Presentation by Jim Johnson, President, Canadian Renewable Fuels Association
to Canadian Ministers of Energy

The Canadian Renewable Fuels Association is an affiliation of organizations, companies and individuals interested in the expanded use of automotive fuels made from renewable biological feedstock. Our primary interest, to date, has been in the use of ethanol as an octane enhancer for gasoline. However, the association intends to devote increased effort to the use of “neat” ethanol (i.e., fuel which is at least 85% ethanol) and “biodiesel” made from soybean and canola oil, as non-fossil automotive fuels.

The use of ethanol produced from biological feedstock as an automotive fuel is not new. Henry Ford designed Model T cars so that they would run on ethanol and other alternative fuels. However, it was not until the 1970s and 1980s, when concerns arose about light crude oil supplies, increasing dependence on off-shore petroleum, and environmental quality, that there was a resurgence in interest in ethanol and other renewable fuels.

Fuel ethanol development in Canada has been slow compared to some other countries including Brazil and the United States. Fuel ethanol development in Brazil was fostered by concerns about expanding imports of foreign crude oil, and their effects on foreign exchange.

U.S. development was triggered by concerns about environmental quality, and recognition of the merits of using grains, produced in excess supply in the U.S., to reduce imports of mid- eastern oil. Environmental standards associated with the use of gasoline are generally higher in the U.S. than Canada. The present annual use of ethanol-blended gasoline in the U.S. exceeds total Canadian gasoline consumption.

Key decisions were made by the Canadian government in 1992 and 1994 to grant an excise tax exemption for ethanol used in blended fuels. This exemption is identical to the exemption which has been provided for other alternative fuels since the early 1980s. Tax exemptions for alternative fuels are granted by several provincial governments. Unlike other alternative fuels, there is no conversion required (i.e., no government conversion incentives required) for vehicles to use ethanol-blended gasoline.

Because of the above, and growing consumer demand for environmentally superior fuels, sales of ethanol-blended gasoline have grown rapidly in Canada over the past two years. Ethanol- blended gasoline is currently sold at over 560 Canadian retail outlets, with this number growing monthly. The major limitation to growth, at present, is ethanol supply. This situation will change when new ethanol-producing facilities are built in Ontario and Western Canada in 1996 and 1997.

Ethanol-blended gasoline is the only automotive fuel granted Environment Canada’s Ecologo™ under the Environmental Choice™ program.

Although ethanol used in gasoline blends, or as “neat” fuel, now benefits from many of the same tax exemptions which are available for other alternative fuels, the resulting net “cost” to government (if lack of a tax is classified as a “cost”) is small. By comparison, an average of over $2 billion per year in grants, tax incentives, and other government incentives was granted to fossil fuel energy producers for the 15-year period prior to 1993 according to a 1993 analysis by Ernst and Young. The total cost of these incentives has not been summarized for more recent years, to our knowledge.

Although the Canadian fuel ethanol industry has developed much more slowly than in the United States, Canadian development has been superior from an environmental and economic perspective for at least three reason.

Firstly, unlike the U.S. situation where federal rules allow ethanol-blended gasoline to be higher in volatility than regular gasoline, no such waiver exists in Canadian General Standards Board (CGSB) specifications. CGSB standards are the basis for gasoline quality regulations in several provinces including Ontario, and serve as the effective standard in other provinces. Because of this emissions of volatile organic compounds are no higher with ethanol-blended gasoline in Canada than with normal gasoline. At the same time, ethanol provides substantial environmental advantages in other ways, as summarized below.

Secondly, the energy efficiency of ethanol production from grain (corn, wheat, barley) is higher in Canada than the U.S. because of a much lower dependence on irrigation for grain production in Canada. A Cemcorp analysis completed for the Ontario Government and the Canadian Renewable Fuels Association in 1992 showed that ethanol made from Ontario-grown corn had over twice the combustible energy content as was used in its production. This analysis involved all aspects of corn production, including input and machinery manufacture and transport. The ratio of energy content to energy required for ethanol production is about 1.7:1 in the U.S. according to a recent U.S. Government study. The ratio is far higher in Western Europe than either Canada or the United States because of the far more energy-intensive (and subsidy- intensive) nature of European agriculture. The OECD head office in Paris, France has recently published a report on biofuels which provide good data on the European situation.

Finally, co-products of Canadian ethanol production, which include high-protein food and feed ingredients, are generally used close to the site of production in Canada, and also serve to replace large imports of U.S.-produced soybean meal. By comparison, a large percentage of byproducts produced in the U.S. are exported.

The cost of ethanol-production from grain, at about 35-45¢/litre, currently exceeds the refinery-gate price of gasoline. Although the cost of production of ethanol has declined substantially over time as technology has improved, present price relationships mean that ethanol provides the highest economic value when it is used as an octane enhancer to replace other octane additives - especially additives containing heavy metals, and “aromatic” compounds such as benzene.

Analyses show that the real global and Canadian domestic price for corn and other grains (i.e., after adjustment for inflation) has trended downward since 1950. For example, average real corn price in Canada has declined at an average annual rate of about $5/tonne/per year (1995 dollars) since 1950. This downward trend is expected to continue. By contrast, the real price of crude oil, though subject to larger cyclical changes in price, has increased over time. As real grain prices continue to decline, and the developed world becomes increasingly dependent on crude oil from more remote and/or expensive sources, the competitive position of fuel ethanol will progressively improve. “E85" fuel is already being marketed in parts of the United States. North American automobile manufacturers have begun producing and marketing vehicles adapted to E85 usage.

In the longer term, it is expected that fuel ethanol will also be produced in sizable quantities from cellulosic materials such as wood, high-cellulose crops, and various waste materials. In the near term, such development continues to be hampered by technical and economic problems associated with the separation of cellulose from lignin, the conversion of cellulose to sugars (subsequently converted to ethanol), and problems associated with the transport and concentration, for processing, of bulky cellulosic materials. Development could occur most quickly where a concentration of byproduct cellulose and/or cellulosic wastes already exists.

Reasons for future expanded use of ethanol as an transportation fuel, in addition to those discussed above, include: