ETHANOL – But more politely this time.

Australia’s first petrol sniffing treatment centre will be opened in South Australia this year. Now do you see why I’m concerned about the government subsidising ethanol production? And you think petrol sniffing is bad now!

But is burning ethanol for fuel in cars really a bad idea? Not as such, no. But I do think that the government subsidizing ethanol production is a bad idea. This is basically giving a little bit of money from all Australians and giving it to just a few companies and a tiny amount will be temporarily given to farmers all over the world as demand for what ever crops will be used increases. For example if the demand for sugar goes up because the government subsidizes ethanol, then Australia will export less sugar, which will push up the price of Cuban sugar and European sugar beat. I wouldn’t mind if the government funded some ethanol research as the results of scientific research can increase the sum total of wealth of all humanity but subsidies for one sector of the economy tend to just move wealth around and often isn’t very efficient at it.

But isn’t ethanol greener than petrol? Shouldn’t the government give it a tax break because of that? Um, yeah… sorta. This is actually a difficult topic. Motorists in Australia pay a petrol tax when they fill up, which acts as a defacto carbon tax and encourages fuel conservation and the purchasing of fuel-efficient cars. But farmers don’t have to pay most of this tax, so a lot of the fossil fuel that gets used to create ethanol isn’t taxed at a high rate. If we had across the board carbon taxes then the cost of the carbon released would be built into the price of the ethanol. But until we get a consistent, logical carbon tax I guess the government will have to look at how much CO2 is released producing ethanol and give it a tax break based upon how green it is and lower that tax if ethanol producers lower the amount of CO2 they produce. Of course this means the government should put a lower tax on imported Brazilian ethanol as it will probably be greener than Australian ethanol. I wonder how that would fly politically?

Okay, so if the government doesn’t subsidize the building of ethanol plants, should private companies invest in ethanol plants in Australia anyway? That’s a tough one. Would I be willing to invest my own money in an ethanol plant? Hmmm… Well recently Brazilian ethanol has been selling for about the same price as oil. Now that’s pretty impressive, because you can use ethanol directly, you don’t have to refine it. On the down side ethanol contains less energy than oil. One litre only has 68% the energy of a litre of petrol. The actual product cost of one litre of petrol in Australia, before any taxes or distribution costs, is roughly 60 cents. One litre of Brazilian ethanol costs roughly 50 cents, but has less energy. The ethanol energy equivalent of one litre of petrol costs about 72 cents. And although ethanol will be more expensive to transport and distribute because of its bulk, when you consider the environmental benefits of ethanol that’s a pretty good deal. It’s obvious that the price of oil doesn’t have to increase by much to make Brazilian ethanol a good deal even if environmental effects are ignored. (However, as the price of oil increases, the price of ethanol will tend to increase as well as they substitute for each other.)

But can Australia produce ethanol as cheaply as Brazil? I see no real reason why not, with regards to using sugar cane, as sugar cane is the easiest crop to convert. (Of course we should consider if it would just be cheaper and easier to import ethanol from Brazil than to make it ourselves.) However, there are apparently plans to use sorghum to make ethanol and sorghum only produces as much ethanol as maize and maize has always been very expensive to convert into ethanol in the United States and has never really been able to compete with Brazilian sugar cane. In the U.S. they keep out Brazilian sugar cane ethanol with a tariff. (Whereas environmentally unfriendly oil has no tariff, pretty stupid, huh?)

So if the price of oil is only going to go up then it may not be a bad idea to invest in a sugar cane ethanol plant in Australia. But I would be very wary of plans to turn sorghum into ethanol. I don’t see how that could compete with sugar cane ethanol. For one thing sorghum is grown inland whereas sugar cane is grown near the coast, closer to population centres and ports. My guess is that oil prices will have to be very high before sorghum becomes an economical source of ethanol.

I think that even if current oil prices don’t go much higher we could see people slowly shifting away from oil use over the next decade. For example I wouldn’t be surprised if “plug-in” hybrid cars that get part of their energy from the electrical grid are soon produced in Japan. Electric cars may even start to become popular before too long. It is possible that government money spent on ethanol production may just delay the introduction of these technologies.

So basically to sum up, I think tax breaks for any environmentally friendly sources of energy are a good idea, and taxes on sources of energy that release CO2 are a good idea. But I don’t think the government should try and pick one form of technology, such as ethanol, and give it special support.