How can we solve the problem of climate change? The broad answer is that we have to push the market towards lower carbon emissions, through a combination of price-setting and regulation. The carbon tax was one way of doing this, across the entire economy (except for the farmer's sacred cows). But while the government has abandoned the broad measure, it is moving ahead on the narrower front with the release of a biofuels sales obligation discussion document outlining its proposed biofuels policy.
The proposal is simple: every year from 2008, fuel companies such as BP, Mobil etc will be required to sell a certain percentage of biofuels. That percentage will be in terms of energy, rather than litres, and will start out as 0.25% in 2008, rising to 2.25% in 2011 and later years. Failing to meet the obligation will incur a penalty of $60 million per PetaJoule, but companies can both roll over the first two years obligation (because the government understands that the infrastructure isn't there yet), bank a limited amount of early overachievement for later use, and trade that obligation amongst themselves provided such trades and the sales they represent can be independently verified. The latter is basically a cap and trade scheme in reverse, similar to the Australian Renewable Energy Certificates, and sets an economic incentive for overachievement.
Another way of looking at this is that the government is planning to set a price of $60 million / PJ for biofuels, or about $1.40 / L for bioethanol and $2.10 / L for biodiesel. If it costs less than that to get to the pump, then it is worth selling, in order to avoid the penalty or onsell the overachievement. Given that biodiesel costs around $1 / L to make (an expensive estimate), this sets a fairly strong incentive.
The proposal is good. While the timelines look distant, it will take at least a year for this to move from being a discussion document to law. The biggest criticism is that there is no "stretch" in the targets - they have been set to be easily achievable based on potential domestic biodiesel production, rather than to encourage innovation and the development of new sources. But its a start, and if the targets continue to rise after 2012, we may be able to push the market even further.