Shaheen Rafi Khan
shaheen@sdpi.org
The Climate Change 2007 Fourth Assessment Report (FAR) has muffled the sceptics. The current findings replace speculation with scientific certainty -- in fact, the reality has overtaken modelled forecasts. Planet Earth is heating up faster than predicted, with extreme events in their several manifestations spiralling out of control. Glacier retreat, polar ice meltdowns, rises in sea levels, tropical cyclones, storms and hurricanes have triggered natural and human calamities on an unprecedented scale. There is a corresponding urgency to address both the causes of climate change (mitigation) and its effects (adaptation).
Renewable energy in general, and biofuels in particular, have begun to look like an increasingly viable mitigation option. The “bio” in biofuels refers to crop and wood-based raw materials such as molasses, rice husks, corn and wood waste, which are processed into fuel. For developed countries, biofuels offer prospects for meeting their emission reduction commitments under the Kyoto Protocol. For developing countries, biofuels present a means to both reduce energy import bills as well as earn precious foreign exchange. However, reconfiguring the fuel economy to renewable sources is not without risks. Global environmental benefits can also generate adverse local environmental impacts. Similarly, multinational corporations giving price incentives to farmers, to switch from growing food crops to biofuel crops, can threaten food security.
Planet Earth is heating up faster than predicted, with extreme events in their several manifestations spiralling out of control. There is a corresponding urgency to address both the causes of climate change (mitigation) and its effects (adaptation). Renewable energy in general, and biofuels in particular, have begun to look like an increasingly viable mitigation option. |
The rapid uptake of biofuels reflects the ease with which they can replace or be blended with fossil fuels, such as petrol and diesel. The technology is simple, cost effective and environmentally friendly. The blended fuels provide a higher octane content, improving vehicle efficiency while reducing carbon emissions. Developing countries also enjoy a cost advantage; they experience year around growing seasons, can access cheap farm labor, and use crop by-products to fertilize fields and fire up distilleries. For instance, Brazil is able to sell ethanol at the equivalent of US$ 25 a barrel, compared to US $50 and US $70 for the US and Europe, respectively.
Not surprisingly, many countries have adopted biofuels as a way to reduce their oil bills and/or to earn foreign exchange. Thailand is building over a dozen ethanol plants using sugar cane and rice husks as fuel sources. China has constructed the world's largest fuel ethanol facility at Jilin. Beijing is reportedly planning to import Brazilian ethanol as well. Japan has already gone that route; it signed its first 15 million-litre deal with Brazil in May 2006 preparatory to replacing up to 3 percent of Japan's gasoline.
Yet this emerging global market in biofuels is not clear of the political thicket. Developed-country farm lobbies lend momentum to biofuels market development, but they also demand protectionist barriers. "Everyone pretends [their enthusiasm] is for the environment, but it's all about agricultural subsidies," biofuels expert Christian Delahouliere warns. To encourage biofuels, the EU pays farmers 45 euros for each hectare of "energy crops" they grow. That provides them a powerful incentive to produce, effectively barring cheap foreign bioethanol from entering their market. When Pakistan gained special access to EU markets in 2002 and began shipping bioethanol, local farm lobbies persuaded Brussels to change course and re-establish tariffs. The United States also imposes a 50-cent-a-gallon import duty on Brazilian ethanol. In addition, almost every country has its own biofuel standard, with different specifications that may be manipulated to hinder market access.
In this article, we evaluate the biofuel prospects in Pakistan in a sustainable development context. The specific biofuel is ethanol extracted from molasses, a by-product of sugar. The potential for producing biofuels from corn, rice husks and wood waste exists but has not been tapped yet. We also examine the external and internal policy constraints which have prevented domestic ethanol production from taking off.
The sugar industry in Pakistan is the second largest after textiles. Currently, 76 sugar mills produce at or below capacity. From a production level of 2.89 million tons in 1991-92, production reached 4 million tons in 2003-04. Yet the production potential is not realized because sugarcane yields remains well below the global average. Also, despite sugar prices doubling since 1992, Pakistan continues to remain globally uncompetitive. The emerging markets in industrial alcohol and fuel ethanol offer prospects of making sugarcane production economically viable.
About 80-85 percent of the total sugarcane production goes towards the production of sugar. The remaining 15-20 percent is converted into gur, a local variant of sugar, which is largely produced and consumed in the North West Frontier Province (NWFP). Cane crushing produces sugar and molasses as a by-product. The molasses-to-bioethanol conversion process is conducted in distilleries. Currently, 21 distilleries produce industrial alcohol in the country.
The majority of the distilleries are a part of the sugar mills and are situated on-site, making the production cycle an integrated one. The mills receive the cane, crush for sugar, store the molasses in storage tanks on-site, and then pass it on to the distilleries for industrial alcohol production. Industrial alcohol can be converted into fuel alcohol in a simple process by using molecular sieve technology, which requires a capital expenditure of about USD 1.5 million and can be completed in 5 to 6 months. As many as 8 distilleries have installed the sieve technology to process industrial ethanol into fuel ethanol.
Until recently, the bulk of the raw molasses was exported, with exports ranging between 0.70 million to 1.75 million tonnes. Only minor quantities were converted to industrial alcohol for domestic use and export. However, over the past five years, a substantial proportion of these molasses was converted into alcohol. Fuel-grade ethanol, which is blended in petroleum products, fetches the highest price in the world market.
The value-addition in molasses through its conversion into alcohol has enabled exporters to earn eight to ten times more foreign exchange. The bulk of exports went to Japan and the EU, with Italy being the single largest recipient within EU. However, exports to the EU as a whole declined in the wake of Pakistan’s removal from the GSP (General System of Preferences) scheme.
Bioethanol is produced entirely from molasses, a direct by-product of sugar production. While other indigenous raw materials, such as maize, rice, wood pulp and other forest residues are available in large quantities, they do not offer the same scope for value addition that sugarcane does. In other words, the opportunity cost of producing bioethanol is substantially lower than for other available sources. The SD implications are, therefore, positive. Bioethanol production is not likely to displace food crops or cause deforestation. This is because there is a large untapped potential to convert raw molasses to bioethanol, provided the right kind of policy incentives are in place. However, in the long term, the SD concerns may materialize if biofuels production in Pakistan takes off. In view of the increasing scarcity of water and land, land-use conversions (deforestation) and crop-switching (threatening food security) would then become legitimate concerns. The “wriggle-room” here would be provided by sugarcane yield increases and the introduction of sugar beet on a larger scale. Sugar beet can be intercropped with sugarcane, and it has relatively higher yield as well as a higher molasses-to-ethanol conversion ratio.
Another environmental concern relates to industrial effluents. Wastewater flowing out of distilleries is highly contaminated; if left untreated it can pollute fertile land and harm aquatic life in rivers and lakes. However, despite the general lack of effluent treatment by industries in Pakistan, most distilleries have installed treatment plants, albeit with varying efficiencies. Cost savings associated with waste treatment are the main incentive for distilleries to be environmentally conscious. Distillery wastewater treatment is an anaerobic process through which the organic components of the wastewater are converted to bio-gas, with negligible excess sludge production. The two major products of the treatment process are methane gas and CO2. Methane gas is recycled as an energy source in the distilleries, meeting as much as 70-90% of the total energy requirement. In effect, then, distilleries have a ‘closed carbon cycle’. The final discharge, when diluted with subsoil saline water, has BOD and COD concentrations reduced by as much as 97 percent and can be used for land irrigation. The environmental gains from wastewater treatment are thus obvious, while the cost-savings incentives to distilleries are built in.
In relation to end-use, the consumption of fuel ethanol in automobiles leads to a substantial reduction in GHG emissions. The blended fuel provides a higher-octane content without any presence of lead (traditionally used in gasoline as a booster), thus enhancing car performance and at the same time reducing disease-causing emissions from car exhausts. Although no Pakistan-specific estimates are available, the general norm is that for blended gasoline carrying 22-24 percent fuel ethanol, reduction of fossil CO2 from the tailpipe could be as high as 80 percent.
However, the clearly demonstrated economic and environmental benefits associated with bioethanol production have failed to induce adequate policy responses – either domestic (i.e. import substitution and export promotion) or external.
Import substitution: Pakistan imported petroleum products worth USD 3.1 billion in fiscal year 2006. This accounted for 85 percent of total oil consumption, and also constituted a large proportion of the country’s trade deficit. Clearly, a switch to fuel ethanol would save the country considerable foreign exchange. A 10 percent blend represents a foreign exchange saving of USD 300 million, which doubles at a 20 percent blend.
As a sop to the technology, Pakistan State Oil (PSO) and the Hydro Carbon Development Institute of Pakistan (HDIP) have launched a pilot project to introduce blended fuel within the country aimed at meeting the energy shortfall. In three PSO petrol pumps (one each in Karachi, Lahore and Islamabad), fuel ethanol is being blended with gasoline in a 1:9 ratio (E10). However, there is a cosmetic aspect to this initiative and it is almost self-evident that the oil lobby will stall further initiatives.
The private sector informants highlighted certain policy proposals repeatedly during our interviews for the study form which this article is extracted. These included a ceiling on molasses exports and a subsidy on bioethanol production to compensate for the fluctuation in molasses prices. To date, there has been no real government response. In fact, the government has allowed a state-owned oil company, Pakistan State Oil, to conduct a background study on the feasibility of bioethanol use, which clearly illustrates the clout of the oil mafia. Another move which caused concern was the situating of the bioethanol promotion mandate within the Ministry of Petroleum and Natural Resources rather than the Ministry of Industries or the Ministry of Environment. Clearly, the policy provenance must shift if any pro-ethanol initiative is to succeed.
Export promotion: As long as the current policy on fuel ethanol is dictated by the oil sector, import substitution will remain a slow process. The immediate prospects for improvement lie in export promotion. As indicated, Pakistan presently exports over 160,000 tons of industrial alcohol and bioethanol, earning a little over USD 100 million in foreign exchange, which is well below potential earnings. While industrial alcohol and fuel ethanol have a higher value-added component, and fetch a substantially higher price, molasses continues to be exported in bulk, notwithstanding the recent increase in fuel alcohol exports. A perverse domestic policy contributes to this sub-optimal performance in the shape of a high central excise duty and sales tax on fuel alcohol. This needs to be removed to increase price competitiveness both abroad and domestically. Also, Pakistan would do well to follow India’s lead in imposing a ceiling on molasses exports.
Tariff restrictions: Until recently, under the General System of Preferences (GSP), Pakistan was the second largest industrial alcohol exporter to the EU after Brazil. Initially, Pakistan and six other countries exported industrial alcohol to the EU under a no-tax regime following a dispensation given in the EU anti-narcotics policy. In May 2005, the Commission of Industrial Ethanol Producers of the EU (CIEP) accused Pakistan and Guatemala (the largest duty free exporters for the period 2002-2004) of dumping ethyl alcohol in the EU market, causing material harm to domestic producers. A year later the EU imposed tariffs on imports from Pakistan. In particular, differentiated tariffs on bioethanol and feedstock (raw molasses in Pakistan’s case) point to tariff escalation, which discriminates against the final product.
Presently, there is no unique customs classification for bioethanol. Industrial alcohol is traded under the code 22 07 which covers both denatured (HS 22 07 20) and undenatured alcohol (HS 22 07 10). Both types of alcohol can be used for biofuel production. Despite this lack of specific customs classification, the use of tariffs is common practice in countries aiming to protect their domestic agriculture and biofuel industries from external competition. Moreover, the tariffs vary. For instance, the EU and the US have trade agreements that grant differentiated market access conditions to various countries.
The local distilleries have consequently begun to suffer losses and some have ceased operations. After 2002-03, the number of distilleries in the country had increased from 6 to 21. However, given a rise in molasses exports post-2003-04, and the more stringent EU tariff measures, the distilleries were soon idle. Currently, at least 2 distilleries have shut down, with another 5 contemplating that option.
However, the clearly demonstrated economic and environmental benefits associated with bioethanol production have failed to induce adequate policy responses – either domestic (i.e. import substitution and export promotion) or external. |
Technical, Environmental and Social Standards: Environmental and social standards are now part of the global trading regime. There is little dispute on whether such sustainable development issues should be linked to trade. The question now is how it should be done. While the North continues to insist upon the stringent implementation of such standards, the South is becoming increasingly wary of the use of standards as hidden tariffs. Moreover, since standards do not tend to be uniform, it becomes virtually impossible for resource-constrained producers in the South to develop variants of their products to conform with standards specific to a particular destination. For instance, the EU’s “Biomass Action Plan” is contemplating certification to ensure that biofuel imported is produced from crops grown in an environmentally sustainable manner. Individual EU members such as the Netherlands and UK are already implementing certification schemes. A number of additional voluntary measures to ensure the import of ‘sustainable’ biofuel are also underway. The varying standards requirements across the North present additional compliance problems for a technically and institutionally unprepared South.
Pakistan has, in principle, supported standards in the global trading regime. But, as a member of the Southern block, it has concurrently and repeatedly opposed any measures that may allow the North to use standards as ‘protective’ devices against free trade. Its stance on the EU agricultural support, which includes energy crops, echoes that of the G-20 block within the WTO: Pakistan seeks an end to EU subsidies to its farmers, especially ‘Amber Box’ subsidies1 Negotiations on EU’s agricultural support, however, continue with no end in sight.
Institutional ambivalence: Biofuels and bioethanol continue to remain unresolved issues in the World Trade Organization (WTO), complicating trade in the products. Experts claim that the WTO has never really probed energy issues because few energy producing countries have been members of the Organization; biofuels have warranted even less attention as they constitute a small percentage of the world’s energy supply. The WTO classifies bioethanol as an agricultural product, making no distinction between its use as fuel and for other purposes; yet bio-diesel is classified as an industrial product. Thus we have “two competing fuels with different rules”. The discussion around biofuels is likely to become more complicated as the range of materials used to make biofuels expands.
Given the optimistic forecasts for biofuel growth, the World Trade Organization and others must act now to regulate rules and standards that are all over the map. According to the International Food and Agricultural Trade Policy Council, which released the report on WTO rules on fuels like fuel ethanol, developing countries are ‘wildly producing biofuels’. The report recommends a unified classification for biofuels. With rules for measures such as import standards varying from country to country, the WTO, the World Customs Organization and national governments must coordinate to make sure that the future biofuel trade runs smoothly.
The promotion of bioethanol presents a win-win for Pakistan. With an annual oil import bill of $3.1 billion, substituting gasoline with bioethanol could generate considerable foreign exchange savings. Moreover, there is no trade-off between bioethanol and food production. The environmental benefits of using biofuel have been globally documented. Environmentally, the bioethanol production process in distilleries exhibits a closed carbon cycle. Moreover, bioethanol substantially reduces CHG emissions from automobiles, while also increasing vehicle efficiency.
Despite the potential advantages, progress in promoting bioethanol lacks policy impetus. The oil refining companies, in collusion with the petroleum Ministry, have managed to keep a lid on private sector involvement. Rather than enjoying incentives, the private sector is burdened with domestic taxes on industrial alcohol sales. Such domestic policy biases have been compounded by import restrictions abroad which have compromised the country’s export potential. EU-imposed tariffs under the revised GSP have led to the closure of distilleries. Further, institutional uncertainties and unresolved issues pertaining to bioethanol classification may complicate the development and global growth of the industry. The domestic policy biases, export barriers, and institutional ambivalence lead to a poor prognosis for future development of bioethanol as a renewable energy source. While the potential for both domestic use as well as exports remains high, key fiscal, policy and external constraints will have to be addressed if positive outcomes are to accrue.
1 http://wto.org/english/tratop_e/agric_e/agboxes_e.
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