The economic effects of an ethanol mandate

Economics Australia


High oil prices, increased reliance on imported oil, and environmental concerns have led to calls for mandating the blending of domestically-produced ethanol with petrol (‘fuel ethanol’). The most common proposal is for a blend with 10 per cent by volume of ethanol (E10). Mandate advocates cite fuel security, a smaller trade deficit resulting from lower oil imports, regional development, and environmental benefits as reasons for adopting a mandate. Concern that the domestic industry would not be able to compete with imports is also a factor behind the calls for a mandate.

Reduced oil imports are only one effect of an ethanol mandate on the trade account. Any diversion of feedstock from exports or increased imports of feedstock needed to meet the mandate would increase the trade deficit.

A mandate is only one way of reducing reliance on imported oil. Importing ethanol, for example, would be less economically costly than a mandate, and would diversify geographic supply sources and the composition of fuel.

The evidence suggests that the costs of creating jobs under an E10 mandate would be high. A mandate could also adversely affect other rural industries.

The Biofuels Taskforce that the Howard Government established concluded that greenhouse gas benefits alone would not warrant further assisting biofuels given the availability of much cheaper carbon reduction options.

The additional demand for feedstock under a mandate might lead to competition for land from other uses such as food and exports. Views differ on the potential for competition for land use in Australia.

A mandate could benefit the economy if domestic ethanol could compete with imports without government assistance.

Even though a comprehensive cost-benefit analysis of an ethanol mandate has not been undertaken, no prima facie economic case for a mandate has been established.

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