South Africa: Bio fuels and the subsidy to burn food

biofuels28 November 2013, Johannesburg – In the pantheon of great human follies, argues Professor Roman Grynberg, subsidizing food producers and processors to grow food crops only to burn them as fuel in cars certainly ranks high, especially so in Africa where poverty, food insecurity and hunger still remain real day-to-day issues.

The government of South Africa has recently announced that it is finally adopting a new policy of developing bio-fuels in a serious way. By October 2015 the government will introduce a requirement that from 2% up to 10% of petrol come from ethanol and that 5% of diesel must come from bio-diesel. The feed stock for the ethanol used is reported to come from sorghum. The feedstock for the bio-diesel is reported to come from edible oils such as canola, sunflower and soybeans.

While South African bio-fuel policy initially started in 2007 after the Bush administration and EU began moving down this road, the government quite rightly moved with great caution to develop the new sector given its fear that this would affect the price of food. Initially the government did not provide sufficient incentives to establish bio fuel facilities. Over the years, the incentives such as a 50% rebate on general fuel levy for the biodiesel manufacturers as well as the 3 year accelerated depreciation [50% – 30% – 20%] proved insufficient get investments in the bio fuels sector, hence according to the government ‘the need for establishing a more enabling and supportive regulatory framework.’ (read subsidy)

The reason for the South African government’s justifiable caution was the close association between the introduction of bio-fuel mandates in the big food exporting countries such the US, the EU Canada, Australia, Brazil and Argentina and the rapid rise in food prices. In 2009 the World Bank issued what was a remarkably controversial report where it blamed the massive spike in food process, especially the price of maize that occurred in 2007-8, in part to bio-fuel policy in the food exporting countries.

At the time of writing the government of South Africa had not yet made public its policy on how exactly it will incentivize farmers and manufacturers through direct subsidies or through the price at which the bio-fuels will be purchased from manufacturers. According to the Department of Energy web site an ethanol plant in South Africa using sorghum will lose approximately 4.6% of its assets per annum. (At this point the reader should be feeling what the late Australian Prime Minister Ben Chifley used to call a sharp pain ‘in the hip pocket nerve’). And if the government of South Africa wants the plant to make a normal profit of say 15% it will, according to its own estimates, have to pay a subsidy of ZAR2.70/lt of ethanol. With ethanol initially set to be 2% of total petrol production that will mean a levy on petrol of ZAR0.054/lt. This corresponds roughly to media accounts that the government is expecting to raise a general levy on fuel by ZAR0.04/litre in order to subsidize ethanol. The government has created the Biofuels Task Team which is expected to set the national strategy by the end of the year.

– The Trade Beat

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