When are subsidies sustainable?

That is not a trick question, nor an economics one. The National-led government has decided that a biofuel subsidy is preferable to a sales obligation, no doubt on ideological grounds rather than economic grounds.

We now have the Biodiesel Subsidy Scheme, which pays biodiesel producers in New Zealand up to 42.5 cents per litre to compensate them for the fact that ethanol does not have to pay excise tax.

There is one significant problem with the scheme – it doesn’t differentiate between locally produced biodiesel feed stocks, which are quite often sustainable, and foreign feed stocks, which are often unsustainable. It is possible that our taxes will subsidise foreign farmers.

As Jeanette said in her press release:

National threw the baby out with the bathwater when they repealed sustainability standards. I assume it must have been a mistake because their biodiesel scheme defeats the purpose which is to look after our environment and our economy.

What we need to do is put the sustainabilty standards that parliament has already approved back into the law. That’s it!

So Jeanette has a new Member’s Bill doing just that. It leaves the ideological bathwater out, but brings the sustainability baby back to life.

I hope it gets drawn from the ballot tomorrow.

15 thoughts on “When are subsidies sustainable?

  1. Why are biodiesel producers in New Zealand being payed up to 42.5 cents per litre to compensate them for the fact that ethanol does not have to pay excise tax when diesel doesn’t have to pay exise tax either?

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  2. I hope it gets drawn from the ballot tomorrow.

    Ballot’s not till Thursday, and then only if the House gets started on one of the 1st reading bills (highly likely, but not absolutely certain).

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  3. Kevyn

    They are not being paid to compensate them. They argued that the excise exemption unfairly favoured ethanol by giving it a price advantage over petrol and so meant that oilcos did not commit to biodiesel because it had no similar price advantage.

    What Frog ignores is that the mandate was equivalent to a subsidy as it provided a guaranteed market, the excise exemption became in effect a double subsidy.

    The sustainabilty standard was complete bollox. It was overcomplicated and would have required massive compliance, which would likely mean no-one would bother, or if they did there would have been so many loopholes that lawyers would have a field day.

    Look at this section

    “(a) specify a mechanism for recognising particular land (including land outside New Zealand) as having high conservation value; and
    “(b) specify a methodology for assessing the effects of the production of a biofuel on indigenous biodiversity and land of high conservation value.

    Who in the NZ bureacracy could say for certain whether land in Brazil had these values and could assess the impact? Who would check? It’s just a nonsense and JF’s bill is full of similar stuff.

    The only reason I can think that she is doing this is really just to create an artificial trade barrier by making it too hard for overseas fuels to comply, which would be true to the general Green anti trade position. Of course it would also in effect ban the major proposed source of ethanol in NZ which was corn crops and Solid Energy’s rape seed biodiesel.

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  4. Wrong on most counts, insider.

    The bit about land of high conservation value was specifically chosen because there are existing designations in law, both here and abroad, that could be used for that purpose.

    Your argument about a double subsidy is like arguing that a triple negative equals a positive. ethanol is exempt from a tax. That doesn’t mean that the taxpayers are forking out a subsidy. Likewise, the sales obligation, thought it would have raised prices slightly, is not a subsidy as the taxpayers aren’t transferring their money, only the fuel users are. To claim this is a ‘double subsidy’ is bollocks. A market intervention? Yes. Subsidy from taxpayers? no.

    And sorry. the taxpayer is being asked to pay money to biodiesel manufacturers in NZ. That’s a subsidy in anyone’s book, whether you want to argue about ‘compensation’ or ‘price advantages’. The oil companies have little interest in neither ethanol nor biodiesel, unless forced to do so.

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  5. Frog

    It wasn’t just the high conservation value. It was similar over-prescription in other parts of the bill potentially creating significant compliance issues due to the complexity of the process it creates, as potentially you have to have a standard in place noit just for every possible country biofuels might come from but from every region within that country that might have a different designation. ANd what if that country had no such system? What if it is in another language? NZ officials would still have to assess it.

    You are creating a large unweildy bureaucratic process and without dissing the officials concerned, I just don’t think they have the capability to do it based on the difficulty they had developing the biofuels obligation.

    Why not get them started, if it’s so simple, by telling us which designations in say, NZ and Australia, that could be used by NZ officials in deciding whther a fuel comes from a high conservation area or not.

    AS for subsidies, you ignore all other motor spirit for on road use is taxed. The lack of tax on ethanol is a subsidy in all but name as the taxpayer is forking out in lost revenue. It’s sole purpose was encourage production/uptake of ethanol. The double subsidy was only if there was also a mandate.

    But that is also a form of subsidy because, to quote you, “The oil companies have little interest in neither ethanol nor biodiesel, unless forced to do so”. Being forced to use a product either they or the consumer are unwilling to otherwise use involves a compulsory financial transfer not from oil companies but from consumers who pay for the product to the producers of biofuels who have a captive market. That to me is akin to a subsidy – albeit an indirect one.

    You are right, the new biodiesel subsidy is one – a more direct one. I don’t support it, I just tried to explain it.

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  6. frog Says:
    June 17th, 2009 at 2:09 pm

    > Your argument about a double subsidy is like arguing that a triple negative equals a positive. ethanol is exempt from a tax. That doesn’t mean that the taxpayers are forking out a subsidy.

    It does actually. The tax in question is petrol tax, which is supposed to cover (among other things) the cost of providing the road network. If drivers of ethanol-powered cars are not paying this, they are not paying their share of the cost of providing the roading network, therefore it is being paid for with money from other sources. That is a subsidy.

    Of course, the question of whether it is a good subsidy or a bad subsidy is a different issue.

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  7. These are the current rates of excise duty for various motor spirits:
    • petrol: 42.5 cents per litre
    • LPG: 11.7 cents per litre
    • CNG: $3.57 per gigajoule
    • Diesel: nil

    I couldn’t find an excise rate for ethanol, therefore I assume it is:
    • E100: nil
    • E20: 42.5 (20% ethanol/80% petrol, provided it has the RON specified for motor spirits in the Customs and Exise Act.)
    • B100: nil
    • B20: nil

    Frog, I’m still at a loss to understand why biodiesel gets the rebate.

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  8. Yes Kevyn it is quite astonishing, diesel has no tax disadvantage over ethanol, excluding local authority petroleum tax which for diesel is 0.33c/l, hardly noticeable.

    More public policy idiocy.

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  9. Kevyn

    The rate for ethanol is zero. Therefore E blends only tax the petrol content, so the tax on an E20 blend is 20% less than that for pure petrol and so on. Note E20 won;t be sold – E10 is the maximum blend available for public sale.

    You and LS can tell me far more about where fuel taxes go than I ever could you. The subsidy is there in an attempt to create an equivalent price incentive for biodiesel as for ethanol, as doing it through RUCs – which replaced diesel fuel tax – is too hard.

    Personally I would have suggested a rebate method so the users have to get off their arses to reclaim it. There are already processes in place for that kind of thing, but I think the main idea is to promote production.

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  10. Thanks insider. So a litre of E10 will be 4.25 cents a litre cheaper than a litre of standard petrol. Likewise a litre of B20 will be 8.5 cents a litre cheaper than a litre of standard diesel.

    The real doosey is EN 14214 compliant B100 which is approved by Case/IH and New Holland will allow farmers to save 42.5 cents a litre on fuel used in vehicles exempt from RUCs :)

    http://www.biodiesel.org/pdf_files/oem%20statements/oem_statements_summary.pdf

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  11. Jeanette’s interview was really really interesting.
    Kevyn , thanks for posting the list of the vehicles.

    Soon we will have all vechiles petroless … :D i am wondering what US will do ? :) who they gonna attack now?

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  12. In case you hadn’t caught up with it, Jeanette’s Bill passed its first reading tonight! Not all parties were present in the House but at least Maori, Labour and National all voted for it to go to the Select Committee.

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