Sweet or sour?

Sweet or sour?

It now seems quite likely that when you drive your car into a petrol pump after October 2008, the attendant will fill a blend of petrol and ethanol into the car’s fuel tank. The Indian government decided last week to enforce a mandatory fuel mix in India, with one litre of ethanol made from sugar to be added to every nine litres of petrol.

On the face of it, this looks like a well-intentioned move that will help cut India’s dependence on imported oil as well as reduce pollution, though there is little clarity, right now, about what the main policy goal really is. Sugar-cane farmers and sugar companies, that are reeling under a huge oversupply, will also welcome the new policy since it will open up a new and growing source of demand for them. It is a sweetener for sugar companies, as stock market investors have been quick to realize.

Using biomass—be it sugar cane or corn—to make car fuel is a policy that has met with moderate success in Brazil and is being implemented in other countries, including the US. So, the Indian government has not strayed too far away from current fashion.

But being fashionable is not necessarily good policy. The benefits of using alcohol squeezed out of biomass as a fuel additive are less clear than is usually assumed.

We are uncomfortable when a government makes technology choices on behalf of private economic agents (other than in the case of network industries like railways, where common standards such as rail gauges are a must). Spiking fossil fuels with ethanol is one example of state-imposed technology choice.

This is, however, not an argument for doing nothing. Given the realities of climate change, there is a clear role for public policy in energy. But we would prefer if the government went to the root of the problem by taxing carbon directly and imposing tougher emission norms. How carbon use is to be minimized could then be left to consumers. There is no need to lock the country to a technology standard—especially when new fuels could emerge in the coming years.

Nor is there consensus on the impact of a mandatory fuel-blending plan on the rest of the economy and the environment. Cane farming and processing have linkages with the rest of the economy. Higher demand for sugar-based ethanol will send out ripples into other markets and change relative prices. It is now well known that the US decision to push the consumption of corn-based ethanol has led to rising corn prices around the world, in effect taxing corn users (including the poor) and subsidizing corn growers. Something similar could happen in sugar as well.

Even the environmental case is a bit unclear. Cars using some ethanol will undoubtedly cut urban pollution. But growing sugar cane, producing ethanol and transporting it will entail the use of land, water, fuel and labour. It is unclear to us whether the net effect on the environment is positive. In fact, sugar soaks up huge amounts of groundwater and this has become a sore point in states such as Maharashtra. Are we shifting the ecological burden from urban to rural areas? We sincerely hope the Indian government has thought through such second-level effects of its proposed blending policy.

Finally, the claim that ethanol use will cut dependence on imported oil must be examined with a cool head. The unstated assumption of the energy security crowd is that home-grown energy is usually better than imported energy. An economist would, on the other hand, ask for more meaningful proof. Should we be using capital and labour to grow fuel-creating biomass or should we use them to produce more stuff that can be exported, and then use the dollars earned to buy oil from around the world?

Using ethanol as a fuel is an attractive idea, but only when the fog of ambiguity is lifted.

Should we use ethanol in cars? Write to us at views@livemint.com

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