Ethanol: a political hat trick

Ben Brooks
Economic DevelopmentSustainability
February 8, 2014

This article by Ben Brooks at Left-Right Think Tank was featured as part of ESSA’s 2013 Equilibrium publication.

The world produces twice as much ethanol for blended biofuel as it consumes in alcoholic beverages. This is a terrible waste of inebriating nectar at best; misguided policymaking at worst. And erstwhile supporters realise as much, with environmentalists from Greenpeace to Al Gore publicly disowning first generation ‘gasohol’.

But even as its champions desert en masse, and despite vehement opposition from Big Oil, the ethanol industry still clings tenaciously to the bowser. Motoring enthusiasts call it a fuel contaminant. Petroleum companies call it a revenue liability. Green advocates call it a policy distraction. Yet in the United States, ethanol is blended into 96 percent of all petrol sold.

Why? Accepting the data offered by the industry, ethanol is a panacea to energy security, rising fuel costs, and anthropogenic global warming: what the US Environmental Protection Agency calls – with unwitting accuracy – a policy hat-trick. In the US, for example, energy security was the paramount justification behind President Bush’s Renewable Fuel Standard program. The Renewable Fuels Association argues with characteristic hyperbole that ethanol liberates American drivers and the US military from ‘tyrannical petro-dictators’. At home, in Australia, ethanol remains a central pillar in government strategies to reduce national greenhouse gas emissions.

Yet policymakers have subscribed too hastily to ethanol, eager to prove their national security and climate change credentials. The benefits of ethanol are controversial – and certainly too contentious to serve as the basis for economic and strategic policy. Properly described, ethanol biofuel is an uncompetitive industry sustained by distorted information and undeserved political patronage.

Take Australia for instance. As a matter of good electoral practice, conscientious citizens should investigate political donations to the major parties. The most recent data from the Australian Electoral Commission covers 2011-12. Listed third among the top five donors – sandwiched between Westfield and Woodside Energy – lies the little-known Manildra Group, which made a donation of over AUD$280,000 split equally between the two major parties and a handful of fringe groups. The year before, it made a donation of over AUD$620,000.

The Manildra Group is a flour miller and ethanol producer. It is the only one in New South Wales and accounts for over two thirds of national ethanol production. For more than a decade, it has been the chief driver behind federal and state efforts to support ethanol biofuel.

On the one hand, Manildra sought to protect its nascent domestic operation from foreign competition. In 2002, then-Prime Minister John Howard hastily reintroduced a 38.143 cents per litre excise on ethanol blended fuel after a Brazilian ethanol tanker set sail for Australia. Indeed, after donations totalling AUD$300,000, Howard had already discussed the threat of Brazilian ethanol with Manildra CEO Dick Honan. Domestic producers like Manildra retained an effective subsidy; but through a new ‘ethanol production grant’ equivalent to the old excise exemption: 38.143 cents per litre. The Brazilian ship however, was forced to turn away at a loss of AUD$1.1 million to its Australian importer.

The Biofuels Association of Australia argues that this grant arrangement does not amount to a subsidy. The World Trade Organisation begs to differ, holding that a subsidy exists if ‘government revenue that is otherwise due is foregone or not collected’. And that subsidy remains, despite recommendations from the 2010 Henry Tax Review to abolish it. In 2011, the regime was extended for another decade, to be reviewed in 2021.

On the other hand, Manildra encouraged state and federal governments to mandate ethanol blending in order to artificially increase demand. In New South Wales, where Manildra has spent hundreds of thousands of dollars in bipartisan political donations, successive Labor and Liberal governments have legislated to ensure that the volume of ethanol sold by major petrol suppliers exceeds 2, 4 and now 6 percent of their total sales. And until last year, plans were afoot to ban regular unleaded petrol entirely.

The state’s Independent Pricing and Regulatory Tribunal has found that it will be difficult for petrol suppliers to meet the mandate, not least because of uncertain pricing: a consequence of the import excise and Manildra’s monopoly. Moreover, it reported that in the absence of regular unleaded petrol, Australians preferred premium unleaded to the E10 blend.

So it is clear from the Australian experience that ethanol biofuel is viable only when governments perform regulatory gymnastics and subsidise generously. The same could be said of the US, which gives over AUD$17 billion in direct and implicit subsidies through almost 500 state and federal subsidy programs, or of the US, United Kingdom, Germany, and China, which all mandate ethanol blending.

Yet the problem with ethanol is more basic than its economic viability. The arguments advanced by the industry rely on exaggerated, often distorted, economic and environmental models.

First, the environmental benefits of ethanol biofuels are alternately negligible, costly, or non-existent. This is the fuel’s greatest appeal – the reason why our E10 pumps are coloured green, accompanied by glossy posters of wheat fields and blue skies, whilst regular unleaded pumps are coloured red.

In a refreshing sanity check, researchers from organisations as diverse as the OECD to the Australian Productivity Commission have found that actual emissions reduction is very small. Of the major ethanol blenders, only the US and UK abate more than one percent of the road-based greenhouse gases that they would otherwise emit. In Australia, this was 0.6 percent. And in China, more carbon dioxide is emitted in the production of ethanol and biodiesel fuels than is saved or recovered. These disappointing figures reflect the marginal emissions reduction in ethanol biofuel combustion, as well as a feedstock and biofuel distribution system which relies on highways and trucks.

Moreover, this hiccup in our greenhouse flatulence comes at considerable direct and indirect costs. As a proportion of GDP, ethanol producers are subsidised to the tune of 0.01 percent in Australia, 0.03 percent in the UK, and 0.11 percent in the US. In terms of environmental degradation, it is well documented that related industries like palm oil and biodiesel plunder tropical ecosystems with impunity.

And globally, the OECD has found that the appropriation of food crops for ethanol production is in large part responsible for rapidly rising food prices. Replacing 10 percent of fossil fuel consumption in Canada, the US and the European Union would require redeploying 30-70 percent of existing crop areas. Industry group Meat and Livestock Australia maintains that an ethanol mandate would increase the cost of Australian grain by 25 percent. And although Manildra says that it uses industrial grade and waste wheat for its ethanol, the Productivity Commission has found it difficult to verify this claim. In any case, the leftovers of Weet-a-bix cannot support a robust ethanol market.

Second, ethanol is only a substitute for the milk of Sunni petro-dictators in very specific circumstances. The US, which imports more than half of its petroleum requirements, has fortified its ethanol industry such that it now displaces more than 485 million barrels, or 7 percent, of imported crude. Should the Arabian Peninsula fall to Al-Qaeda, life will carry on. Brazil did better, reversing its 80 percent dependence on foreign oil and becoming a net exporter thanks to the biofuel. This was achieved at significant ecological and agricultural cost to the land, and even then, bodies like the Energy Commerce Program at Texas Tech University concede that ‘Brazil is a one-off’.

Australia only imports 22 percent of its petroleum, and this reliance on foreign oil is largely self-inflicted. A decade ago, Australia was a net exporter of petroleum, but the decline of domestic refineries has increased our reliance on imports from South East Asia. If insuring our oil flow against the vicissitudes of geopolitics were a major issue – which it isn’t, in this sleepy corner of the world – then a more practical alternative would be to subsidise domestic refiners. Moreover, biofuel prices are so closely tied to the price of their constituent oil that ethanol does not serve as an effective buffer against foreign price hikes.

Third, the impression that ethanol blends are cheaper than regular unleaded petrol is a fallacy. At the time of writing, Sydney E10 is between 2 and 20 cents a litre cheaper than the latter. But preserving this price advantage requires subsidies and lost government revenue which, according to the Productivity Commission, totalled over AUD$144 million in 2010: 52 cents per litre of biofuel, or $364 per tonne of abated carbon dioxide. In the UK, implicit support for the industry via the Renewable Transport Fuels Obligation mandate and tax concessions was equivalent to AUD 48 cents per litre (AUD$335 per tonne of carbon dioxide) whilst in the US, grants and subsidies like the now-defunct Volumetric Ethanol Excise Tax Credit were equivalent to AUD 62 cents per litre (AUD$672 per tonne of carbon dioxide).

These costs and losses are not economically justifiable outside the Americas. In Brazil, ethanol drives economic growth, and explains the industry’s 80 percent reduction in tax announced this year. In the US, an established ethanol industry artificially sustained by government has created 383,000 direct and indirect jobs.

In Australia, Manildra employs some 800 people.

It will be interesting to peruse their donation returns after the most recent election. They might be relatively small, but the company exemplifies ethanol politics globally: a narrative of protectionism, confused environmental policy, and scientific speculation. Ethanol producers subsist on misinformation, and ordinarily, this would be harmless hype. But the industry has proven itself politically manipulative. A praetorian guard of faux-environmentalist politicians exist to support its wasteful services, too readily convinced by the messianic promise of second generation biofuels.

In the struggle to reduce greenhouse gas emissions, feel-good experiments are too often substituted for do-good policy. Ethanol blending falls firmly within the former category. For Australia, at least, it is an appropriate time to revisit our support. 2021 is too far away.

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