Biofuels in Australia Some economic and policy considerations

A report for the Rural Industries Research and Development Corporation by David Batten and Deborah O’Connell

November 2007 RIRDC Publication No 07/177 RIRDC Project No CSW-44A (PRJ-000830)

© 2007 Rural Industries Research and Development Corporation. All rights reserved. ISBN 1 74151 572 6 ISSN 1440-6845 Biofuels in Australia – some economic and policy considerations Publication No. 07/177 Project No. CSW-44A (PRJ-000830) The information contained in this publication is intended for general use to assist public knowledge and discussion and to help improve the development of sustainable regions. You must not rely on any information contained in this publication without taking specialist advice relevant to your particular circumstances. While reasonable care has been taken in preparing this publication to ensure that information is true and correct, the Commonwealth of Australia gives no assurance as to the accuracy of any information in this publication. The Commonwealth of Australia, the Rural Industries Research and Development Corporation (RIRDC), the authors or contributors expressly disclaim, to the maximum extent permitted by law, all responsibility and liability to any person, arising directly or indirectly from any act or omission, or for any consequences of any such act or omission, made in reliance on the contents of this publication, whether or not caused by any negligence on the part of the Commonwealth of Australia, RIRDC, the authors or contributors. The Commonwealth of Australia does not necessarily endorse the views in this publication. This publication is copyright. Apart from any use as permitted under the Copyright Act 1968, all other rights are reserved. However, wide dissemination is encouraged. Requests and inquiries concerning reproduction and rights should be addressed to the RIRDC Publications Manager on phone 02 6271 4165

Researcher Contact Details Dr David Batten The Temaplan Group PO Box 3026 Dendy Brighton VIC 3186

Dr Deborah O’Connell CSIRO Sustainable Ecosystems GPO Box 284 Crace ACT 2601

Phone: Email:

Phone: Email:

03 9592 0720 [email protected]

02 6242 1600 deborah.o’[email protected]

In submitting this report, the researcher has agreed to RIRDC publishing this material in its edited form. RIRDC Contact Details Rural Industries Research and Development Corporation Level 2, 15 National Circuit BARTON ACT 2600 PO Box 4776 KINGSTON ACT 2604 Phone: Fax: Email: Web:

02 6271 4100 02 6271 4199 [email protected] http://www.rirdc.gov.au

Published in November 2007 Printed on environmentally friendly paper by Canprint

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Foreword Demand for all forms of energy has grown dramatically throughout the world during the 21st century. There is a growing trend worldwide to look for alternative energy sources which are more secure and produce less greenhouse gases. Biofuels have been promoted internationally as a major response to these drivers. They can offer the potential for improved fuel security, lower greenhouse gas emissions and health benefits in cities. There are also potential benefits to rural communities in Australia. However, the benefits are very sensitive to the particular production system, and are not universal. The recent report Biofuels in Australia – issues and prospects (O’Connell et al. 2007) reviewed and compiled our knowledge of the implications of a biofuels industry in Australia. The report was an early step towards synthesising a picture of the current situation for biofuels in Australia, and scoping some of the prospects and implications of industry growth. Further detail on the economic and policy aspects of biofuels is provided in this report, as a supplement to the main report. This project was funded from RIRDC Core Funds (which are provided by the Australian Government) in partnership with CSIRO’s Energy Transformed Flagship. Most of our publications are available for viewing, downloading or purchasing online through our website: • •

downloads at www.rirdc.gov.au/fullreports/index.html purchases at www.rirdc.gov.au/eshop

Peter O’Brien Managing Director Rural Industries Research and Development Corporation

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Acknowledgments Thanks to Roslyn Prinsley for instigating this study and Charlie McElhone for providing ongoing input and discussion as it evolved. Thanks also to CSIRO colleagues for their valuable discussion and input, including Michael O’Connor, Barrie May, John Raison, Brian Keating, Tom Beer, Andrew Braid, Victoria Haritos, Cameron Begley, Mick Poole, Perry Poulton, Sonia Graham, Michael Dunlop, Tim Grant, Peter Campbell, David Lamb and Damien Farine. Thank you to our reviewers – Paul Graham, Steve Hatfield Dodds, Mikael Hirsch and Steve Schuck – your commentary was extremely valuable.

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Abbreviations ACT ANTS A$ B5 B10 B20 B100 BTL c/L CA$ CNG CO2 CTL DME E10 EC EU FCAI GL GM GST GTL IEA IPC LNG LPG MJ/L ML Mt MTBE Mtoe NETS NETT NIEIR NSW NT OECD R&D ULS US USA US$ VRET WA WTO

Australian Capital Territory Analysis of the New Tax System Australian dollars Blend of 5% Biodiesel in petroleum diesel Blend of 10% Biodiesel in petroleum diesel Blend of 20% Biodiesel in petroleum diesel Fuel containing 100% Biodiesel Biomass To Liquid Australian cents per Litre Canadian dollars Compressed Natural Gas Carbon Dioxide Coal to Liquid Dimethyl ether 10% blend of Ethanol in Petrol European Commission European Union Federal Chamber of Automotive Industries Gigalitre Genetically modified Goods & Services Tax Gas to Liquid International Energy Agency International Food & Agricultural Trade Policy Council Liquefied Natural Gas Liquid Petroleum Gas Megajoule per litre Megalitre Metric ton Methyl tertiary butyl ether Million tonnes of oil equivalents National Emissions Trading Scheme National Emissions Trading Taskforce National Institute of Economic and Industry Research New South Wales Northern Territory Organisation for Economic Cooperation and Development Research and Development Ultra low sulfur United States (of America) United States of America United States dollars Victorian Renewable Energy Target Western Australia World Trade Organisation

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Contents Foreword ............................................................................................................................................... iii Acknowledgments................................................................................................................................. iv Abbreviations......................................................................................................................................... v Executive Summary ........................................................................................................................... viii 1. Introduction ................................................................................................................................... 1 2. Competition for crops with alternative markets ........................................................................ 3 2.1 First generation biofuels – international.................................................................................. 3 2.2 First generation biofuels – Australia ....................................................................................... 5 2.2.1 Second generation biofuels – market impacts and interactions .................................. 7 2.3 Key learnings and further work............................................................................................... 9 3. Policies affecting biofuels security ............................................................................................. 10 3.1 Subsidies associated with fossil fuel use in Australia ........................................................... 10 3.2 Current policy affecting the Australian biofuels industry ..................................................... 12 3.3 Policies and subsidies for biofuels in other countries ........................................................... 16 3.3.1 South America........................................................................................................... 17 3.3.2 USA........................................................................................................................... 18 3.3.3 Canada....................................................................................................................... 19 3.3.4 The European Union ................................................................................................. 19 3.4 Key learnings and further work............................................................................................. 21 4. Options for expanding demand.................................................................................................. 22 4.1 Current barriers affecting demand......................................................................................... 22 4.1.1 Intermediate demand................................................................................................. 22 4.1.2 Final demand............................................................................................................. 23 4.1.3 Trade barriers ............................................................................................................ 25 4.2 Strategies for stimulating demand ......................................................................................... 26 4.2.1 Removal of demand barriers ..................................................................................... 26 4.2.2 Rollout incentives ..................................................................................................... 26 4.2.3 Price discounting....................................................................................................... 26 4.2.4 Mandating fuel blends or flexi-fuel vehicles ............................................................ 27 4.2.5 Tax, excise and import incentives............................................................................. 27 4.3 The European strategy........................................................................................................... 28 4.4 Key learnings and further work............................................................................................. 29 5. Options for encouraging future capital investment.................................................................. 30 5.1 Effectiveness of present policy.............................................................................................. 30 5.2 Targeted and transparent incentives ...................................................................................... 31 5.2.1 Emissions trading schemes ....................................................................................... 32 5.3 Capacity of domestic biofuels industry to satisfy consumer demand.................................... 34 5.4 Key learnings and further work............................................................................................. 35 6. Conclusions .................................................................................................................................. 36 7. References .................................................................................................................................... 38

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List of figures Figure 2-1 Food, feed and fuel consumption globally ............................................................................ 3 Figure 2-2 World production of ethanol and biodiesel ........................................................................... 4 Figure 2-3 a) World wheat stocks b) USA wheat prices (Kansas in US$).............................................. 4 Figure 2-4 Indicative production costs in Australia ................................................................................ 6 Figure 4–1 Aggregated industry projections up to 2010…………………………………………..…..22

List of tables Table 2–1 estimates of current Australian production and capacity levels (2006-07) and proposed capacity for expansion in the future……….……………………….………...………………6 Table 3-1 Selected fuel excise rates to apply at the end of the phase-in period .................................... 12 Table 3-2 Excise transition path for fuels entering the excise net......................................................... 12 Table 3-3 History of key subsidies and other policy instruments in the national context..................... 13 Table 3-4 History of key subsidies and other policy instruments in the international context ............. 16 Table 4-1 Attitudes to buying petrol containing ethanol....................................................................... 24 Table 4-2 Some barriers affecting the demand for ethanol ................................................................... 24 Table 4-3 Some barriers affecting the demand for biodiesel................................................................. 25 Table 4-4 Strategies recommended by the Biofuels Taskforce (2005) to restore consumer confidence in ethanol ............................................................................................................................................... 26

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Executive Summary What the report is about This report discusses some economic and policy issues associated with the production of liquid biofuels in Australia and overseas. Ethanol and biodiesel are the principal alternative fuels discussed here, and the topics covered include: • Competition for crops with alternative markets: Food, fibre, livestock and biofuel producers are competing for the same commodity crops in the international arena. • Policies affecting biofuels security: There are net subsidies to petroleum-based transport fuels and vehicle use in Australia, and recent changes to the fuel taxation system have had a negative impact on the biodiesel industry. • Options for expanding demand: Misunderstandings and misinformation among consumers, and a lack of availability of E10 and B5 in southern and western states, are currently constraining demand growth. • Options for encouraging future capital investment: In addition to an emissions trading scheme, targeted incentives could be introduced to promote the judicious use of biofuels. As the production of biofuels is an emerging industry in Australia, the information contained in this report is important in determining what benefits may accrue from any proposed diversion of human and animal feed stocks – sugars, cereals and oilseeds – into biofuel production.

Who is the report targeted at? The report was prepared to provide information and advice to all levels of government and industry in Australia. It is of particular relevance to the energy and transport sectors, as well as those agricultural sectors engaged in the production of sugars, cereals, oilseeds and livestock. Since it includes a review of the research literature on economic and policy aspects of ethanol and biodiesel, it may be of interest to other scientists in the energy, transport and agricultural fields.

Background Australia’s land and water resources will be increasingly contested for animal, food, fibre, and energy production, as well as environmental services like carbon sequestration and biodiversity. The choices we make about biofuels will have far reaching implications for the nation’s economy, environment and society. It is critical that any move to a large-scale biofuel industry in Australia is sustainable. The sustainability credentials for biofuels across the areas of greenhouse gas emissions, land and water impacts, financial viability and social acceptability must be clear. Internationally, biofuels have been promoted as a response to greenhouse gas emissions, supply constraints in the oil industry and energy security. In the USA, the accelerating use of corn for the production of ethanol has led to significant increases in the feed corn price and protests from various quarters (in and outside the USA). With the biofuel industry in its infancy in Australia, questions have emerged on the effect the development of a local biofuel industry could have on other industries and whether targets or mandates are suitable policy instruments to promote their use in the marketplace. The recent report Biofuels in Australia – issues and prospects (O’Connell et al. 2007) synthesises our knowledge of the implications of a biofuels industry in Australia. The additional detail described in this report on the economic and policy aspects of biofuels is supplementary to the above report.

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Aims/Objectives The aim of the research was to provide an independent, refereed report on some key economic and policy issues associated with the production of biofuels in Australia, for example • Competition for crops with alternative markets: To what extent can Australian food, fibre, livestock feed and biofuel producers afford to compete for the same commodity crops? • Policies affecting biofuels security: How does the level of net subsidies provided to fossil fuels and vehicle use compare with subsidies and policies impacting on biofuel producers in Australia? • Options for expanding demand: How can certain misunderstandings and misinformation among consumers and a lack of availability of biofuel bends in southern and western states be addressed? • Options for encouraging future capital investment: Are targeted incentives the best strategies to adopt in order to promote the judicious use of biofuels?

Methods used Most of the material in this report was derived by reviewing existing stocks of knowledge – research papers from refereed journals, unpublished reports, news articles and personal contacts with industry leaders and other scientists. Although there is a large amount of material on biofuels available on various websites, much of this sponsored by the ethanol and biodiesel industries, it was discounted as secondary to the other sources. Effort was made to locate papers on ethanol production from grains and sugars, and biodiesel production from oils and tallow, as these are the most likely feedstocks to be used in the production of first generation biofuels in Australia.

Results/Key findings Competition for crops with alternative markets •

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In some commodity markets, food, livestock and biofuels producers compete for the same crops – while in others it is less clear that this is the case. About 61% of the world’s ethanol production comes from sugar crops – sugar cane, sugar beet or molasses. Brazil is able to shift from sugar to ethanol production in response to oil-sugar price shifts. When the sugar price is high relative to ethanol, producers stay with sugar. But when the ethanol price rises relative to sugar, they produce more ethanol. Thus food and fuel uses are competing for the same crop in this case. Most of the remaining ethanol is made from grains, with corn-based ethanol production growing by about 30% per year in the USA. Recent price increases include doubling of USA corn prices in 2006-7; rising prices of food staples such as milk, eggs and chicken in highly-populated nations like China, India and the USA, as well as tortillas in Mexico; doubling of rapeseed (canola) oil prices in Europe over the last five years; and European prices of cereals, starches and glucose increasing by about 20% in the last year. However, the case of competition for feedstocks is less clear for other crops than it is for sugar. The degree of substitution between grains for food, feed and biofuels is not clear, and the impact of other factors such as an increase in energy price, the steady increase in demand for food and feed, or the impact of drought and climate change has not been thoroughly investigated. Although competition with food producers for crops has not been a serious issue for Australia’s few ethanol producers (who use waste starch and C-molasses), increases in global grain commodity prices have increased world agricultural commodity prices, especially grains, thus increasing returns to Australian producers. Currently ethanol from waste starch and C-molasses, and biodiesel from waste oil can be produced for less than 45 c/L (roughly competing with oil at US$40 per barrel). Ethanol from sugar, and biodiesel from tallow and canola, can be produced for less than 80 c/L (roughly competing with oil at US$80 per barrel). Production costs vary mostly because of different feedstock costs. Higher levels of ethanol production from C-molasses could place upward pressure on molasses prices, and eventually have an impact on the price and availability of molasses for other uses – such as in the food additive and stock feed markets.

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Use of wheat or sorghum as feedstocks to fuel the expansion of the Australian ethanol industry will increase competition with grains for food and with feedgrain for livestock. Similarly, expansion of Australia’s biodiesel industry will trigger competition with soap and detergent manufacturers for input feedstock. A whole new set of markets for second generation (lignocellulosic or algal) feedstocks is expected to develop, which have not been explored in Australia. Although some biomass-based sources have no competing markets, they do have competing uses – e.g. retaining carbon in ecosystems. In the case of a large-scale biofuel industry, there is likely to be competing markets not just for the feedstocks, but also for the factors of production – including land, water and labour – which would then impact on many other industry sectors, especially in regional Australia.

Subsidies to the fossil fuel industry •

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Estimates of subsidies to all fossil fuel use in Australia range from 2 to 10 billion Australian dollars per year. These estimates include: o perverse subsidies i.e. those which increase greenhouse gas emissions and reduce economic efficiency o subsidies to motorists – which would still apply if the motorists were running their vehicles on alternative fuels instead of fossil fuels. Further research is needed to improve the estimates of subsidies directly associated with fossil fuel use in Australia.

Australian biofuels policies and impacts •

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The major biofuels policy at the national level is a 350 ML target by 2010. Based on current production levels, current installation of new facilities, plus recent uptake by some oil majors, it seems likely that this target will be met. Different states are developing their own approaches, which are in various stages of development. Assistance currently provided to producers includes: o a production grant of 38.1 c/L, which fully offsets the excise paid on biofuels o a capital grant that effectively provides around 1c/L in additional assistance over the lifetime of the plant. Assistance to biofuels is scheduled to fall to 12.5 c/L for ethanol and 19.1 c/L for biodiesel by 1 July 2015. A banded excise system will impose rates on different fuels, classified into high, medium and low energy groups. This strategy broadly keeps constant the excise payable per kilometre travelled by vehicles using the fuel. Domestic producers are eligible for the excise rebate from the Australian government. Ethanol imports are subject to both a general tariff of 5% (zero if imports are from the USA) and the full excise of mid-energy fuels of 25 c/L. This differential treatment of domestic and imported sources amounts to a tariff on imports reducing the competitive pressures on domestic producers, and may lead to higher biofuel prices for Australian businesses and households. Recent changes to the fuel taxation system have had a major impact on the biodiesel industry. Changes to the Fuel Tax Act 2006 mean that the payment of a producer grant (under the Energy Grants (Cleaner Fuels Scheme) Act 2004) extinguishes the fuel tax liability – i.e. if the producer of the biodiesel has received a grant, the purchaser of biodiesel cannot claim a fuel tax credit. This penalises any biodiesel purchaser who could ordinarily claim a rebate on diesel, and thus impacts on the demand for biodiesel.

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Comparison to overseas subsidies and policies Drivers for the use of biofuels differ greatly between countries and between fuels. • Ethanol was initially regarded as a fuel extender. Then it was used as a replacement for methyl tertiary butyl ether (MTBE). MTBE is an oxygenate which reduces air pollution from petrol in cities. When MTBE contaminated groundwater in the USA, it was banned by the end of 2002 – with ethanol being chosen as the replacement oxygenate. Oil companies then realised that ethanol was a good octane enhancer. It is now considered as an alternative fuel, and major policy support in Brazil and USA is largely a response to the issue of national energy security, and a general culture of government support for domestic agriculture. • Many countries moved to using Ultra Low Sulfur (ULS) diesel because of air pollution problems caused by sulfur in the fuel. When the sulfur was removed, however, many lubricant properties of the diesel were lost. Biodiesel has excellent lubricant properties, and was introduced to a diesel blend as a lubricant enhancer. The further benefits of biodiesel were then demonstrated – especially in terms of lower particulate emissions and thus reduced air pollution and better health outcomes. It is now considered as an alternative fuel rather than an extender. Major policy support in the European Union (EU) is based on reducing greenhouse gas emissions and improving urban air quality, rather than as a response to energy security.

Current barriers to demand Total demand for transport fuel has two components: • Intermediate demand – purchasing patterns of intermediate producers such as oil companies, services stations, farming co-operatives who process, blend and distribute fuels for eventual sale to customers. • Final demand – purchases by individual consumers and households. Barriers to intermediate demand include: • Industry projections quoted in the Prime Minister’s Biofuels Action Plan show that oil majors expect to exceed the government's biofuels target of 350 ML by 2010. BP’s recent decision to purchase 40 ML of ethanol from Manildra over the next year will make it Australia’s largest marketer of biofuels, and result in nearly half of BP’s fuel sales in NSW containing ethanol. • Prior to this, only about 5% of the 8,000 or so service stations across Australia have been selling ethanol or biodiesel blends. • Until BP’s increased outlets come on stream, ethanol and biodiesel blends are being provided mostly by independent and small scale fuel providers. • A lack of availability of E10 and B5 in southern and western states remains one of the largest barriers to demand growth. Barriers to final demand include: • Consumer confidence is the major barrier. Regional motorists are more comfortable with E10, and Queenslanders favour ethanol more than drivers from other states. This is probably due to Queensland government initiatives to promote ethanol. • Motorists are concerned that ethanol will damage their engines. This concern is unfounded for modern cars running on E10. • The motor industry does not warrant vehicles for blends containing greater than 10% ethanol. • E10 typically slightly reduces fuel economy (by 2-3%) because of its lower energy density, and motorists therefore expect it to be slightly cheaper. Trade barriers include: • An additional consequence of recent changes in sulfur content rules has been to restrict the import of fuel from many Asian sources, due to their high sulphur content. This shelters the oil majors in Australia from further external competition in their refining capacity. • Both the USA and the EU impose tariffs on ethanol imports.

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Strategies to stimulate demand Those recognised by the Biofuels Taskforce (2005) include: • industry-based information dissemination • more marketing and promotional activity • simplification of the FCAI vehicle list on E10 suitability • further E10 vehicle operability testing • simplification and modification of the current fuel ethanol information standard. The following additional options could be considered for addition to this list: • removal of demand barriers • rollout incentives – investment incentives could be made available to companies to expand distribution networks by constructing retail outlets whose sales included, for example, 10% ethanol and 5% biodiesel blends • price discounting: – if a biofuel is produced for less than the price of the standard fuel, pass on the savings to the consumers – introduce controls on weekly fuel price movements – discount the price of ethanol to compensate for differences in fuel efficiency • mandating fuel blends: there are many complex issues involved in mandating biofuels, but several states will introduce mandates shortly - Queensland intends to mandate a minimum 5% ethanol in regular unleaded petrol produced and wholesaled in Queensland from 31 December 2010. Also, NSW is, in principle, supporting a 10% ethanol mandate in unleaded petrol produced and wholesaled in NSW, on a phased-in basis with full implementation by 2011 • producing and/or mandating flexi-fuel vehicles would address consumer confidence issues, and place Australia in a position to increase our ethanol use in the future • tax, excise and import incentives: – between July 2011 and July 2015, production grants for ethanol and biodiesel will incrementally reduce to about half the current excise rate – currently, the production grant for biodiesel also applies to imports of biodiesel to Australia. Imported ethanol does not receive a production grant, although in 2011 imported ethanol will be treated equivalently to domestically produced ethanol – the effect of this on the local production of ethanol is unclear. It is possible that Brazilian ethanol could be purchased at a lower price than Australian produced ethanol, so that the industry may experience increased competition from overseas producers when the import market is opened up in 2011.

Effectiveness of present policy in encouraging sustainable capital investment and growth in supply •

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Australia’s policy platforms for biofuels differ significantly from Europe, America and other nations which actively promote the production and use of biofuels. Some of the intended and unintended consequences of these proactive policies are currently unfolding – particularly in the USA, where there has been a massive increase in the production of ethanol, with consequent increases in the grain price and impacts for the human and livestock food supplies. In contrast, Australia’s policies have been cautious. Recent marketing announcements by BP, along with additional new production capacity coming on stream shortly, suggest that biofuel production is likely to reach or exceed the 350 ML target by 2010. Reductions in levels of excise relief from 2011 onwards, and the uncertainty in the domestic industry about future directions, may slow down further capital investment. There are limits and security of supply risks to a biofuels industry based on domestic feedstocks and first generation technologies. These first generation technologies can serve as a stepping stone towards a biofuels future based on second generation technologies.

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Given the potential for lignocellulosic ethanol and algal biodiesel to change the economics of the biofuels industry in the coming decade, policy interventions based on current technologies and feedstocks require careful consideration. There is a need for a closer assessment of the potential for second generation technologies, such as lignocellulose and algae (Biofuels Taskforce 2005), and an industry roadmap for the implementation of these technologies.

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Targeted incentives and assistance programs •

There are opportunities to use targeted incentives in the area of biofuels. For example, if a set of criteria was based on a set of preferred outcomes (e.g. lower greenhouse gas emissions, higher energy input-to-output ratios, better health or regional outcomes), then incentives could be targeted and scaled on this basis. These incentives would require a technically defensible and transparent basis. For example biofuels from second generation lignocellulosic sources could target positive hydrological, biodiversity or regional benefits. An emissions trading scheme could promote the use of biofuels, if sale of renewable fuels did not require purchase of emissions allowances, whereas fossil fuel suppliers would be obliged to purchase emissions allowances in order to sell fossil fuels.

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There are claims that the two challenges to commercialising conversion technologies are being overcome and that the industry will be viable within 2 to 3 years (Microbiogen 2006). The first challenge – breakdown of lignocellulose into its component sugars – has not been economic using chemical or enzymatic means. However, in the past three years, large scale investment (~US$40 million) (A$50 million) by the US government in collaboration with enzyme companies such as Novozymes and Genencor has led to a thirty-fold decrease in the costs of enzyme technology. The current estimate by Novozymes of 30 USc/gallon (~8 USc/L) has brought the cost of enzymes into an economic range. The second challenge – development of organisms capable of efficiently fermenting all the sugars present into ethanol – may eventually be met by Microbiogen, who have developed nonGM organisms that can use all the sugars in lignocellulosics. A previous study has suggested that current cellulosic ethanol production could produce ethanol for 82 c/L in a 200ML plant and for 99 c/L in a 100ML plant (Enecon 2002). Each case assumed a woody feedstock cost of A$30/green tonne delivered, with other costs adapted from an earlier report (NREL 1999).

Can a domestic industry supply sufficient biofuel to satisfy consumer demand? •

Because consumer demand is currently a barrier to biofuel expansion, there is likely to be sufficient capacity to meet any growth in consumer demand for biofuels for the rest of this decade. The challenge facing Australia’s biofuels industry today is to produce basic blends like B5 and E10 cheaply enough to attract interest from lukewarm oil majors and misinformed and therefore sceptical consumers in the southern and western states.

Implications for relevant stakeholders Government policy makers: • • • •

Focus on renewable energy supplies which maximize the chances of positive environmental, social and economic outcomes and do not directly compete with food supply. Consider the introduction of targeted incentives in the area of biofuels. Ensure consistent policy development for biofuels with any policy framework for alternative fuels or sustainable energy in Australia, and consistency across the agriculture, forestry, energy, transport and carbon market domains. Seek to understand potential interactions between policy and other factors which require analysis in order to gain the intended benefits and avoid unintended costs. The transitional

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pathways to a sustainable energy future need to be clearly mapped – including the sequence of steps and policy changes required to reach the intended destination. Seek to identify and minimise potential distortions that may arise through interactions with other policies.

Biofuel industry: • • • •

Consider economies of co-location, e.g. co-locate and integrate grain ethanol production with beef feedlots or dairies utilizing co-products like wet or dry distiller’s grains (e.g. Braid 2007). Prioritise use of low-cost and low-emissions feedstocks like waste oils and starches, thereby complementing existing activities through the use of wasted by-products and low-value inputs wherever possible, rather than competing for inputs. Seek to understand and implement sustainability into business development plans. Seek to pass on savings on rebates to consumers to provide price incentives.

Consumers: • •

Strive for co-location and integration of processes – as described above – which can expand the local industry and thereby benefit the local community. Better understanding of consumer attitudes and behaviours is required.

Conclusions and recommendations Competition for crops with alternative markets •

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There is currently negligible competition between biofuel and food production in Australia because the biofuel industry is in its infancy and does not heavily rely on food as feedstocks. As the industry grows, however, this may be an issue and competition for food, animal feed and water must be carefully understood and managed. Internationally, it is mooted that the increase in commodity price is due to competing demand between food and biofuel, but the extent to which biofuel production is driving price (compared to other factors such as drought) deserves closer examination. Maintaining a strong, up-to-date understanding of the international and domestic commodity markets which affect feedstock prices, and the competition between competing markets under various policy, technological, economic and other drivers is essential to keep abreast of this fast moving area of development. Maintaining a strong understanding of supply and transportation logistics and their costs is needed. A significant cost of delivering feedstocks to the factory gate can be in the transportation cost. A consistent set of policies with well researched intended outcomes, clear transition pathways, clear benefits and minimimal risks to the public, future generations and industry will place Australia in an excellent position to secure a sustainable energy future with a stable environment for investor confidence. Second generation processing technologies which rely on non-food feedstocks (e.g. lignocellulose) appear promising in terms of lower energy input systems, and lower costs. Further analysis is required to obtain a robust assessment of the impact of second generation biofuels applicable to Australian feedstock production systems, market conditions and infrastructure requirements. Any new energy industry – especially one based on domestic biomass – will change the material and energy flows through the whole economy once it reaches a critical size. The biophysical and economic impacts of these need to be understood, particularly in the dynamic market conditions for commodities, fuel and carbon.

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Policies affecting biofuels security •

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If estimates of specific taxes and subsidies that are directly associated with fossil fuel use in Australia are to be improved, further research is required. It would be worthwhile to update and consolidate earlier analyses and to examine the impact of recent changes in taxation, including changes to fuel excise and the freight fuel excise rebate. Given the potential for lignocellulosic ethanol and algal biodiesel to change the economics of the biofuels industry in the coming decade, policy interventions based on current technologies and feedstocks require further consideration, which should ideally be based on a well reasoned technology roadmap (O’Connell et al. 2007). Australia would benefit from remaining abreast of international developments in subsidies and other forms of support to biofuel production, including their impacts on other domestic and international industries, communities and economies. Australia would benefit from close linkages with international developments in sustainability certification and trade.

Options for expanding demand •

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Intermediate and final demand are barriers to uptake of biofuels. Understanding how consumer attitudes and behaviours are formed is needed, including how and what information is given to consumers and what incentives may work to encourage uptake. For example, the federal government has invested significantly into understanding some of these issues with respect to consumer attitudes to biotechnology, focussing on GM crops and stem cells. A more detailed assessment than is provided here of domestic and international trade barriers with respect to emerging production and markets for biomass and biofuels would be useful to Australian industry and government. Effective use of different approaches and policy instruments including removal of demand barriers, rollout incentives, price discounting, mandating fuel blends, producing and/or mandating flexi-fuel vehicles, and tax, excise and import incentives is critical. Any policies to stimulate demand would ideally be underpinned by a clear understanding of the interactions and consequences of these different approaches so that the intended consequences were achieved while minimizing unintended ones – including potential interactions with other policies across the domains of agriculture, forestry, water, energy and carbon markets.

Options for encouraging future capital investment •

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There are opportunities to use targeted incentives in a similar way in the area of biofuels. To be a viable and sustainable alternative to fossil fuels, a biofuel should provide a net energy gain, possess environmental benefits, be economically competitive, and able to be produced in large quantities with minimal adverse impact on food or livestock feed supplies. Trees, other woody plants (including woody weeds), and various grasses and forbs (broadleaved herbs) can be produced on less productive agricultural land with little or no fertiliser, pesticides and energy inputs and may have hydrological, biodiversity or regional benefits as well as greenhouse gas reductions. These options are good candidates for research and carefully targeted incentive and assistance programs in the near future. A set of internationally consistent sustainability criteria (e.g. greenhouse gas emission profile, energy return on energy invested) could be developed around which incentives could be targeted and scaled. The incentives would require a technically defensible and transparent basis, linking production feedstocks and technologies to environmental (or other) target outcomes. A full and detailed discussion of the critical area of emerging carbon trading schemes and potential interaction with biofuels was beyond the remit of this report. Interactions between biofuels policies and domestic and international carbon market schemes warrant some serious further investigation.

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1. Introduction Australia, like many countries, faces a complex set of challenges and opportunities with respect to meeting our future energy needs. Rising oil prices; the prospect of a ‘peak’ in oil resources; instability in the Middle East; and rapidly growing global demand will all affect our future energy supplies. Concerns about greenhouse gas emissions and urban air pollution are creating a need for cleaner, low emissions energy and making governments consider putting a price on carbon emissions. These challenges are particularly complex and pressing when thinking about our future transport fuel options. Transport is the second largest emitter of energy related greenhouse gases, and is extremely dependent on oil. Australia currently supplies 75% of its transport fuel from local oil and gas sources. However, demand is growing at an increasing rate, and without major new discoveries or technological breakthroughs, this fraction is estimated to decline to 45% by 2020. For Australia to achieve a more self-sufficient fuel supply, we need to employ a range of strategies. We need to investigate new technologies for more efficient oil and gas extraction and processing with lower greenhouse gas emissions. Other options include adding more liquefied petroleum gas (LPG) and compressed natural gas (CNG) to Australia’s fuel mix, and using biofuels, gas-to-liquids and coalto-liquids fuel transformation technologies. It will also be important to limit growth or reduce demand for transport fuel by using smaller and more fuel-efficient engines, like hybrid electric engines and fuel cells, and encouraging eco-efficient urban design to reduce car use. How do biofuels rate among this range of strategies? Australia has a small, commercial biofuel industry, which currently supplies less than 0.3% of Australia’s transport fuel consumption, and a modest national target of producing 350 ML of biofuels (or approximately 1% of current total transport fuel) by 2010. This is in stark contrast to many other countries, which have instituted policies to ramp up biofuel production rapidly. The recent report Biofuels in Australia – issues and prospects (O'Connell et al. 2007) synthesises current knowledge of a biofuel industry in Australia in the light of international developments. The additional detail provided in this report is supplementary to the above report and addresses the following Terms of Reference: 1) Competition for crops with alternative markets. a) To what extent might sugar/molasses, grains, starches and other agricultural products and byproducts be forced to compete in food, biofuels and other markets in the future? 2) Policies affecting biofuels security. Summarise those policies and fiscal instruments that affect the security and sustainability of a domestic biofuels/bioenergy industry. a) What is the nature and magnitude of subsidies to the fossil fuel industry in Australia – at both the inception of the industry and in recent times, including the present? b) How do these subsidies compare with the nature and magnitude of subsidies to biofuels industries in other countries? c) What impact are domestic (federal and state government) current policies having on the establishment of a domestic biofuels industry? d) How do these compare with policies in other countries including the EU, USA and Brazil? 3) Options for expanding demand. Summarise and discuss strategies and policy changes that could create more demand for biofuels. a) What are the barriers affecting current levels of demand and are present policies effective in encouraging demand growth? b) Which strategies could be used to stimulate demand – including incentives, discounting prices, increasing biofuel availability, tax incentives and mandating fuel mixes?

1

4) Options for encouraging future capital investment. a) Is our present policy effective in encouraging sustainable capital investment and growth in supply? b) Under what circumstances would targeted or transparent incentive and assistance programs (e.g. start-up grants) be more effective in driving investment and biofuel supply than the existing excise treatment (pre- and post-2011)? c) Can the domestic industry alone provide sufficient volumes of biofuel to satisfy consumer demand, or will imports will be required? d) What is the role of the major oil companies in building a domestic biofuels industry? The report has been structured around these questions, largely addressed in separate chapters. The implication of carbon trading schemes on the biofuels industry was not a requirement in the Terms of Reference, but some brief introductory discussion is provided in Chapter 5 because the authors thought it a critically important issue for consideration. Most of the material in this report was derived by reviewing existing stocks of knowledge – research papers from refereed journals, unpublished reports, news articles and personal contacts with industry leaders and other scientists. Although there is a large amount of material on biofuels available on various websites, much of this sponsored by the ethanol and biodiesel industries, it was discounted as secondary to the other sources. Effort was made to locate papers on ethanol production from grains and sugars, and biodiesel production from oils and tallow, as these are the most likely feedstocks to be used in the production of first-generation biofuels in Australia. This report provides an insight into some of the economic and current policy settings and their implications in Australia and overseas, as guided by the Terms of Reference. There are many economic and policy issues which are important but fall outside of this remit, and this report provides a basis for pointing towards which areas may be worthy of further investigation.

2

2. Competition for crops with alternative markets 2.1

First generation biofuels – international

There has been an explosion of analyses, reports and predictions for the response of world commodity markets to the recent exponential increases in biofuel production (e.g. Green 2007, OECD 2006, von Braun 2007, Caesar et al. 2007). This very brief examination is not intended as an exhaustive review of the literature, but a brief introduction to the issues of competing markets for food crops for the end uses of fuel and food. Human food and animal feed have led to a steady increase in demand for agricultural commodities globally through the last forty years (Figure 2–1). The extra demand which has resulted from fuel demand shows clearly as a wedge increasing from 2000 – 2006, and is predicted to increase at a higher rate between 2006 and 2015 based on current trends. The overall extra demand to date, as shown by the size of the wedge, is relatively minor in comparison to demand from food and feed. World production of biofuel is ramping up rapidly. European production is focussed on biodiesel while the USA and Brazil are focussed on ethanol (Figure 2–2). The production of commodities has been struggling to meet the growing demand recently. World stocks are low, and there is upward pressure on prices (e.g. world wheat, see Figure 2–3 a, b).

Year (1960-2014)

Figure 2-1 Food, feed and fuel consumption globally (Rathbone 2007 sourced from USDA and Goldman Sachs Commodities research estimates)

3

Figure 2-2 World production of ethanol and biodiesel (OECD/IEA 2007)

a) World wheat stocks

b) USA wheat prices

Figure 2-3 a) World wheat stocks b) USA wheat prices (Kansas in US$) (Rathbone 2007, based on analyses from Analysing Agriculture)

In at least some of the commodity markets of today, food, livestock and biofuels producers compete for the same crops – while in others it is less clear that this is the case. About 61% of the world’s ethanol production comes from sugar crops – sugar cane, sugar beet or molasses. Brazil dominates this pathway to such an extent that it is mooted by some that oil, ethanol and sugar prices have become intrinsically linked through the ability of Brazil to shift from sugar to ethanol production in response to oil-sugar price margins (e.g. Howden et al. 2006). When the sugar price is high relative to ethanol, producers stay with sugar. But when the ethanol price rises relative to sugar, they produce more

4

ethanol. Thus food and fuel uses are competing for the same crop in this case. Most of the remaining ethanol is made from grains, with American corn being the dominant feedstock. Ethanol produced from corn in the USA costs roughly US$1.40 per gallon (i.e. A$0.47/L), more than twice the cost of Brazil’s cane-based ethanol (Berg & Licht 2004). It also yields less ethanol per hectare of land than sugar beet or cane. Brazilian producers use the bagasse to provide energy to run the entire industrial process. That is partly why Brazilian production costs are less than half that of American corn (Batten et al. 2007). The case of competition for feedstocks is therefore less clear for other crops than it is for sugar – for example the decrease in stocks and increase in price of wheat (Figure 2–3) is clear and yet corn rather than wheat is the major feedstock for ethanol in the USA. The degree of substitution is not clear, and the impact of other factors (such as an increase in energy price, the steady increase in food and feed demand as shown by Figure 2-1, or the impact of climate change) has not been thoroughly investigated. It is therefore not clear whether the increased demand on grain from biofuels is the major driver for increases in grain prices. Despite yielding less ethanol per hectare of land than sugar beet or cane and emitting more greenhouse gases, corn-based ethanol production is growing by about 30% per annum in the USA. There is growing concern that the US may be heading in a similar direction with corn to the Brazilians with sugar, though admittedly not (yet) by the same plant producing both food and fuel. But even if the plants are different, the cumulative effect may be similar. Importantly, there is now a perception that food and fuel are competing in this way. Market movements are determined as much by perceptions and emotions as they are by supply/demand realities. A growing grain demand has seen a doubling of corn prices this year. Although one-to-one causalities are impossible to identify, rising grain prices may impact severely on up to 30% of the USA pork and chicken industries (Higgins 2006). Moreover, the prices of food staples (e.g. milk, eggs, chicken and tortillas) in several highly-populated nations – like China, India, Mexico and the USA – have risen substantially, because in many cases they rely on grains to feed the animals that produce the food. Although there is no direct competition between food and fuel in most of Europe, more of the food industry’s raw materials are being diverted to biofuels production, mainly biodiesel. Industry wants the European Commission (EC) to adopt measures to ensure they do not face further price rises for their supplies, but the EC wants biofuels to reach a target of 10% of vehicle fuel by 2020. Biodiesel is attracting an increasing share of Europe’s vegetable oil supplies. Rapeseed oil prices doubled over the last five years and the price of cereals, starches and glucose recently increased by about 20%. The EU has land set aside rules whereby farmers are paid to not produce food. However, production of energy crops is permitted and also subsidised. As such, there is no direct competition on the same land for food versus fuel.

2.2

First generation biofuels – Australia

Competition with food producers for crops has not been an issue for Australia’s few ethanol producers, since those already established use co-products – waste starch from flour milling and Cmolasses from sugar refining. However, higher levels of ethanol production from C-molasses could be expected to place upward pressure on the C-molasses price, and eventually have an impact on the price and availability of A, B and C-molasses for other uses – such as in the food additive and stock feed markets. The costs of producing a range of first generation biofuels in Australia is shown in Figure 2–4. The figure also shows the variability of the cost of production (largely due to volatility of feedstock costs) as well as estimates of the comparative costs of biofuels production with oil price. On a comparative costs basis, the most attractive feedstocks for producing biodiesel are byproducts like used vegetable oils and tallow. Their use in Australia has had little or no impact on other markets because they are

5

seen as residues. As such, feedstocks have been relatively inexpensive and the activity has been profitable (Short & Dickson 2004). Furthermore, economic viability does not rely on the sale of coproducts, as it does for wheat, sorghum and canola.

Ethanol 80 c/l (US$80/ bbl)

Bio-diesel

100 80

45 c/l (US$40/ bbl)

60

Cost of production c/l

40

capital operating feedstock_adj coprod rev

20 0 -20 -40

waste starch

C Mol

Sugar

grain

waste oil

tallow

canola

Feedstock

Figure 2-4 Indicative production costs in Australia (Keating et al. 2006)

If the Australian ethanol industry expands production capacity to planned levels of 1,000 ML per annum or more (see Table 1-1), using wheat or sorghum as feedstock, competition with grains for foods and indirectly with feedgrain for the livestock industry will intensify. Similarly, potential expansion of Australia’s fledgling biodiesel industry to 1,000 ML levels will mean competition with other manufacturers (e.g. cooking oil, margarine, soaps, detergents) for input feedstock. Although relatively cheap, tallow and palm oil are less attractive as feedstocks because they have a tendency to solidify (go waxy) in cold weather. Blending could overcome this problem, but there are still limits to the supply of tallow and sustainability issues arising from production of large volumes of palm oil in Asia (discussed in more detail in O’Connell et al. 2007). Table 2-1 Estimates of current Australian production and capacity levels (2006-07) and proposed capacity expansion in the future (Batten et al. 2007 and O’Connell et al. 2007)

Feedstocks

2006/7 Production (ML/year)

Current Capacity (ML/year) 148

Proposed Capacity (ML/year) 1,155

Ethanol

Waste starch, C-molasses and various grains

83.6 [Manildra 80%]

Biodiesel

Used cooking oil, tallow and various oilseeds

76.3

323

1,122

159.9

471

2,277

Total

To neutralize the debate about whether crops for food should have priority over crops for fuels, it is wiser to search for eco-efficient alternatives based on the use of agricultural residues. It is estimated that biomass currently provides about 14% of the world’s energy, making it the fourth largest energy

6

source (Ekmann et al. 1998). If the residues from biomass conversion into food and energy are not recovered and reused in clever ways, significant amounts of potential heat and energy are wasted and additional greenhouse gases emitted (Edye 2006). If all the agricultural waste currently produced was used for biofuel, a higher proportion of Australia's fuel needs could be supplied – but the extent to which this is possible needs further research and qualification. Use of biomass for both food and energy production has been quantified in many countries (e.g. Perlack et al. 2006 assessed the capacity for USA to produce one billion tonnes of biomass over and above current production) and is employed already in some developing countries. The fibrous component of plants (about 50% of the biomass) may be used to produce energy, while the non-fibrous components (soluble carbohydrates, protein, minerals and vitamins) provide the food supply for humans and animals. There is less conflict between food and energy needs when the energy is derived from undigestible fibrous byproducts – although in future Australia’s land and water resources will be increasingly contested for food, feed, fibreand energy production as well as environmental services. There is currently negligible competition between biofuel and food production in Australia because the industry is in its infancy and does not heavily rely on food as feedstocks. As the industry grows, however, this may be an issue and competition for food, animal feed and water must be carefully understood and managed. Internationally, it is mooted that the increase in commodity price is due to competing demand between food and biofuel, but the extent to which biofuel production is driving price (compared to other factors) deserves closer examination. Regardless of whether we have a significant biofuels industry in Australia, the competing markets for grain will be driven increasingly by biofuels activities internationally. Increases in the global commodity price will mean that both ethanol producers and livestock producers will have to deal with increased costs. However, increased grain prices in response to a new market may not be a long-term phenomenon – if supply expands to meet the new demands, economic theory predicts the price will stabilise at slightly higher than cost of grain production. Maintaining a strong, up-to-date understanding of the international and domestic commodity markets which affect feedstock prices, and the competition between competing markets under various policy, technological, economic and other drivers is essential to keep abreast of this fast moving area of development. This should include quantifying supply and transportation logistics and their costs, which comprises a significant element in the cost of feedstocks to the factory gate.

2.2.1 Second generation biofuels – market impacts and interactions While first generation biofuels are competing with crops and livestock for land and water, a more complex game will develop in the international and domestic marketplace. If the price of grains suitable for ethanol production continues on an upward trend (as expected), Australia might earn more by exporting grains for food rather than reducing food exports to produce ethanol. In the meantime, the economic viability of second generation biofuels could be explored. As discussed above, first generation technologies have relatively low conversion costs and relatively high feedstock costs, once the small ‘buckets’ of cheap feedstock (such as waste oil, tallow, waste starch) have been used up. The opposite is currently true of second generation technologies – the processing costs are more expensive relative to lignocellulosic feedstock costs. Second generation technologies are the subject of much research overseas – pilot plants are underway in Canada, Germany, Sweden, Spain and Denmark; a set of six full-scale plants have recently been announced in USA and potentially one in Bombala, NSW, based on wood processing residues 1.

1

Press release by Wilmott Forests, 16 March 2007 www.willmottforests.com.au

7

There are claims that the two challenges to commercialising conversion technologies are being overcome and that the industry will be viable within 2 to 3 years (Microbiogen 2006). The first challenge – breakdown of lignocellulose into its component sugars – has not been economic using chemical or enzymatic means. However, in the past three years, large scale investment (~US$40 million) (A$50 million) by the US government in collaboration with enzyme companies such as Novozymes and Genencor has led to a thirty-fold decrease in the costs of enzyme technology. The current estimate by Novozymes of 30 USc/gallon (~8 USc/L) has brought the cost of enzymes into an economic range. The second challenge – development of organisms capable of efficiently fermenting all the sugars present into ethanol – may eventually be met by Microbiogen, who have developed nonGM organisms that can use all the sugars in lignocellulosics. A previous study has suggested that current cellulosic ethanol production could produce ethanol for 82 c/L in a 200ML plant and for 99 c/L in a 100ML plant (Enecon 2002). Each case assumed a woody feedstock cost of A$30/green tonne delivered, with other costs adapted from an earlier report (NREL 1999). When second generation processing technologies become commercially viable, a new set of markets for lignocellulosic feedstocks will develop. There are very few studies looking at potential market impacts and interactions for second generation feedstocks, but the following could be considered: • Lignocellulosic feedstocks with no competing markets, but strong competing uses – e.g. forest and agricultural residues. Cereal stubble, native forest and plantation residues and thinnings may find a market as biofuel feedstocks. Although these materials may not have a current market, they do have an important existing use – in being retained as residues they are maintaining carbon in their ecosystems, recycling nutrients, protecting soil structure, and in some cases providing habitat for fauna. Removal would require careful assessment of the impacts compared to the benefits. • Lignocellulosic feedstocks with existing markets – e.g. grasses, pastures and some woodchips already have existing markets which would compete for use of these materials for biofuels. • Lignocellulosic ‘waste stream’ materials for which biofuels could form a market – in the same way as the residues or wastes (which can be rather viewed as co-products) of food are the cheapest feedstocks for first generation fuels (e.g. tallow, waste oil), there are many lignocellulosic ‘waste streams’ (e.g. bagasse from sugar cane, from food or wood processing, urban wood waste) which could form a market at the cheap end of feedstock supply. Many of these feedstocks have already found a market in Renewable Energy Certificates for bioenergy – they are used for power generation. Use of biomass to generate power may have lower greenhouse gas emissions than using it to produce liquid fuels – however with the current structure of the vehicle fleet, this does contribute to the transport task which requires petrol and diesel replacements (or extenders). Thus ironically bioenergy (electricity) may be a strong competing market for some of the cheaper lignocellulosic feedstock for liquid biofuel. • Dedicated energy/chemical lignocellulosic sources, which may be grown at large scale – e.g. oil mallee or short rotation coppice trees. The competing markets for these may include bioenergy (as described above). The economics of the situation could change substantially with development of more dense arrangements of planting or in-field pre-processing to compact the biomass and thus minimize transport costs; biorefinery or integrated processing technologies to make multiple products from processing e.g. Integrated Tree Processing pilot plant in Narrogin which produced high value activated carbon, cineole and electricity (Enecon 2001); or by introduction of a carbon emissions trading scheme. In the case of a large-scale biofuel industry, there is likely to be competing markets not just for the feedstocks, but also for the factors of production – including land, water and labour – which would then impact on many other industry sectors, especially in regional Australia.

8

2.3

Key learnings and further work

There is currently negligible competition between biofuel and food production in Australia because the industry is in its infancy and does not heavily rely on food as feedstocks. As the industry grows, however, this may be an issue and competition for food, animal feed and water must be carefully understood and managed. Internationally, it is mooted that the increase in commodity price is due to competing demand between food and biofuel, but the extent to which biofuel production is driving price (compared to other factors) deserves closer examination. Maintaining a strong, up-to-date understanding of the international and domestic commodity markets which affect feedstock prices, and the competition between competing markets under various policy, technological, economic and other drivers is essential to keep abreast of this fast moving area of development. This should include quantifying supply and transportation logistics and their costs, which comprises a significant element in the cost of feedstocks to the factory gate. Second generation processing technologies which rely on non-food feedstocks (e.g. lignocellulose) appear promising in terms of lower energy input systems, and lower costs. Further analysis is required to obtain a robust assessment of the impact of second generation biofuels applicable to Australian feedstock production systems, market conditions and infrastructure requirements. Any new energy industry – especially one based on domestic biomass – will change the material and energy flows through the whole economy once it reaches a critical size. The biophysical and economic impacts of these need to be understood, particularly in the dynamic market conditions for commodities, fuel and carbon.

9

3. Policies affecting biofuels security 3.1

Subsidies associated with fossil fuel use in Australia

Before considering subsidies to biofuels, it is worth noting that fossil fuels have been supported since their inception by subsidies, tax relief and grants. This is hardly surprising, since most incumbent industries have received some assistance or subsidy during their development (e.g. through R&D grants available to all industries). However, the literature discussing Australia's subsidies for fossil fuel use gives the impression that our subsidies are among the highest in the OECD. Perhaps this impression results from the observation that tax rates on petroleum products in Australia are relatively low in comparison with other parts of the developed world (OECD 1998). To assess the net subsidy situation, however, various subsidies must be compared with levels of taxation imposed on the transport sector. As environmental taxes are used to compensate for some of the environmental externalities generated by transport fuels and vehicle use, these must be taken into consideration. The extent to which fossil fuel use by the transport sector is subsidised is related to the issue of whether the transport sector is subsidised or overtaxed. This depends on judgements about the balance between transport taxes, subsidies and the social costs of road use. Although this topic arouses considerable passion, there is relatively little robust empirical research on whether transport externalities are greater or lesser than the revenue raised by transport taxes (Allen Consulting Group, 2002). In this section, we shall review the literature on fossil fuel subsidies and try to assess the relationship of these subsidies to transport taxes and the social costs of vehicle use in Australia. In 1996, the National Institute of Economic and Industry Research (NIEIR) examined subsidies to the use of natural resources in Australia. They estimated A$2 billion (in 1994 dollars) in financial subsidies to the Australian energy sector, and A$4-$5.2 billion in environmental costs from externalities. As this analysis did not distinguish between subsidies to fossil fuels and to other forms of energy, it is difficult to draw conclusions regarding subsidies directed specifically to fossil fuels. In 1999, an Analysis of the New Tax System (ANTS) found that the net subsidy to fuel road transport in the ANTS package was approximately A$2.2 billion per annum (Quiggin 1999). This included GST-free fuel use for business users, extensions of the Diesel Fuel Rebate, and the Diesel and Alternative Fuels Grants Scheme. Other fuel subsidies included about A$1.4 billion per annum for the Diesel Fuel Rebate (1998-99) and the costs of A$2.6 billion (over three years) recently incurred to prevent the GST impact of fuel price rises for consumers. In 2000, the Senate Environment, Communications, Information Technology and the Arts References Committee estimated direct fossil fuel subsidies at A$2 billion per year (referring to NIEIR’s earlier work), adding an additional A$4 billion in indirect subsidies like “tax incentives, startup grants, preferential purchasing agreements for oil, and biased market structures” (The Senate Environment, Communications, Information Technology and the Arts (ECITA) References Committee 2000). It is not clear whether the indirect subsidies were only to fossil fuels or to the energy sector as a whole. The A$4 billion estimate for indirect subsidies was based on a summation of specific subsidies reported to the inquiry in hearings and submissions. No attempt was made to ensure that all estimates were based on a consistent definition and benchmark, so the overall accuracy is questionable. In reality, many of these subsidies may not have been destined for fossil fuels per se, but have been counted as such in various statistical analyses. A report called Subsidies that Encourage Fossil Fuel Use in Australia (Riedy 2003) identified almost A$9 billion per annum of subsidies that encourage fossil fuel use, claiming that about 91% (A$8.1 billion) of these subsidies are likely to increase greenhouse gas emissions above the unsubsidised level. However, most of these subsidies are not targeting fossil fuel use in the first place, but normal aspects of the business and indirect tax systems. Many are used to achieve other economic or social

10

objectives. About 58% of the total fossil fuel subsidies identified in this report are known as perverse subsidies – those that increase greenhouse gas emissions while at the same time reducing economic efficiency. The largest subsidies (A$4.5 million) in this category are to motorists, based on the difference between the revenue of a hypothetical road authority and the actual income from road users. This is an incomplete analysis, since it does not consider costs and tax revenues associated with the externalities that motoring creates – pollution, congestion, accidents and noise. Europe is sensitive to such costs, aiming to identify all the social and environmental costs and to make consumers pay for them (Kågeson 1993). In Australia, the tax revenues associated with such externalities (but excluding greenhouse gas emissions) have been discussed in Hatfield Dodds (1999), Pender (1999) and Allen Consulting Group (2002). Pender (1999) effectively argues that externalities such as congestion and noise are internal to the road system and should not be paid for by road users through transport related taxes. From this perspective he concludes that urban users are overtaxed, but rural users are subsidised. It is important to note that, in reaching this conclusion, Pender (1999) includes a requirement that road users pay a normal return on the value of the road network, just as payments by electricity users include an amount to cover the value of electricity assets. This requirement accounts for around half of the total social costs of rural road use estimated by Pender (1999), and a little over a third of urban social costs. Hatfield Dodds (1999) takes a different approach, examining the extent to which road-related taxes ‘internalise’ the social and environmental costs of road use. This work suggests that the broad quantum of revenue raised was consistent with the estimated value of externalities in 1993-94, but draws attention to the very significant cross subsidy implied by these calculations. In particular, around two thirds of car use is in urban areas, implying that the taxation of rural fuel and vehicle use is higher than would be justified on the basis of the externalities involved. A shortcoming of Riedy’s (2003) analysis is that 50% or more of the subsidies he listed went to motorists and they and others are simply normal aspects of business and indirect tax systems. They do not qualify as special or favourable treatment to fossil fuels, per se. Most would still apply if motorists were running their vehicles on alternative fuels instead of fossil fuels. Removal of subsidies like these might provide a double dividend of greenhouse abatement and improved economic performance – but only if careful planning is conducted to ensure that the disruption caused by subsidy removal is minimised and steps are taken to ensure equitable treatment of all parties. Although some economists argue that all subsidies should be removed to allow markets to operate efficiently (see e.g. Saunders 2000), most governments continue to use subsidies to achieve environmental and social goals. A World Bank estimate of total net fossil fuel subsidies in the OECD found only US$10 billion (A$18 billion) in annual subsidies (UNEP and IEA 2002). It is difficult to reconcile the above estimates of A$6-$9 billion in subsidies in Australia with this World Bank estimate of A$18 billion to the whole of the OECD. As mentioned earlier, many of the subsidies identified by the authors cited above are nothing more than normal components of Australia’s business and indirect tax systems. Although there may be a net subsidy to transport and motoring, relatively little of this would be directly attributable to fuel tax and excise arrangements (Hatfield Dodds, personal communication). Further research is needed to improve the estimates of specific taxes and subsidies that are directly associated with fossil fuel use in Australia. Also, it would be worthwhile to update and consolidate earlier analyses and to examine the impact of recent changes in taxation, including changes to fuel excise and the freight fuel excise rebate (Allen Consulting Group 2002).

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3.2

Current policy affecting the Australian biofuels industry

Because most biofuels cost more to produce than petroleum products, their use has been assisted in several ways to enable ethanol and biodiesel to compete with petrol and diesel. Assistance is currently provided to all producers in the form of a production grant of 38.1 c/L, which fully offsets the excise paid on biofuels. New facilities approved under the Biofuels Capital Grants Program also receive a capital grant that provides around 1 c/L in additional assistance over the lifetime of the plant. Future assistance to biofuels is scheduled to fall to 12.5 c/L for ethanol and 19.1 c/L for biodiesel by 1 July 2015, and to continue at those levels indefinitely. Thus new biofuels plants need to be constructed and operating as soon as possible – so as to capture sufficient benefits during the fuel-tax concession period to generate acceptable rates of return on capital (Biofuels Taskforce 2005). However, most of the proposed plants still require capital and supply contracts to proceed. Table 3-1 Selected fuel excise rates to apply at the end of the phase-in period Fuel type High energy content fuels Petrol, diesel, biodiesel, GTL diesel Mid-energy content fuels LPG, LNG, ethanol, Di Methyl Ether Low-energy content fuels Methanol

Energy content (MJ/L) > 30

Excise rate (c/L) 38.143

20 - 30

25

< 20

17

Alternative fuels (c/L) 19.2 Biodiesel 12.5 LPG, ethanol, LNG 8.5 Methanol

The rationale for the new excise structure (see Table 3-1 and Table 3-2) relates to differences in energy content, and to the level of assistance that will be given to encourage substitution of cleaner fuels for petrol and diesel. A banded excise system imposes three different rates on fuels depending on their energy content. The excise rate for each band roughly reflects the energy content fuel relative to that of petrol and diesel. As an incentive for consumption of biofuels and other alternative fuels, excise rates for these fuels have been set at half the rate for oil-based fuels in the same energy content band. The excise transition path – or changes to the excise structure over time – is tabulated in Table 3-2. Table 3-2 Excise transition path for fuels entering the excise net

c/L

July 2003 -July 2010 0

July 2011 3.8

July 2012 7.6

July 2013 11.4

July 2014 15.3

July 2015 19.1

c/L

0

2.5

5.0

7.5

10.0

12.5

c/L

0

1.7

3.4

5.1

6.8

8.5

c/m3

0

3.8

7.6

11.4

15.2

19.0

Fuel type

Unit

High energy content fuels Biodiesel Mid-energy content fuels LPG, LNG, ethanol Low-energy content fuels Methanol CNG

This strategy broadly keeps constant the excise payable per kilometre travelled by vehicles using the fuel. For example, ethanol on a per litre basis contains 68% of the energy of petrol. The nondiscounted excise rate for ethanol – 25 c/L – is around 65% of petrol’s excise. Thus this structure compensates for the fact that transport users of the fuel need one third more ethanol than petrol to drive a given distance. Import competition could have an effect on domestically produced ethanol from 1 July 2011 on, depending on the relative competitiveness of imported compared with domestically produced ethanol. While the Biofuels Taskforce did not predict this for 2011, it noted that the quote for the world ethanol price in April 2005 (about 42 c/L) was below the reported Australian ethanol sale prices (in mid-60

12

c/L range) at that time (Biofuels Taskforce 2005). Only domestic producers are eligible for the excise rebate from the Australian government. Ethanol imports are subject to both a general tariff of 5% (zero if imports are from the USA) and the full excise of mid-energy fuels of 25 c/L. This differential treatment of domestic and imported sources reduces competitive pressures on domestic producers, and has been described by the Centre for International Economics (2005) as an unofficial tariff on imports. This differential treatment of domestic and imported sources reduces competitive pressures on domestic producers, and could result in the industry being less efficient than overseas competitors. This differential treatment does not seem to be closely related to the major policy benefits of biofuel use, namely greenhouse gas emissions and urban air quality. According to the Senate’s Standing Committee on Rural and Regional Affairs and Transport report on Australia’s future oil supply and alternative transport fuels, recent changes to the fuel taxation system (Fuel Tax Act 2006) have had an adverse impact on the prospects for the future development of the biodiesel industry (Senate Standing Committee on Rural and Regional Affairs and Transport 2007). These changes do not appear to have been foreseen by the industry, despite the Biofuels Taskforce warning of their impact (Biofuels Taskforce 2005). The key issue for this industry in the Fuel Tax Act 2006 changes was that the payment of a producer grant under the Energy Grants (Cleaner Fuels Scheme) Act 2004 is taken to have extinguished the fuel tax liability – i.e. if the producer of the biodiesel has received a grant, the purchaser of biodiesel cannot claim a fuel tax credit. While sympathetic to the dilemma in which the industry finds itself as a result of the fuel tax changes, the Senate committee notes that the benefit previously enjoyed by the industry is considered by the government to have been a loophole. Although biodiesel blends meeting the petroleum diesel standard (i.e. up to B30) can still get this extra benefit, it does illustrate the relatively precarious economics of biodiesel production in Australia today. The policies and subsidies for biofuels in Australia are summarised in Table 3-4, and described in the ensuing text. Table 3-3 History of key subsidies and other policy instruments in the national context

State Federal

History of Key Subsidies and Other Policy Instruments • •

•

• •

• •

a biofuels target of at least 350 million litres by 2010. The measures to achieve this target include the Biofuels Action Plan, which indicate that biofuels will grow from a base of 28 million litres in 2005 to exceed the 350 million litre target by 2010 initiatives to improve consumer confidence in ethanol including actively encouraging users of Commonwealth vehicles to purchase E10 (a blend of 10% ethanol with petrol); undertaking vehicle testing of E5 (a blend of 5% ethanol with petrol) and E10 blends; commissioning a study on the health impact of ethanol under Australian conditions; and labelling new Australian-made vehicles to advise of their suitability to use ethanol-blended fuels A$37.6 million for the Biofuels Capital Grants Program to support new or expanded biofuel production capacity that effectively provides around 1 c/L in additional assistance over the lifetime of the plant. This Program is now closed and selected seven project, four biodiesel and three ethanol plants for this support the Ethanol Production Grant Program and the Cleaner Fuels Grant Program of 38.143 c/L paid to domestic ethanol and biodiesel producers respectively ensuring that alternative fuels remain effectively excise free until 2011, after which assistance to biofuels is scheduled to fall to 12.5 c/L for ethanol and 19.1 c/L for biodiesel by 1 July 2015. A banded excise system will impose rates on different fuels, classified into high, medium and low energy groups. This strategy broadly keeps constant the excise payable per kilometre travelled by vehicles using the fuel funding of A$7.72 million committed under the National Collaborative Research Infrastructure Strategy to construct two pilot scale facilities for development of novel biofuel production technologies and to enhance related laboratory infrastructure at three universities; funding of approx A$7.5 million for innovative renewable fuel projects under the Renewable Energy Development Initiative

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NSW

•

A$17.2 million for the Ethanol Distribution Program to support the uptake of ethanol by encouraging petrol stations to install new, or convert existing pumps, to sell E10 blended fuel.

•

announced in August 2006 that in principle they support a 10% ethanol mandate in unleaded petrol produced and wholesale, on a phase in basis with full implementation by 2011. An Ethanol Mandate Taskforce was established in August 2006 to examine a number of key issues related to the proposed mandate in February 2007 the NSW Premier announced the NSW Government will introduce a 2% ethanol mandate on the total volume of petrol sold in NSW from September 2007 as the first step to a 10% mandate endorsed the use of E10 blends in their own government fleet, when that fuel is available. In addition, executive officers and public service staff who drive government-owned vehicles as part of their remuneration package are required to obtain E10 fuel “where this is practicable, available and cost effective” Sydney Ferries are currently conducting a biodiesel trial that includes analysis of carbon dioxide, nitrogen oxide and PM emissions. The trial commenced in 2006, and will be expanded to other water craft following completion of initial studies. Initial studies have looked at using B20, with B80 and B100 to be assessed in future. The NSW Greenhouse Office provided a grant of A$50,000 for the trial.

• •

•

QLD

•

Policy document: o Biofuel (Ethanol Content) Bill 2007

•

Queensland has been the most proactive state in promoting the biofuels industry. Two ethanol production facilities are operating already (CSR Sarina and Rocky Point), and another five ethanol production facilities are being planned. Queensland’s government fleet was the first to use E10 wherever possible. The state has developed an Ethanol Industry Blueprint as a precursor to a long term Ethanol Industry Action Plan. Announced in April 2005, this plan provides A$7.3 million over two years for programs supporting Queensland’s ethanol industry. Mackay Sugar, Bundaberg Sugar, CSR and Austcane have received assistance Queensland’s Action Plan brings together several activities supported by the Government to develop Queensland’s ethanol industry. The policy objectives include o lobbying the Commonwealth Government to introduce a national mandate for E10 fuel o promoting quality standards for ethanol fuels, and encouraging monitoring of standards under relevant State and Commonwealth Acts; o lobbying the Commonwealth Government to retain domestic ethanol production grants indefinitely o assisting the provision of infrastructure for the production, distribution and export of ethanol through the provision of funds Queensland is also developing an Industry Action Plan for biodiesel. It is similar to that for ethanol and biodiesel is being trialled in Government vehicles and other modes of transport. Another first for that state was the announcement in early August 2006 of a mandate for a minimum 5% ethanol in regular unleaded petrol produced and wholesaled in Queensland from 31 December 2010 announced in August 2006, a mandate for a minimum 5% ethanol in regular unleaded petrol produced and wholesaled in Queensland from 31 December 2010.

•

•

• •

Policy documents: o Qld Ethanol Industry Action Plan 2005-2007 o Ethanol: Cutting the burden at the bowser (published August 2006) – Mandating ethanol o +e Campaign/partnership with BP (website: http://www.sd.qld.gov.au/dsdweb/v3/guis/templates/content/gui_cue_menu.cfm?id= 5946).

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VIC

• •

Victoria has set a biofuels target of 5% of the fuel market (400 million litres). It is expected that the target will be met easily, largely by biodiesel. Victoria is currently not interested in a mandate for biofuels all government vehicles to use ethanol blended fuel whenever possible and trials are being conducted on the use of biodiesel in heavy vehicles. Also, an A$5 million Biofuels Infrastructure Grant (BIG) program will be provided to assist infrastructure development.

•

Policy documents: o Inquiry into Mandatory Ethanol and Biofuels Targets in Victoria – inquiry began 1 March 2007, the Economic Development and Infrastructure Committee is to report to VIC Gov on 31 March 2008 o Driving Growth: A Road Map and Action Plan for the Development of the Victorian Biofuels Industry - Published April 2007.

WA

•

Western Australia has established a Biofuels Taskforce to examine the role of biofuels in that state. The Taskforce released its final report in May 2007 (Western Australian Biofuels Taskforce 2007). It will work with government and industry by providing recommendations and strategies on o reviewing and addressing opportunities and impediments to the development of a biofuels industry in Western Australia o increasing consumer acceptance and use of biofuels o using biofuels as cost-effective alternatives to petrol/diesel o maximising WA’s participation in providing biofuels to meet the national 350ML fuel target o maximising WA's opportunity to leverage funds from Commonwealth funding programs related to biofuels o provision of a consultation mechanism with industry and the Federal Government o promoting a whole of government and industry approach to the use of biofuels.

ACT

•

Australian Capital Territory (ACT) has no biofuels policies of its own other than to generally follow what NSW is doing because most of their fuel supplies are sourced from NSW. The ACT does not plan to mandate ethanol.

NT

•

Although all fuel is imported into the Northern Territory (NT), the NT Government encourages biofuels. Natural Fuels Australia and Charles Sturt University are working in cooperation with the NT Government to trial B20 in the Darwin bus fleet. Although not directed at transport activities, trials have also been conducted in the NT on the use of B100 for electricity generation in existing diesel generators.

SA

•

South Australia has no plans to mandate or set a target for biofuels use. In 2005, the South Australian Government announced a clean fuel initiative directed at reducing greenhouse gas emissions and fuel consumption by the public sector. Biofuels initiatives include the use of B5 in all metropolitan trains and diesel buses. This accounts for consumption of around 0.8ML of neat biodiesel annually. In future, B20 may be introduced if this program proves successful

TAS

. •

Tasmania has a Parliamentary Inquiry into Alternative Fuels underway in early 2007. Tasmania’s alternative fuel policy is currently based on CNG in buses. The natural gas is supplied from Bass Strait through pipeline.

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3.3

Policies and subsidies for biofuels in other countries

The policies and subsidies for biofuels in other countries are summarised in Table 3-4, and described in the ensuing text. Table 3-4 History of key subsidies and other policy instruments in the international context

Country Brazil

History of Key Subsidies and Other Policy Instruments • • • •

•

Proálcool policy (1970s) introduced to build passenger cars to run on ethanol. Led to building of a nationwide distribution network supplying ethanol in all service stations first ethanol-use mandate (1977) for a 4.5% mixture of ethanol in petrol. Since then, the mix of ethanol in petrol is up to 25%. By late 1980s, ethanol had a larger market share in the transportation sector than petrol 1975 to 2002, fuel ethanol use helped replace around 210 billion litres of petrol, saving the country around US$52 billion the Proálcool program left a long-term legacy of a dedicated ethanol-handling infrastructure, an ethanol-powered automotive fleet and continued production of both petrol-fuelled and ethanol-fuelled automobiles. Current legislation requires an ethanol content of 20-25%, with flexibility to adjust levels within that band young biodiesel industry is helped by a mandated 2% mix by 2008, and 5% by 2013.

Argentina

•

Argentina has become the world's 17th-largest ethanol producer, and is considering mandating a 5% mix of biodiesel with regular diesel (B5).

Venezuela

•

Venezuela mandates ethanol blending in some parts of the country and may require a 10% mix nationwide in the future.

Colombia

•

Colombia has mandated 10% ethanol mix in cities with populations over 500,000.

USA

•

Energy Tax Act of 1978 introduced the first major Federal subsidy to ethanol, a full exemption from the 4 USc/gallon (1.3 c/l) motor fuel excise tax. Present law allows a partial federal excise tax exemption of 0.51 USc/ gallon for ethanol blended into gasoline subsidies exist at many points in the supply chain – from production of feedstock crops to final consumers. At the start are subsidies to intermediate inputs. Largest subsidies go to producers of feedstock crops used to make biofuels, particularly corn (for ethanol) and soybeans (for biodiesel). Subsidies provided for liquid biofuels currently fall somewhere between US$5.1-$6.8 billion (i.e. A$6.4-$8.5 billion) for ethanol and US$0.4-$0.5 billion (i.e. A$0.5-$0.6 billion) for biodiesel most subsidies are tied to output and output is increasing at double-digit growth rates, so the cost of these programs will continue to climb oil refiners in California predominantly used methyl tertiary butyl ether (MTBE) to meet their oxygenation needs. MTBE has been detected in ground water and was therefore banned in gasoline by the end of 2002. Other states have followed, opening the way for ethanol to replace MTBE as oxygenate of first choice the USA has announced the granting of US$385 million for construction of six bioproducts and biorefinery plants. If the loan guarantee plan is approved, up to 14 plants may be built which would allow US$1 billion for projects costing up to US$100 million each and US$1 billion for projects costing US$100 million to US$250 million each (Washington Post 2007 cited in Biopact 2007).

•

• •

•

Canada

• •

•

national target of 5% by 2010 prospects for an ethanol industry improved substantially after the national government in Ottawa pledged financial support: CA$100 million (A$110 million) for the sector in the framework of its Kyoto commitments. E10 blends are expected to achieve a 35% market penetration by 2010 at present, Ontario is the only sizeable fuel ethanol producing province in the country, but

16

this could soon change.

European Union

• • • •

fuel policies in the EU are gradually shifting to be consistent with carbon trading European Commission’s (EC) first directive aimed to achieve a 2% share of renewables by the end of 2005 and a 5.75% share by the end of 2010 EC’s second directive – biofuels such as ethanol and biodiesel are exempt from the tax on mineral oil products in January 2007, EC proposed a radical energy and climate change package to cut emissions for the 21st Century – i.e. cut greenhouse gas emissions by at least 20% by 2020 (largely through energy measures), and maintain EU position as a world leader in renewable energy with a binding target of 20% of its overall energy mix to be sourced from renewable energy by 2020.

3.3.1 South America In the mid-1970s, the government of Brazil launched the National Fuel Alcohol Program or Proálcool, aimed at increasing the share of domestically produced fuels in the country's fuel pool. The Proálcool policy required passenger cars to run on ethanol, and led to installation of a nationwide infrastructure to supply ethanol in all service stations. Supply was guaranteed via strict controls on the planting of sugarcane and the production of both sugar and ethanol. Employing various forms of support, the program proved to be spectacularly successful. By the late 1980s, ethanol had a larger market share in the transportation sector than petrol. By the mid-1990s, the program was abandoned, because ethanol shortages and low petrol prices led to widespread rejection of ethanol-powered cars. Although ethanol’s lead over petrol was lost, ethanol has retained a significant market share in this segment until today. During the high petrol prices in the last few years, the market share of ethanol has increased further and is likely to continue to do so in the future. From 1975 to 2002, ethanol replaced around 210 GL of petrol, saving the country around US$52 billion (A$65 million). The Proálcool program left a long-term legacy of a dedicated ethanol-handling infrastructure, an ethanol-powered car fleet and continued production of both petrol- and ethanol-fueled cars. The current resurgence of ethanol in Brazil is due to the private-sector taking advantage of the availability of ethanol. The flexi-fuel car was first produced so that consumers would be able to choose between petrol and ethanol. Launched in 2003, sales of flexi-fuel cars rocketed to more than 70% of new car sales by the end of 2005. Auto manufacturers that previously produced two models of each car (one for petrol, another for ethanol) consolidated production lines to one flexi-fuel model. For consumers, flexi-fuel cars mean choice at the pump, and increased resale value. Since the introduction of flexi-fuel cars, tax incentives have provided a significant base support for ethanol producers and distributors. The Brazilian government provides preferential treatment for ethanol consumption under federal tax programs. Differentials in these assessments were estimated by industry contacts at approximately US$0.51 per gallon (i.e. A$0.17/L) in October 2005. State tax regimes give ethanol consumption an even greater boost. While market forces drive demand growth for ethanol, government policy still has a significant influence on market dynamics. Policy supports for ethanol consumption include both an ethanol-use mandate and significant tax credits. Brazil's first ethanol-use mandate in 1977 required a 4.5% mixture of ethanol to petrol. Since then, the mix of ethanol in petrol has risen as high as 25%. Current legislation requires an ethanol content of 20-25%, with flexibility to adjust levels within that band. The mixture stood at 25% from 2003 until March 2006, when ethanol shortages and rising prices prompted the government to reduce the rate to 20%. While Brazil builds its ethanol empire – eyeing customers from Venezuela to China – other South American nations are also getting on board. Most are embracing mandatory fuel mixes for cost, security, and environmental reasons. Venezuela mandates ethanol blending in some parts of the country and may require a 10% mix nationwide in the future. Colombia has mandated a 10% ethanol

17

mix in cities with populations over 500,000 – but geography restricts its sugar cane production, meaning it may have no exportable surplus. Peru is pushing ethanol, with California as a potential market. Argentina has become the world's 17th-biggest ethanol maker, producing 42 million gallons (i.e.159 ML) last year (Berg & Licht 2004), although most of its output goes to agrochemicals, drinks, and cosmetics. Paraguay and Uruguay are also seeking to get involved. Argentina produces high volumes of soybean and sunflower seeds, and biodiesel is often mooted as the alternative fuel with the most national potential. An estimated 20 plants are operating in the country, but they are not legally registered 2. Some hope that tighter regulation and legal subsidies will help cultivate the fledgling industry. Argentine lawmakers are considering mandating a 5% biodiesel blend, which would create an annual demand of 750 ML by 2009. Brazil has a young biodiesel industry which is helped by a mandated 2% mix by 2008, and 5% by 2013. Brazil opened its first commercial biodiesel refinery in March 2006.

3.3.2 USA Government subsidies at both the federal and state levels have long played an important role in the expansion of the biofuels industry within the USA. A 1988 report by the US Department of Agriculture observed that “the fuel-ethanol industry was created by a mix of Federal and State subsidies, loan programs, and incentives. It continues to depend on Federal and State subsidies” (U.S.D.A. 1988). Twenty years later, this assessment remains valid. The most influential actors in the ethanol industry are still federal and state Governments. The Energy Tax Act of 1978 introduced the first major Federal subsidy to ethanol, a full exemption from the 4 USc/gallon (1.3 c/L) motor fuel excise tax. In that year, the first 20 million gallons (about 76 ML) of commercial ethanol production capacity came online. Since that time, production capacity has grown steadily. In both the ethanol and biodiesel sectors, the pace of growth has accelerated dramatically in recent years. Currently, new capacity will increase ethanol output by nearly 50% between 2006 and 2008. New biodiesel plants will boost production capacity by nearly 200% in this period. State and federal policies have remained an important part of the story. A recent report discussed subsidies provided at different points in the supply chain for US biofuels – from production of feedstock crops to final consumers (Koplow 2006). At the beginning of the supply chain are subsidies to what economists call ‘intermediate inputs’ – goods and services that are consumed in the production process. The largest of these are subsidies to producers of feedstock crops used to make biofuels – particularly corn (for ethanol) and soybeans (for biodiesel). Although these subsidies do not result in a one-for-one reduction in feedstock prices (and thus the input costs for biofuel manufacturers) they are believed to have some depressing effect on prices. Full liberalization of agricultural markets with the removal of trade distortions would raise world (and therefore US) prices of corn by 5.7% (Fabiosa et al. 2005). Subsidies to USA biofuels have reached several billion dollars a year (Koplow 2006). The largest subsidies continue to come from federal programs. In total, subsidies provided for liquid biofuels currently fall somewhere between US$5.1-$6.8 billion (i.e. A$6.4-$8.5 billion) for ethanol and US$0.4-$0.5 billion (i.e. A$0.5-$0.6 billion) for biodiesel. Present law allows a partial federal excise tax exemption of 0.51 USc/gallon for ethanol blended into gasoline. Hundreds of government programs have been created to support every stage of production and consumption relating to ethanol and biodiesel – from growing the crops that are used for feedstock to the vehicles that consume the biofuels. In many locations, producers have been able to tap into multiple sources of subsidies. As far as second generation biofuels are concerned, the Washington Post (2007) (cited in Biopact Team 2007) reported that the U.S. government may underwrite up to US$2 billion in construction of biorefineries and bioproduct plants under a House Agriculture Committee 2

According to AgroDiario, an Argentina-based agriculture magazine

18

plan currently under consideration. The bioenergy package would authorize a total of US$4.5 billion for biomass research and loan guarantees to biofacilities through fiscal 2012. Under the loan guarantee program, at least 14 plants could be built, with US$1 billion for projects costing up to US$100 million each and US$1 billion for projects costing US$100 million to US$250 million each. Because the bulk of subsidies are tied to output and output is increasing at double-digit growth rates, the cost of these programs will continue to climb. High levels of legislative activity, especially at the state level, compound the problem with new exemptions, purchase mandates, and subsidies appearing every month. Incorporating just the capacity now in process and the purchase mandate targets for biofuels will generate subsidies substantially higher in future years. Average annual values of US$6.3$8.7 billion (i.e. A$7.8-$10.8 billion) per year are estimated for ethanol, and US$1.7-$2.3 billion (i.e. A$2.1-$2.9 billion) per year for biodiesel, between 2006 and 2012 (Koplow 2006). A number of ethanol producing states have introduced their own incentives. Although these tax incentives have certainly helped the ethanol industry in the US to get off the ground, the real boost came with the introduction of mandated or captive markets in the early 1990s. The 1990 amendments to the Clean Air Act required that an additive (oxygenate) be added to the gasoline used in areas with excessive carbon monoxide or ozone pollution to help mitigate these conditions. The Clean Air Act requires those areas with severe ozone pollution to use reformulated gasoline, which contains at least 2% oxygen by weight. In California, like most other areas of the country, oil refining companies predominantly used the oxygenate MTBE to meet the Clean Air Act requirement. However, because MTBE has been detected in ground water and it can be tasted in water at very low concentrations, it is regarded as a health hazard and was banned by the end of 2002. Other states followed, thereby opening the way for ethanol to replace MTBE as the oxygenate of choice. Increasingly, policy makers and industry representatives believe that the reformulated gasoline program enacted under the clean air legislation is not sustainable in the long run. There is no need for oxygenates like ethanol any longer. After the ban of MTBE, ethanol would have a monopoly position which many refiners fiercely oppose. Moreover, as mentioned before, there are several logistical problems attached to ethanol which could increase the price of fuel. And finally, advances in auto technology devalue oxygenates. Modern car engines are producing less and less pollution.

3.3.3 Canada Canada has a national target of 5% biofuels by 2010. Prospects for an ethanol industry in Canada improved substantially after the national government in Ottawa pledged financial support to the tune of CA$100 million (A$110 million) for the sector under its Kyoto commitments. Under the plan, E10 blends are to achieve a 35% market penetration by 2010. In today's terms, this represents 1.33 GL per year. With a carbon dioxide (CO2) reduction of 40% for grain ethanol, it equates to the replacement of 532 ML of petrol or 1.33 Mt of CO2. At present, Ontario is the only province in the country producing large volumes of ethanol, but this could soon change. Following the provincial government of Saskatchewan's Ethanol Fuel Act 2002 mandated ethanol, the provincial government in Regina announced a set of phased-in rules a 2.5% minimum bulk average of ethanol for gasoline distributors from July 1, 2004. The provincial average rose to 7.55% in 2005. The ethanol mandate sparked an investment boom and plans for a total of 400 ML of new capacity have been announced. Besides the mandate, the provincial government has granted a CA$0.15/L (A$0.17/L) tax break for ethanol manufactured in Saskatchewan. The provincial government of Manitoba is also considering a mandate for E10 blends.

3.3.4 The European Union Fuel policies in the European Union are gradually shifting to be consistent with carbon trading. Biodiesel is of primary interest in Europe. The early drivers are two biofuel directives by the European

19

Commission. The first directive, promotional in nature, was approved in May 2003. Member states were to try to achieve a 2% share of renewables by the end of 2005 and a 5.75% share by end of 2010. The second directive relevant for biofuels was a taxation of energy products. Under this directive member states will be able to exempt biofuels, such as ethanol and biodiesel, from the tax on mineral oil products. In January 2007, the European Commission proposed an integrated energy and climate change package to cut emissions for the 21st century. The European Commission today proposes a comprehensive package of measures to establish a new Energy Policy for Europe to combat climate change and boost the EU's energy security and competitiveness. The package of proposals sets a series of ambitious targets on greenhouse gas emissions and renewable energy and aims to create a true internal market for energy and strengthen effective regulation. The Commission believes that when an international agreement is reached on the post-2012 framework this should lead to a 30% cut in emissions from developed countries by 2020. The European Commission proposes that the European Union commits now to cut greenhouse gas emissions by at least 20% by 2020, in particular through energy measures. It proposes to maintain the EU's position as a world leader in renewable energy, by proposing a binding target of 20% of its overall energy mix will to be sourced from renewable energy by 2020. This will require a massive growth in all three renewable energy sectors – electricity, biofuels and heating and cooling. This renewables target will be supplemented by a minimum target for biofuels of 10%. In addition, a 2007 renewables legislative package will include specific measures to facilitate the market penetration of both biofuels and heating and cooling. Research is also crucial to lower the cost of clean energy and to put EU industry at the forefront of the rapidly growing low-carbon technology sector. To meet these objectives, the European Commission will propose a strategic European Energy Technology Plan. The European Union will also increase by at least 50% its annual spending on energy research for the next seven years. The European Commission proposes that the use of fuel efficient vehicles for transport is accelerated; tougher standards and better labelling on appliances; improved energy performance of the EU's existing buildings and improved efficiency of heat and electricity generation, transmission and distribution – underpinned by a new international agreement on energy efficiency. The policy approach to expanding demand in the EU is discussed further in section 4.3.

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3.4

Key learnings and further work

It is clear that governments around the world are attempting to address the same set of challenges with respect to reducing both their dependence on oil and their greenhouse gas emissions by introducing biofuels. They are using a variety of policy instruments within their respective domestic commodity market dynamics, and in Brazil, USA, and the EU these instruments have greatly stimulated the supply and demand for biofuels as intended. The unintended consequences are, however, also now becoming apparent and of increasing concern (Doornbosch and Steenblik 2007, The Worldwatch Institute 2007; UN - Energy 2007). This may lead to a shift in the thinking around a transition to biofuels – for example it has been suggested by Doornbosch and Steenblik (2007) in a report to the OECD that governments should stop mandating biofuels, and focus instead on internationally consistent sustainability standards. Further research and actions include: • to improve the estimates of specific taxes and subsidies that are directly associated with fossil fuel use in Australia. Also, it would be worthwhile to update and consolidate earlier analyses and to examine the impact of recent changes in taxation, including changes to fuel excise and the freight fuel excise rebate (Allen Consulting Group 2002) • assess the potential for second generation technologies, such as lignocellulose and algae, and an industry roadmap for the implementation of these technologies • given the potential for lignocellulosic ethanol and algal biodiesel to change the economics of the biofuels industry in the coming decade, policy interventions based on current technologies and feedstocks require further consideration, which should ideally be based on a well reasoned technology roadmap (O’Connell et al. 2007) • remain abreast of international developments in subsidies and other forms of support to biofuel production, their impacts on other domestic and international industries, communities and economies • close linkages with international developments in sustainability certification and trade • ongoing participation in the International Energy Agency’s Bioenergy Task 39 on Commercialising First and Second Generation Biofuels. Also greater involvement in other Tasks such as Task 40 on international trade which considers sustainability issues in biomass trade.

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4. Options for expanding demand 4.1

Current barriers affecting demand

Two components determine the aggregate demand for alternative fuels like ethanol and biodiesel in transport. Economists call them intermediate and final demand. Intermediate demand is the purchasing patterns of intermediate producers such as oil companies, service stations, farming cooperatives and other intermediaries who process and blend fuels for eventual sale to consumers. Final demand consists of fuel purchases by consumers for use in their own vehicles and fleets. To explore possible barriers affecting the demand for biofuels, we must examine both components.

4.1.1 Intermediate demand The 2001 pre-election policy of the Federal Coalition set a target for Australia to produce 350 ML of biofuels by 2010 which equates to less than 1% of our current fuel usage. Ambitious plans are afoot for the growth of ethanol and biodiesel production capacity to take Australia beyond the 350 ML target. BP and Manildra announced recently that BP would purchase 40 ML of ethanol over the next year, and the two companies have started negotiations to extend the agreement for a further two years. Other new production capacity will come on stream in the next few months. Thus Australia may well exceed this target. In December 2005, the Prime Minister’s office announced their Biofuels Action Plan, designed to underpin a sustainable biofuels industry in Australia (Howard 2005). Aggregated industry projections in the Plan show that industry expects not only to meet but to exceed the government's biofuels target of 350 ML by 2010. The release of the Action Plan expressed a “strong vote of confidence in the industry”. Aggregated industry projections up to 2010 Based on the company action plans

550

532

500

Upper estimates

480

450

411

400 2010

350

350 ML target

370

403

Lower estimates

321

300

251

250 200 181

150

124

100 89

50 0

28

end 2005

end 2006

end 2007

end 2008

end 2009

end 2010

Year

Figure 4–1 Aggregated industry projections up to 2010 (Source Biofuels Action Plan 2005)

Figure 4–1 shows the collective company action plans submitted by major oil companies, members of the Independent Petroleum Group and major retailers. The government promised to monitor and review progress towards these targets on a six-monthly basis and industry players have committed to annually update their company action plans. The government has announced that over 400 service stations Australia-wide are now selling ethanol or biodiesel blends, according to rollout figures from BP, Caltex, Shell, Coles Express, United, Australian Farmers Fuel, Neumann Petroleum, Bogas and Freedom Fuels.

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The ANZ Bank estimates that there are about 8,000 service stations in Australia (down slightly from 8,370 stations in 2000 and down by about 50% from 25 years ago) (Toth 2006). At present, only about 5% of these service stations supply ethanol and/or biodiesel blends. Although this is a very slow rollout of biofuels to the marketplace since the government enlisted the assistance of the oil majors and retailers five years ago, BP’s latest announcement (see above) will do much to speed up the process. E10 rollouts by BP and Caltex are mostly confined to Queensland and New South Wales. Caltex supplies B5 and B20 blends in NSW and South Australia. Shell designed Optimax Extreme, a super-high octane fuel containing 5% ethanol and marketed through Coles Express, to help address the issue of consumer confidence. Caltex is planning to source all biodiesel from domestic feedstock rather than imported palm oil. In its submission to the Victorian Inquiry, the Manildra Group (2006) stated that of 23ML fuel grade ethanol sold in the six months to June 2006, only 9ML was purchased by the oil majors for sale in their service stations (Manildra Group 2006). Thus it appears that the ethanol fuel industry has been largely sustained by independent and small scale fuel providers. United sells Plus ULP and Boost 98, both formulated with ethanol at over 90 locations Australia-wide, Australian Farmers Fuel sells biofuels at over 50 outlets across Australia, and Neumann Petroleum and Freedom Fuels each sell biofuels at 25 stations. The skewed rollout is largely controlled by the majors – Shell, Mobil, BP and Caltex – who control or exclusively supply 75% of the sites and 85% of sales. Biodiesel also has a skewed population of retail outlets – according to Grown Fuel 3, 72 service stations in Australia sell biodiesel. Grown Fuel only lists biodiesel retailers that have proven that they meet the Australian biodiesel standard. Caltex supplies B5 and B20 blends in NSW and South Australia. Several independents (e.g. Australian Farmers Fuel and Freedom Fuels) sell biodiesel blends across Australia, while a B20 blend is sold by Gull in Western Australia. Some of the oil majors have identified access to infrastructure at retail petroleum sites as a barrier to the uptake of biofuels. From the oil companies’ perspective, this issue relates to physical access to tanks and bowsers at service station sites. The oil companies have noted that, in many service stations, there is typically sufficient infrastructure (in the absence of significant investment) to deliver two or possibly three grades of petroleum. Given the desire of the oil majors to provide consumers with choice, they argue that this has impeded their ability to market ethanol fuels, for which there is little demand. On the other hand, some independents see the phase-out of lead replacement petrol, and the resulting freeing up of capacity, as an opportunity to market ethanol. If more supplies of E10 and B5 could be made available to potential customers in the southern and western states, the use of ethanol and biodiesel could be expected to grow in these states, as has occurred already in Queensland and NSW. Oil company cooperation, together with improved consumer confidence, reliable supplies and competitive prices remain critical to achieving or exceeding the 350ML target.

4.1.2 Final demand The most formidable barrier to final demand is consumer confidence. Drawing upon a set of ANOP Surveys, the Biofuels Taskforce (2005) recognised that consumer confidence in ethanol, while having slightly improved recently, is still a major challenge for the ethanol industry (Table 4–1). The lingering doubts motorists have about ethanol relate to concerns about potential damage to engines.

3

website (www.grownfuel.com)

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Table 4-1 Attitudes to buying petrol containing ethanol (ANOP Research Services Pty Ltd 2005)

Regional motorists are happier to purchase E10 than city dwellers, with Queenslanders favouring ethanol more than drivers from other states. As part of its broader ethanol industry development policies, the Queensland government has had many initiatives during the past three years to improve consumer confidence in ethanol blends – including information about the suitability of E10 (consistent with manufacturers’ advice) in all motor vehicle registration renewal notices; the launch of an ethanol website providing the latest information to consumers and industry 4; working with vehicle manufacturers to ensure that fuel and engine technologies are optimally compatible; and encouraging service stations in Queensland to sell E10. E10 typically results in poorer fuel economy because it has a lower energy density. Individual vehicles vary but 2 to 3% poorer fuel economy is typical. Although motorists would find it difficult to notice this difference in everyday driving, they still expect the price of E10 to be a few cents cheaper than unleaded petrol to compensate for this lower fuel efficiency. In addition, the Australian motor industry will not, in general, warrant vehicles operated on ethanol blends greater than 10%. It is currently illegal to supply blends of greater than E10, so this is not a major issue. The demand barriers for ethanol are summarised in Table 4-2. Table 4-2 Some barriers affecting the demand for ethanol

Demand barriers Lack of consumer confidence

States affected All (Queensland less so)

Limited service station outlets Commercial risks for producers Unattractive relative price Lack of supply reliability

All (Qld and NSW less so) All All All

Removal strategy Wider information dissemination Rollout incentives Demand incentives Discounted prices Supply monitoring

Biodiesel does not suffer from a similar degree of consumer negativity as ethanol blends. However, confidence can be fragile, and the biodiesel industry will need to ensure that consumers are properly advised on fuel blends. Being used mostly by the trucking industry, the advice from engine manufacturers is that the maximum biodiesel blend for the current truck fleet should be no greater than 5%. Manufacturers have indicated that higher blends raise significant issues involving engine performance, efficiency, emissions and warranties. In Europe, vehicles are designed for diesel fuel 4

http://www.ethanol.qld.gov.au

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containing a maximum biodiesel content of 5%. This limit is a requirement of the fuel injection equipment manufacturers. As the diesel fuel specification permits up to 5% biodiesel, its presence does not require labelling (as for E5) in Europe. There are proposals to increase the maximum level of biodiesel in European fuel standards to 10% (B10). The demand barriers for biodiesel are listed in Table 4-3. Table 4-3 Some barriers affecting the demand for biodiesel

Demand barriers Limited service station outlets High cost of production Effect of Fuel Tax Bill 2006 Commercial risk on entry Concern over some feedstocks

States affected All (NSW, SA and WA less so) All All All All

Removal strategy Rollout incentives

Demand incentives Standards testing

There are sensitive links between levels of intermediate and final demand. For example, the oil majors say that the commercial risks of market entry are very high since they are associated with low levels of consumer confidence and thus a lack of consumer demand for the product. Establishing a pricing regime that appropriately balances risk and results in reasonable returns, additional infrastructure costs and supply reliability are also industry concerns. These risks are higher for ‘first movers’. For the oil majors, the benefits are not seen as justifying the risks and there is little commercial incentive for them to develop a mainstream market for biofuel blends. In the absence of improved confidence, and unless first mover risks are managed, there will, at best, be a continuation of small, trial-based marketing of biofuel by the oil majors. However, there could be attractive market segments for the independent fuel retailers if confidence improves.

4.1.3 Trade barriers There is some debate about what kind of products biofuels really are and how they should be classified in the future under current global trade rules. Are green fuels and their feedstocks agricultural, industrial or environmental goods? Perhaps they are a combination of each that warrants a new form of classification? And what kind of mechanisms and negotiation strategies are there to limit importers to impose protectionist measures? A recent report by the International Food & Agricultural Trade Policy Council (IPC) on international biofuels trade issues addresses precisely these questions and offers some pointers as to the effects of different forms of classification (IPC and REIL 2006). Hoping to lower global trade barriers on ethanol, the Brazilian Government has set its sights on reclassifying ethanol in the international trade arena as a fuel commodity rather than an agricultural commodity 5. If ethanol were deemed to be an energy commodity, then it could receive the same treatment as petroleum. To date, no nation places a tariff on petroleum imports, because that would penalise the whole productive process of that nation. A recent report to the OECD (Doornbosch and Steenblik 2007) discusses in detail the implications of various trade barriers on the international biofuels industry, concluding that they lead to inefficiency, lack of cost-effectivness, and that the ambitious targets for production clash directly with the goals of potential sustainable supply. They recommend that national governments should cease to use mandates and trade barriers and replace them with technology neutral policies such as carbon taxes. This report has yet to be discussed or formally accepted by the OECD, but raises some interesting and wellfounded arguments nonetheless.

5

(see http://www.cattlenetwork.com/content.asp?contentid=83808)

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4.2

Strategies for stimulating demand

4.2.1 Removal of demand barriers The oil majors and the automobile manufacturers know that almost all post-1986 vehicles can operate satisfactorily on E10. The federal government and some state governments have attempted to lead by example, by using ethanol blends in their vehicle fleets where possible. When combined with the lack of outlets selling biofuels, these initiatives have not alleviated the concerns held by various members of the wider community. Nor have they convinced the oil majors that the biofuels markets will grow profitably. To restore consumer confidence in ethanol blends, the Biofuels Taskforce made some recommendations that are summarized in Table 4–4. Table 4–4 Strategies recommended by the Biofuels Taskforce (2005) to restore consumer confidence in ethanol

Negative factor Lack of consumer confidence

Recommended strategies • Greater marketing and promotional activity • FCAI vehicle list on E10 suitability to be simplified • Further E10 vehicle operability testing to be done • Current fuel ethanol information standard to be simplified and modified (labeling needed only above 5% ethanol in petrol instead of 1%)

Greater fuel consumption

Price discounting strategies

Limited service station outlets

Rollout incentives

There is consumer demand for higher octane fuels, regardless of manufacturers' recommendations, and both premium unleaded petrol and E10 unleaded can meet this market demand, albeit to differing extents. However, octane is only one of the qualities that must be met under the national standards for petrol.

4.2.2 Rollout incentives Investment incentives could be made available to companies to construct retail outlets on those premises whose sales include at least 10% or more ethanol and biodiesel (by volume). Initially, this would help several of the smaller independent companies to expand their distribution networks. It would also encourage greater involvement from the oil majors.

4.2.3 Price discounting According to John Honan (Managing Director of the Manildra Group), ethanol could be sold for approximately 40 c/L less than petrol, and thus E10 should be 4 c/L cheaper than regular petrol (ABC 2006). While the Federal Government has called for fuel producers to pass on the subsidy they receive, this report also noted that while the independent service station operators are more likely to pass those savings on to consumers, BP was defending its move to sell its ethanol blended petrol at the same price as regular petrol. Price discounting of ethanol is motivated by the fact that its energy density is lower than that of petrol. Freedom Fuels, a discount fuel retailer in Queensland, has included E10 in all of its petrol products. Apart from the well-documented, but still unclear environmental and health benefits of ethanol blends,

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Freedom has done this because of price. Moreover, it is delivering to the consumer with its pump prices always discounted below those of service stations under the banner of the oil majors.

4.2.4 Mandating fuel blends or flexi-fuel vehicles If the major oil companies fail to meet their Action Plan targets set in 2006, then the argument for mandating access for consumers to ethanol and biodiesel blended fuels may be strengthened. Queensland intends to mandate a minimum 5% ethanol in regular unleaded petrol produced and wholesaled in Queensland from 31 December 2010. Also, NSW is, in principle, supporting a 10% ethanol mandate in unleaded petrol produced and wholesaled in NSW, on a phased-in basis with full implementation by 2011. As discussed in previous sections, there are several arguments for and against the mandating of biofuels blends. Without suitable tariff protection, mandating fuel mixes in Australia risks more imports. Whether this is a realistic concern depends mostly on the rate of expansion of the global biofuels industry – particularly ethanol in Brazil and the USA and biodiesel in Europe. There is talk of the USA removing its tariffs on ethanol imports, so that it can import more ethanol from Brazil. If this occurs, then it may be quite difficult for Brazil to satisfy the growing demand for their cheaper product around the world. On the other hand, mandating would provide a significant kickstart to a biofuels industry in Australia – but this could have significant impacts on cost and supply of food for humans and livestock especially in drought years (O'Connell et al. 2007). An alternative to mandating fuel blends would be to develop a program for the construction of flexifuel vehicles by local automobile manufacturers. This was one of the main ways that the Brazilian industry kicked off. Their Proálcool policy required that passenger cars be built to run on ethanol, leading to both flexi-fuel vehicles and others running on blends containing higher levels of ethanol.

4.2.5 Tax, excise and import incentives To offset the effects of universal fuel excise rates, the Cleaner Fuels Grants Scheme awards production grants to biodiesel and ethanol (among others). Until 1 July 2011, these production grants are equivalent to the excise rate for fuels, meaning that there is no net tax on the production of these fuels. Between July 2011 and July 2015, however, production grants for ethanol and biodiesel will be incrementally reduced to approximately half of the current excise rate. Currently the production grant for biodiesel also applies to imports of biodiesel to Australia. Imported ethanol does not receive a production grant, although in 2011 imported ethanol will be treated equivalently to domestically produced ethanol. The effect of this on the local production of ethanol is unclear. It is possible that Brazilian ethanol could be purchased at a lower price than Australian produced ethanol, so that the industry may experience increased competition from overseas producers when the import market is opened up in 2011. Although the Cleaner Fuels Grants Scheme effectively negates the fuel excise for biofuels, to be eligible for the grant, fuel producers must demonstrate that their fuel meets the relevant standard. As most alternative fuels, such as ethanol and LPG, are produced commercially on a large scale, in most cases costs associated with testing fuel quality against the relevant standard can be easily absorbed as an operating expense. However, this is not necessarily the case for small scale biodiesel producers, as testing fuel quality against the standard can be expensive. If, as suspected, there are a large number of small-scale producers of biodiesel, including for example farmers who produce for use on-farm, one possible mechanism to support these would be to provide grants to finance the establishment of fuel quality testing cooperatives on a local basis.

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4.3

The European strategy

The European Commission proposes seven policy axes, under which are grouped the measures it will take to promote the production and use of biofuels (Commission of the European Communities 2006). The first set of measures, designed to stimulate demand for biofuels, will: • consider a possible revision of the Biofuels Directive, which sets national targets for market shares of biofuels, specifies biofuel obligations and ensures sustainable production • encourage Member States to give favourable treatment to second-generation biofuels in the biofuels obligations • encourage the Council and European Parliament to give speedy approval to its recently adopted legislative proposal to promote public procurement of clean and efficient vehicles, including those using high blends of biofuels. The Biofuels Directive sets reference values of a 2% market share for biofuels in 2005 and a 5.75% share in 2010. To implement the directive, many Member States are relying on fuel tax exemptions, facilitated by the Energy Taxation Directive. Several Member States have turned to biofuel obligations, requiring fuel supply companies to incorporate a given percentage of biofuels in the fuels they place on the national market. However, the 2005 target share of 2% biofuels was not achieved by most of the EU countries (although Sweden achieved 3%). With the objectives set by the Member States, the share of biofuels would have attained 1.4% at most. The Commission has launched infringement proceedings in seven cases where Member States adopted low targets without due justification. Any demand stimulants would need to apply in a non-discriminatory way to domestically produced and imported biofuels, and comply with WTO provisions. Biofuel obligations are regarded as a promising way of overcoming difficulties with tax exemptions, and also make it easier to afford favourable treatment to biofuels with greater greenhouse gas savings, which the Commission intends to encourage. Compatibility between biofuel supply obligations and tax incentives must be carefully assessed. It can be expected that obligations would take away the need for fiscal support and permit a reduction in the levels of state aid, in line with the polluter pays principle and the Commission’s state aid action plan, which focuses on less but better aid (Commission of the European Communities 2006). Moreover, a framework for incentives linked to the environmental performance of individual fuels may be established. This would encourage and promote the use of market-driven and demand-side measures for biofuels. Suitable policy measures could include, for example, the encouragement of environmental systems for vehicle users, eco-labelling, price differentiation through emission charges and levies, environmental quality promotion through educating and informing both consumers and producers, tradable permits, environmental performance bonds, funds and environmental risk assessment in banking procedures. Fertile markets for the development of biofuel use are offered by publicly and privately owned vehicle fleets, and by farm and heavy goods vehicles, where tax exemptions or reductions have proved particularly successful in encouraging the use of high-blend biofuels. At farm level, small-scale processors and seed press systems are now available that can produce biodiesel economically from farm waste or oilseed crops. City and privately-operated bus fleets generally have dedicated fuel supplies, so can switch quite easily to biofuels. Another area where the demand for biofuels should be stimulated concerns fishing fleets and vessels which offer a potential market for the use of biodiesel.

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4.4

Key learnings and further work

Total demand for transport fuel has two components including • intermediate demand – purchasing patterns of intermediate producers such as oil companies, services stations, farming co-operatives etc who process, blend and distribute fuels for eventual sale to customers • final demand – purchases by individual consumers and households. Both of these are important to understanding what it may take to expand demand for biofuels. There are a number of barriers to both intermediate and final demand, as well as trade barriers which have been presented and discussed. A detailed assessment of trade barriers was beyond the remit of this report. A range of instruments for stimulating demand includes removal of demand barriers, rollout incentives, price discounting, mandating fuel blends, producing and/or mandating flexi-fuel vehicles, and tax, excise and import incentives – each with advantages and potential drawbacks. Further work includes • how consumer attitudes and behaviours are formed, including how and what information is given to consumers and what incentives may work. For example, the federal government has invested significantly into understanding some of these issues with respect to consumer attitudes to biotechnology, focussing on GM crops and stem cells • a more detailed assessment of domestic and international trade barriers with respect to emerging production and markets for biomass and biofuels • the relative roles of different approaches and instruments including removal of demand barriers, rollout incentives, price discounting, mandating fuel blends, producing and/or mandating flexifuel vehicles, and tax, excise and import incentives. Any policies to stimulate demand would ideally be underpinned by a clear understanding of the interactions and consequences of these different approaches so that the intended consequences were achieved while minimizing unintended ones – including potential interactions with other policies across the domains of agriculture, forestry, water, energy and carbon markets.

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5. Options for encouraging future capital investment 5.1

Effectiveness of present policy

Australia’s policy platforms for biofuels differ significantly from Europe, America and other major nations, where there is a very active set of policies to promote the production and use of biofuels. Some of the intended and unintended consequences of these proactive policies are currently unfolding – particularly in the US where there has been a massive increase in the production of ethanol, with consequent increases in the grain price, and impacts for the human and livestock food supplies. Australia’s policies have been cautious in comparison to some overseas countries, and progress towards the 350 ML target has been slow. The Biofuels Taskforce (2005) reported on progress towards this target for 2010, summarising the factors retarding progress as well as suggestions for what can be done to help. Their list of constraints included: • oil companies in a competitive market had no commercial reason to surrender market share to other oil or biofuel suppliers • lack of consumer demand and confidence in ethanol • under 2005 market conditions, and no consumer confidence, there was little commercial incentive for oil majors to promote ethanol blends as a bulk fuel – so that new ethanol producers could not invest in bulk ethanol production • ‘first mover’ risks • complex policy settings and sovereign risk in being the first mover to make investments • higher costs of production for Australia compared to countries like Brazil. They recommended ethanol blend labelling standards, information be provided to consumers on vehicle/fuel compatibility in a user friendly manner, government procurement programs to boost consumer confidence, and compliance inspections for fuel quality standards. Two years later, many of these have been implemented but there are still constraints to further bioenergy installations. Additional constraints include: • volatility in the crude oil price – for example a recent decline from a peak of around US$75 per barrel down to about US$60 per barrel and currently over US$80 per barrel • potential volatility in the price of feedstocks, especially as commodity prices go up in response to international biofuel production, and drought in Australia has meant that some biodiesel plants have produced at well below capacity during 2006/2007 • uncertainties in the prices of co-products from ethanol and biodiesel production – for example during the 1990s European biodiesel manufacture was profitable because of the high price for the co-product, glycerol or glycerin. However with the expansion in European production of biodiesel, the entire biodiesel industry has been seeking buyers for their crude glycerine and the price has therefore fallen dramatically in recent months (Redman, 2007). • difficulty in capturing economies of scale – overseas, ethanol plants of 150ML or more are considered to capture scales of economy. The current small and fragmented nature of the Australian industry, combined with large catchments for feedstock and long transport distances may provide barriers to ethanol plants of economic scale. • supply and demand uncertainty – for example, the existing ethanol refineries (Manildra, CSR and Rocky Point) are producing sufficient to meet present demand. New ethanol refineries are taking longer to establish than originally envisaged because of difficulties in obtaining reliable supplies of feedstock, and reliable agreements to purchase the biofuels. Without such agreements it is often difficult to obtain finance • disparate policy drivers in the areas of greenhouse gas reduction (on a voluntary basis), energy security (both in terms of supply security, and price security), and assistance to the agricultural sector. For example, the considerable activity in the establishment of biodiesel plants in the early part of 2006 was abruptly halted following taxation changes in 1 July 2006. The phasing 30

out of subsidies for ethanol transport fuels by 2011 may also present an economic constraint to long term investment. If a biofuels industry in Australia is to contribute as part of the main game (>10% of our transport needs), then it is unlikely that it could rely on first generation feedstocks from traditional crops. Given the competition from other nations, first generation feedstocks can serve only as a small stepping stone towards a biofuels future based on second generation technologies. Overseas research indicates that this is where Australian farmers will enjoy longer-term security. A key finding of the International Energy Agency’s report – Biofuels for Transport: an international perspective (International Energy Agency 2004) was that the costs of producing first generation biofuels are much lower in developing tropical and subtropical countries (with their lower land and labour costs) than in developed, temperate countries (International Energy Agency 2004). There is a stark mismatch between countries where biofuels can be produced at the least cost (e.g. South America) and those where demand for biofuels is rising very rapidly (e.g. North America). From this perspective, increasing global demand may lead to the development of a significant level of international trade in biofuels. While energy security and environmental concerns are often cited as key drivers, the IEA found that biofuels policies in many countries (including Australia) are largely agriculture driven (International Energy Agency 2004, page 21). This finding has been echoed by the Biofuels Taskforce “The Taskforce considers that agricultural support for agriculture is, or becomes so once government assistance is established, the primary driver of biofuel assistance in all cases except for countries with limited capacity to increase agricultural production.” (Biofuels Taskforce 2005 page 10). The World Bank estimates that food production needs to double to meet the needs of an additional 3 billion people in the next 30 years (Watson, 1999). The demand for transportation fuels is expected to increase even more rapidly unless escalating demand patterns are reversed (EIA 2006). Thus there is a need to expand food supply and, at the same time, to develop renewable energy supplies which do not cause significant environmental harm and do not compete with our food supply. Energy conservation, together with biofuels that are not food-based, is likely to be of far greater importance over the longer term. Australia’s policy incentives could be re-oriented to achieve these longer-term goals if they were considered by government to be desirable.

5.2

Targeted and transparent incentives

There has been a major move in biodiversity and revegetation in NSW to provide targeted incentives on the basis of environmental outcomes rather than management inputs. For example, farmers or catchment groups were previously given Landcare or other grants for the action of fencing off areas of remnant vegetation – based on the assumption that fencing vegetation would have a positive biodiversity outcome. In future, incentives will be based on the biodiversity outcome itself. Allometric relationships are being defined to relate management interventions in particular locations to certain levels of improvement in biodiversity. The incentives are targeted so as to obtain maximum impact in terms of outcomes, and payments are made on the basis of the predicted outcome rather than the management action itself. There are opportunities to use targeted incentives in a similar way in the area of biofuels. To be a viable and sustainable alternative to fossil fuels, a biofuel should provide a net energy gain, possess environmental benefits, be economically competitive and able to be produced in large quantities without impacting on food or livestock feed supplies. A set of sustainability criteria (e.g. greenhouse gas emission profile, energy input:output ratio) (e.g. Energy Transition Taskforce 2006, O'Connell et al. 2005) could be developed around which incentives could be targeted and scaled. The incentives would require a technically defensible and transparent basis, linking production feedstocks and technologies to environmental (or other) target outcomes. This would be likely to favour non-food feedstocks which outperform food-based feedstocks on all criteria – the energetic, environmental, and economic criteria. Trees, other woody plants (including woody weeds), and various grasses and forbs

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(broadleaved herbs), which can all be converted into synfuel hydrocarbons or cellulosic ethanol, can be produced on less productive agricultural lands with little or no fertiliser, pesticides, and energy inputs (e.g. Tilman et al. 2006). All of these more greenhouse gas-effective, second generation processes warrant further investigation in Australia. Each of them is a strong candidate for research and carefully targeted incentive and assistance programs in the near future. There could be good opportunities to use targeted incentives – particularly from second generation lignocellulosic feedstocks – to promote hydrological, biodiversity or regional benefits as well as greenhouse gas reductions. Along with their emissions trading scheme, the European Commission gives a high priority to research into second generation biofuels and the bio-refinery concept – aimed at finding valuable uses for all parts of a plant. Similar research is underway in northern Queensland (Edye 2006). The EU has financed a campaign to inform European farmers and forest owners about the properties of energy crops and the second generation opportunities they offer. It has brought forward a Forestry Action Plan, in which the energy use of woody material will play an important part, and has clarified standards for the secondary use of waste materials and byproducts. Australian farmers and foresters could benefit from a similar targeted incentive plan for woody biomass and wastes materials, extended to include tailpipe emissions of CO2 from road vehicles, indirectly through fuel suppliers. Emissions allowances could be auctioned to fuel suppliers or allocated free according to market share. Revenue from auctioning could be used to reduce fuel duty or for climate change mitigation measures or a combination of these. Biofuels would not require emissions allowances, since they are renewable, hence their supply would be promoted.

5.2.1 Emissions trading schemes Emissions trading schemes are a major area of policy development internationally and in Australia. A thorough discussion is beyond the remit of this report, and a very brief snapshot is provided here in order to set some context for discussion of targeted and transparent incentives. The EU’s Emission Trading Scheme is the largest multi-national, greenhouse gas emissions trading scheme in the world and is a main pillar of EU climate policy. Under the scheme, each participating country has a National Allocation Plan specifying caps on greenhouse gas emissions for individual power plants and other large point sources. Each facility gets a maximum amount of emission allowances for a particular period (e.g. 2005-07). To comply, facilities can reduce their emissions or purchase allowances from facilities with an excess of allowances. Progressively tightening caps are foreseen for each new period, forcing overall reductions in emissions. The second phase (2008-12) expands the scope significantly. All greenhouse gases (not just CO2) will be included, aviation emissions may be added, and four non-EU members – Iceland, Liechtenstein, Norway and Switzerland – are expected to join the scheme. Aviation is important due to the large, rapidly growing emissions of that sector. Ultimately, the EC wants the post-2012 scheme to include all greenhouse gases and all sectors, including aviation, maritime transport and forestry. For transport, the large number of individual users adds complexities, but it will be implemented either as a cap-andtrade system for fuel suppliers or a baseline-and-credit system for car manufacturers. Extensions have been proposed to include tailpipe emissions of CO2 from road vehicles in the EU scheme. Emissions allowances could be auctioned to fuel suppliers and the revenue from auctions used to reduce fuel duty or for climate change mitigation measures or a combination of both. Biofuels would not require emissions allowances, since they are renewable. Hence their supply would be promoted.

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Effective emission reduction policies could encompass the following key features: • slow down CO2 and other carbon dioxide emissions where it is cost-effective to do so • involve some mechanism for compensating those who will be hurt • incorporate a high degree of consensus – domestically and internationally. It is unlikely that a rigid global regulatory regime for greenhouse policy could ever be implemented – few countries want to relinquish sovereignty over setting their own polices especially when the policies in question can have large economic effects • allow a core group of countries to continue to participate even if countries exit the system at certain times • able to adapt over time as new information about the climate and the ability to reduce emissions is revealed. McKibbin Wilcoxen outline an interesting hybrid system involving coordinated national or regional emissions trading markets, rather than a fully integrated, global emissions market (McKibbin 2006). The system is based on annual permits and long-term entitlements. Annual permits focus on equating the costs and expected benefits of taking action. Long term entitlements focus on achieving targeted reductions in emissions, but only along a low cost pathway and without specifying in which year these reductions will be reached. Each participating country would take three concrete steps. • They would issue a fixed quantity of long-term entitlements or property rights to emit CO2 based on some target (possibly 1990 levels). The time horizon of these rights needs to be at least as long as the time horizon of energy investments (30-50 years). Some of these long-term entitlements can expire over time, so as to tighten the target. • Countries would require producers of energy embodying carbon to hold an emission permit for every ton of carbon in their production. • Countries would be allowed to issue annual emission permits of sufficient quantity to supplement the long-term entitlements in order to ensure that the price of annual permits do not rise above an internationally agreed price. Although the annual price is fixed, the price of longterm entitlements will reflect the expected future price of annual permits. None of these permits would be traded internationally – the annual permits are the same price everywhere so no trade is necessary. In December 2006, the Prime Minister established a government-business Task Group on emissions trading. Their terms of reference were to advise on the nature and design of a “workable” global emissions trading system in which Australia could participate, and maintain Australia's comparative advantage while delivering substantive emissions abatement. The Final Report of the Task Group was released in June 2007. It recommended that the key design features of an Australian emissions trading model should be based on a ‘cap and trade’ model with the following features: • a long-term aspirational emissions abatement goal and associated pathways • an overall emissions reduction trajectory that commences moderately, progeressively stabilises and then results in deeper emissions reductions over time • maximum practical coverage of all sources and sinks • initial exclusion of agriculture and land use from the scheme • a mixture of free allocation and auctioning of single-year dated emissions permits • a ‘safety valve’ emissions fee • recognition of a wide range of credible carbon offset regimes • capacity, over time, to link to other comparable national and regional schemes There is considerable uncertainty about the nature, scope and timing of global mitigation efforts, and the ways that national or regional emissions trading schemes are likely to be coupled over time. These issues are recognized as central to the detailed design of Australian emissions trading arrangements and wider policy settings, which are expected to be elaborated and announced shortly.

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State and territory governments in Australia also recognised the importance of addressing climate change, and have established the National Emissions Trading Taskforce (NETT) to develop a multijurisdictional emissions trading scheme for consideration by state and territory governments. The Prime Minister's Task Group is entirely separate to NETT. Given the differences in focus between the work of both groups, the NETT will continue with its work on the development of a design for a possible national emissions trading scheme (NETS), with a view to recommending a preferred scheme design in the second half of 2007. To avoid duplication of work effort, the NETT will attempt to engage with the Prime Minister's Task Group, and to share the results of the NETT's stakeholder consultation process. Premiers and Chief Ministers have expressed their expectation that the Prime Minister would make a commitment to the introduction of a national emissions trading scheme following receipt of the Task Group report in May 2007. If the Commonwealth refuses to commit at this time, the states and territories will introduce an emissions trading scheme by the end of 2010. Meanwhile, in Victoria emission offsets for the use of biofuels are being encouraged as part of the VRET program. Other potential policy initiatives noted by the Victorian Inquiry into the production and/or use of biofuels in Victoria (Environment and Natural Resources Committee 2006) include: • a fuel excise exemption for small scale, biodiesel producers (< 20,000 litres per year) that are producing biodiesel for their own needs • trialing of B20 (20% biodiesel in fossil diesel) in government owned diesel vehicles • encouragement of regional towns to invest in their own crush mills, biodiesel plants and testing equipment (to meet Australian standards) – the size of which would be geared to the production of oil seeds from each local community • development of a website which promotes education on the issue of life cycle emissions • introduction of clear labelling laws that display the source of the biodiesel, and allow consumers to make an informed choice • funding of further research to assess the extent to which biodiesel from different feedstocks reduces greenhouse gas emissions • mandating of E10 and B5 for a trial period, where available.

5.3

Capacity of domestic biofuels industry to satisfy consumer demand

Consumer demand is currently not a major driver of expansion of biofuel production in Australia. Therefore, it is likely that there is sufficient surplus capacity to meet any growth in consumer demand for ethanol and biodiesel for the rest of this decade. The challenge facing Australia’s biofuels industry today is to produce basic blends like B5 and E10 cheaply enough to attract interest from lukewarm oil majors and partly misinformed consumers in the southern and western states. This would allow a fledgling industry to establish footholds in the market, and may be an important step in preparing the market for a transition to a more major role for biofuels – if this role was warranted in the longer term.

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5.4

Key learnings and further work

Australia’s policy platforms for biofuels differ significantly from Europe, America and other major nations, where there is a very active set of policies to promote the production and use of biofuels. Some of the intended and unintended consequences of these proactive policies are currently unfolding – particularly in the US where there has been a massive increase in the production of ethanol, with consequent increases in the grain price, and impacts for the human and livestock food supplies. Australia’s policies have been cautious in comparison to some overseas countries, and progress towards the 350 ML target has been slow. There are opportunities to use targeted incentives in a similar way in the area of biofuels. To be a viable and sustainable alternative to fossil fuels, a biofuel should provide a net energy gain, possess environmental benefits, be economically competitive and able to be produced in large quantities without impacting on food or livestock feed supplies. Further work: • Trees, other woody plants (including woody weeds), and various grasses and forbs (broadleaved herbs) can be produced on less productive agricultural land with little or no fertilizer, pesticides, and energy inputs and may have hydrological, biodiversity or regional benefits as well as greenhouse gas reductions. These options are good candidates for research and carefully targeted incentive and assistance programs in the near future.

•

•

Development of a set of internationally consistent sustainability criteria (e.g. greenhouse gas emission profile, energy input:output ratio) (e.g. Energy Transition Taskforce 2006, O'Connell et al. 2005) could be developed around which incentives could be targeted and scaled. The incentives would require a technically defensible and transparent basis, linking production feedstocks and technologies to environmental (or other) target outcomes. A detailed discussion of the potential impacts of emerging carbon trading schemes on development of the biofuels industry was beyond the remit of this report. Interactions between biofuels policies and domestic and international carbon market schemes warrant further investigation.

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6. Conclusions Like many countries, Australia faces a complex set of challenges, opportunities and decisions with respect to meeting our future energy needs. Indigenous oil reserves and supplies are dwindling, peak oil is a crucial factor – especially with the emergence of India and China competing on world markets for fuel – and cheap transport fuel is likely to be a thing of the past. Coupled to this are major imperatives to reduce greenhouse gas emissions. Some important decisions about energy and fuel alternatives must be made. Biofuels can be expected to play a part in this future. The synthesis report “Biofuels in Australia – issues and prospects” (O’Connell et al. 2007) covers a wide range of issues relating to the implications of a biofuels industry in Australia. It is clear that the economic and policy environment for biofuels is a complex and challenging area. In this more detailed, supplementary report, we have expanded on some of the policy issues so as to inform and promote further debate on the issue. In favourable economic circumstances, using current technologies and existing agricultural land and crops, biofuels could form a small component ( 20%) of Australia’s current or future transport fuels usage, new technology, new production crops and new cultivation areas are necessary. For example, technological breakthroughs are needed to make the production of ethanol or methanol from the woody and fibrous portion of plants economically competitive at current prices. Second generation biofuels clearly deserve further in-depth consideration. In this report, lignocellulosic ethanol has been discussed as an example – but there are many other processing technologies and fuels (e.g. DME) which require further investigation (e.g. Hamelinck & Faaij 2006). Australia’s land and water resources will be increasingly contested for food, fibre, and energy production, as well as environmental services like carbon sequestration and biodiversity. The choices made about biofuels will have far reaching implications for the nation’s economy, environment and society. It is critical that any move to a large-scale biofuel industry in Australia is sustainable. The sustainability credentials for biofuels across the areas of greenhouse gas emissions, land and water impacts, financial viability and social acceptability must be clear. Ideally, policies for appropriate development of the biofuels industry would be nested within a broader policy framework for alternative transport fuels, which again would be nested within a comprehensive policy framework for sustainable energy in Australia. Additionally, a consistent set of policies across the agriculture, forestry, energy, transport and carbon market areas would need to be developed to maximise the chances of gaining intended consequences across all of these portfolios. There are opportunities to use targeted incentives in the area of biofuels. For example, if a set of criteria were based on a set of preferred outcomes (e.g. lower greenhouse gas emissions, higher energy return on energy invested, better health or regional outcomes), then incentives could be targeted and scaled on this basis. These incentives would require a technically defensible and transparent basis, which constitutes a scientific challenge in terms of the biophysical and economic quantification which would be required to underpin such a policy.

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Maintaining a strong and current understanding of the international and domestic commodity markets which affect feedstock prices, and the competition between competing markets under various policy, technological, economic and other drivers is essential to keep abreast of this fast moving area of development. The potential interactions between policy and other factors require analysis in order to gain the intended benefits. Transitional pathways to a sustainable energy future need to be clearly mapped – including the sequence of steps and policy changes required to reach the intended destination. A consistent set of policies with well researched intended outcomes, clear transition pathways, clear benefits and minimimal risks to the public, future generations and industry will place Australia in an excellent position to secure a sustainable energy future with a stable environment for investor confidence.

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