The problems with ethanol

The New South Wales Government is proposing to mandate that all standard unleaded petrol in NSW will contain 10 per cent ethanol. This ethanol will mostly be sourced from grain. We must oppose this grain ethanol industry because of the humanitarian effects of converting food to fuel, the lack of CO2 abatement ,its unsuitability to operate in the variable NSW climate and the hindrance an established industry will provide to the development of the preferred cellulose ethanol industry.

The ethanol industry debate worldwide has been muddied by misinformation and spin doctoring, not helped by the terminology. Barrels, litres, US gallons, bushels, tonnes, millions and billions can easily be daunting. Ethanol, biofuels, grain ethanol, waste are all terms used glibly to suit the occasion. In this discussion of the proposed E10 mandate I am setting out the problems of processing ethanol from primary grain in NSW.

The global debate about the humanitarian effects is hard to miss in the media. There is now no question that world food supplies, and therefore price, have been influenced by the expansion of the grain ethanol industry. The Food and Agricultural Organization (FAO) in their latest data estimates that 100 million tonnes of grain or 1/20th of world production was converted to ethanol worldwide in 2007-2008. The USDA predicts that 100 million tonnes of just the United States’ corn will be converted to ethanol in 2008-09.

Given the exponential rate of expansion of this industry, subsidised and mandated by governments, this conversion of food to fuel will have an ever increasing effect on the price of grain and consequently there will be increased starvation, misery and civil unrest for many millions of the world’s poor. At what level of grain conversion will the developed world call a halt?

A NSW decision to mandate E10 will have a significant impact on this global debate now raging about the merits of grain ethanol. The decision will be noted and be used to support debate by on side or the other.

It is hypocritical for farmers to demand protectionist policies with respect to grain ethanol when for years we have fought tariffs and USA-EU farm subsidies. As an exporting nation, Australia must support global trade and benefit from comparative advantages between trading partners.

Mandated and subsidised grain ethanol will increase the price of grain and arable acres worldwide and so will benefit rural areas. However, as in Iowa, the rest of the population will object to this transfer of wealth when it is pointed out that the NSW E10 involves a $230 million annual subsidy of federal money to NSW. The Productivity Commission recently questioned the value of this excise rebate.

If the Federal Government wishes to support regional and rural areas this money would be better spent directly in these areas rather than have ethanol investors “clip” it on the way past. Better still the annual $230 million could be spent on research and the encouragement of cellulose ethanol.

If E10 is mandated, and the supply of grain is limited by drought, grain prices will run to “import parity” (a higher price reflecting the cost of importing grain). Under “export parity” conditions the ethanol plant will only pay the export price for grain. The only way a farmer will benefit is from the increased occurrence of import parity situations that the increased demand for grain will bring about.

Export industries that value-add grain, such as beef and dairy and a range of food production including wheat gluten, flour and malt, will all be priced out of the global market. Domestic food costs will rise.

Localised shortages occur in NSW, both in grain and starch quantity when grain is pinched from drought. A local grain ethanol plant would increase the occurrence and severity of these domestic “import parity” situations. Other end users will shift their operations to ports where they can have access to imported grain in response to this more commonly occurring event of import parity pricing. This has the potential of tearing the fabric of NSW agriculture apart.

Will it be possible for the government to let the ethanol plants continue to operate under import parity pricing?

NSW’s variable climate and harvest is the principle factor making a grain ethanol industry impracticable. Iowa’s grain ethanol experience, with its relatively certain climate, is not admissible to the NSW E10 debate. On the other hand, Texas has a more variable climate and it is no surprise that its Governor is calling for relief from the USA ethanol mandate. NSW E10 translates to conversion of 1.5 million tonnes of grain into ethanol. This is about 30 per cent of the NSW harvest in three of the last seven years.

There will be greater movement of grain across the established transport routes which stretch from production areas to the ports. The infrastructure for this freight movement does not exist.

The 1.5 million tonnes of grain required for the E10 mandate will come from decreasing exports, or from increased production. Any decrease in exports will contribute to humanitarian problems in some countries. They will have to increase their production from marginal or new land, both environmentally damaging. Any CO2 release from this must be billed to the grain ethanol industry here in NSW. Increasing production in a drought is not possible underlining the impracticability of the grain ethanol industry in NSW.

To overcome grain shortages from droughts, grain would have to be stored for up to two years or transported long distances. The provision of infrastructure to store or transport grain would be a significant cost to the grain ethanol industry making it uneconomic compared to sugar ethanol in a more certain climate.

Climate change experts are predicting a hotter, dryer NSW with even greater variability of harvests. It is strange that the NSW Government is, on one hand, building a desalination plant in response to these climatic predictions while on the other proposing a grain ethanol industry whose operation under the same climatic predictions will be even more unworkable.

Grain ethanol plants need water for operation and irrigation water to grow grain to provide some certainty of supply. This water availability is also becoming more variable. Water buybacks for environmental flows, minimum tillage decreasing runoff, and again climate change, all make a grain ethanol industry impracticable.

Grain ethanol is seen as a stepping stone to the eventual implemenation of cellulose ethanol, but it would be better to import the sugar cane ethanol from Brazil and sell our grain. With the price of Brazilian ethanol futures currently at about A$0.30/litre delivered to Paulinia in San Paulo. Carbon credits could make ethanol made from sugar cane and “true” waste economical. This combination of imported, sugar and waste ethanol would offer much better CO2 abatement, less humanitarian effect and nil distortion of NSW agriculture.

The economics and greenhouse gas abatement of a grain ethanol plant are improved if the distillers grain protein byproduct can be used wet in livestock rations. Because of this a grain ethanol plant should be associated with an intensive livestock operation nearby. Cellulose ethanol does not have this protein byproduct and so a change to the preferred cellulose ethanol will compromise the economics and CO2 abatement of the grain ethanol-livestock complex. Also, bearing in mind that the transporting of cellulose feedstock to a plant is a major cost, these grain ethanol plants may not be sited favourably for cellulose ethanol production.

A grain ethanol industry will take the limited resources of arable acres and water from existing industries: any jobs lost must be deducted from those few created by this new capital intensive industry.

With urban encroachment on arable acres, climate change and increasing demand for grain protein, grain farmers will enjoy moderate increases in grain prices. By increasing demand for grain, the grain ethanol industry has added to the rapidity of these price increases to a level beyond the capacity of world agriculture to respond.

With the variable climate and grain production in NSW, grain ethanol offers little in terms of fuel security. The Victorian Parliamentary Report on biofuels in February 2008 concluded that the use of compressed natural gas offered much greater transport fuel security. This excellent report found against mandating ethanol in Victoria.

The Victorian Parliamentary report was told at an interview in 2007 that about 50 per cent of the NSW ethanol produced at that time came from waste. This means that only 200,000 tonnes of grain was processed in such a way as to leave a “true” starch waste byproduct. Although some ethanol may be produced from sugar waste at Harwood it is clear that 1.3 million tonnes of grain would be used as primary ethanol feedstock.

Various studies show that the CO2 abatement claimed for grain ethanol has been shown to be low or negative. Even compressed natural gas has greater CO2 abatement than grain ethanol.

While biodiesel burns cleaner than diesel, it has not been clearly demonstrated that ethanol has any advantage over petrol with regards to air quality. It is suggested by the Victorian Parliamentary Report that with the use of ethanol, carbon monoxide emissions are decreased but emissions of nitrous oxide and particulate matter are increased.

With increasing knowledge over the last five years the merits of grain ethanol have been diminished. Politicians from all parties are taking the head-in-sand approach in the face of these new facts and world debate, perhaps simply because it entails admitting they were wrong.

Public acceptance of ethanol appears weak. E10 would be easier to “sell” politically if we imported the more environmentally friendly sugar cane ethanol and avoided the baggage of a disastrous adventure attempting to convert up to one third of a poor NSW harvest into ethanol. The NSW mandate will add ethanol to all standard unleaded petrol. This will leave some people not happy with “taking food from a starving family to fuel a car”. Their only alternative will be to buy the more expensive premium grade which will not contain ethanol.

An established grain ethanol industry will be a hindrance to the development of the preferred cellulose ethanol. This industry will have no incentive to change to cellulose and in fact, if sited in the wrong location and faced with possible cheaper ethanol production they would actively campaign against it. Politicians, faced with compensation for encouraging the grain ethanol industry, will likewise have little incentive to get behind a cellulose ethanol industry.

Put another way, cellulose ethanol feedstock will probably be sourced between the tropics where there is greater photosynthetic activity. The grain ethanol industry now developing in temperate areas will not be advocates of this competition. This will be a very unfortunate as cellulose ethanol could be the real replacement for transport fossil fuel we are all hoping for. Australia is fortunate in having millions of acres undeveloped in our tropics which would be ideal for large scale cellulose ethanol production to supply both domestic and export markets.

I ask you, why are we supporting a mandated grain ethanol industry in NSW?