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.

If 10 percent ethanol content in petrol were made compulsory in future, the cost to the budget at the current rate of petrol consumption would be $703 million per year. That's money that would otherwise be available for health, education, roads, defence, helping the underprivileged or tax cuts. For example, $703 million per year would pay for a Brisbane-Gold Coast Motorway-sized project every 16 months, or rebuild Brisbane's two major hospitals every 14 months.

In addition, the capital subsidy for ethanol facilities will take another $30 million or so out of government infrastructure and services provision over the next five years.

Nor does ethanol do motorists any favours when it comes to fuel economy. Studies in the United States and Australia indicate that 2.8 to 5 percent more fuel is required to drive a given distance on E10. If 10 percent ethanol content is mandatory, Australians' fuel bill would increase by $423 million to $756 million per year at the current rate of consumption.

On top of that, technical experts have expressed concerns regarding engine and fuel system durability and performance, particularly at ethanol concentrations above 10 percent. Manufacturers have indicated they may not honour new vehicle warranties at such concentrations.

Subsidising and mandating use of ethanol would mean less efficient use of resources in satisfying the wants of Australians, and lower economic growth because:

• resources would be drawn into an uneconomic activity;
• industries exposed to international competition would bear higher costs, which they cannot pass-on;
• consumption patterns would be distorted.

Given these enormous combined costs of subsidising and mandating use of fuel-ethanol, how do the claimed benefits of such a move stack up?

Firstly, claims of benefits to motorists through fuel octane enhancement by ethanol need to be treated with caution, as it also increases the difference between research and motor octane numbers (octane sensitivity). Tests indicate that high engine speed knock (evidenced by pinging or poorer acceleration) is likely because of increased octane sensitivity when ethanol content exceeds five percent.

Ethanol's "claim to fame" as an environmentally friendly and sustainable fuel is dubious. Investigations by CSIRO, Environment Australia and other respected institutions concluded that, when the production/consumption life cycle is considered, E10 does not yield discernible overall environmental benefits. Also, its credentials as a sustainable energy source are suspect.

E10 slightly reduces emissions of carbon monoxide, hydrocarbons and some carcinogens, such as benzene, but slightly increases emissions of other carcinogens, such as aldehydes, and greenhouse gases, such as carbon dioxide.

Other environmental concerns over ethanol include an increased potential for leaking of underground fuel tanks and contamination of groundwater. Also, criticisms have been directed at the environmental effects and sustainability of many current farming practices producing sugar cane and wheat crops, and processing activities supporting ethanol production.

Unfortunately, very little, if any, of the subsidies paid to ethanol producers can be expected to trickle down to farmers, because of the structure of farming industries and markets, the highly concentrated structure of the ethanol industry, and the low value of by-product or waste-product feed-stocks to ethanol plants.

Subsidised expansion of the ethanol industry will create some jobs in rural regions, but the money has alternative job-creating uses. Economically more efficient use of the subsidy funds could include enhancing infrastructure to lower costs of production, as well as facilitating amalgamation of uneconomic units, adoption of improved practices, diversification, retraining and relocation.

Finally, the self-sufficiency argument for subsidising the ethanol industry is deficient. Exploration and technological advances in petroleum exploration, production and use have more than offset depletion of reserves over the past century. This has created long-term downward pressure on oil prices after allowing for inflation.

In any case, the gathering pace of hydrogen fuel cell technology threatens to make ethanol's proposed role as a fuel extender in automotive applications only a short-term one.

Meanwhile, displacement of 10 percent of petrol by domestically produced ethanol will take several years and be bought at a very high economic cost to all but the few ethanol producers.