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

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.

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."

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.

Entities with market or political power can pass on at least some of these losses to others but many entities cannot shift the burden elsewhere. Those who ultimately carry the pain of higher costs and lower benefits will be poorer sections of the community and those involved in businesses competing in world markets, such as mining, farming, tourism and manufacturing.

Overall, the community suffers substantial losses because protection/subsidy deals draw resources into activities in which we cannot compete efficiently and handicap our more efficient and dynamic industries. Consequently, income and growth are lower than they could be. The Queensland economy will be particularly adversely affected because it is more heavily dependent on farming, mining and tourism activity than most other state economies.

Politicians and the ethanol lobby have promoted E10 as good for the environment. However, there is division among scientists on this matter.

Scientists agree that E10 results in lower emissions of carbon monoxide, hydrocarbons and some carcinogens, such as benzene, but causes increased emissions of other carcinogens, such as aldehydes, and greater emissions of oxides of nitrogen. There is disagreement as to whether carbon dioxide emissions rise or fall.

Some scientists have expressed concerns about E10 increasing the potential for leaking of underground fuel tanks and contamination of ground water. Also, criticisms have been directed at the environmental effects and sustainability of many current farming practices producing sugar cane and grain crops, and environmental effects of processing activities supporting ethanol production.

To the extent that there are environmental gains from using E10 instead of petrol, the costs must be taken into account. Politicians and the ethanol lobby have not told us just how large the costs are.

Queensland's environment minister has referred approvingly to a study undertaken for CSR, which indicates E10 cuts emissions of the "greenhouse" gas, carbon dioxide by 4 per cent. If figures in that report are combined with the of cost of the subsidy and increased fuel consumption, the cost of avoiding emission of a tonne of carbon dioxide by using E10 ranges from about $382 to $1120. However, work by the Australian Greenhouse Office, the Australian Bureau of Agricultural and Resource Economics and United States' experts indicates that Australia could attain its greenhouse gas reduction commitments in other, more economic ways for a maximum of $50 per tonne.

The justifications offered by Commonwealth and Queensland government ministers for hand-outs to the ethanol industry cannot withstand close scrutiny. There is no doubt that protecting this industry is appallingly bad policy.