1990s, popularisation of the concept of sustainable development and the theory of global warming revitalised interest in ethanol. This induced the Commonwealth Government to continue exempting fuel-ethanol from excise and customs duty.

In October 2001, the Commonwealth Government announced a capital subsidy of 16 cents per litre for new or expanded production facilities for biofuels, such as ethanol, until 30 June 2007 or production capacity reached 310 million litres. It also maintained excise and customs duty exemptions.

From 17 September 2002, the Commonwealth applied excise and customs duty to fuel-ethanol at 38.143 cents per litre, the same rate as petrol. Simultaneously, a subsidy of 38.143 cents per litre was given to domestic producers of fuel-ethanol for one year, pending consideration of long-term arrangements for "renewable energy".

Subsequently, politicians with one eye on crucial rural electorates and the urban green vote have argued that the ethanol subsidy should continue, and inclusion of ethanol in petrol should be compulsory, with the proportion rising over time as the Australian ethanol industry expands.

Manildra and CSR currently dominate ethanol production in Australia. Manildra uses waste starch from its wheat gluten and starch plant at Nowra. CSR's ethanol plant at Sarina uses C molasses, a low value by-product of sugar production.

In response to Commonwealth subsidies, all existing producers in Australia plan to expand capacity substantially. Also, Multiplex is investigating entering the industry with several ethanol plants around Australia.

But the costs and income transfers associated with subsidising and mandating use of ethanol in petrol are enormous.