Wednesday, September 13, 2006

Pushing the market

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.


Nice summary I/S. I see the DomPost has an editorial today which slams the decision to allow Fonterra to pollute our rivers. Seemed like a word for word summary of your post a week or so ago and very timely.

Posted by Anonymous : 9/13/2006 09:00:00 AM

Biofuels are certainly no magic bullet. They mean that land that would otherwise be going into food production or being left as forest is used to produce oil.

This thread on RealClimate spells it out quite nicely...

Posted by Anonymous : 9/13/2006 10:56:00 AM

George: not if you make the biofuels from waste - which is exactly what we are planning to do in New Zealand. Initially, we'll be using biodiesel from tallow, and a small amount of bioethanol from whey production and possibly waste fruit. Longer-term, we'd be hoping to use sewage (though that supply will never be very big), possibly tank-grown algae, and waste wood from the forestry industry. All of which are compatible with current land uses.

I don't think its a magic bullet, but it should allow us a far better sustainable standard of living than we would have just by abandoning transport as the cheap oil runs out.

Posted by Idiot/Savant : 9/13/2006 11:21:00 AM

Just to reiterate the point made by I/S above, the biofuel debate in NZ should not be confused with that in the US and other countires.

The current US administration is apparently pushing ethanol-from-corn as its magic bullet to ween the US from imported petroleum. This is not only unrealistic, considering the volumes of petroleum imported, but pursuing such a program could have some severe side-effects globally. These might include much higher prices for food staples and switching of land from food to fuel production. Essentially, their current program is a huge pork-barrel scheme to enrich ADM and other agri-giants through massive subsidies for ethanol. This is very much tied to election strategies in the Midwest states.

One of the reasons often cited to go for ethanol over biodeisel is the example of Brazil. However, Brazil uses sugar as the base input, which is much more suited to this application than corn. And Brazil has achieved energy independence because it uses so much less petroleum per capita than the US and by sacrificing rainforest for sugar cane production.


Posted by Anonymous : 9/13/2006 03:33:00 PM


It most definitely is a stretch target given that there is no biofuels production in situ or planned as yet in NZ. It has taken 20 years in places like Germany and they are not yet at the level the Govt wants to achieve in 4.

One problem is the feedstocks are not waste - they are valuable products. There was a documentary on Nat Rad Insight two weeks ago where the tallow and ethanol feedstock producers said they were currently making good money selling their product and fuel companies would have to match those prices. Which will mean more expensive fuel.

In short the potential is far greater than the realistic outcome given that I don't think the Govt is going to mandate that tallow producers must sell their product to biofuel manufacturers


Posted by Anonymous : 9/14/2006 10:20:00 AM

Insider, of course it will make fuel expensive.

Current fuel prices are subsidised by the fact that we just dig them out of the ground, effectively mining for stored energy. If we're using arable land to make energy crops, then we pay the true value of the energy (compared to other crops like foods). This is the fat end of running low on fossil fuels, and we're just going to have to cope.

Posted by Chris : 9/14/2006 12:27:00 PM

Insider: British-owned Argent group has been looking at a tallow plant in Northland for two years now, and the thing that has delayed them has been the lack of certainty in the market. The biofuels obligation will provide that certainty. And if Argent doesn't do it, someone else certainly will.

(The clear expectation of the document is that the obligation will be met primarily from biodiesel rather than ethanol)

As for the inputs, I'm quite aware they'll have to buy them on the open market and compete with other uses, and that this will lead to more expensive fuel. But I don't see this as a problem. Rather, artificially cheap fuel which externalises its costs (in air pollution, in climate change, and in sustainability) is the problem, and one that this move will help us solve.

Posted by Idiot/Savant : 9/14/2006 03:15:00 PM

Argent or anyone else not investing says to me that they are not confident anyone will buy their product.

A mandate is a subsidy by another name. It's nice that you are - arguably unnecessarily = willing to pay more for fuel but many people are not or will miss out on other things as a result. Are you also willing to refund their extra costs? It is always easier to spend someone else's money.


Posted by Anonymous : 9/14/2006 09:45:00 PM

It's always easier to ruin someone else's (future generations') environment.


Posted by Anonymous : 9/15/2006 12:32:00 AM

In the long run Tallow prices will go up quite probably faster than petrol (and just keep on going up like petrol).

New Zealand is a major producer of tallow and moves by us (and potentially the other major producers) to try to use it as a fuel would tend to result in the price going up even faster. the people who use it use it for goods where they can just keep on paying more and more if they must. In the end you may find you just can't pay enough - if your making a huge variable and fixed loss on the energy production side that could just be a huge waste.

Posted by Genius : 9/15/2006 07:16:00 AM