Priming Australia’s Ethanol Pump
By Mike SeccombeFebruary 13, 2012
A monopoly, a subsidy and a mandate forcing consumers to buy your product; the Manildra business model is hard to beat.
When The Global Mail broke the news to Bob Katter, MP, that the NSW government had just wound back, ever so slightly, its plans to force ethanol on the motorists in that state, Katter didn't mince words.
Premier Barry O'Farrell, Katter said, "is a coward, a rat and an ignoramus."
For added emphasis Katter, who is probably the strongest supporter of ethanol in Australian politics, repeated the words. And then he really got going, about the negative health effects of petrol, which he said were literally killing people.
"People are dying. If he [O'Farrell] doesn't know that, he's an ignorant man. And if he does know that, we must pass a much harsher judgment still upon him," said Katter.
For sure, by implying that the leader of a state is guilty of killing his constituents, Katter was pushing political rhetoric past its normal bounds. But that's not the really odd thing about his response. He has long been known for a tendency to hyperbole.
The really surprising thing is that Katter is a climate-change sceptic. He does not believe that human-induced global warming poses a threat. And the major claim to fame of ethanol — the alcohol fuel produced from plants — was always that it cut the emissions of carbon dioxide, the greatest contributor to the warming. That's the reason, or at least the major purported reason — why Australian governments, state and federal, have poured money into subsidising ethanol production in over the past decade or so.
We're talking big money. Huge money. It's hard to establish an exact total over that time, but in a report last year the Productivity Commission, while looking at the ways governments around the world have gone about reducing emissions of carbon dioxide, produced some startling figures. The commission found Australia's ethanol producers received total government assistance of AUD$108 million in 2009-10 alone. The lion's share of that money went to just one producer, the Manildra Group, which makes ethanol from wheat and/or wheat by-products.
You may not live in NSW, where most of the ethanol is produced, or in Queensland, where the rest of it is made, but you are nonetheless paying to support its handsome subsidisation. (You might also be paying for it through higher food prices, but we'll get to that later.) And how much did all this subsidised ethanol production reduce the nation's CO2 emissions below what they might otherwise have been?
By about 0.3 per cent, according to the commission.
Others believe it was even lower.
John Kaye, a NSW Greens MP, is one.
An electrical engineer by training with a background in sustainable energy and greenhouse issues, Kaye is acutely conscious of the need to find alternatives to fossil fuels, if human energy needs are not to cook the planet.
Yet he is a trenchant critic of ethanol. He believes the greenhouse benefits of the fuel are close to zero and that Australian governments are inconveniencing motorists and pushing up the price of fuel for no good reason.
"Look," says Kaye, "we're not against inconveniencing motorists if there is a good public-policy reason for doing so, but in this particular case there is a question mark over the greenhouse benefits.
"The Productivity Commission data suggests the [reductions in CO2 emissions from ethanol, as opposed to petrol] are somewhere between 25 and 50 per cent, depending on the mixture between wheat and [waste] wheat starch. Their analysis of those data, by their own admission, is conservative. The greenhouse gains could, in my opinion, be as low as zero."
Worse, says Kaye, the production of ethanol from grain takes resources away from food production.
"Manildra has admitted that 50 per cent of their feedstock is wheat and not waste-wheat starch. What this means is that we have an insatiable appetite for energy, in competition with food.
"The more the demand for ethanol, the more wheat will be diverted from the food chain to the production of bioethanol, the greater the cost of bread. This is not good public policy."
Bob Katter would beg to differ, however. For him, the benefits of ethanol have nothing to do with climate change, and everything to do with supporting rural industry, growing jobs and cutting Australia's dependence on foreign oil. And as for the alleged health benefits: all these claimed benefits are highly debatable.
Katter articulates a vision of vast fields of waving feedstocks such as sugar cane and wheat, spread across the nation — and particularly across his huge north Queensland electorate, where he sees huge untapped water and land resources.
There is only one area where Katter and Kaye agree, sort of. Both think ethanol policy has been driven by political influence. It's just that they see the influence coming from different directions.
Katter believes the petroleum industry "owns" the major political parties. Kaye believes it is the ethanol industry which manipulates the political process.
A search of the Australian Electoral Commission record of donations to political parties shows that oil and gas companies are not actually big donors. For the most part they are not donors at all. The big four petrol companies make no donations, although some pay to attend party conferences and thus show up on AEC records for relatively small (in the order of $20,000) contributions.
In stark contrast just one ethanol maker, Manildra gave some $600,000 in 2010-11, roughly evenly split between the Labor and conservative parties.
Now, a little background about Manildra, to put these donations into some context. Its chairman Dick Honan inherited the flour milling concern from his father in 1952 and grew it into a company producing a diverse range of products derived from wheat, such as starches, syrups, gluten and, since 1991, ethanol.
In 1999, Manildra greatly increased its production of ethanol, which was at that time widely seen as a desirable alternative fuel, particularly by environmentalists. (In America, Al Gore was one of its great champions; his views have since changed, along with those of many greens.)
Manildra is the largest user of wheat for industrial purposes in Australia, processing some 1 million tonnes each year. Though there now are a couple of other, smaller operations in Queensland, using other feedstocks (sorghum and sugar cane), Manildra is still by far the largest producer of ethanol in Australia. As of the start of this year, its production capacity was 300 Megalitres, out of a national total of 440 Megalitres. The company remains essentially a monopoly supplier of ethanol in NSW.
But there is not much to gain in being a monopoly producer of something if there is not a market for it. And ethanol faced big market hurdles at the start. It was unsuitable for most engines unless blended at low concentrations with petrol. Petrol companies and car makers were resistant to its use. Initially it was sold through small independent distributors, and sometimes at concentrations far higher than 10 per cent, which resulted in complaints about damaged engines. Bad publicity. Even at 10 per cent (E10, as it is commonly called), many cars and most motorbikes were, and are, unable to use it safely.
The Federal Chamber of Automotive Industries has complied a list of ethanol compatible/incompatible vehicles. The list of vehicles which cannot safely use E10 is extensive, particularly for those more than 10 years old. It includes, for example, an array of older Toyotas, Hondas, Holdens, and Fords. Also, because ethanol contains less energy by volume, cars get about three per cent less mileage on E10.
Given these obstacles to acceptance of the fuel, ethanol needed a political push.
And it got one, in extraordinary circumstances which smacked of policy on the run, in 2002. On September 12, the Howard Government took steps which prevented a ship on the high seas from making landfall in Australia.
Shades of the Tampa intervention, but this time it wasn't 400 rescued boat people kept out of the country. The cargo of the Oriental Wisteria was 12,000 tonnes of Brazilian ethanol.
Nor were the means of stopping it as dramatic as sending in the SAS, although they were just as effective. In this instance, the government simply whacked a 38 cents-per-litre new tax on ethanol, with an exactly equal offsetting subsidy for domestic ethanol production.
With its ethanol instantly made $3 million less competitive, the ship turned away to sell it elsewhere — at a loss of about $1 million.
The Labor Opposition accused Howard of acting to please a major party donor.
It made for an uncomfortable few days for John Howard, but Labor's attack over political donations quickly became mutually destructive; it emerged they too had been copping money from the ethanol maker.
In an effort to recover the initiative, Labor made a big show of returning one $50,000 donation from Manildra, but quickly lost heart for the fight.
The ALP resumed its practice of accepting Manildra's largesse.Which brings us back to the company's huge donations.
Over 10 years — 2001-2 to 2010-11 — Manildra has kicked in more than AUD$3 million to Australia's major political parties. Most of it went to either the federal party bodies or the NSW branches. The amounts varied widely, and tended to be greatest around election times.
And the ethanol subsidy remained, and remains to this day, despite the change of government. Indeed Labor, as part of its efforts to gain support from independents after the last election, expanded the program. This was vigorously opposed, by the way, by livestock farmers, whose animals consume about 80 per cent of east-coast grain production in a normal year. The Australian Lot Feeders' Association complained that expanded ethanol production would push up their costs. Particularly in drought years, subsidised ethanol producers would be able to outbid unsubsidised livestock farmers. The inevitable consequence: more expensive meat. By ALFA's calculation, the ethanol subsidy will deliver more than $540 million dollars to Manildra in the 10 years to 2021.
But the government was not listening.
It serves as an object lesson in the way politics works, suggests Alan Moran, the director of deregulation at the right-leaning Institute of Public Affairs.
When both sides of politics are taking donations, any revelations can be mutually damaging. "It's a heck of a business model, but not much of an economic model," Says Moran.
Now, you might think a two-thirds share of the national ethanol market, and a monopoly in the largest state, all underpinned by a big subsidy, would be enough. But to ensure a continued market for ethanol, one more thing was needed.
A couple of years ago, the NSW Labor Government provided it: a mandate.
They decreed that from January 1, 2010, ethanol must make up at least four per cent of the total volume of petrol sales in the state, increasing to six per cent from October 1, 2011.
In effect this meant 60 per cent of all petrol sold in the state would have to be E10.
The government also decided that from July 1 this year 'primary wholesalers' would be forbidden from selling regular unleaded petrol unless it contained 10 per cent ethanol. In other words, NSW motorists would be able to buy only E10 or the considerably more expensive premium unleaded petrol.
Monopoly, subsidy, mandate. Manildra was working on a $300 million expansion of its Nowra plant. But there were problems brewing. First there was that Productivity Commission report, mentioned above, which suggested ethanol did little to reduce greenhouse emissions, and did it at great cost.
Then the Australian Competition and Consumer Commission (ACCC) looked into the ethanol mandate and ban on regular unleaded petrol, proposed by the Labor Government, and noted a number of negative consequences.
The mandate would not only force the owners of many vehicles to buy premium unleaded, it would potentially lead to a shortage of premium unleaded throughout Australia, it said.
It might also result in shortages of E10, because of limited domestic production capacity. Manildra insists that "the three ethanol producers in Australia are well positioned to ensure supply can adequately meet demand."
The ACCC also suggested that in the absence of competitive pressure from ethanol imports (because of that hefty tax John Howard began), all fuel prices could rise.
The new state Liberal/National Government was in a quandary. The energy minister, Chris Hartcher, wanted to back off the proposed changes. The Nationals wanted to proceed. O'Farrell decided to push ahead with the mandate.
Then after a public outcry, spurred by the revelation that some 750,000 owners of ethanol-incompatible vehicles would have to pay 15 cents a litre more to buy premium fuel, O'Farrell executed a partial backflip, dropping the ban on regular unleaded, but maintaining the requirement that six per cent of all fuel sold be ethanol. He copped a lot of stick for his reversal. That's what caused Katter to call him a rat and an ignoramus. It also caused Dick Honan to say he was stopping work on the expansion of ethanol facilities, and the Australian Workers' Union's national secretary, Paul Howes, to fly into print protesting lost job opportunities.
But it is questionable whether it will really make much difference; BP warned that continuing with the decision to enforce a six per cent ethanol mandate would "still see regular Unleaded disappear from the forecourt."
Manildra still is going to do pretty well. As things now stand, ethanol makes up about 3.5 to 3.6 per cent of fuel sales in NSW. A six per cent mandate still leaves a lot of room for growth — and for millions more in subsidies — in the years ahead.
When The Global Mail contacted Manildra to ask about its political donations and subsidies, the company vigorously defended its giving. It was "an active participant in the community and makes donations to a significant number of not-for-profit organisations including charities, sporting clubs and community groups." Also, "like hundreds of other individuals, companies and organisations," it made political donations.
"Manildra makes donations to political parties in the full knowledge that these donations are published every year on the public record," a company statement said.
It said the company talked to politicians and other members of the community as part of its "passionate" advocacy of the benefits of the "fledgling industry of ethanol blended fuel.
"We believe ethanol is better for the environment, is safe, cheaper, creates jobs and helps secure Australia's long term fuel needs."
The fact is, though, the benefits of ethanol have been questioned increasingly over recent years. A 2007 Organisation for Economic Co-operation and Development (OECD) report on biofuels, including ethanol, entitled "Is the cure worse than the disease?" made for sobering reading; it found that biofuels displaced food crops, often did not deliver the claimed environmental benefits, did not offer any comprehensive answer to concerns about energy independence, were cost-uncompetitive without continuing subsidies, and could never amount to more than a very minor contributor to the world's needs for transport fuels.
Numerous other investigations, internationally and in Australia, have also raised questions. But some of the issues are very complicated. Determining how ethanol compares with petrol in terms of emissions of greenhouse gases, for example, means measuring not just what comes out of the exhaust pipe of the vehicle using the fuel, but calculating the emissions generated through land clearing, the growing, fertilizing and transporting of the feedstock crops, and the refining process. Bottom line, not all ethanol is created equal.
Some ethanol actually produces more carbon dioxide than petroleum, and nearly as much as tar sands.
If the ethanol is produced from waste products left from other agricultural uses — waste wheat starch for example — then its life-cycle emissions are counted as being lower, because the bulk of them are chalked up against the main product, the wheat.
Manildra says it makes its ethanol from "waste associated with making food products from flour."
However, the Productivity Commission could not get clear answers on the extent to which the ethanol really came from waste, which made it hard to assess accurately just how beneficial the product was for the environment.
Then there is the question of health benefits. Manildra and other ethanol boosters including Bob Katter say it makes petrol burn more cleanly and cuts certain toxic emissions, like benzene. They claim the product is endorsed by health experts, including the American Lung Association.
But when The Global Mail went to that organisation, a more complex picture emerged.
Janice Nolen, the ALA's national vice president for policy and advocacy, said the organisation did support the use of high-concentration ethanol, known as e85, in engines designed for its use.
But at lower-blend levels there were concerns: while ethanol reduced some things, it appeared to increase others.
A particular concern was ozone, a highly toxic air pollutant.
Far from being supportive of lower blends of petrol and ethanol like E10, the association had "grave concerns" about their health effects, she said.
"So we have been opposed to these levels of ethanol range, and supportive of E85."
So the claims that ethanol is better for human health are, at best, dubious.
Manildra definitely creates jobs, though. A spokesperson for the company said it employed about 800 people directly. Based on the Productivity Commission figures for total subsidies, this works out to a taxpayer subsidy of about $90,000 per employee.
Likewise the assertion that ethanol-blend fuel is "cheaper" has to be considered in light of the subsidy. It may be slightly cheaper at the pump, but that is only because of the support of the taxpayer.
The suggestion that ethanol could make a major impact on reducing the nation's carbon footprint, or on Australia's quest for long-term energy independence also is doubtful at best.
Says Graeme Pearman, a former head of the CSIRO Division of Atmospheric Research: "The very best we could do is provide a few per cent of our total energy through biomass. If you took all the wheat grown in Australia and used it for energy production, it would supply enough energy for aviation, about two per cent of our total needs. Sugar would provide even less."
By Pearman's calculation, you would have to turn five per cent of everything which grows in Australia — all the crops, all the forests, algae, grass, everything — into ethanol to provide for Australia's annual energy needs.
"I suppose it could be done, technically, but at what cost?" he says.
When it comes to ethanol's purported environmental benefits, the evidence is not encouraging, either.
As the Productivity Commission report showed, all the subsidies to date have made only a marginal improvement to Australia's emissions of CO2. Pearman sees "no evidence" that ethanol presents a net gain in emissions.
"In many cases the emissions of nitrogen, particularly nitrous oxide, are ignored," he says. "And nitrous oxide is about 200 times more extreme as a greenhouse gas than carbon dioxide."
Pearman certainly acknowledges the superficial attractions of ethanol, which once made it seem such a good alternative to petrol. "Recycling carbon sounds like a good solution. Meeting the problems of security of supply sounds like a good solution. Supporting rural industry sounds like a good solution. But all of these questions remain. What would that mean to our environment, food production, even water production? The real analysis hasn't been done."
And by the time it is done, it may not be all that relevant anyway. The near future, says Pearman, is electric.
All the major vehicle manufacturers in the world, he says, are rapidly jumping to the next technology, which is about five times as efficient as liquid fuels, be they petroleum or ethanol.
Australia could have been a leader in that area of research, Pearman laments, but instead is "stuck to the internal combustion engine. We are not investing at all well for the future…"
But, to slightly paraphrase the Greens' John Kaye, the major parties have several million reasons to support the status quo.
The Global Mail approached former Prime Minister Howard for comment, but he declined to speak.