Should Manitoba Expand Ethanol Subsidies?

Agriculture, Commentary, Robert Sopuck, Rural, Uncategorized

The Manitoba Government has embarked on a new initiative to investigate the potential of expanding the ethanol industry in Manitoba. Typically, they are conducting a “consultation” exercise, where they will ask Manitobans what they think about ethanol production and use. A recent poll of Manitobans revealed that most supported this expansion.

The poll didn’t asked people what they would be willing to give up in order to expand the ethanol industry. Governing is all about trade-offs, so simple polls that ask soft questions without an acknowledgement of the hard choices that are inevitable in policy-making are of very little value. After a daily diet of media “greenwashing”, most folks respond in the affirmative to any proposal that sounds good for the environment.

Manitoba has one ethanol plant, located in Minnedosa. It employs 30 people, purchases grain from 150 farmers and consumes about 27,000 metric tonnes or one million bushels of grain a year. The plant’s feedstock is mostly wheat, but some corn is also used. It puts out 10 million litres of ethanol, of which one million is sold for industrial purposes and nine million are combined with gasoline at a ratio of ten to one, to produce 90 million litres of blended fuel. All of the Minnedosa plant’s output ends up in Manitoba vehicles.

An expansion of the ethanol industry raises both environmental and economic issues. Ethanol fuels emit fewer greenhouse gases and carbon monoxide. The state of California, generally considered the leader in continental environmental policy, is phasing out the supposedly harmful additive MTBE and some companies, notably Shell, are replacing it with ethanol. However, given Manitoba’s “bit player” status in the world economy, whatever we do in this respect will have negligible consequences for the environment.

As another industry that processes raw product, in this case grain, into something of higher value, ethanol plants deserve consideration. But this addition in value must measure up to its costs. In Manitoba, the road tax for ethanol is reduced by 2.5 cents a litre, which adds up to a subsidy of about $2.25 million per year. That means that each job in Minnedosa costs the public purse about $75,000.

In addition, the ethanol industry is quire vulnerable to “price shocks” for both grain and fossil fuels. We are currently experiencing a sharp spike in the price of grain due to dismal crop prospects in western Canada. Ethanol made from wheat will therefore go up in price. Manitoba is also perennially short of feed grains – we are a net importer – and the economies of many rural communities depend on livestock. An expansion of the ethanol industry will make the tight supply of feed grain even worse. In brief, new subsidies will cause distortions in other markets.

A more thorough discussion is provided by a new Frontier Centre paper entitled: Ethanol-The Promise and the Peril (which is available at www.fcpp.org.) Given this uncertainty, it may make sense for the Government of Manitoba to continue its research into the industry’s prospects. But it is premature to mandate the use of ethanol-blended gasoline or subsidize its production.

Full subsidization of the ethanol industry – if widened by mandating an ethanol component in all gasoline – would cost $35 million a year. The universal goal of environmental improvement would almost certainly be better advanced by spending that money in other ways. Helping farmers to deliver environmental benefits to society would be one much better option. Improving urban waterways, enhancing urban green space, and providing incentives for energy conservation are others.

If an expanded ethanol industry doesn’t measure up in terms of costs and benefits, then we shouldn’t do it.