Thursday, April 10, 2008

Next Steps for Biofuels

Shyam Ponappa / New Delhi August 03, 2006

Organise production supported with mandatory use, taxes and pricing.

After the summer power-cuts, let us shake off our malaise to address our energy needs in a practical way. The power situation apart, oil prices will continue to be a long-term concern.

In a previous article on energy for transportation, I had mentioned that Brazil made a virtue of necessity, developing ethanol as a renewable fuel (Business Standard, September 1, 2005: “More energy for ethanol and biodiesel”). This is a closer look to see how we could do it. As for sunlight, available conversion technologies are inefficient, while improvement requires high-end R&D; wind energy, now addressed by the private sector, needs more, but that is another story. However, some of India’s large farming population could profitably grow crops for biofuels.

While Brazil has the benefit of available land with favourable conditions for sugarcane (which is excellent for ethanol), Brazilian governments had to forge a dogged course over 30 years to succeed. Their strategy involved compulsory blending, support prices, user subsidies, and cheap credit.

In India, we have been unable to untangle the implementation issues. Perhaps we can learn something of long-gestation projects not only from Brazil, but also from the example of Capt. George Swinton, chairman of Delhi’s Town Planning Committee in 1912. His vision that “[t]rees will be everywhere … and Imperial Delhi will be in the main a sea of foliage… different from any city that the world has known…” is a manifest reality (from Pradip Krishen’s Trees of Delhi: A Field Guide).

Key Success Factors

First, plans extend well beyond budget years and Plan Periods. Second, expert knowledge and pragmatic implementation are essential. Third, we must stay the course. In Brazil, there were times when its ethanol policies nearly collapsed because high sugar prices triggered sugar exports while ethanol supplies dropped. But dogged persistence towards the objective of biofuel as a national necessity led to the present condition where no subsidies are required. Moreover, new technologies were actually created to fit Brazil’s plans, as major automobile manufacturers developed flex-fuel cars that switch readily between ethanol and petrol.

Fuzzy Outlook in India

The need for developing biofuels in India is unquestionable, both for petrol additives/substitutes, and diesel additives (pure biodiesel is apparently unsuitable for engines because of the gummy effect of long-chain polymers). Both need focused strategies and execution with knowledgeable inputs over a long period. These requirements include:

- cultivation and yield management (i.e. the agricultural/silvicultural aspects, covering the selection and cultivation of crops for climate, soil, and cultivation methods),

- extraction or production (manufacture), and

- supportive policies for marketing and distribution, including mandatory usage and tax incentives to ensure commercial viability during the build-up of the industry.

There are encouraging developments, but they seem episodic and one-off. One example is Teri’s project with BP in Andhra Pradesh, to set up farmers’ cooperatives for jatropha cultivation and the production of biodiesel. Another is Reliance Industries’ plans to set up ethanol plants in Maharashtra, procuring sugarcane from farmers at Rs 1,500 per tonne, compared with Rs 850 paid by cooperatives. (The implications for the cooperatives are not good, given their poor record. This is particularly galling given their potential, if they could only organise and run on sound principles.) There is, however, the cautionary tale of a large-scale trial that failed in the 90s in Nasik.* Experienced farmers apparently suffered poor yields, belying the notion that jatropha seeds broadcast over wasteland can yield a bonanza.

Mandatory Usage, Pricing and Taxes

These three factors form the bedrock of Brazil’s success. Oil companies in India buy ethanol at Rs 18.75/litre, while producers want Rs 25 (according to a report in this paper yesterday, they are willing to settle at Rs 21); meanwhile, the chemical industry, which uses ethanol as an input, lobbies to keep the price down. Excise adds Rs 3/litre, while state taxes add Rs 4-5/litre. If taxes were dropped, supplier expectations could be met. It is in the public interest to build biofuel capacity, foregoing tax revenues. As with much else, it comes down to the clarity of national objectives.

We must try to learn from Brazil’s success, recognising it has taken them 30 years and several billion dollars of incentives, with many missteps.** Its success results from pursuing a policy goal since 1975 with supportive incentives and controls. This has included a level of guaranteed purchase of ethanol at controlled prices, a fixed ratio of ethanol to petrol prices that varied over time, loans at low interest rates, even when it was damaging domestically, production quotas for sugar, and government control of exports.

In contrast, our government’s initiatives to develop ethanol and biodiesel appear sporadic and diffuse, unless there is much more going on than meets the eye. We have made a beginning with a mandatory blending of 5 per cent ethanol in nine states and four Union Territories, although supply has been insufficient for implementation. For biodiesel, the Planning Commission’s allocation of Rs 1,500 crore in the Tenth Plan for demonstration projects for jatropha (of which Rs 1,200 crore is for nurseries) pales before the magnitude of the requirements for a successful outcome. Moreover, much depends on the quality of extension support. Many failures in biodiesel crops were apparently because of inappropriate species for prevailing climatic and soil conditions.*** The Railways have conducted trials, but it is difficult to determine whether the effort has been well-planned and systematic, and with what results.

For those who think free markets are the panacea, please remember the importance of regulations and taxes. An eye-opener for me was when I helped a Silicon Valley company in the early 80s to decide where to locate their manufacturing subsidiary, choosing between Mexico (the winner), Ireland, and Austria. The criterion was the net present value of after-tax cash. While costs varied with location, the most important drivers were tax-related. While there are other significant factors, e.g. the cost structure, efficiency and productivity, a well-crafted tax policy can certainly influence objective decisions.

By sheer luck, India can exploit a quirk that the tax wizard who masterminded Brazil’s successful ethanol tax strategy is currently an advisor to the finance minister (see Lunch with BS, March 21, 2006 [Parthasarathy Shome]: ‘Democrazy’ Taxes); we need only make the most of it, drawing on the likes of Teri and Brazil’s CENBIO to build our own success.

* “Crops for cars?” Darryl D’ Monte, .

** “Fuel of future for U.S. now reality in Brazil,” Larry Rohter, The New York Times, April 11, 2006.

*** “Biofuels in South Asia: An Overview”, Ed. K.V. Raju;

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