Ethanol-blended Fuel policies: when will the cheap tricks end?

Australia's ethanol fuel policy is a disaster. Pork-barreling, cronyism and convoluted industry policies have severely impaired the potential of developing an environmentally sustainable and renewable source of energy for Australia. In the past 30 years, the Australian government has spent billions of taxpayers' dollar subsidising the ethanol industry. Despite the evidence that these subsidies are ineffective in stimulating long-term use of ethanol fuel, the government continues to support industry welfare. We propose a set of policies that would provide a stable background for long-term production and consumption of ethanol-blended fuel.

Ethanol is used for a variety of purposes, including pharmaceuticals, plastics production and in alcoholic beverages. It can also be blended with petrol to use as fuel. Ethanol is the most widely used alternative fuel in the world. Unlike crude oil, ethanol fuel is an environmentally sustainable and renewable source of energy. Ethanol is made via a fermentation process from a variety of agricultural crops, including, sugarcane, wheat and wood-based materials.

In Australia, ethanol is made from sugarcane and wheat. The key motivation for the government to support ethanol production is that the sugarcane and wheat farmers are located in marginal seats in rural Queensland and New South Wales. In the past decade, the sugar industry has experienced a number of reversals: low production and world price, extreme weather conditions, disease and pest incursions. The government hopes that the co-production of sugar and ethanol would provide a permanent solution to the flagging sugar industry, and secure the rural seats in the next election.

To gain electoral support, in its "Biofuels for Cleaner Transport" policy, the Howard government anticipates the establishment of at least five new ethanol distilleries and the creation of around 3,500 jobs in rural Queensland and New South Wales communities and industries. However, no distilleries have been established since its announcement in 2001. Further, a key point to note is that existing ethanol producers would be unwilling to pay more than the current low world price for the sugar. Thus, it is clear that the Howard government is not interested in helping the sugarcane farmers, and only interested in staying in office.

So, who is really benefiting from the Howard government's policy? None other than the generous Liberal Party donour and close friend to the Prime Minister, Dick Honan. Honan owns Manildra. Manildra is the dominant market producer of ethanol in Australia, accounting for 90 per cent of market share. Manildra produces ethanol from the by-products of its wheat production. It is in the position to gain the most benefits from the industry subsidies, unlike the smaller sugarcane and wheat farmers do not have the expertise or the resources to establish an ethanol plant and compete against Manildra.

The cost of these industry subsidies is considerable. It costs about 70 cents to produce one litre of ethanol-blended fuel, compared to 35 cents for petrol. The government currently subsidises 16 cents per litre of ethanol until June 2007, or until production capacity reaches 310 million litres. Current total ethanol output is around 135 million litres of which around 50 million litres are used for fuel blending. The Department of Treasury estimates the cost of the subsidy to be $62 million in 2006-07. In addition, the one-year domestic production subsidy, which expired in September this year, has been extended to 2008. This domestic production subsidy imposed an excise of 38.143 cents on imported and domestic ethanol fuel. At the same time, the government introduced a production subsidy of the same amount for domestic producers. The Fuel Taxation Inquiry estimates that the total value of the excise exemptions for petroleum product substitutes over the period 1994-95 to 2004-05 was about $8.7 billion (in 2000-01 prices).

Not only is the cost of subsidising ethanol production from sugarcane and wheat is enormous, the touted environmental benefits are minimal. While there are reduced tailpipe exhaust emissions, for example, carbon monoxide, there is little or no benefit in reduced tailpipe emissions of carbon dioxide compared with unleaded petrol. Further, ethanol produced from wheat and sugarcane does not produce significant full fuel cycle greenhouse gas savings over conventionally produced gasoline. Full fuel cycle emissions take account of all emissions including aspects such as production, refining, distribution and tailpipe emissions.

The government's indecisiveness has also impaired consumer confidence of ethanol-blended fuel. After three years, the government has yet to decide on a standard of the amount of ethanol in petrol, having deferred the decision three times. Further, public concern of the mandated use of ethanol fuel has caused concern and resistance, especially after a leaked report regarding the incompatibility of certain car engines and ethanol fuel. In addition, given that ethanol costs twice as much to produce than petrol, consumers would be unwilling to purchase ethanol fuel if it is more expensive and is less energy efficient than petrol.

Instead of wasting millions of dollars on industry handouts, to support an industry and technology that has proved ineffective, and dallying in pork-barreling and cronyism, the government should fund research and development into the production of ethanol from lignocellulosic materials. Lignocellulosic materials such as wood, crop residues, and municipal wastes, provide a large readily available supply of cheap feedstock that can be broken down and used for the production of ethanol. Research shows that the amount of ethanol yielded from lignocellulosic materials is much more than conventional sugarcane and wheat feedstocks.

Lignocellulosic material can be converted into ethanol either by acid treatment or enzyme treatment. The use of enzyme treatment is generally preferrable to acid treatment, as it results in higher ethanol yields, less energy consumption, and less handling of hazardous materials. Lignocellulosic materials have the added benefit of omitting production inputs, such as, land, fertiliser and harvesting of the crops. However, the enzymes required for this process are currently very expensive to buy commercially, adding significantly to processing costs.

With the use of lignocellulosic materials, each state can build their own ethanol plant at the site of a municipal waste landfill. Jobs would be created across the country, unlike ethanol that is produced from sugarcane and wheat, which only benefit rural Queensland and New South Wales. Further, taxpayers' money would not be wasted on propping-up a dying agricultural industry.

There are also significant environmental benefits from using municipal wastes for ethanol production. First, production inputs, such as land clearing and fertiliser will not be used. This results in more significant full fuel cycle reduction of carbon dioxide emissions, than ethanol that is produced from sugarcane or wheat. Second, using municipal wastes reduces the amount of landfill and the costs of disposing the wastes.

The government should be decisive and active in encouraging the use of ethanol-blended fuel. Explicit regulations and information regarding labelling and ensuring quality should be made available. All Commonwealth and State car fleets should use ethanol-blended fuel to set an example to the community regarding the use of environmentally sustainable and renewable fuel. Public transport should also be encouraged to use ethanol-blended fuel. By setting an example, the government and public transport aids in the promotion of consumer awareness and confidence in voluntarily using ethanol-blended fuel by Australian motorists.

Ethanol-blended fuel has enormous potential in supplying a source of environmentally sustainable and renewable fuel for Australia. However, for this to happen, the Howard government must stop seeing the ethanol fuel policy as political card trick and implement effective, realistic policies.