The ethanol challenge

The government's decision to get the state-owned oil-marketing companies to re-start their programme to dope petrol with ethanol to the extent of 5 per cent is to be welcomed. This will provide the sugar sector with another source of income (at current prices, 5 per cent doping will give Rs 950 crore extra to the sugar industry/farmers), and it will put the oil sector on a more ecologically sustainable: plant-based substitutes, like ethanol for petrol and jatropha for diesel, pollute less than conventional fossil fuels and are a renewable resource.

Unfortunately, mandating the use of ethanol does not ensure compliance. In 2003-04, the oil companies were able to buy just half the required ethanol in the nine states and four union territories where the programme was to run. Consequently, the mandatory provision was dropped. There are several obstacles in the way of success. Vested interests (like the current users of ethanol) do not want another source of demand as this will hike prices""the chemical industry in Maharashtra is even now getting the authorities to declare the state a "no-excess-capacity zone" as far as ethanol is concerned, to prevent the "diversion" of ethanol to the gasohol programme. There is also the issue of pricing in relation to petrol""with the oil-marketing companies arguing that they cannot afford to pay increased ethanol prices (they are naturally reluctant to see their profits getting transferred to the sugar sector!). While current contracts are being executed at Rs 18.75 per litre, the sugar industry is pitching for Rs 25 in return for long-term contracts with stiff penalty clauses. The answer to such issues would be to free ethanol pricing and distribution, as also petrol pricing""in the US, ethanol now costs more than petrol because of the government's mandate for 10 per cent doping.

It is equally clear that the central and the state governments have to do their bit. The Centre adds around Rs 3 per litre to ethanol prices through the excise duty""since this is not cenvattable against the excise paid on the final petrol, the oil firms have to bear this cost. Similarly, states levy import/export levies on ethanol purchases/supplies and this adds up to another Rs 4-5 per litre. This does not leave the oil firms with much margin, hence their manifest reluctance to fall in line with the doping programme. Finally, while existing users such as the chemical industry and the ethanol-supplying sugar industry differ on whether there is surplus capacity or not, the country needs to augment ethanol supplies if the doping programme is to grow, especially in years when cane/sugar production falls. This requires use of other cellulosic raw material that will generate ethanol (such as potato, rice, and sweet sorghum, and even varieties of grass/straw). All of this requires sustained cooperation between the various arms of government, industry and research bodies, and the conscious use of fiscal and other incentives. Merely mandating the use of ethanol will not deliver results.