Beware the ethanol hangover

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.