Fuel change: the taxing question of ethanol

30 August 2012

Ethanol and other biofuels have a positive environmental impact and have proven to be viable alternatives to fossil fuels in public transport applications worldwide. Scania’s director of sustainable systems Jonas Strömberg and managing director of Scania Siam Vichai Jirathiyut explain that the problem is not the technology, but the tax policy that makes ethanol more expensive than petrol.

Around the world, there are projects underway to prove the viability of biofuels such as ethanol as fuel for public transport. Bioethanol for Sustainable Transport (BEST) - a four-year project supported by the European Union - is perhaps the best known and, between 2006 and 2010, it promoted ethanol as a vehicle fuel in nine European cities. Now, more projects are in place across many continents.

The BEST project was coordinated around Stockholm, where the use of ethanol as a fuel is commonplace. The city set goals of having 50% of public transportation running on biofuel by 2012, 75% by 2016 and 100% by 2025. Progress is well ahead of schedule, with over 800 buses using ethanol, more than 200 biogas buses in operation and up to 150 biodiesel buses in the test phase. In all, that accounts for around 56% of Stockholm's public buses.

"Ethanol is extremely clean," says Jonas Strömberg, director of sustainable systems at automotive manufacturer Scania. "Since 1989, we have seen EU regulations come into force, and there has also been a shortage of diesel, so we are looking at ethanol for many reasons, including carbon emissions, air quality and energy independence."

Scania is a driving force behind the project in Stockholm, which benefits from the very high position that sustainability has on Sweden's social and political agenda: around 40% of cars in Sweden already use biofuels; however, the firm is also pushing for greater use of ethanol outside Europe and has projects running in São Paulo, Brazil; Bangkok, Thailand; and Johannesburg, South Africa.

"Rapidly growing cities in emerging markets will increasingly account for a larger proportion of the world's GDP, but rapid growth produces environmental concerns," says Strömberg. "In Bangkok in Thailand, for example, air quality is a big issue, as it was in Stockholm in the 1980s. Also, there is a big need for energy security. It requires a locally produced fuel to move away from oil dependency, so it must look for something to replace diesel."

"Stockholm has set goals of having 50% of public transportation running on biofuel by 2012, 75% by 2016 and 100% by 2025."

The main advantage of ethanol is that it is very clean. Scania's buses use ED95 - a blend of 95% ethanol and 5% ignition improver - which powers diesel engines modified to use the higher compression needed to ignite the fuel. The company's buses running ED95 began operation in Stockholm in the late 1980s, and since then they have been exported to other Swedish cities, as well as to Belgium, Italy, Spain, Norway and the UK.

Thai experiment

Thailand's trial of ethanol buses is a useful blueprint for the use of biofuel by public transport operators in emerging markets. Bangkok is a city that is growing fast, in step with the country's economy.

"Thailand produces a lot of ethanol," says Strömberg. "In fact, it has supplies that it does not know what to do with. So, when we wanted to take the Scandinavian example to other continents to demonstrate the technology, Bangkok was an ideal place."

Thailand is heavily dependent on fuel imports, and the rapid growth of cities such as Bangkok also poses environmental challenges.

"In 2009, fossil fuel prices were rising, with oil reaching $140 a barrel, so we thought about how Thailand could find out more about energy security and started to look for alternatives," says Vichai Jirathiyut, managing director of Scania Siam. "We found that Scania Sweden used ethanol for buses in Stockholm, so we looked at the BEST project and chose ED95, which Scania was using in different countries.

"Thailand is an agricultural country that has lots of ethanol, so we now have a demonstration model here that uses concepts from Stockholm, and we have started a process of education because ethanol is not yet considered a fuel by the Thai Government."

A project backed by both public and private sector organisations is promoting ED95 as a fuel as part of a 15-year plan for alternative energy development. The Energy Ministry and the Industry Ministry are participating, and the country already has 47 refineries licensed to produce ethanol. The stumbling block, therefore, is not supply; the problems lie with the country's tax regime.

"Ethanol is seen as being used in alcoholic drinks, so it has a high tax," explains Jirathiyut. "After one year of our project, we brought in government representatives to show them that ethanol is a fuel. Now they are beginning the process of changing the regulations, but they want to see a larger study.

"A project backed by Thailand’s public and private sector organisations is promoting ED95 as a fuel as part of a 15-year plan for alternative energy development."

"Ethanol can't compete with fossil fuels in terms of efficiency, so if you want a cleaner world you must subsidise it along with other renewable sources of energy. You need a balance, and Thailand has to import all of its oil.

"The one thing the country does have is natural gas, so we are looking at gas buses, too, but it is still not a renewable fuel," he continues. "The ethanol project needs more time because the excise department here will face a loss of revenue from fuel taxes if they change the tax regime, so we need incentives."

Voices of reason

Making the switch to an ethanol engine is relatively simple, particularly with Scania's modular system. It uses the same components as a diesel engine, but one module is changed. This keeps costs down, and as the engines use broadly the same spare parts, the potential maintenance issues are kept to a minimum.

The incentive to switch to such engines will come when issues with tax regimes are addressed. The problems that exist in Thailand echo the tax treatment of biofuels elsewhere in the world, including Europe and the US.

"The challenges in making the transition to ethanol are not technological," says Strömberg. "Ethanol engines are similar to diesel engines; you just have to change the compression. The technology has been the same since the 1980s.

"The problem is that the decision-makers need to decide to push the technology at local and national levels. The EU, for example, lacks the tax regime for biofuels.

"There is higher tax on biofuels than on fossil fuels, so it is the red tape that is the problem. We do more work on lobbying that on technological development. The other issue is that you need the local infrastructure to supply the fuels. Operators just want to make the switch easily, so we need to provide a package solution that includes vehicles, infrastructure and fuels, which does take longer."

Taxing situation

Getting fuel to vehicles is possible, but the effort of putting the necessary infrastructure in place needs to make sense from a cost perspective.

"Ethanol and other biofuels are commodities now, so transporting them is not a problem," explains Strömberg. "Ethanol has similar chemical properties to petrol, so the safety regulations are the same.

"The biggest problem is that taxation is higher on all biofuels. They produce less energy per litre than other fuels, and tax is always levied by volume, which means the de facto tax is higher. Some countries are starting to move towards an energy-based tax, and that is what we need. Ethanol, for example, is actually quite cheap, but the current tax regime benefits fossil fuels. We would prefer to see incentives, although we ultimately want biofuels to work on their own merits.

"An energy-based tax, which we are starting to see in some Scandinavian countries, would be ideal. Having the same tax regime for all fuels would make biofuels very competitive. Fuel cost is the big thing, so we need to get the tax regime right."

The Thai Government is pursuing a 15-year plan of alternative energy development, spearheaded by Vichai Jirathiyut (pictured) and Scania Siam, and focusing on ED95 ethanol-powered buses.
Vichai Jirathiyut, managing director of Scania Siam.
Jonas Strömberg, director of sustainable solutions at Scania Sweden.

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