An Exercise in Public Policy Making

There is an old saying that "There are two things you don't want to watch being made: sausage and legislation". At the moment, there is an extremely interesting exercise in public policy making taking place that may serve to confirm that wry observation. The public policy issue concerns ethanol.

The issue is not "if ethanol should be introduced, that battle was won when all three provincial political parties included essentially the same renewable fuels commitment in their party platforms in the last provincial election. The issue is "how" to implement that commitment of 5% ethanol in the gasoline pool by 2007. The risk is that in its attempt to keep its political commitments, this provincial government could very well stumble over unintended consequences while short-changing the benefits that could be generated.

The McGuinty government committed to expansion of ethanol (virtually the only commitment to agriculture in the entire party platform) as a means of providing benefit to rural economic activity and Ontario agriculture. One would think, then, that maximizing these benefits would be the priority. One would be wrong.

Unspoken in the government's commitment to ethanol was a very real desire to reduce expenditures in support of ethanol, and to get out from under obligations contained in Ethanol Manufacturers' Agreements (EMA) signed with ethanol producers. Currently in Ontario, the provincial government provides support through a 14./cent/litre tax exemption on the ethanol portion of ethanol-blended gasoline sales. The EMA commits the government to provide equivalent benefit to ethanol manufacturers should the tax exemption be altered or eliminated.

Currently, about 300 million litres of fuel ethanol are sold in Ontario (up from zero as recently as 1997), but only half is produced in Ontario with the rest imported from the U.S. where ethanol is more heavily subsidized. Obviously, the existing support package is sufficient to expand ethanol sales because it did. However, despite the provincial support package (i.e., tax exemption plus EMA), not one new ethanol plant has been built since the CAI plant in Chatham in 1996/97. Obviously, this level of support is insufficient to generate new construction because it hasn't. The key point is in order to maximize benefit to rural economic development and Ontario agriculture, new ethanol construction is required, not merely new ethanol sales.

To assist the government in developing a strategy to implement its commitment, the OCPA developed a business plan which maximizes the benefits to rural Ontario and corn producers while avoiding unintended consequences such as enticing even more imported ethanol into the province. OCPA developed a coalition with all the major petroleum refiners and retailers (the Canadian Petroleum Products Institute, CPPI), one of whom, Suncor, has demonstrated a decade-long commitment to ethanol both as a refiner and a retailer and is about to build a 200 million litre ethanol plant near Sarnia. Our coalition attracted the support of the independent petroleum retailers (Canadian Independent Petroleum Marketers' Association, C1PMA) who retail 24% of all the gasoline sold in Ontario and many of whom already market ethanol and are committed to sell all they can get. As well, elements of our plan garnered letters of support from the two farmer-owned ethanol co-operative projects underway in Ontario. In fact, only the current ethanol producer abstained from joining our coalition (despite our efforts) perhaps because they would benefit if the current tax exemption were transformed into a subsidy paid directly to ethanol producers based on ethanol output regardless of source of corn. With all components of the provincial corn ethanol industry (save one) represented in support of our plan, one would think the government would listen. One would be wrong.

The Ontario government is about to implement its ethanol strategy by forcing retailers to market ethanol regardless of the source of that ethanol. Sounds like the OCPA should be happy; but the unintended consequence is that imports of ethanol will soar. Rural Ontario and Ontario corn producers do not benefit at all from expanded usage of ethanol if that ethanol is imported from the U.S. or Brazil or anywhere else. Simply selling more ethanol is not the commitment the government made. The government promised benefit to rural economic development and Ontario corn producers through implementation of its commitment to ethanol. The benefit to rural Ontario and Ontario corn producers is maximized only when new ethanol plants are constructed that purchase new volumes of Ontario corn. If the objective is to maximize benefit to rural economic development, why force sales which force imports?

Elimination of the provincial tax exemption on ethanol, in conjunction with forcing ethanol sales, saves the government $110 million annually by 2007. That is the government's real underlying motivation: reduce support to ethanol. The government seems bent on converting only a minor portion of that support into assistance to ethanol production. And even then, seems bent on providing that support in the form of a grant based on ethanol production (thus meeting its obligations under the EMAs), including existing ethanol production, regardless of the source of the corn. If the objective is to encourage expansion of new ethanol production, why provide a windfall profit on existing ethanol production? If the objective is to maximize benefit to Ontario corn producers, why provide a windfall profit on ethanol produced from U.S. corn?

The McGuinty government had a chance to keep its promise to aid rural economic development and Ontario corn producers, but didn't listen. This government put its own interests and obligations ahead of its promises. Sometimes you don't want to know how certain things are made like sausages and legislation and other smelly things.

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