State cannot afford to lag in implementing biofuel directive

Minister for Communications Marine and Natural Resources, Mr Dermot Ahern, recently announced a derogation from excise duty for suitable biofuel projects.

This initiative, no doubt, is the first response by the Government to the EU directive of last May on biofuels. By end-2005, at least 2 per cent (on an energy basis) of total petrol and diesel used for transport purposes should be in the form of biofuels. By end-2010 the target is set at 5.75 per cent.

If these amounts of fuel were to be supplied by bioethanol - which is now the renewable fuel of choice in most other countries - the 2005 target would be equivalent to around 175 million litres of bioethanol; the 2010 target would amount to over 700 million litres.

Bioethanol has several attractions, not least that it can be blended with both unleaded petrol and diesel up to 20 per cent by volume without requiring any modification to vehicles. Ford have developed a so-called flexible-fuel vehicle that can operate on the basis of an 85 per cent ethanol and 15 per cent petrol blend to the same efficiency as a petrol-fuelled vehicles.

The first challenge to developing an effective national supply of bioethanol is to find a suitable feedstock. The most feasible, on the basis of current technologies and economic conditions, would appear to be grains, sugar beet and/or its byproduct molasses. Sourcing adequate supplies of feedstock within the country to attain the targets in the directive would be difficult. But it should be possible to procure sufficient feedstock for a modest-sized plant of, say, 20 million litres.

The economics of bioethanol production are of course the critical constraint. Clearly, bioethanol won't be bought at the pumps if its price is not at least equal to petrol when denominated on an equivalent energy basis. Last month the post-tax price of petrol was about 89 cents per litre or, in terms of energy units, 28.2 per gigajoule (GJ). This price was made up of a pre-tax price of €9.15/GJ, excise of 13.94/GJ and VAT of 5.11/GJ.

Based on a recent report produced for the Department of Transport in the UK, the pre-tax imported price at the pumps could vary from €10.7/GJ (Brazil: sugar cane) to 22.4/GJ (EU15: wheat). If a national production facility for bioethanol is to be contemplated, it is likely that the pre- tax production price would be in line with the EU15 estimate based on the wheat feedstock. In these circumstances a complete derogation from excise duty would likely be required to ensure commercial viability.

There are sound justifications for such a derogation and possible capital subsidies given the public benefits that accrue to the substitution of fossil-based fuels by a fuel produced from biomass.

The easiest-measured public benefit is the net reduction in CO2 emissions that accrues from the use of bioethanol. This is an important public policy consideration in the context of our commitments under Kyoto.

A recent official UK report suggests that the net reduction is between 2.5 and about 4.5 tonnes of carbon per 1,000 litres of bioethanol. On the basis of a current carbon price of around 20 per tonne, every additional litre of bioethanol that replaces fossil fuels, saves 5-9 cents per litre of bioethanol in carbon emission costs.

Another public benefit arises because of the use of agricultural biomass as a feedstock. With reductions in agricultural price supports now well advanced due to the latest instalment of CAP reforms, farmers are looking to alternative sources of demand for their products. In the medium to longer term we can also look to developments in R&D to render the use of non-traditional biomass sources of bioethanol production cost-effective. Such developments would open up new opportunities for agricultural producers.

Official UK estimates suggest that five farming jobs are potentially created or sustained for every one million litres of bioethanol that is produced. The jobs at the plants themselves have been reckoned to amount to one per two million litres of bioethanol produced. An added public benefit is that these jobs would be regionally dispersed and thus the initiative would further the goal of balanced regional development in a way which would be also be consistent with sustainable environmental development.

The long-term prospects for ensuring the competitiveness of bioethanol with fossil fuels depend crucially on the cost of the feedstock used to produce ethanol. Continued international and national investment in R&D will play a central role in this regard.

The basic process of bioethanol production is the fermentation of the sugars extracted from plants like grains and sugar beet into ethanol. The development of new enzymes, enabled by biotechnology, has considerably speeded up the process of ethanol conversion from plant sugars. Enzymes are also now being developed that allow the cellulose wastes of agricultural products, organic residues, hardwoods, softwoods, and herbaceous grass as feedstocks to be converted to sugars prior to the fermentation to ethanol. The major advantage of these feedstocks is their relative cheapness compared with feedstocks like grains and sugar beet.

Another important advantage is that the net reduction in carbon emissions is significantly greater for cellulosic biomass relative to grains or sugar beet-based ethanol.

A few short years ago, to even contemplate the feasibility of a national bioethanol production industry would have appeared fanciful. Today this is no longer true. Due to the concern over global warming on foot of carbon emissions from the consumption of fossil fuels, the cost of a continued exclusive reliance on such fuels has become all too apparent.

Ireland's commitments under the Kyoto Protocol have forced us to promote the production and use of renewable fuels. The EU directive of last May has forced us to accelerate that process. At the same time, developments in biotechnology have rendered biofuels much more competitive vis-à-vis fossil fuels, and the prospects are for an enhancement of these trends.

Ireland is well placed to exploit these opportunities. We produce an abundance of biomass and farmers are looking for new markets for their products. There is no obvious reason why we can't emulate the developments in other countries. In the US, for instance, about eight billion litres of bioethanol are now produced each year compared with virtually nothing two decades ago.

The French are intent on achieving the directive targets through the development of their embryonic national bioethanol industry. Currently they produce over a billion litres per annum which amounts to under 1 per cent of their total fuel consumption. Plans are advanced to construct two new bioethanol distilleries with a combined annual capacity of about 5.5 billion litres. Can Ireland afford to be left behind?

Gerry Boyle is Associate Professor and Head, Department of Economics, NUI Maynooth and Non-Executive Director FGS Consulting