Jyoti Parikh: A green Budget to support biofuels

As the Budget is approaching, it is worthwhile to think of an environmentally sensitive Budget that benefits the people of the country with minimum or no damage to the exchequer. Let us consider green biofuels such as ethanol, and biodiesel, which are obtained from the sugarcane and oil seeds respectively.

Ethanol substitutes petrol, and biodiesel, which is processed oil from oil seeds, substitutes high-speed diesel (HSD). Petrol and diesel represent nearly 50 per cent of refined oil products consumption. Biodiesel obtained from Jatropha, Karanj or Palm oil (after a process called esterification) are blended up to 20 per cent in HSD. Thus, they substitute imported fuels, generate jobs at the farm levels within the country and give strategic security. Moreover, they emit far less local pollutants that affect health and emit minimal greenhouse gases that lead to global warming.

Crude oil has enormous hidden costs that are not visible. These include political confrontation, diplomatic efforts that should also be costed, infrastructure development and management such as port facilities, pipelines and large storage facilities accompanied by low employment of unskilled manpower (compared to biomass that give livelihoods to poor). Different hidden costs are borne by different ministries and various segments of society. It is up to the finance ministry to holistically consider, what the country pays as a whole and who benefits from the payments.

Currently, efforts to cultivate oil seeds bearing plants to produce biodiesel and ethanol production are done mainly by the private sector. They need government support for at least five to eight years, considering the long gestation periods involved in setting up a reasonable market share, say, 5 per cent, after which programmes and incentives can be reviewed.

The government has already announced purchase policy for both these fuels on per litre basis, that is, Rs 18.75 for ethanol and Rs 25 for biodiesel, for stipulated quality. This is a good first step, but that's not enough. This can be seen from the experience in ethanol.

If we examine biodiesel holistically, there are four types of stakeholders here: cultivators, extraction and processing industries, oil companies that blend and market, and the final end users. Among these, extraction companies can benefit from byproducts and end users get better fuels. So it seems they can be on their own. There is a case for helping cultivators and, strange it may sound, also the oil companies. For example, sugar mills have alleged that oil companies are not lifting 475 million litre of ethanol from them though they have sufficient stock of it. Despite the low contracted price of Rs 18.75 per litre, oil companies have delayed the lifting of ethanol. The reasons have to be understood in detail, but currently, there are no benefits for an oil company but there are some costs.

What can be done?

Reduce rates for excise duty (or provide a tax holiday) for ethanol and biodiesel for a limited period of 5 to 8 years respectively. This will help in attaining stability in this new business. Excise duty waiver should be applicable only to the portion that is derived from biomass and not the entire blended mix with refined products. Lower excise will send encouraging signal to cultivators and give them encouragement to grow more oilseeds and increase India's energy security. To prevent fictitious fuels appearing in the market to claim excise reduction, these additional blends of biofuels will have to be strictly accounted for by making it mandatory to say from which farm they got their supply, register all suppliers, their production and stock. This would prevent fictitious blends in the mineral oil products to a large extent. Such systems are developed by the European Union. Upper limits of blends in terms of all India percentage can be prescribed, that may be increased periodically. That would also provide some check on how much benefits can be availed and put an upper bound.

The cultivators, especially in case of biodiesel, need initial support as the oilseed plants take more than three years to get full harvestable yield. Farmers cannot wait that long to receive income. They can be given fixed amount of capital costs per hectare or plants as interest-free loan. In case of arid, uncultivated lands, the landless labour can be also used by co-operatives. Good quality saplings have to be ensured so at the end of a few years, one does not repent. Even then, they will need additional support to survive for a few years till they start receiving incomes.

Enormous employment can be generated in this programme, where part of the cost can be partially offset against rural employment guarantee schemes. There should be long-term signal up to the point when the demonstration phase is completed. Currently, these are uncertain times for biofuels requiring investments in financial, technical and managerial efforts involving risks. Once sizeable supply comes on market, say, 5 per cent share, at all India level and all the processes are streamlined, the benefit package can be reviewed. Even if the programme fails to deliver expected results, it will be no worse than a few dry wells for oil exploration.

The writer is executive director of Integrated Research and Action for Development.

Email: jparikh@irade.res.in