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Claims that ethanol in petrol helps farmers is a hoax of the worst kind

By Ken Willett - posted Friday, 8 August 2003


Fuel-ethanol production has the dubious distinction of being the most protected industry in Australia. The hand-outs to participants in this industry at the expense of the Australian community exceed the feather-bedding of longstanding protection addicts, manufacturers of motor vehicles, textiles, clothing and footwear.

The Commonwealth Government has effectively shut out imports of fuel-ethanol by applying excise and customs duty at a rate of 38.143 cents per litre and paying a subsidy for Australian production at the same rate. In addition, the Commonwealth pays capital subsidies for new investments in the industry.

The structure of the protection package means Australian consumers do not benefit from the subsidy. Instead, they will pay more than double the cost of buying Brazilian ethanol and transporting it to Australia.

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Although the Queensland and Commonwealth governments are normally political enemies, Queensland government ministers, particularly Environment Minister Dean Wells, have enthusiastically supported the Commonwealth's protectionist policy on fuel-ethanol. Mr Wells claimed it provides great benefits to sugar cane farmers and Queensland, and is good for the environment. His justifications are similar to those offered by Commonwealth ministers and spokespersons for the ethanol lobby.

In contrast, highly respected economist David Trebeck, who was Chairman of the Fuel Tax Inquiry, described the protection of the fuel-ethanol industry as "one of the craziest examples of public policy I've come across in 30 years."

Who is right, the Commonwealth and Queensland Governments or Mr Trebeck?

Contrary to Mr Wells' assertion, benefits to sugar-cane farmers will be minimal. Molasses is the sugar processing by-product used to make ethanol. Molasses required for additional ethanol production will be diverted from export markets and then domestic uses, rather than coming from extra cane production. Farmers will not receive higher prices for their cane and will not be able to sell any more without lowering the market price.

Grain used for ethanol production would be bid away from stock-feed-use. This would provide higher prices to stock-feed producers, initially. Additional production could be induced, dampening or eliminating the price increase. But, to the extent that stock feed producers benefit from higher prices in the short- or longer-term, livestock industries bear higher costs. Similarly, diversion of molasses from stock-feed to ethanol production would increase the costs of livestock industries.

Assertions of substantial benefits to the rural sector are "…a cruel hoax of the worst kind", according to Mr Trebeck. He added, "I am, frankly, staggered that the policy debate has reached the position it has without some of this nonsense being knocked on the head."

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The main beneficiaries of government protection of the ethanol industry will be investors in that industry and suppliers of goods and services to it. Government hand-outs allow the ethanol industry and its suppliers to attract resources from alternative uses where, in the absence of assistance, they would generally earn higher returns. Other participants in the economy have to pay for those hand-outs and bear higher costs as result of competition for resources from subsidised activities

Those who are initially made worse-off include car owners who have to foot the bill for increased fuel consumption associated with ethanol blends. In the case of E10, fuel consumption rises by 2.8 per cent to 5 per cent, which is equivalent to an increase of 2.25 cents to 4 cents per litre in the price of petrol.

Other initial losers include those who have to pay more tax and/or lose benefits from government programmes to finance subsidies to ethanol producers. The loss to these entities is 3.8 cents for each litre of E10.

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An edited version of this article was first published in The Australian Financial Review on 4 August 2003.



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About the Author

Ken Willett is Manager of Economic and Public Policy at the RACQ.

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