Ethanol use sure to ignite fiery debate

By CHRIS DANIELS

The Government will grapple on Monday with a dilemma that faces politicians around the globe.

How far should it distort the market in order to achieve desirable social or environmental objectives?

The predicament has arisen since oil companies were last week given permission to start blending ethanol into petrol stocks, a move that delighted supporters of renewable fuels.

Made from organic matter such as whey, sugar, wheat or corn, up to 10 per cent ethanol can now be added to each litre of petrol.

But a litre of ethanol, even if it comes from a dairy factory in Te Rapa, costs more than a litre of refined petrol from the Middle East.

To solve this problem, the Government is expected to announce how it proposes to tax ethanol-blended fuel.

Oil company BP says the cost of refined petrol is just under 40c a litre. With ethanol apparently selling for around 70c a litre, blended fuel would fail to make much of an impact on the forecourt against cheaper 100-per-cent pure petrol.

Oil companies are loath to criticise ethanol, perhaps because they know its use is supported by a Government keen to meet Kyoto Protocol commitments on cutting COinf2 emissions.

But they believe that without a tax break or subsidy, the business case for adding ethanol to petrol is weak.

In other countries, such as the United States and Australia, ethanol use in fuel has been more about protecting farmers and giving them a new buyer for unwanted crops than protecting the environment.

Peter Thornbury, Mobil's public affairs manager, says one problem is that local ethanol supplies are tight and overseas stocks unreliable.

Another complication with ethanol blended fuel is the amount of storage and transport facilities shared between the big oil companies.

These arrangements mean it is likely all the big four oil companies will probably have to agree to introduce ethanol at the same time, if it is to become widely available.

And Thornbury is not keen on tax breaks or subsidies. "Ethanol should be treated the same as every other fuel, in terms of subsidies."

Ethanol should not be "given any favours", he says, asking why companies that sell a blended fuel "should be subsidised by other road users".

"We are not looking for a subsidy. The markets where ethanol is used and used in any great volumes, there are either tax subsidies or a legislative directive to incorporate it."

Mobil says more COinf2 is emitted when crops are grown specifically for turning into ethanol - the trucks, tractors and ploughing, plus the energy used in the fermentation and distillation of the corn, sugar or wheat.

Ethanol does not reduce COinf2 emissions from your car - its attraction is the greenhouse gases "closed loop" it produces: namely the grass grows, cows eat the grass and produce milk, the milk is turned into ethanol, cars burn the ethanol, the grass converts the COinf2 from the cars back into the grass.

BP spokeswoman Diana Stretch says she "would be very surprised if it was introduced in New Zealand without a tax subsidy".

One of the smaller oil companies, Gull, is likely to be the first to introduce ethanol-blended fuel into New Zealand. It does not share tanks or pipes with the other oil majors.

Alan Mountfort, terminal manager at Gull's Mt Maunganui bulk fuels facility, explains that being able to sell ethanol blends could allow the company to compete with other, high-octane fuels sold by rivals.

If a 12-month moratorium on the imposition of an excise tax on ethanol is announced on Monday, then an ethanol blend could compete with the other premium, high-octane fuels.

It would not be any cheaper at the pump, says Mountfort. He says Fonterra is believed to have enough ethanol to supply one or two oil companies.

Elizabeth Yeaman, senior transport adviser for the Energy Efficiency and Conservation Authority, says the present method of taxing fuel cannot make a distinction between those fuels that are better for the environment.

"We don't anticipate the public will buy it if it's more expensive. The idea would be that it's the same price as petrol," she says.

Tim Mackle, manager of New Zealand's only major ethanol maker, Anchor Ethanol, says the fuel should be exempt from excise.

Chief executive of EECA, Heather Staley, says the Government has to make some decisions about how it can promote its environmental aims while allowing a market to operate.

"It's a fantastic opportunity for New Zealanders to choose to use renewable energy in the transport area."