Australia’s Productivity Commission Says Biofuels a Bad Deal All Around

March 29, 2017

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by Meghan Sapp (Biofuels Digest) In Australia, the federal government’s economic advisor—The Productivity Commission—has called on New South Wales, Queensland and commonwealth governments to drop biofuel blending, saying the polices unnecessarily increase fuel prices for consumers. It also dismissed out of hand Queensland’s claims that ethanol blending creates jobs, pointing the finger at various policy attempts to do so through biofuels since 1980 but achieving little, saying instead that its environmental benefits are minimal while imposing additional costs on farmers. READ MORE and MORE (Biofuels Association of Australia) and MORE (Southcoast Register) Download report

Excerpts from Productivity Commission report on agricultural regulations: Other significant unnecessary transport-related regulatory burdens on farm businesses
include:
...
• arrangements to support the biofuel industry, such as ethanol mandates and excise
arrangements. These should be removed as they deliver negligible environmental
benefits and impose unnecessary costs on farmers and the community.

...

9.5 Biofuel support programs
Biofuels are liquid fuels made from organic material, such as plants and animal material.
Both Queensland and New South Wales currently have (or have passed laws to implement)
biofuel mandates.

Queensland’s Liquid Fuel Supply Act 1984 requires that, from 1 January 2017, a minimum
of 3 per cent of non-premium petrol sales be ethanol (ethanol is a renewable, clear and
colourless liquid that mixes with petrol). That is, to achieve the target, at least one in three
litres of non-premium petrol sold at stations stocking E10 must be an E10 product. The

Queensland Department of Energy and Water Supply stated that:
A biofuel mandate is a step towards growing our biofuel and bio-manufacturing industries.
It will provide certainty so the industry can invest, innovate and create jobs as part of a cleaner,
greener future for Queensland. A flourishing biofuels industry will also create the foundation
for a new high-value bio-manufacturing industry. (QDEWS 2016)

In New South Wales, under the Biofuels Act 2007 (NSW) there is an ethanol target of
6 per cent of total fuel sale volumes.

Both states also have biodiesel targets — in New South Wales the target is 2 per cent of all
diesel sold, and in Queensland it is 0.5 per cent of all diesel sold.

Also, until recently the Australian Government operated an Ethanol Production Grants
(EPG) program. In place from 2002 to 30 June 2015, the EPG program effectively
removed excise rates for domestic ethanol (imported ethanol remained subject to full
excise). After the EPG program rebate ceased, the full excise rate applicable to ethanol was
reduced to zero for domestic production for 2015-16, after which the excise rate will
increase incrementally over five years until it reaches 32.8 per cent of the excise rate for
gasoline (ATO 2016c; Treasury 2014a). Imported ethanol continues to be subject to the
full excise — currently 39.5 cents per litre (ATO 2016b). In effect, local ethanol
production continues to be protected by arrangements equivalent to a tariff.

A range of participants (including the Australian Forest Products Association, sub. 11;
Australian Sugar Milling Council, sub. DR234; Canegrowers, subs. 22 and DR169; NFF,
sub. DR216; and Queensland Government, sub. DR154) expressed support for biofuel
subsidies and mandates. For example, the Queensland Government said that:
Queensland’s biofuel mandate is designed to provide certainty to the biofuels sector to
encourage investment, innovation and growth, and lead to more jobs. (sub. DR154, p. 3)
In addition to supporting current arrangements, the NFF advocated for ‘greater support for
small-scale biodiesel production and consumption’ (sub. DR216, p. 46).

Biofuel support can increase fuel costs and may not help the
environment

Assessments of the New South Wales biofuel mandate showed that:
• retailers cut the supply of regular unleaded petrol to meet the biofuel sales target
• the mandate reduced consumer choice and increased the price consumers paid for
petrol because they substituted to premium fuels
• the mandate affected the competitive dynamic between retailers by reducing the
availability of regular unleaded petrol at many retail sites (ACCC 2013b, sub. DR121;
IPART 2015).

The extent to which farm businesses are affected by biofuel mandates depends on whether
they are able (and willing) to switch to biofuel blends. Quality control issues for biodiesel
have led to some apprehension over its use in heavy vehicles (Australian Institute of
Petroleum 2015), which means that some farm businesses might avoid (or prefer to avoid)
blended products.

About 84 per cent of fuel consumption in agriculture is diesel and 14 per cent is petrol
(ABS 2004), so the impact of biofuel mandates on farms would likely be felt through the
biodiesel target. That said, the price impact of biodiesel mandates on consumers is
uncertain, as:
• the highest biodiesel target in Australia is 2 per cent (New South Wales), and it has not
yet been achieved (see below)
• at least one major petrol retailer does not label biodiesel blends below 5 per cent (BP
Australia 2016). This means consumer preferences for biodiesel blends, and thus the
price impacts of mandates, cannot be observed.

Despite molasses-based ethanol of the type produced in Queensland being ‘the lowest
greenhouse emission intensity source of ethanol’ (Australian Sugar Milling Council,
sub. DR234, p. 5), the environmental benefits from ethanol support programs in Australia
have been modest. Only about 1 per cent of all road transport fuel volume in Australia is
ethanol, which means only a small displacement of fossil fuels has been achieved. The cost
of abatement through the EPG program was relatively high — estimated to be between
$274 and $496 per tonne of carbon emissions abated (BREE 2014; PC 2011b).

Also, the extent to which biofuels offer carbon emissions savings depends on how they are
produced. If native vegetation is cleared in order for the land to be used in biofuel
production (or to replace agricultural land diverted to biofuel production), this can lead to
several times more carbon emissions being released than the fossil fuels they displace
(Fargione et al. 2008).

Tariffs for ethanol also reduce the use of ethanol imports, thus reducing the net carbon
abatement benefits which could have been gained by using imports that have lower
greenhouse gas emissions (such as from Brazil which is regarded as one of the world’s
most advanced ethanol producers) (de Gorter, Just and Tan 2009; UN-Energy Knowledge
Network 2011) — even though the emissions reductions benefits of imported ethanol may
be partially offset by the emissions associated with its transport (Australian Sugar Milling
Council, sub. 234).

Biofuel mandates have limited benefits for farmers

A viable domestic biofuel market remains elusive after decades of support

As the Queensland Department of Energy and Water Supply noted, the biofuel mandate
aims to provide an alternative market for primary producers (QDEWS 2015). The
Queensland Government believes that a biofuel mandate would stimulate the biofuel
market in Queensland which has ‘remained relatively static for the last several years’
(sub. DR154, p. 3).

However, in spite of various government support programs in Australia since 1980, they
have been ineffective in developing a viable domestic biofuel market (ANAO 2015).

Biofuel support programs, including the EPG program and biofuel mandates and targets,
have had limited effects on stimulating domestic production capacity, which limits the
market for producers to sell feedstock. Currently, there is only one producer in New South
Wales (Manildra Group, which owns the Manildra Ethanol Plant and received over
70 per cent of all EPG program funding) and two producers in Queensland (ANAO 2015;
BREE 2014).

In relation to the EPG program, the Australian National Audit Office found that:
After 12 years of operation and some $895 million in government support directed towards
improving the long‐term viability of the domestic ethanol industry, in 2014 only three domestic
producers (up from two in 2002) were operating, and an expanded Australian ethanol industry
based on market priced feedstock was considered unlikely to be commercially viable in the
absence of the EPG rebate. (ANAO 2015, p. 17)

Moreover, the New South Wales ethanol target has never been achieved, and the scheduled
increase in the biodiesel target was suspended due to insufficient local production capacity
(ACCC 2013b; Hartcher 2011). Mobil (2015) and the Australian Institute of Petroleum
(2015) also claimed that there is insufficient local biodiesel production to achieve the
Queensland target, and that the significant risk of supply disruption could impose costs on
the fuel supply chain. The market for selling biofuel feedstock is therefore likely to remain
limited and concentrated, and could lead to increased costs being passed onto consumers.
Feed price implications for farmers

Several stakeholders expressed concern that demand from biofuel producers could result in
additional competition for feedstock. Australian Pork Limited (sub. DR282), for example,
raised concerns about the impact of ethanol mandates on pig producers, particularly during
dry periods when feed grains can represent up to 80 per cent of cost of pig production.

Australian Dairy Farmers also said that:
… anything which artificially increases the cost of a production input (such as mandated and
subsidised ethanol production) disadvantages the thousands of individual dairy producers
across the country. (sub. DR218, p. 5)

However, there are two main factors that limit the direct influence of domestic biofuel
mandates on crop prices.

• The feedstock used in Australia is predominantly composed of byproducts — starch
(Manildra Ethanol Plant) and molasses (Sarina Distillery) — which have a limited
impact on other markets. One plant (Dalby Bio-Refinery) uses sorghum as its feedstock
and represents 18 per cent of industry production capacity (BREE 2014). Feedstock is
the largest cost component in ethanol production, and an expanded domestic ethanol
industry using market-priced crops as feedstock is unlikely to be economically viable in
the absence of the EPG program rebate (whereas producers using waste residues face
zero or low costs) (BREE 2014).

• Australian farmers are price takers in global markets, which means it is unlikely that
domestic biofuel mandates will directly influence crop prices received by farmers.

While sorghum producers in Australia have benefited from global grain prices that
were driven up by overseas ethanol policies (Wylie 2008), in the long run ethanol
support policies (both in Australia and overseas) have the potential to raise the cost of
feed grain prices and impact livestock industries (PC 2008b; Serra and
Zilberman 2013).

Biofuel industry outcomes should be market driven

Some participants (including Ag Institute Australia (sub. DR182) and the Australian Lot
Feeders’ Association (sub. DR294)) supported the removal of biofuel support policies. The
latter considered that the mandates distort the development of more advanced biofuel
technologies, including second generation ethanol production technologies:
… [the Queensland’s mandate would] lead to a misallocation of resources towards a small
number of ethanol producers in the state who have demonstrated over time to be unviable
without such assistance [and foster] reliance on Government support and further ‘rent seeking’
behaviour into the future. (sub. DR294, pp. 15–16)

Cotton Australia also argued that, while ‘bio-fuels have been proven to be technically
feasible [it] should be up to the market to determine their up-take’ (sub. DR262, p. 14).
The Commission considers that farmers and the community would benefit from the
removal of ethanol mandates and excise arrangements, as these policies deliver negligible
environmental benefits and come at a high cost.

RECOMMENDATION 9.6
Arrangements to support the biofuel industry — including excise arrangements and
ethanol mandates — deliver negligible environmental benefits and impose
unnecessary costs on farmers and the community. The Australian, New South Wales
and Queensland Government READ MORE