In the late 1970s, the US government rolled out tax breaks for corn-based biofuel (ethanol), with the aim of incentivising a domestic industry to cut emissions and reduce the nation’s reliance on oil. Over the years that has been followed up with further subsidies and mandates (namely the Renewable Fuel Standard), with the outcome being billions of dollars down the drain and very little to show for it:
“Ethanol has never been economical to turn into a commercial product, and ethanol subsidies have significant economic, agricultural and environmental implications. Because subsidies to ethanol blenders create demand for corn from farmers, the Congressional Budget Office (CBO) estimates that subsidies are responsible for a 28-47% rise in the price of corn. Since corn is a main ingredient in livestock feed and many consumer food products, ethanol subsidies raise the price of food to consumers. The inflated value of corn also encourages large-scale agriculture that may not be environmentally sustainable.”
Flash forward to today and the Albanese government is splashing the cash on something that, at first glance, looks to be very similar:
“The government will on Wednesday announce a 10-year grants program to encourage private sector investment in on-shore production of lower-emissions fuels, such as so-called renewable diesel and sustainable aviation fuels.
The petrol alternatives – which are made from feedstock such as canola, sorghum and sugar – have long been touted as the solution to cut emissions in hard-to-abate sectors including aviation, cargo shipping and heavy road freight.”
According to Chris Bowen:
“Across the nation we have 2 billion litres’ worth of projects in the pipeline, many of which are ready to scale up production. A new thriving domestic industry with more jobs in our regions, from farmers growing the inputs to workers refining the fuels of the future is within our reach.”
My prediction is that this money will be wasted. There’s also a risk that the “jobs in our regions” end up forming rent‑seeking constituencies, a classic case of special‑interest politics with little cost benefit support. Various Australian states have tried and failed at supporting biofuels with subsidies and mandates since 1980, with the Productivity Commission finding that consumers suffered from higher prices and less choice. They may even have had a negative impact on the environment:
“[T]he extent to which biofuels offer carbon emissions savings depends on how they are produced. If native vegetation is cleared in order for the land to be used in biofuel production (or to replace agricultural land diverted to biofuel production), this can lead to several times more carbon emissions being released than the fossil fuels they displace.”
There are also other unintended consequences. Markets are linked, so when you subsidise biofuels you increase the price farmers receive from turning canola, sorghum and sugar into it. But lots of other goods use those as inputs—for example, pig and dairy producers, who may have to raise their prices. Consumers lose, taxpayers lose, the environment may lose, and most farmers lose.
This is poor policymaking from the Albanese government and its least-competent minister, Chris Bowen. It will create a new industry dependent on government handouts, reduce Australia’s productivity, and if it succeeds in entrenching special interests, then in a decade from now the taxpayer will be on the hook for much more than the sticker price of $1.1 billion.