Friday, September 27, 2013

India could learn from the success of the Brazilian fuel ethanol policy

Here is the link to The Hindu which published the article as an Op-Ed piece on 24 September 2013

The public and media were outraged recently by a suggestion that petrol stations could be closed from 8 pm to 8 am to curb consumption. Oil import is the heaviest burden on foreign exchange, with 144 billion dollars last year. The situation could get worse  given the potential for increase in crude prices with the escalation of the Syrian crisis and further destabilisation in the Middle East. India needs to think beyond 8 pm to 8 am and look for longterm indigenous sustainable solutions.

One of the ways to reduce petrol consumption is by the use of ethanol as a fuel. Brazil has already done it successfully and reduced petrol consumption by thirty percent. All the new cars produced in Brazil have flexifuel engines which run on 100% ethanol or 100% petrol or any combination of the two. In addition, there is a 20 percent mandatory ethanol addition to petrol. Brazil is the global leader with 16 million flexifuel vehicles out of the world total of 27 million in December 2011. Brazil uses ethanol in motor cycles, light commercial vehicles and agricultural aircrafts too. They are now experimenting with ethanol in buses, trucks, tractors and harvestors. They have developed sugar cane diesel which is used in some Sao Paulo buses. They are now moving into cellulosic ethanol technology which uses waste material and bagasse from the sugar mills. The use of fuel ethanol has created a synergy between agriculture and energy sectors and a win-win for the farmers, industry and government. The Brazilians have improved the quality of air in their cities with the use of ethanol which causes less pollution than petrol.

How did Brazil do it? The Brazilian government has brought all the stake holders (the sugar cane farmers, sugar mills, car manufacturers and oil companies besides the ministries of agriculture, industry and energy) together and formulated a policy and oversaw its implementation rigorously as a strategic priority since 1975 after the first oil crisis. They provided three important initial drivers: guaranteed purchases by the state-owned oil company Petrobras, low-interest loans for sugarcane farming and ethanol production, and fixed gasoline and ethanol prices. The policy has evolved over the years through learning from experience. Today fuel ethanol is the centre piece of Brazil's energy, agricultural and industrial strategy and Brazil is a role model for the world.

The success of the policy has encouraged the oil companies to become stakeholders in ethanol production in Brazil. Multinational oil companies such as Shell and traders like Luis Dreyfus and Bunge have invested in  ethanol besides Petrobras, the state oil company.

Conscious of the cyclical nature of the sugar cane production and weather risks, the government has a flexible policy of exports during surplus and imports at times of shortage. Brazil is working quietly to create a global ethanol market with standardization of specifications and market mechanisms in collaboration with US. Brazil is encouraging and collaborating with other Latin American and Caribbean countries to produce fuel ethanol. Brazilian ethanol companies have started investing in other countries. 

As the second largest producer of sugar cane in the world, India has the potential to replicate the success of Brazil. The risk and investment involved in ethanol production are much less in comparison to oil exploration and production. 

The government of India launched a programme of 5% mandatory ethanol blending in 2006. But it does not work because the oil companies have shown the least interest in ethanol. They offer unattractive prices to the ethanol suppliers even when they pay through their nose for the foreign oil suppliers. The ethanol producers prefer better prices offered by chemical and alcohol companies as well as foreign importers. It is a mistake for the government to have left the ethanol policy as a hostage to this conflict of interest between the oil and the sugar companies. Neither of them see the larger picture of nationalinterest. The petroleum ministry is also biased on the side of the oil companies. In view of this, the government needs to take up the matter in its own hands, bring all the stake holders together and evolve a long term policy treating it as a national energy security imperative. The mandatory blending should be increased to ten percent immediately and the target should be 20 percent in the next three years. They should force the oil companies to invest in ethanol production to make them develop a stake. The car manufacturers need to be brought on board to modify the engines. Some of the car makers in India such as Ford, GM, Volkswagen, Honda, Toyota, Renault and Fiat are already producing flexifuel cars in Brazil.

Use of ethanol as fuel has multiple benefits for India besides reducing petrol consumption. Money will go to the Indian farmers and industry in rupees instead of the foreign oil suppliers in dollars. It will help the farmers to sustain their income during the cyclical bumper harvests and consequent lower sugarprices, like the prevailing situation this year. India can reduce trade deficit and cut foreign exchange outflow. Ethanol causes less pollution than petrol. Most importantly fuel ethanol will be a sustainable long term India-centric solution.