It is vital at this point to differentiate commercial realities from strategic (or geopo­litical) and all other considerations. Although (as discussed in chapter 1) historical, environmental, political, and macroeconomic arguments have all been adduced in support of bioenergy programs, fiscal considerations now play an important role in both encouraging (prompted by political agendas) the take-up of novel alternative fuels and in partitioning the market for first and subsequent generations of rival but not equally readily commercialized biofuels. Indeed, taxation issues were quickly recognized and seized on by proponents of bioethanol, particularly because they were useful to counter the gasoline versus gasohol price differential: for example, in the United States, the indirect costs of regulating air pollution and of military protection for oil supplies from the Middle East are calculable and greatly inflate the nominal price of crude oil but are not (explicitly) passed on to the consumer.5 This distortion of the transportation fuel market by “hidden” subsidies has also led to economics models in which other indirect factors are included in the cost-benefit analysis:

• Technological developments that improve the national scientific base for employment, patents and overseas licensing, and engineering advances that “spillover” into related fields

• Reduced foreign currency payments and associated “banking” costs—highly important for a developing economy such as Brazil’s

• Higher income and sales tax returns from greater rural employment

• Reduced longer-term economic impacts of climate change and air pollution

All these arguments are, to varying degrees, contentious, and skeptics can be found from opposite ends of the economic spectrum, from oil industry analysts to academ­ics who foresee only accelerated land degradation from the industrial agronomy of energy crop cultivation.67

Taxation as an instrument of social and economic policy has, moreover, obvi­ous limitations if wasteful subsidies or punitive levels of taxation on standard gasoline and diesel products are to be avoided. Consider the following three scenarios:

• Bioethanol production can generate a commercial fuel with pump prices no greater than those of standard gasoline grades at equivalent tax rates, the comparison being valid when average prices during a period of one to five years are calculated, thus avoiding false comparisons at peaks and troughs caused by fluctuations in both agricultural feedstock prices (as an important cost input to biofuel production) and oil price movements if they continue to move inside the wide limits evident since the early 1980s (figure 5.1).

• Bioethanol can be produced commercially at a total (production, distribu­tion, and resale) cost that averaged, during a 5- to 10-year period, 10-50% higher than that of gasoline.

• Bioethanol production can only generate an unsubsidized product with a total cost more than twice that of the refinery gate price of standard gasoline (a price differential quoted for the United States in the late 1990s8) — or per­haps, even up to 10 times higher than conventional fuels where, for example, local conditions of climate and biomass availability are consistently much less favorable than for sugarcane production in Brazil or corn in the United States or where only refractory lignocellulosic feedstocks can be accessed with poorly developed bioprocessing technology.

The first (optimistic) case approximates that of Brazilian consumers with flexibly fueled cars after 2000.9 The second case is the conclusion most often reached in technoeconomic studies, whereas the third scenario is parallel to the emergency or “wartime” case discussed when the energy yields of conventional and alternative fuels were considered in chapter 1 (section 1.6.1): even if biofuels are prohibitively expensive now, technical developments may erode that differential or be obviated if (or when) fossil fuel shortages become acute in the present century (see later, section 5.6). In all three cases, taxation policy can (and will) influence consumer choice and purchasing patterns, whether for short — (tactical) or longer-term (strategic) reasons and when legislation enforces alternative or reconstituted fuels to achieve environ­mental targets.

A snapshot of data from October 2002 in Brazil, however, reveals the complexity of the interaction between production/distribution costs and imposed taxation on the final at-pump selling price.10 Although gasohol mixtures, hydrous ethanol, and diesel all had very similar production costs, equivalent to approximately 150/l (570/gal — lon) at that time, the final cost to the user was determined by the much higher taxes applied to gasohol (figure 5.2). Brazil exemplifies the extensive use of taxation to determine and direct the perceived prices of gasoline and alternative fuels as a delib­erate instrument of national policy. Such management of the fuel economy is likely to be instigated in societies where not only economics but social and environmental considerations are taken into account, but runs the risk of experiencing budgetary shortfalls if the total tax raised is severely reduced when the policy is too successful in achieving its aims — this becomes even worse if private transportation is perceived as being subsidized by other taxation sources (e. g., sales tax, income tax). For all the various interest groups in biofuels development, therefore, the priority is to establish viable production processes with the minimum requirement for tax incentives.