THE AUTHOR

 

Rafael M. Plaza

 

 

Biofuels Regulatory Frameworks in the Context of Energy Security and Climate Change

The objective of this article is to analyze the current state of biofuels policy and regulatory frameworks in the world’s largest ethanol and biodiesel manufacturering countries. BY RAFAEL M. PLAZA

 

 

Introduction

Almost forty per cent of Australia’s energy consumption is attributable to the transportation sector, with road transportation accounting for most of the petroleum products used in Australia. For geophysical reasons the country’s economy is dependent on transport either international or domestic. Moreover, the Australian transportation sector is almost entirely dependent on fossil fuels. To make things worst some says that the oil global peak production has already occurred, whilst others have confirmed sharp increase in the crude oil demand and international oil prices. But this is not the end of the story. The burning of fossil fuels liberates greenhouse gases to the atmosphere, which are main factors of the climate change.

 

 

Furthermore, transport-related emissions accounts for one fifth of Australia’s total emissions of greenhouse gases. On top of that, Australia has committed its international responsibility in reducing its GHGs emissions under the Kyoto Protocol.

Having said that, it seems clear that something must be done regarding the transportation sector fuels, climate change and energy security. Well, here comes into play renewable energy sources, particularly biomass and liquid biofuels.

 



The objective of this article is to analyze the current state of biofuels policy and regulatory frameworks in the world’s largest ethanol and biodiesel manufacturering countries, focusing our attention on three key elements: Biofuels standards, volumetric targets, and incentives schemes in order to assess the opportunities and policy and legal instruments for enhancing the development of the biofuels industry in Australia, not only as a driver for a major change in the transportation sector and oil reliance, but also as a powerful tool for GHGs emissions abatement.

 

The paper is structured as follows. Its first part deals with the climate change issue and the hopes put on biomass and biofuels as renewable energy sources suitable to address it as well as to reduce fossil oil dependency. The second part of the paper is devoted to the biofuels regulatory frameworks in Brazil, the United States, and the European Union. The former is relevant for pioneering incentives schemes and developing the market, while the two latter for regulatory policies, promotion of biofuels as complementary measure to emissions trading schemes and cooperation with developing countries. The third part deals with and focuses mainly on Australia’s current Commonwealth regime on biofuels and the analysis of opportunities and threats for the Australian biofuels industry. Conclusions will be drawn in the final part.

 
Part I. Climate Change and Renewable Energy Sources
 
A. The Facts...

The nature of the Climate Change problem has been directly addressed by the IPCC Fourth Assessment Report in 2007. The UN Intergovernmental Panel on Climate Change unequivocally concluded that empirical evidence shows that ‘many natural systems are being affected by regional climate changes, particularly temperature increases’, which in turn has caused the poles to melt and consequently the sea-level to rise, along with other associated environmental changes, like the extinction of ecosystems and the change of climate patterns. Thus, there is a growing international need for reducing GHG emissions to counteract or at least stabilize climate change impacts.

 
… of a Global Concern...

At international level the Climate Change framework is mainly composed of the United Nations Convention on Climate Change (UNFCC) and the Kyoto Protocol. The former contains principles relevant to renewable energy, especially, that there is a need for appropriate international response to face such common concern though with differentiated responsibilities, and that developed countries are encouraged to take action for developing comprehensive strategies. In this context, Annex I countries agreed on returning GHGs emissions to 1990 levels by reversing the trend of growing GHGs emissions. The Kyoto Protocol was the result of the third Conference of the UNFCC signatories in 1997, through this instrument they set differentiated and legally binding individual emission targets, a timetable for achieving emissions reductions, as well as ‘flexible mechanisms’ to do so.

...with local implications

At national level, if the Parliament passes the proposed bill, Australia is to have an Emission Trading Scheme (ETS) by 2011. For Australia, coal is its largest export commodity with more than AUD$ 45 billion in export in 2008. Moreover, coal is used to generate more than 80% of its electricity demand and its combustion accounts for 92% of the GHGs emissions from power generation. Thus, despite its relatively modest overall GHGs emission reduction target for the first commitment period, power generation represent a major concern for Australia.

In summary, anthropogenic emissions derived from burning fossil fuels, particularly for energy production, are the major cause of climate change. Coal or petroleum burning has significantly adverse environmental, economic, social, demographic and energy security impacts, and is the primary cause of air pollution and GHGs emissions. The concerns about such environmental impacts coupled with the carbon fuels supply have led to the progressive introduction of renewable energy sources, particularly based on biomass.

B. Biomass, the transport sector long awaited renewable fuel
All organic matter is known as biomass. From an ecological perspective, is the term used to describe all plants and animals, including humans, upon the earth. However, the name is also used to refer to ways of using plants (vegetation biomass) and animals and other biodegradable wastes (animal biomass) as energy sources. Basically, biomass can be transformed into energy either by generating electricity through its combustion in steam generators; or by transforming the biomass into a liquid or gas fuel.

Unlike fossil liquid fuels, which are also of biological origin, liquid biofuels are renewable energy sources. Nowadays, uncertainties of fossil fuel supplies, increasing oil prices, and the need for developed countries to meet the targets of reducing GHG emissions have promoted a growing interest in biomass as a promising technological alternative for managing CO2 emission reductions and climate change impacts.
 
Biofuels

Biofuels come mostly from cellulose-rich energy crops and the use of acids and/or micro-organisms capable of modifying its chemical structure and generating new transport fuel products. The so-called ‘first generation biofuels’ are mainly ethanol, bioethanol/ETBE, biodiesel, biomethanol/ MTBE and bio-oil (or pyrolysis-oil).

 

 

 

Ethanol

One of the most successful biomass products is ethanol, which can be manufactured by the fermentation of biomass feedstock containing sugar, or components like starch or cellulose that through chemical processes can be converted into sugars. To obtain the highest amount of biomass energy in ethanol production, feedstock must be low in nitrogen and high in cellulose content. Through fermentation and distilling processes using acids or enzymes, sucrose is converted into a form of alcohol; ethanol, which is a clean-flammable liquid can be specially used as a substitute to petroleum-based transportation fuels. Additionally, the life-cycle for GHGs reductions for E-10 range from 1.7% to 3.7% depending on the feedstock used to produce it.

 

Biodiesel

Another clean-burning biodegradable and non-toxic product coming out from biomass sources is biodiesel, which is derived from the methyl esters of fatty acids in vegetable and tallow oil triglycerides. It can be mixed with petroleum diesel and used in engines without significant alteration; it also can be produced from almost any vegetable oil, through a process that is relatively easy and inexpensive even in small quantities. Biodiesel, particularly at higher concentrations, has great potential to abate GHG emissions, for instance, the life-cycle GHG reductions for B-20 range from 7.6 per cent to 19.3 per cent.

 

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Part II. Regulatory Frameworks for Biofuels in major producer countries

It is not surprising that the most vibrant periods of the industry’s development have been inextricably linked to the rising of the international price of crude oil, rather than to the emergence of the climate change problem. However, this latter has propelled a myriad of new approaches on how to accelerate the application of long-time dormant technologies and how to promote the soon-as-possible development of the biomass and biofuels industry suddenly seen as the solution to energy insecurity. Tax incentives to production from renewable energy sources are one of those approaches, and the mechanisms employed are wide and varied. Some countries waive excise fuel taxes by conferring offsetting credits to alternative-fuel producers or exempt taxes for vehicles capable to run on biofuels; others prefer temporary tax preferential treatments applying reduced tax rates over a certain period of time; while some others waive the excise or reduce the fuel tax burden differentiating producers, regions, feedstock and raw materials, or even linking tax rates to the environmental performance of particular fuels.

 

A. Brazil, a pioneer developing country

The world’s largest producer of ethanol and bioethanol is Brazil, followed by the United States. As earlier as 1975, when a significant increase in international crude oil prices occurred, Brazil adopted the first political and economic measures to overcome its long dependency on imports of foreign energy sources, particularly oil. It did so by stimulating larger investments in the hydroelectricity sector, pioneering research and development of alternative energy sources, promoting energy crops like sugar cane and cassava, and introducing ethanol in the Brazilian fuel matrix through mandatory programs to replace gasoline, particularly, through the National Alcohol Program, PROALCOOL, developed as a response to the oil crisis of 1973. The capital investment in the agricultural and industrial sectors for ethanol production over mid 70’s and 80’s rose US$ 4.92 billion. The program was a success both in avoiding oil imports and in replacing oil for ethanol to power automotive vehicles.

Subsequently, renewable energy policies were fostered under the principles of social function of property and freedom to compete, but also in others less liberal principles based on an active role of the State as economic regulator. These are set forth in the Brazilian Federal Constitution of 1998. This constitutional framework made possible for Brazil to articulate a comprehensive and consistent public policy linking energy, water and agriculture, as the baseline for the development of the renewable energy industry, either nationally or as suited to the particularities of each region through delegated legislative powers granted on the state members. Such statutory framework is complemented by legal directives, strategies and programs, like the Incentive Program for Alternative Electricity Sources, PROINFA, or the National Program of Biodiesel Production and Use, PNPB, launched by the end of 2003. These programs were aimed at promoting the industry and the diversification of the energy matrix, as a direct consequence of biodiesel increasing demand in the aftermath of the Kyoto Protocol.

The Brazilian case study highlights the importance of a gradual though continuing public policy. Even in spite of some economic setbacks in periods in which the crude oil price has fallen or the price of sugar has risen in the international markets, successive Brazilian governments have persevered on its support to renewable energy sources and the agricultural sector. Remarkably, they have done so along with policies and programs aimed to create jobs, reduce inequalities, and encourage social inclusion.

Biodiesel must be produced only by companies incorporated in Brazil and subject to the Brazilian regulatory framework according to Resolution ANP 41/2004 and to the Social Fuel Label’s requirements set forth by Decree 5.297/2004. The former imposes a licensing procedure, while the latter compels industrial producers to acquire supplies from subsistence farmers with whom had entered into price-regulated purchase agreements with specific obligations on training and technical assistance. Finally, the formal recognition of biodiesel into the Brazilian energy matrix was made by Law 11.097/2005, which encompasses the principal instrument in the regulation of the biodiesel, namely, a compulsory requirement to liquid fuels distributors and refineries of adding a minimum quantity to traditional diesel: all petrol is sold with an ethanol component of 20–26%. Nowadays, there are no subsidies for ethanol production and the product (E-20) is competitive both internationally and in the domestic market.

That regulatory framework would not be complete without addressing the somewhat paradoxical threat posed by deforestation over rainforest. The issue is the subject matter of the Law 11.428/2006 on Use and Protection of the Native Vegetation of Bioma Atlantic Rainforest. However, its allegedly limited scope has been object of strong conservationist criticisms.

 

B. The United States, an enthusiastic follower… in a rush

The combination of factors like rising oil prices, energy security concerns, and promising results of years of continuing research on biofuels have propelled the United States to address all of them from the perspective of national security rather than in connection to environmental concerns, and to enact aggressive legislatives schemes for substantial production and use of biofuels, particularly biodiesel.

 

The First steps

Few years ago, there was only a restrictive ethanol tax incentive in the U.S. But, in 2004, amendments were introduced to the Energy Tax Act to promote the use of biofuels. Thus, the Volumetric Ethanol Excise Tax Credit (VEETC) introduced a tax exemption to all levels of blending up to the end of 2010 at a rate of US$0.51 per gallon. The Act also improved the Small Ethanol Producer Tax Credit, which grants a tax credit of US$0.10 per gallon on the first 15 billion gallons of ethanol or biodiesel produced by facilities with an annual capacity of less than 60 million gallons. It also introduced a tax credit of US$1,0 per gallon for new-oil-made biodiesel or US$0.50 per gallon if made from recycled oil. Additionally, several States confer subsidies to intra-state production of ethanol or biodiesel at rates of US$0.20 per gallon of pure biofuel.

In the following year, 2005, the U.S. Congress passed the Energy Policy Act which amended the Clean Air Act and required the Environmental Protection Agency (EPA), in coordination with the U.S. department of Energy, the U.S. Department of Agriculture, and stakeholders, to devise a program requiring the blending of renewable fuels into the automotive fuel supply. The EPA then established the Renewable Fuel Standard Program (RFS1), which basically set up an increasing volume of renewable fuels to be blended into vehicle fuel supply, every year through 2012. Although its goals were modest at the outset, the program proved itself successful in increasing ethanol production and use. In fact, in 2006, 5.4. billion gallons (Bgal) of renewable fuel were used in the U.S., almost a quarter more than required for that year. In 2007 the floor was 4.7. Bgal, while in 2008 was 9 Bgal. The RFS1 requires by 2012, at least, 15.2 Bgal of renewable fuels to be blended, and 36 Bgal. by 2022. The gasoline currently used in the United States is blended with ethanol at levels of up to 10% (E-10). Blends at higher volumes, like 85% (E-85) are available for flexible-fuel vehicles (FFV).

 

A focused policy shift: the EISA

It is far from being a coincidence that the first legislative act of the new United States Democratic Congress in 2007 was passing the Energy Independence and Security Act (EISA), also known as the ‘Biofuels Act’. This was a bi-partisan motion which remarks the significance that the US attributes to energy security, namely, to decrease fossil fuels dependence through domestic production of biofuels.

Title II of the EISA refers specifically to ‘Energy Security through Increased Production of Biofuels’. In four subtitles it introduced a Renewable Fuel Standard, addressed Biofuels Research and Development, Biofuels Infrastructure and Environmental Safeguards regarding waivers for fuel or fuel additives. It is worth analyzing in detail the first three.

The EISA aims directly to expand renewable fuels use and production through setting new specific volume standards for cellulosic biofuel, biomass-based diesel, advanced biofuel, and total renewable fuel to be used in transportation each year; including new definitions for both renewable fuels and feedstock used to produce them. It includes, as well, the first mandatory lifecycle GHGs emission reduction thresholds for renewable fuel categories, stating that those produced in facilities constructed after its enactment must achieve at least 20% reduction in lifecycle GHG emissions compared to the set baseline. Building upon statutory standards for blending and national consumption, the EISA adjusts the volumes of renewable fuels required for 2008–2012 and specifies those for the period 2013–2022 making them, also, applicable to cellulosic biofuel, biomass-based diesel and advanced biofuel for certain of these years. In respect to the latter, the EISA directed the Secretary of Energy to establish a grant program to encourage the production of advanced biofuels, which is consistent with its transitional character and compatibility. The total renewable fuel volume standard required by EISA for 2009 is 11.1 Bgal.

As to R&D the measures adopted in Sub-Title B are wide and varied, but the most relevant are as follows: Firstly, the Secretary of Energy is entrusted with the task to provide grants for R&D, demonstration and commercial application of biofuel in states with low rates of production, as well as to establish R&D programs destined to enhance biorefinery efficiency and to retrofit technologies to accept a wider range of feedstock as biomass for ethanol production. Further, under a peer-reviewed competitive process the Secretary may confer grants to entities proposing research projects on cellulosic ethanol and biofuels. Secondly, the Secretary must report to the U.S. Congress on: potential efficiency of optimizing FFV to use E-85 fuel, durability and performance of engines associated with the use of biodiesel, and methods to increase fuel efficiency in biogas and hybrid-electric vehicles. Thirdly, the EISA amended the Energy Policy Act of 2005 to create a research, development, and demonstration program in environmental science, and to foster technological development of less resource and land-intensive feedstock, as well as to direct the creation of at least seven Bioenergy Research Centers with the straightforward aim to accelerate basic transformational R&D of biofuels, including biological processes. Fourthly, the Act requires some Congressional Committees to be reported on R&D concerning the use of algae as biofuels’ feedstock.

In Sub-Title C, the EISA prohibited franchise agreements imposing restrictions upon renewable fuel pump installations, and required a feasibility report on setting-up E-85 dispensers in certain regions, the feasibility of constructing dedicated ethanol pipelines, and the adequacy of using railroad transportation system for domestically-produced renewable fuel. More comprehensively, it directs the Secretary of Energy to implement a research, development, and demonstration program relating to existing transportation fuel distribution infrastructure and new alternative distribution infrastructure. In this light, the EISA instructed the EPA Administrator to establish a series of uniform per gallon fuel standards for categories of fuels containing biodiesel. Moreover, it directed the set up of a grant program to assist fuel dealers with installation, replacement, conversion or development of motor fuel storage and dispensing infrastructure to be used exclusively for renewable fuel blends. It also introduces a competitive grant pilot program to establish refueling infrastructure corridors.

 

The aftermath: the American Fuels Act

As a direct consequence of EISA’s expanded scope beyond gasoline to cover all transportation fuels, changes had to be proposed to the RFS1 in order to introduce specific volume standards for cellulosic biofuel, biomass-based diesel, advanced biofuel, and total renewable fuel consumption in transportation per annum. These changes, like the volume standard increase beginning in 2008 from 5.4 Bgal. to 9.0 Bgal., and thereafter to reach 36 Bgal. by 2022, the inclusion of diesel and non-road fuels, and the threshold set forth to GHGs reductions, are implemented by the EPA constitutes the current Renewable Fuel Standard, known as RFS2.

The U.S. National Petrochemical & Refiners Association (NPRA) has bitterly criticized the EISA on the grounds that energy-saving policy should not be mandatory, that E-85 blend is neither economic nor energy-efficient as a wide-ranging alternative to imported crude oil, and in the lack of infrastructure to transport, store or distribute it.

The U.S. Congress enacted also the American Fuels Act 2007, an initiative promoted i.a. by the then U.S. Senator Barack Obama, to work jointly with the EISA. Its objectives are consistent with decreasing U.S. dependence on foreign oil by promoting domestic production of cellulosic biomass ethanol (CBE) to 250 million gallons by 2012 through tax credits to producers and qualifying ethanol blending and processing equipment; providing incentives to investment and research in biofuels, and encouraging producers to blend and sell on-site as a means to avoid refinery and shipping costs, strengthening - by the same token - the distribution network of renewable fuels. The Act allows also tax credits to raise production of FFV and contains stimulus for the motor industry by requiring the whole federal fleet to be fuel-efficient by 2014, as well as buses acquired with federal funds to use clean technologies. Modeled in the RFS1, the Act introduced an Alternative Diesel Standard (ADS) that requires 2 Bgal. of alternative diesel be mixed into the 40 Bgal. annual national diesel pool by 2015. Further, it made explicit that fuel produced in the U.S using starch, sugar, cellulosic biomass, plant or animal oils, or thermal chemical conversion, thermal depolymerization, or thermal conversion processes meets the needs of the U.S. Department of Defense, thus encouraging private sector companies competition in finding and supplying energy efficient alternatives fuels for defense purposes.
 

C. The European Union in an Energy Crossroad

For the European Union (EU), the policies relating to renewable sources of energy form part of a broader strategy directly linked to the Scheme for Greenhouse Gas Emission Allowance Trading within the Community established by the joint Directive 2003/87/EC of the European Parliament and the Council, dated 13th October 2003, which amended Council Directive 96/61/EC concerning integrated pollution prevention and control. In the context of achieving sustainable development, several programs and strategies have complemented these instruments introducing a wide range of measures.

The EU consumes over 15 million barrels of oil per day and is the world’s second largest oil consumer after the United States. Although it has important petroleum reserves especially in the North Sea, the EU oil production model seems to have peaked and is currently a declining one. Just in monetary terms, the EU oil dependence is valued €100 billion per year, of which 80% can be attributed to the transport sector, which also accounts for more than 30 % of final energy consumption in the EU, currently, in expansion. In turn, CO2 emissions are expected to increase in 50% in the lapse 1990-2010, namely, 1,113 million tons of which 84% would be transport-related CO2 emissions; in sum, transport is responsible for an estimated 21% of all GHGs emissions contributing to global warming.

 

Biofuels and Transport: the Directive 2003/03/EC

As to policies concerning renewable fuels for transportation the regulatory framework was set by Directive 2003/03/EC of the European Parliament and of the Council, of 8th May 2003, on the promotion of the use of biofuels or other renewable fuels for transport. The Directive established an indicative target of 2% share of biofuels in road-transport’s overall fuel consumption by 2005, a 5.75% target to be achieved by 2010, and a further one of at least 10% to be attained by 2020.

Accordingly, the Member States enacted measures to implement the Directive, many of them relying on fuel tax exemptions to support biofuel production which were facilitated by Directive 2003/96/EC, naturally, conforming to the Commission’s State Aid Action Plan. However, tax measures presented certain difficulties, like distortion of competition and over-compensations, unlike biofuel obligations in some other Member States which worked better, particularly by ensuring that consumption targets are achieved cost-efficiently and also making it easier to award favorable treatment to second-generation biofuels, what the Commission encourages.

In 2005, biofuels were used in 17 of the EU Member States. In the first two years under the Directive the consumption of biofuels doubled up, and the biofuels market-share experienced a significant increase reaching, on average, 1%. Despite such a rising trend this percentile remained below the reference value set at 2%, which was only achieved by Germany (3.8%) and Sweden (2.2%). Biodiesel got a stake of about 1.6% of the diesel market, while ethanol only 0.4% of the oil market. Hence, and relying upon several projections, in its Report of 10th January 2007 on the progress made by EU Member States in terms of biofuels and other renewable fuels, the EU Commission considered unlikely that Member States will achieve the 5.75% target set by the Directive for 2010, for that reason recommended that the Biofuels Directive be amended, particularly, by promoting high-quality biofuels and setting a mandatory target for the EU as a whole of 10% for 2010.
 

The Biomass Action Plan

The European Commission's White Paper for a Community Strategy sets out a plan to double the share of renewable energies to 20% in gross domestic energy consumption by 2020, including a timetable of actions to achieve this objective in the form of the Biomass Action Plan, adopted at the end of 2005. In order to reach the ambitious target of a 20% share of energy from renewable sources in the overall energy mix, the EU plans to focus its efforts on the electricity, heating and cooling sectors, as well as on biofuels. Whilst electricity production consumes only a marginal 3% of the total EU’s oil demand, basically, because it is primarily produced by nuclear stations; the heating sector is responsible for c. 17% of the EU’s oil consumption. By contrast, the EU’s transportation sector - which is almost exclusively dependent on oil, even in a far greater degree than that of the United States - accounts for c. 80% of the EU total imported oil consumption. The Biomass Action Plan proposed the amendments of existing standards to allow the use of a wide variety of suitable oils for biodiesel and the removing of unjustified or discriminatory technical barriers to using biofuels. The Plan, additionally, set eligibility requirements and minimum sustainability standards for biofuels production, as well as ensured non-discriminatory market access conditions for imported bioethanol. It adopted also a balance approach as to ongoing and future free-trade agreements negotiations with ethanol-producing countries.

In regard to biomass supply, realistically, the Action Plan discarded an autarkic approach as impossible and undesirable considering that biofuels’ raw materials are traded on world markets and the externalities and international obligations derived from the global warming might represent an opportunity to achieve CO2 emissions reduction targets and to enhance the cooperation with developing countries. Thus, the Biomass Action Plan addressed the changes to be made to the Common Agricultural Policy (CAP). In 2008 the EU commenced the revision of the CAP which relevant themes were: common market organizations, EU budget, allocation and transparency of CAP payments, and biofuels. In fact, the demand for the latter triggered a price increase for commodities leading farmers towards biofuels feedstock production, making it more pressing the need for trade agreements and cooperation with third countries in order to balance food production within the EU.

 

The EU Strategy for Biofuels

Finally, the Biomass Action Plan was complemented by the Commission through the EU Strategy for Biofuels, released in 2006 with the view to reduce GHGs emissions, boost the decarbonisation of transport fuels, diversify fuel supply sources and develop long-term replacements for fossil oil. It upholds the use of biofuels not only in the EU, but also in developing countries or regions, with which the EU intends to cooperate in the sustainable production of biofuels’ feedstock in order to prepare a large-scale use of cost-competitive biofuels, particularly of the second generation. The Strategy was accompanied with an Impact Assessment of different policy options, from which that of a regulated market-based approach was chosen. In turn, this policy broke down into seven policy areas or ‘axes’: 1. Biofuels’ demand stimulation, 2. Environmental benefits assurance, 3. Biofuels’ production and distribution development, 4. Feedstock supplies expansion, 5. Trade opportunities enhancement, 6. Developing countries support, and 7. Research and Innovation support; all of them further developed in specific measures.

 

Analysis of the Development of the Biofuels Industry in developed countries

Surprisingly, the approach for developing the industry has not been very different in well-settled market economies like the U.S. or the E.U., where the biofuels industry have been fostered in varied ways until making it competitive. In this context, biofuels have been object of aggressive market penetration strategies coupled with intensive R&D investments and significant equity transfers from the State to privately-held businesses either via government loan programs (for construction of processing plants) or subsidizing the price of biofuels (via tax credits). Therefore, liberal trade policies i.e. those that allow unrestricted flow of goods and services on sharp competition have been set aside. The explanation for this is two-fold: firstly, it has been necessary to create the demand for biofuels in an existing consolidated oil market; and, secondly, it is consistent with crucial national concerns of energy security and diversification of energy matrix. Biofuels obligations, volumetric targets and quality fuel standards have also been applied on phase-basis. It is expected that once the market for biofuels be stabilized, policy approaches will respond more to ‘deregulatory trends’ and reliance on market mechanisms to allocate the use of resources.

 

Part III. Australia. Threats, Opportunities, and Tools

The 70’s witnessed the first Australian attempts on environmental legislation, both at federal and state level. In the next decades, though creepingly, the legal framework becomes more comprehensive in scope and also more aware of the cross-border and cross-cultural nature embedded in environmental issues, as well as of the idea of sustainable development.

 

The Commonwealth’s renewable energy regime

After years of fluctuating policies regarding the promotion of renewable energy sources, a different scenario emerged under the federal Renewable Energy (Electricity) Act 2000 (Cth) and the Renewable Action Agenda (REAA). The latter was a joint initiative with the industry aimed to strategically analyze the sector’s position and to develop a set of actions to achieve a sustainable and competitive renewable energy industry. The Action Agenda’s Leading Group gave birth to the Renewable Energy Technology Roadmap Report in 2002. After three years of implementation, in November 2005, the REAA was subjected to an Evaluation Report. However, existing Action Agendas processes were concluded by mid 2008 following the change of the Government and substituted for new policies based upon Industry Innovation Councils designed to ‘facilitate interaction within industries and between government, industry and the research community’ and to ‘provide strategic advice on innovation priorities’ to the Minister for Innovation, Industry, Science and Research. By April 2009, the Minister had established two relevant Councils: the Automotive Industry Innovation Council (AIIC), and the Future Manufacturing Industry Innovation Council (FMIIC). The Councils acts as an advisory body to the Minister considering industry innovation challenges like climate change, sustainability and industry competitiveness as well as issues such as regulatory reform and access to new technologies.

The Renewable Energy Act not only determines which are ‘eligible renewable energy sources’ for its purposes, but also imposes a Mandatory Renewable Energy Target (MRET) on electricity generation requiring that - by 2010 - at least 2% thereof (an additional 9,500 GWh) must come from renewable energy sources. The MRET applies nationally but to a specified category of ‘liable parties’, who are directly responsible for supporting an increase in the amount of renewable energy-sourced electricity, through the surrender of Renewable Energy Certificates (RECs) in proportion to their acquisitions of electricity to meet their annual quota of ‘required renewable energy’. Shortfalls trigger penalties, and surplus might be carried forward. The overseeing of the implementation of the Act is entrusted to a statutory authority: the Office of the Renewable Energy Regulator (ORER), who is in charge of registering liable entities, accredited power stations, and RECs. The MRET scheme, however, is focused in the generation of electricity, in other words, it is not directly related with the energy used to fuel transport. Hence, its applicability to biomass and biomass derivatives as biofuels should be necessarily linked to the production of electricity. A particular issue arose at the time of the enactment of the Act as to whether the burning of biomass coming from native forest would trigger the Environmental Impact Assessment (EIA) of the EPBC Act. The fact is that forestry operations are regulated by Regional Forestry Agreements (RFAs), to which the EPBC Act does not apply and rendering the use of that kind of biomass for renewable energy to be assessed only at a State level.
 

The Australian Biofuels regulatory framework

In Australia, the regulatory framework for using biofuels gets back to 2000 with the Fuel Quality Standard Act (Cth) which set mandatory nation-wide quality standards for fuel supply and sulphur-content caps to premium unleaded petrol and diesel. The following year, under the auspices of the Green Power Program and the Biofuels for Cleaner Transport policy, the Government announced a volumetric target of at least 350 million liters of biofuel production by 2010.

In order to meet the 350 ML biofuels production target, in 2005 was announced the Biofuels Action Plan, a joint initiative of the industry and the Government which sets out annual volumetric goals and business plans, including marketing and retail strategies, for ethanol and biodiesel blended fuels. At the same time and being a part thereof, the Biofuels Capital Grants Program was launched aimed at promoting new or expanded biofuels production capacity by allocating AUD$37.6 million. Under this scheme funding was provided to projects for the construction of processing plants or the development of feedstock in Queensland, New South Wales, Victoria and South Australia. The program is over but it set the starting-point for the expansion of the industry.

Later on, the Parliament enacted the Energy Grants (Cleaner Fuels) Scheme Act 2003 aimed to promote cleaner fuels production by providing long-term incentives and security to the industry by giving to domestic ethanol/biodiesel producers or importers of biodiesel a grant that offsets the excise currently applicable to petrol, ultra-low sulphur biodiesel and biofuels until 30th June 2011. Thereafter and until 1st July 2015, a phased introduction of excise on biofuels will apply although with 50% discount on energy content fuel tax rates. This fuel excise exemption acquires greater significance when considered in connection with electricity generation by private and businesses eligible under the MRET scheme. In sum, under the form of a subsidy there is no effective excise on commercially produced biodiesel or ethanol until 2011, which it has enabled the setting-up of biofuels business and to make them competitive. Main beneficiaries of these measures have been the CSR and the Manildra Group, Australia’s largest producers of ethanol which have a combined capacity of 150 million litres (ML).

In addition, the Energy Grants Credits Scheme provides businesses with credits of a certain amount depending on off-road or on-road use of biodiesel. Ethanol credit for on-road use is also granted. The credit scheme is being phased out from 1st July 2006 to 30th June 2010 when it will be replaced with fuel tax credits.

In a broader context, under the Fuel Tax Credit Reform alternative fuels for off-road business use are eligible for a fuel tax credit.

Finally, there is the Ethanol Distribution Infrastructure Upgrade Grants program aimed to support upgrading in ethanol storage and transport infrastructure.
 

Brief overview on State regimes

At state level, based on predictions that ethanol and biodiesel will become the major alternative fuels produced in the state, in 2005, Queensland (Qld) developed its Ethanol Industry Action Plan. It encompassed two components: the Queensland Ethanol Conversion Initiative worth AUD$4.8 million and a Marketing, Communications, and Labeling campaign valued AUD$2.28 million to support Queensland’s ethanol industry. Queensland has already 100 megalitres of ethanol production capacity, which will increase with the introduction of 5% ethanol mandate in regular unleaded petrol produced and wholesaled in the state from 31 December 2010. There is 190 megalitres of biodiesel production capacity in Queensland; thus, the Biodiesel Industry Action Plan follows as part of its comprehensive Alternative Fuels Sector Action Plan. In addition, Queensland pioneered in government E-10 powered fleets, biofuels trial programs and retail stations distribution network.

In August 2006 New South Wales (NSW) also announced its support to a 10% ethanol mandate (E-10) in unleaded petrol on a phase-in basis to be fully implemented by 2011. An Ethanol Mandate Taskforce was established thereto. In February 2007 the NSW Government announced that it will introduce E-2 mandate on the total volume of petrol sold from September 2007 as the first step to the E-10 mandate.

Victoria (VIC) addressed biofuels use in December 2005 by giving support to E-10 and encouraging government fleets to use it where available, practicable and cost-effective, and also funding the development of the publication Driving Growth: A Biofuels Roadmap and Action Plan for the Development of the Victorian Biofuels Industry released in 2007, which identified the design and implementation of quality standards. Although VIC has not established any mandatory volumetric target for biofuels, it has an indicative biofuels target of 5% of the market, which is expected to be met largely by biodiesel. Finally, VIC has implemented grant programs to biofuels infrastructure.

Due to the fact that most of their supplies are sourced from NSW, Australian Capital Territory (ACT) generally follows NSW’s policies on fuel supply and standards.

The government of South Australia (SA) established a Biofuels Taskforce to examine the latest scientific evidence on the impacts of ethanol and other biofuels use on human health, environmental outcomes and automotive operations, which reported in August 2005. However, SA has no plans to mandate or setting a target for biofuels.

All fuel is imported into the Northern Territory (NT), and its Government encourages the use of biofuels by requiring or testing the use of ethanol or biodiesel in either Government car or bus fleets.

Although Tasmania’s alternative fuel policy for buses is currently based on compressed natural gas (CNG) supplied through a pipeline from the Bass Strait, it has conducted a Parliamentary Inquiry into Alternative Fuels.
 

Analysis of opportunities and threats for Australia

In December 2007, the new Government of Australia ratified the Kyoto Protocol. Behind were left previous skepticism about the science underlying the Kyoto commitments, the suspicions on exempted highly polluting developing nations such as India and China, the consideration of potential damages for domestic oil-dependent industries, or even the initially shared idea with the U.S. that a country can reduce its GHGs emissions with no need to ratify the treaty.

Australia is in a goof position to take advantage of two large problems. The first is new and common to the whole humankind: the climate change and its impacts; the second is an old and known one, but particular and twofold: geographic isolation and the cost of transportation.

Due to the fact that being Australia rich in mineral resources, the main feedstock for power stations and to produce electricity is coal, and so it is expected to be for considerable time in the future even under the operation of the Carbon Pollution Reduction (CPRS) and the Emission Trading Schemes (ETS). In Australia, energy production industry is by far the largest CO2 emitter, but it is also an industry of national security concern, thus, it is presumably that its transition to new basis and forms of production will be progressive but escalated.

In the context of abundance of coal and high long-term investments in coal-fired based power infrastructure, Australia should certainly do its part in the solution of climate change problem by committing international CO2 trajectory reduction targets through CPRS and ETS and evolving to a low carbon economy, but - although promising - the substitution for biomass as fuel for electricity generation seems not to be readily at hand and relegated -at least for a while- just as complementary measures to CPRS and ETS. However, relatively long-term horizons for transition in this sector might precisely represent the time needed for the domestic Renewable Energy industry (REI) to make-up the pace of innovation and research and development, particularly in the field of biotechnology in order to develop suitable energy crops and to stimulate necessary changes in agricultural patterns as well as to create a competitive market for those produces and make possible to increase production capacity. However, the conclusion of a biotechnology-related R&D expenditure analysis mimic the unstable policy toward renewable energy sources applied in Australia, it is highly indicative that in 2003-04 only 304 business organizations performed biotechnology-related R&D, totaling $378 million, and that in 2004-05 such expenditure plummeted to just $299.4 million. This is something that should change if Australia seriously considers biomass as an alternative energy source.
 

The Opportunity: Exporting the Climate Change Problem?

Australia needs to tackle the CO2 emissions reductions via CPRS and ETS, in line with its international commitments, but at the same time it should prepare itself to make a step forward in order to materially change the composition of its own energy matrix from one heavily relying on fossils fuels to other predominantly based on renewable sources. The faster this transition occurs, the greater the economic benefits will be coming out from trading excess carbon permits and reorienting coal domestic consumption to export market. In the climate change crisis, Australia has a joint opportunity to discharge its international responsibility as to CO2 emissions reductions and transform its energy matrix in a way that might represent economic advantages as to emissions trading and external trade. The shift to renewable energy sources, like biomass and biofuels, is for Australia the way to export the climate change problem.

Nonetheless, the second and possibly more attainable way of Australia to take advantage of biomass concerns transportation. Transport activity is a basic component of developed economies, connecting businesses to markets and to supplies of inputs; it also has significant economic, social, and environmental impacts. Due to its physical geography, Australia’s trade and economy depends profoundly on transportation, this is especially true as to international trade, because goods can only be carried out of or into the country by air or by sea. In 2005-06, the transport industry was the largest end-user of energy. In the same period, road transport accounted for 78% of the sector's energy use, followed by 12% of air transport, water transport with 3,4%, and rail transport with 2%. The second largest end-user of energy was the manufacturing sector. These two sectors combined account for 67% of total energy end-use. If these data is considered in connection with the fact that the transport sector is the one major area where oil has not still effectively substituted, unlike the electricity sector for instance, the potentiality of biomass as alternative greener fuel is highlighted.
 

The Threat: Energy Security

According to APPEA the Australian production of liquid fuels peaked in 2000, when the country met nearly 100% of its demand. Six years later the situation has changed substantially with only 57% of demand being met.

 

According to Geoscience Australia production levels will fall by a third by 2015, and two third lower by 2025, meaning that just the remainder third of Australian current demand will be met then by domestic production.

 

Further, if demand growing trend persists, less than 20% of likely requirements would be met in 2025. More recently, ABARE’s report on commodities (2009) shows production figures even lower. All these projections pose a threat on Australia’s reliance on conventional energy sources.

 

Policy and Legal Instruments to take advantage

From our analysis of several frameworks on biofuels we can now draw out some principles underlying the statutory regimes, as well as some trends in current policy approaches. These will serve to tackle the Australia’s opportunity to kill three birds with just one stone: restructure its transportation sector, reduce its oil dependence, and abate GHGs emissions. The main policy and regulatory lessons to learn are as follows:

 

1. Multi-approach towards incentives and R&D

Based on the belief that technology is crucial to developing comparative advantages in new industries, different approaches have been developed in the context of market-based economy frameworks in regard to the promotion of biofuels. Either directly or through individuals, governments have invested in technological innovation and provided incentives for the biofuels industry, the removal of technical or logistic barriers, and the creation of a market. As we have seen, in devising biofuels incentives the EU policymaker has been extremely creative.

 

2. Production-related subsidies and clear reorientation of the policy towards renewable energy sources

The EISA and the American Fuels Act represent the U.S. commitment to energy security and to a significant shift in the composition of energy matrix toward alternative fuels; first creating a market for, making them accessible for consumers, and later moving them gradually into additional markets; along with advancing vast financial support for research and development in renewable sources. The policies are targeted to gradually replace hydrocarbons with carbohydrates as soon and fast as possible, and this is - not surprisingly - the reason why they have started to be applied precisely in the transportation sector, which accounts for 60% of American oil consumption. The underlying goal of energy independence requires to increasingly off-set amounts of imported crude oil, and - in general - the preferential way to achieve that is through production-related subsidies.

 

3. Market-based incentives mechanisms and biofuels supply obligations

As we have seen, there are many possible forms of biofuels supply obligations. However, the compatibility between them and tax incentives is a matter to be assessed. It is expected that the former would render unnecessary fiscal support in the form of ‘state aids’. To the EU, the incentive schemes should be linked to the environmental performance of individual fuels and market-driven and demand-side measures for biofuels. The EU Commission encourages biofuels supply obligations instead of tax measures,

 

4. Renewable energies (Biofuels) potential for GHGs emissions abatement

The use of biofuels may lead to reduced life-cycle air pollutants and GHGs emissions. The amount of reductions, however, is dependent upon the feedstock used in the production of the wide range of biofuels. In this context, biomass and biofuels use in transportation should be considered as complementary measure to Emission Trading Schemes. Its potentiality in terms of applicability of Carbon Reduction Schemes such as those of the EU and some States of the US, or the proposed Carbon Pollution Reduction Scheme (CPRS) and the use of international ‘flexible mechanisms’ under the Kyoto Protocol (particularly CDMs) looks promising and more readily achievable.

 

4. Renewable energies (Biofuels) potential for GHGs emissions abatement

The use of biofuels may lead to reduced life-cycle air pollutants and GHGs emissions.

 

Final Part. Conclusion

Our objective was to analyze current relevant policy and regulatory frameworks for the biofuels industry focused on some recurrent comparative key elements. That was made, firstly, as a way of contrast with Australia’s policy and regulatory approaches and, secondly, to identify the opportunities and threats that the Australian biofuels industry faces.

As to the opportunities, we noted that they are several and varied. Australia has the chance to reorganize its energy matrix by turning the focus upon renewable energy sources, like biomass and biofuels. It has also the possibility to induce a major change in one of its most strategic though oil-dependent economic areas: transportation. Most importantly, Australia has the opportunity to discharge its international responsibility as to CO2 emission reductions - literally and metaphorically - exporting its share on the climate change problem.

The answer to how to do all of that is clearly a policy answer. But the study of comparative regimes provides us with adequate tools. Indeed, at an international level, Australia can take advantage of the‘flexible mechanisms’ like those of the the Kyoto Protocol (particularly, CDMs projects on biofuels feedstock) while in the national context it can phase-in biofuels standards and/or volumetric targets, as well as provide incentives schemes for the use and production of biomass products. However, there are also associated threats, against which the policy options will have to be balanced.

To take advantage of those opportunities it is decision-time. The prospect of economic rewards in trade - particularly in the transportation sector - and emissions trading, as well as the new political asset of energy security make a timely change of Australia’s energy matrix and consumption patterns an imperative. This is the kind of multifaceted-challenge that the shift to cleaner renewable energy sources, like biomass and biofuels, are suitable to deal with.
 

About the Author

Rafael M. Plaza, JD (Hons)/Grad Dip, (Universidad de Chile), LLM (New York University), LLM (University of Melbourne), PhD candidate (Melbourne Law School, University of Melbourne).

 

His article is part of the research thesis entitled: ‘International Transmission of Renewable Energies. A study on international legal mechanisms to further cross-border interconnections and independent operation of power transmission facilities’ undertaken by the author at the Melbourne Law School - PhD program of the University of Melbourne.

 

The author can be reached via E-Mail at: r.plaza@student.unimelb.edu.au.
 

 

 

 
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