Biofuels and incentives

Biofuels are likely to be a key means of reducing our transport emissions in the short-to-medium term, allowing immediate reductions by substituting some level of lower-carbon fuels. But Newsroom reports that business has its hand out for incentives to produce them:

In its submission, Refining NZ obligingly lays out six incentive options. Naomi James tells Newsroom that the first priority would be to support capital investment, but operational support would come close behind.

One of the options would be to fund the capital or operational support through a levy on individual passenger carbon emissions – for example, through the International Visitor Levy.

Obviously, rapidly establishing new production capacity in Aotearoa is going to cost money. But if business wants the government to provide that money, then the government should get equity in exchange. Because that's what happens in the real world when business ventures want capital from other people. And if they don't want to do that, then the government can and should just establish a business to produce the fuels itself, and drive them out of business.

But its also worth looking at what incentives fuel polluters will face to adopt biofuels, and what that adoption is worth to the government. On the first front, the proposed sustainable biofuels mandate would set fines of $300/ton of emissions where the requirements are not met. A litre of diesel produces 2.7 kg of carbon when burned, so that gives them an effective incentive of $0.81/L to comply (unfortunately, there's no bonus for overachievement). To that we can add the cost of avoided ETS credits - biofuels are not included in the ETS and so don't attract liability - which is currently $50/ton, or another $0.20/L. So under the proposed scheme they'll be facing an effective incentive of $1.01/L to produce biofuels, about two-thirds of the retail price, and three times the importer margin of fossil fuel. On the second front, the government internally prices carbon at $150/ton, so that tells us what biofuel is worth to it: $0.40/L times the effective efficiency of the fuel (the proposed mandate will be actually looking at net lifecycle efficiency, and setting a direct emissions reduction target rather than a volume target). So for biodiesel made from leftover cooking oil, at 50% efficiency, that means about $0.20/L; for biodiesel made from wood, its probably $0.30/L.

Of course, the actual number that matters here is production costs. On that from, in 2010 the Parliamentary Commissioner for the Environment estimated the cost of biodiesel from wood at $1.85/L (p. 37; note that this is 2010 wood prices). The cost to import a litre of diesel is currently $0.75, so even with that implied $1.01/L incentive, the government may still need to provide a subsidy to make it cost-competitive. Still, it seems that the amount required would be less than the cost of the emissions avoided, so the government would still be ahead in the long-term. Alternatively, it could just increase the fines for non-compliance with biofuels mandate to triple rather than double the internal carbon price, and then it all works out quite happily, with no subsidy needed.