Victorian Biofuels Inquiry Submission by Australian Pork ... · 2. report on whether a mandatory target should be 5 per cent by 2010, 10 per cent by 2015 or otherwise; 3. report on

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Victorian Biofuels Inquiry Submission by Australian Pork Limited August 2007

Australian Pork Limited

PO Box 148 Deakin West ACT 2600 Phone: 61 (2) 6285-2200 | Fax: 61 (2) 6285-2288

www.australianpork.com.au

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Prepared for Australian Pork Ltd by Emergent Futures Pty Ltd ABN 391 057 304 07 Emergent Futures 39 Nellie Hamilton Ave Gungahlin, ACT 2912 Ph 026 242 6399 Fax 026 262 3548 [email protected]

Paul Higgins 0408 557 583 02 6242 6399 [email protected] www.emergentfutures.com

Sandy Teagle 0408 002 909 07 3862 6267 [email protected]

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Contents

FIGURES........................................................................................................................... 7

TABLES............................................................................................................................. 8

GLOSSARY AND CONVERSIONS........................................................................... 9

TERMS OF REFERENCE............................................................................................. 10

1. EXECUTIVE SUMMARY.................................................................................... 11

1 INTRODUCTION................................................................................................. 16

2 SUMMARY OF VARIOUS BIOFUELS............................................................ 19

2.1 First Generation Biofuels...........................................................................................................19

2.2 Second Generation Biofuels.....................................................................................................23

2.3 Third Generation Biofuels .......................................................................................................25

3 COSTS OF VARIOUS BIOFUELS .................................................................... 27

3.1 Grain Based Ethanol ..................................................................................................................27

3.2 Sugar Based Ethanol ..................................................................................................................38

3.3 Imported ethanol (most likely Brazilian Ethanol) ...............................................................41

3.4 Various Biodiesels .....................................................................................................................43

3.5 Biomass Based Ethanol .............................................................................................................47

3.6 Third Generation Technologies ..............................................................................................48

4 GREENHOUSE GAS BENEFITS....................................................................... 52

4.1 Grain Based Ethanol ..................................................................................................................52

4.2 Sugar Based Ethanol ..................................................................................................................57

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4.3 Biomass Based Ethanol .............................................................................................................58

4.4 Biodiesel.......................................................................................................................................59

5 ENVIRONMENTAL IMPACT AND SUSTAINABILITY............................ 60

5.1 Pollution Issues ..........................................................................................................................60 5.1.1 Ethanol .....................................................................................................................................60 5.1.2 Biodiesel...................................................................................................................................61

5.2 Land Use, Availability and Sustainability ............................................................................63

6 CURRENT INCENTIVES AND BENEFITS FOR BIOFUELS ..................... 66

6.1 Capital Grants from the Federal Government. .....................................................................66

6.2 Federal Government Incentives ..............................................................................................67

6.3 State Government Incentives...................................................................................................69

7 MANDATING POLICY ISSUES....................................................................... 71

7.1 Mandating distorts the market place by forcing consumers to take product whether they want it or not.....................................................................................................................................71

7.2 Mandating reduces innovation and incentives in the industry.........................................72

7.3 Technical issues limiting mandating of ethanol ..................................................................72

7.4 Mandating biofuels drives up the prices of the feed stock in the market place reducing any value of any regional development and employment benefits of the biofuel development. 73

8 COSTS TO THE PORK INDUSTRY OF MANDATING BIOFUELS........ 78

8.1 Increased Cost of Production ...................................................................................................78

8.2 The Fallacy of Dried Distillers Grains Benefits ...................................................................84

9 FORWARD POLICY RECOMMENDATIONS .............................................. 86

9.1 That biofuels not be mandated................................................................................................86

9.2 That the Victorian Government support the development of required infrastructure such as tanks for E10 in a similar manner to the Queensland Government..................................86

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9.3 That the Victorian Government support an excise/carbon trading structure that brings in the externalities of pollution to even up the playing field between fossil fuels and biofuels 86

9.4 That the Victorian Government put in place a long term strategy for moving to biomass based biofuels as part of the long term solution to reducing greenhouse gas emissions from transport. The Victorian Government should focus on adoption of existing alternative strategies - including fuel efficient cars, efficient diesel engines, modifying vehicle use and design, changing car usage and driving behaviour, full implementation of existing technologies, improving city and road design to minimise fuel use, and increasing incentives for low emission vehicles etc..................................................................................................................87

10 APPENDICES .................................................................................................... 89

10.1 Appendix 1 – Details of Second Generation Biofuels.........................................................89

10.2 Appendix 2 – USDOE Funding Support for Biomass Plants in the USA........................93

10.3 Appendix 3 – Possibilities for a Victorian Road Map to Reduce Greenhouse Gas Emissions. ..................................................................................................................................................97

10.3.1 Light weighting of Motor Vehicles..................................................................................97 10.3.2 Hybrid Motor Vehicles .....................................................................................................99 10.3.3 Plug in Hybrids............................................................................................................... 100 10.3.4 Cellulosic Ethanol and 3rd Generation Biofuels Plus Flex Fuel Vehicles................. 101 10.3.5 Feebate Incentive Systems ............................................................................................. 103 10.3.6 Intelligent Traffic Flow and Telematics ....................................................................... 104 10.3.7 Supermarket Smart Card Incentives ............................................................................ 105

10.4 Appendix 4 - Reasoning for Higher Grain Pricing ........................................................... 106

10.5 Appendix 5 - European Union Biofuel Policy and Subsidies......................................... 112

10.6 Appendix 6- Background into Australian Pork Limited and the Australian Pork Industry ................................................................................................................................................... 113

10.6.1 Structure and regional distribution of the industry................................................... 114 10.6.2 The geographical make-up of the Australian pork industry.................................... 114 10.6.3 The importance of feedgrain to the Australian pork industry ................................. 116

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FIGURES

Figure 1 - CO2 emissions from transport (Australian Greenhouse Gas Emissions Projections 2005)............................................................................................................. 16 Figure 2 – Australia’s Oil Import Future .................................................................... 17 Figure 3 - Simple Production of Ethanol from Starch.............................................. 21 Figure 4 – Simple Base Transesterification for Biodiesel Production..................... 22 Figure 5 – Potential Biomass Hotspots for Biofuel Production in Australia ......... 24 Figure 6 – Variability of Potential Biomass Volumes in Identified Hotspots ....... 24 Figure 7 – Costs of Producing Ethanol from Corn in the USA................................ 27 Figure 8 – Reductions in Capital Costs for Ethanol Plants with Increasing Scale 32 Figure 9 - Australian Tallow Prices Since 1995......................................................... 44 Figure 10- Average Monthly Prices for Four Major Oils – 1995 to 2006 ................ 45 Figure 11 - Global Production of Ethanol.................................................................. 49 Figure 12– Scenarios for Global Development of Biofuels....................................... 50 Figure 13 – Various Papers on the Energy Balance of Corn Based Ethanol Over Time ................................................................................................................................. 53 Figure 14 – Improvements in Corn Output per Pound of Nitrogen Fertiliser (bushels/lb)..................................................................................................................... 54 Figure 15 – Energy Use Improvements Per Gallon of Ethanol produced ............ 55 Figure 16 – Reductions in Greenhouse Gas Emissions per Mile by use of Ethanol from Different Sources in Petrol .................................................................................. 56 Figure 17 – Costs of Job Creation from Biofuel Production..................................... 74 Figure 18 – Projected Feed Grain Demand in Australia........................................... 78 Figure 19 – Grain production Projections in Australia............................................. 78 Figure 20 – Comparison of Feed Wheat and ASW Wheat Prices ........................... 79 Figure 21 – Import Parity Comparisons for Sorghum.............................................. 80 Figure 22 – Possible Impacts on Meat production in Australia .............................. 83 Figure 23 – Projected use of Distillers Grain in US Animal Feeds.......................... 84 Figure 24 - Enzyme Production of Glucose from Cellulose..................................... 89 Figure 25 – The Iogen Process for Making Ethanol from Biomass. ........................ 90 Figure 26 – The Pearson Gasification Process............................................................ 91 Figure 27 – Ethanol Production in the USA (from the Renewable Fuels Association)................................................................................................................... 107 Figure 28 – Chicago Board of Trade Corn Prices July 31 2007 (US cents per bushel) ........................................................................................................................... 108 Figure 29– USDA Corn Harvest Yields (million bushels) and prices (US$/bushel) 1975-2006 ....................................................................................................................... 110

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TABLES

Table 1– Projected Annual Petrol Consumption (mL) ............................................. 29 Table 2– Ethanol Consumption Figures in Various Mandating Scenarios (ML)* 30 Table 3– Matrix of Ethanol Cost of Production against Various Grain and DDGS Prices ................................................................................................................................ 33 Table 4 – The Costs and Petrol Equivalent Costs of Ethanol Under Various Excise Regimes ........................................................................................................................... 36 Table 5 – Ethanol Prices Required to Produce Equivalent Revenue to Sugar Production at various sugar prices. (A$/Litre) ......................................................... 38 Table 6 - Ethanol Prices Required to Produce Equivalent Revenue to Sugar Production at various sugar prices. (A$/Litre) ......................................................... 39 Table 7- Required Ethanol Prices for a 15% Internal Rate of Return for various sugar prices at half excise rates and zero excise rates .............................................. 40 Table 8 - Projected World Raw Sugar Prices.............................................................. 40 Table 9 - Cost of importing Brazilian ethanol ............................................................ 41 Table 10 – Various Cost Imposts on Imported Ethanol not Applied to Locally Produced Ethanol........................................................................................................... 42 Table 11 – ABARE Analysis of Biofuel Plant Operating and Fixed Capital Costs46 Table 12 - ABARE Analysis of Biofuel Feedstock Costs and By-product Revenues........................................................................................................................................... 46 Table 13 – Pearson Technologies Assessment of the Potential Cost of Producing Ethanol from Wood Chips at US$15/wet tonne (US$/US Gallon) ........................ 48 Table 14 – Government Excise Levels......................................................................... 69 Table 15 – Increases in Grain Costs per Tonne in Various Scenarios..................... 81 Table 16 – Emergent Futures Survey of US Ethanol Plants ................................... 106

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GLOSSARY AND CONVERSIONS ABARE Australian Bureau of Agricultural and Resource Economics

ABS Australian Bureau of Statistics

APL Australian Pork Limited

CIE Centre for International Economics

DDGS Dried distillers grain with solubles

MLA Meat and Livestock Australia

ML million litres (metric)

PM Particulate matter

USDOE United States Department of Energy

US gallons (liquid) 1 gallon = 3.785411784 metric litres

US bushels (dry) 1 bushel = 35.2390704 metric litres

US tons 1 ton = 0.90718474 metric tonnes

US barrel (petroleum) 158.987 litres

US pounds (lb) 2204.623 lb = 1 tonne

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TERMS OF REFERENCE PARLIAMENTARY COMMITTEES ACT 2003

Inquiry into Mandatory Ethanol and Biofuels Targets in Victoria

That the Economic Development and Infrastructure Committee to inquire into, consider and report to Parliament on mandatory ethanol and biofuels targets in Victoria – and, in particular, the Committee is required to:

1. report on the merits or otherwise of a mandated target for alternative fuels including biofuels and ethanol;

2. report on whether a mandatory target should be 5 per cent by 2010, 10 per cent by 2015 or otherwise;

3. report on the measures required by Government to facilitate an alternative fuels industry in Victoria for transport and non-transport applications; and

4. report on how to maximise the regional economic development benefits of a mandatory biofuels target including jobs growth and investment potential.

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1. Executive Summary

Australian Pork Limited (APL) actively supports the need for Australia to reduce gas emissions and that reduction of greenhouse gas emissions in the transport system is an essential part of this action. At the same time, a decision to mandate will provide only limited short term and heavily subsidised employment opportunities, while destroying real jobs in the economy. Rural and regional economies will suffer in the medium and long terms because of the destabilizing impacts of short term employment and the even greater ramification of loss of industries associated with consumable grain and feed grain production and processing as subsidised biofuel plants take over grain production and markets. This submission describes in considerable detail the basis for these arguments and recommends the components of an alternate strategy that the industry believes will produce a far better result for much lower economic cost. Biofuels can be divided into first generation, second generation and third generation biofuels. First generation biofuels are those such as ethanol produced from grain or sugar cane and biodiesel produced from the simple transesterification of oils. First generation fuels are produced using relatively mature technologies that have been around for a long time. Second generation biofuels are those produced from plant biomass. The technologies for second generation biofuel production are less mature and are not currently commercially viable, although six full-size commercial plants are likely to be built in the USA in the next three to four years. Research undertaken by Emergent Futures for the Grains Research and Development Corporation on biomass technologies, mapped the potential crop biomass sources in Australia. The Wimmera/Mallee region of Victoria came out as one possible biomass hot spot that could be a region to site a biomass biofuel plant if the technology becomes commercially viable. Third generation biofuels are those produced using new technologies such as the genetic engineering of plants to produce biodiesel directly, the creation of new organisms that can produce ethanol directly from plant biomass, and the production of biodiesel from algae using a variety of techniques. Most biofuel production systems around the world are not presently viable without significant government assistance measures. To be viable at current oil

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prices, grain based ethanol in particular appears to require either significant subsidies and tariff protection, or ethanol mandates. The information provided by Orbital Australia Pty Ltd to the Federal Government on the suitability of the vehicle fleet in Australia in utilizing ethanol blended petrol indicates that a 10% ethanol mandate is impractical and our interpretation of the data is that the maximum ethanol mandate that is technically possible in the next five years is a 5% ethanol mandate. Our analysis shows that a 5% ethanol mandate in Victoria, NSW and QLD is likely to consume 1.8-2 million tonnes of grain unless imported ethanol is allowed to fill the mandate. Such demand will distort grain prices in local regional areas and significantly increase the likelihood of importing feed grains into the east coast, artificially raising feed grain prices for the current feed grain value adding industries that have to compete in international markets. It has been argued by the proponents of ethanol that the supply of Dried Distillers Grains with Solubles (DDGS), a by-product of the ethanol process will be a boon for livestock producers and avoid the grain pricing problems identified in this report. However a recent report from the Centre for Agricultural and Rural Development (CARD) at Iowa State University has indicated that DDGS use will not be anywhere as high as anticipated, particularly in pigs and poultry. Further as it is unlikely that there will be very high levels of DDGS produced in Australia, it is unlikely that there will be low prices for DDGS resulting from surpluses. Therefore, the long run analysis for the USA is likely to apply from the beginning in Australia, resulting in inclusion rates of less than 5% of the diet. Mandating of biofuels at this point in the development cycle for biofuels will lead to increased adoption of first generation technologies as these are the biofuels that are currently commercialised. However, there are a number of problems with creating a first generation biofuel based business model by the artificial means of mandating:

• It is highly likely that the cost of first generation biofuels will be higher than that of petrol even with the current subsidies in place. This creates a “tax” on consumers by forcing them to buy a product which is more expensive than they could otherwise purchase.

• A mandate will exert upward pressure on prices motorists pay for fuel

through a range of mechanisms including reduced inter-fuel competition, additional blending, distribution and dispensing costs, and restrictions on competition from imports.

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• The creation of a successful first generation set of biofuels plants by artificial mandating of consumption will create a barrier to the next generation of biofuels by filling the mandated target so there is no room in the market place.

• First generation biofuels compete directly with food for the agricultural

products that they require as feedstocks. There is considerable international concern that this may cause significant increases in food prices, which may lead to increasing interest rates in developed countries, while in developing countries, an increase in food prices may decrease a nation’s standard of living and those people living at the margin.

• Injecting an artificial demand stream into agriculture through mandating

will distort the market place, with other industries that utilise grain and oil seeds, such as the Australian pork industry, and that value-add those products left facing unfair competition which will drive up their input costs and reduce their international and domestic competitiveness. This could lead to business failures and job losses in complementary industries.

The ABARE analysis for the Prime Minister’s Biofuels Task Force Report showed that if the 350 million litre target was achieved in 2009-10 the government expenditure would be $545,000 per direct job created and the direct economic cost would be $417,000 per direct job created. This analysis did not take into account any job losses in other grain value adding industries.

Given these problems it is doubtful that the espoused benefits of the development of a mandated biofuels industry will offer any significant overall advantage to the community for the following reasons:

• The greenhouse gas emission reductions of biofuels have been overstated by the proponents of biofuels. Life cycle analysis shows that there are significant energy inputs into the biofuel production system, which limit the net greenhouse gas emission reductions, because fossil fuels are used in the feedstock production chain. Importantly there are indications that the life cycle analysis of E10 from grain in Australia will make greenhouse gas emissions worse than using unleaded petrol:

“There is limited information on life cycles using grain in Australia. However a recent presentation by Tom Mascara from AgriEnergy Limited which is building the ethanol plant at Swan Hill stated that using the Greenhouse Gas Office Methodology on life cycles their work had indicated that the use of E10 would produce a slight increase in

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greenhouse gas emissions over standard unleaded petrol in Australian conditions.”1

• Regional employment benefits from the development of a mandated

biofuels industry are unlikely to be sustainable because modern biofuel plants do not have high labour needs and it is highly likely that there will be employment losses in other value adding industries as a result of an increase in feedstock prices for those industries.

• Biofuels offer some pollution reduction benefits over unleaded petrol and

diesel. However, based on current available data, the extent of these benefits is unclear. It may be possible that some of these reductions may be similarly achieved by advances in engine technology and improvements in existing fuels. Some of the benefits of biofuels are also offset by increases in certain pollutants. More data on impacts in Australian conditions is required before a definitive case for pollution reduction advantages of biofuels can be made.

There are many niche markets for which biofuel production, especially second generation biofuels, can co-exist with food production. However, by mandating biofuel consumption and providing subsidies from the consumer to ensure that the mandate is met, the government will interfere with a market previously geared to the production of food, animal feed and a small volume of industrial products. Competition between fuel and food could emerge and have significant social implications. The impact of such policies will be felt in Australia and by price-sensitive countries impacted by declining crop exports and escalating food prices. In particular there are significant concerns: that mandating and subsidising biofuels will drive up the price of food internationally and put pressure on housing interest rates; that placing marginal land into production will increase erosion and nutrient run off problems; and that biofuel plants will use significant amounts of scarce water for crops and in the plants themselves. Victoria and Australia need to take action to reduce the greenhouse gas emissions from our transport system, and to reduce oil use. The solution lies partly in regional Australia where we can boost regional development and employment. Biofuels are an essential component of a future energy mix, but mandating of biofuels in the transport fuel system must be excluded since it creates more problems than it solves. What is required is a long term solution that maps out a strategy for the next 20 years. To achieve the outcomes we seek requires a variety of approaches which allocates resource use efficiently.

1 Australian Cereal Chemistry Conference, Melbourne, Australia August 2007

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We are concerned that economic resources are going to be expended on a second rate solution that will not achieve the objective. If resources are wasted on these, then first rate solutions will be given less chance to work because they will be started later than they should be and with less economic support than they need to succeed. Our recommendations are:

i) That biofuels not be mandated.

ii) That the Victorian Government support the development of required infrastructure such as tanks for E10 in a similar manner to the Queensland Government in order to remove market blockages to ethanol adoption.

iii) That the Victorian Government support an excise/carbon trading

structure that recognises the negative externalities of pollution to even up the playing field between fossil fuels and biofuels.

iv) That the Victorian Government put in place a long term strategy for

moving to biomass based biofuels as part of the long term solution to reducing greenhouse gas emissions from transport. This strategy should focus on adopting existing alternative strategies - including fuel efficient cars, efficient diesel engines, modifying vehicle use and design, changing car usage and driving behaviour, full implementation of existing technologies, improving city and road design to minimise fuel use, and increasing incentives for low emission vehicles.

An understanding of biofuels in Victoria and Australia is outlined in this submission, highlighting potential problems and the impact of international and Australian government support for the ethanol industry. Components of a forward 20 year strategy are outlined to reduce transport based greenhouse gases, reduce oil use and boost regional development and employment.

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1 Introduction

Much of the recent commentary on climate change in Australia since the release of the Stern Review2 in 2006 has focused on coal. The Australian Greenhouse Office projects that CO2 emissions from stationary energy sources will be 49 per cent of all CO2 emissions in 2010, of which 70 per cent will be from electricity generation. The fact that CO2 emissions from the transport sector will be 16 per cent of all CO2 emissions in 2010 has been largely ignored; as has the fact that CO2 emissions from transport are projected to be 56 per cent above the 1990 levels and are projected to continue to rise as a percentage of all CO2 emissions. As can be seen in Figure 1 the majority of these emissions are from cars, light commercial vehicles, and heavy trucks and buses. This data shows that in the area of transport most of our efforts should be focused on cars and light commercial vehicles.

Figure 1 - CO2 emissions from transport (Australian Greenhouse Gas Emissions Projections 2005)

The data extrapolating our oil use and imports also indicates that Australia is facing a significant increase in oil imports as our demand for oil grows and our

2 Stern Review: Economics of Climate Change, 2006, www.sternreview.org.uk

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production volumes flatten out and decline. Figure 2 shows the ABARE forecasts for production and net imports for oil to 2025. This is an important issue for both international security and for maintaining a steady balance of trade, especially if oil prices continue to be high.

Figure 2 – Australia’s Oil Import Future3

Based on the available data, Victoria and Australia should take action to reduce the greenhouse gas emissions from the transport sector, and to reduce oil use. We also believe that the solution in part lies in regional Australia and regional development and employment can be boosted via such a strategy. Biofuels are an essential component of a future energy mix, but mandating of biofuels in the transport fuel system must be excluded since it creates more problems than it solves. What is required is a long term solution that maps out a strategy for the next 20 years. To achieve the outcomes we seek requires a variety of approaches which allocates resource use efficiently. An understanding of biofuels in Victoria and Australia is described in this submission, highlighting potential problems and the impact of international and Australian government support for the ethanol industry. Components of a

3 ABARE Energy in Australia 2005

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forward twenty year strategy are outlined to reduce transport based greenhouse gases, reduce oil use and boost regional development and employment.

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2 Summary of Various Biofuels

Biofuels can essentially be divided into three categories:

2.1 First Generation Biofuels

The first generation biofuels are ethanol produced from the fermentation of sugar from sugar cane, grains or waste starch products; and biodiesel produced from the transesterification of oils and fats. The reason that these are called first generation biofuels is that the central technologies in their production have been known for a long time and are essentially mature technologies. Figure 3 shows the simple chemical steps that occur during the production of ethanol from sugar or starch. In the case of sugar the process is fermentation of the sugar- using yeast organisms that have been industrially commercialised over a long period of time. If grain or waste starch are used (as in the existing plant at Manildra) then a process needs to be added before the fermentation stage to obtain starch from the feed stock and then split that starch into glucose that can then be fermented. Figure 4 shows the simple chemical process for the base transesterification of a triglyceride oil or fat into biodiesel. While the basic technologies are mature technologies, considerable work has been undertaken on incremental process improvement in modern biofuel plants in order to reduce costs, especially in grain based ethanol plants in the USA which have more process steps and energy inputs than sugar based ethanol plants. These processes include:

• Increasing plant scale to improve the economies of scale (see Section 3 on Costs).

• Cold starch treatment methods to reduce the heat input into the process.

• Increasing sugar and ethanol concentrations to reduce distillation energy

costs.

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• Improving the quality of the grain ethanol by-product “Dried Distillers Grains with Solubles” (DDGS)4 in order to create more feed value from the by-product and thereby offset costs in the ethanol production processes.

There has been considerable improvement in some of these areas but all of the gains made have had matching cost increases due to increasing energy costs, especially natural gas costs in the USA.

4 DDGS is the by-product of the ethanol production is a high nutrient feed valued by the livestock industry

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Figure 3 - Simple Production of Ethanol from Starch5

5 Biofuels Made Easy by Dr Chris Hamilton, Director Sales and Marketing, Lurgi Pacific Pty Ltd. Presentation 18 March 2004.

Condensation Polymer of Glucose C6O6H12 2C2H5OH + 2CO2

+ enzyme + yeast

STARCH GLUCOSE ETHANOL

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Figure 4 – Simple Base Transesterification for Biodiesel Production6

6 from http://www.esru.strath.ac.uk/EandE/Web_sites/02-03/biofuels/what_biodiesel.htm

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2.2 Second Generation Biofuels

Second generation biofuels are produced from less mature technologies utilising more complex feed stocks9. These technologies have been around for a long time with the US producing ethanol from wood chips for its war effort in World War 2. However the costs of these technologies have always been much higher than sugar or starch based ethanol and biodiesel transesterification due to the complex nature of the process. There are two main processes that have been used to decompose plant material and turn it into biofuel. These are chemical/enzyme treatments and a process called gasification. More detail on these processes is contained in Appendix 1. Many different biomass sources can be used to produce ethanol. Some of these include wood chips, wheat straw, rice hulls, waste wood products, and specifically grown energy crops. Work undertaken by Emergent Futures and Neil Clark and Associates in Bendigo for the Grains Research and Development Corporation (GRDC) included preliminary mapping of the possible sources of crop biomass such as sugar cane bagasse and wheat and barley straw. This mapping process identified a number of possible areas- “hot spots” - that may be suitable for harvesting these by-products and turning them into ethanol. Of particular interest for the inquiry would be the hot spot in the Wimmera/Mallee as identified in Figure 5. This work also assessed biomass variability resulting from the impact of drought and variable rainfall on crop production. This was done to determine if there would be sufficient biomass present in these areas every year to reduce the risk that a plant would not run at full capacity due to feed stock constraints, or would be required to ship biomass in from elsewhere. The results of this work are shown in Figure 6. Considerably more work needs to be undertaken to verify that the potential biomass identified is harvestable and to investigate alternative specific energy crops that may be grown in the identified regions. However, the preliminary results indicate that a biomass plant may be viable in a number of the cropping areas in Australia.

9 We are able to produce ethanol from biomass material other than starch and sugar essentially because most plants are mostly comprised of sugar. This sugar is tightly bound up in complex polysaccharides in cellulose and hemi-cellulose. Plants have built up strong defence mechanisms to prevent these compounds being easily decomposed into their component sugars. Consequently it has been technically difficult to access those component sugars.

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Figure 5 – Potential Biomass Hotspots for Biofuel Production in Australia

Figure 6 – Variability of Potential Biomass Volumes in Identified Hotspots

Hotspot Stubble Trends 1994 to 2004

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Years

Tonn

es

Burdekin FNQ Wimmera / Mallee Southern NSW York / Mid North Moree Central WA Southern WA

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The US Department of Energy announced in February 2007 that they were funding six commercial companies with up to US$385 million to build six commercial biomass ethanol plants. The details of this announcement are attached in Appendix 2. It is highly likely that the combination of government funding with the commercial investment made by the respective companies will result in at least one, if not more, viable commercial biomass technologies that will be able to compete with first generation biofuel technologies in the market place by 2011/2012. This development significantly changes the possible futures for the biofuels industry in Australia and needs to be carefully considered when designing a future strategy for reducing fossil fuel use and greenhouse gas emissions.

2.3 Third Generation Biofuels

Third generation biofuels are those biofuel technologies that are still in the early development stages. They include: 1) The genetic engineering of plants to insert enzyme genes into their

structure. These plants have a metabolic pathway that allows the control of a trigger that activates enzymes built into their system to dissolve the hemicellulose and cellulose in their structures. Such a mechanism would allow plants to be grown for energy purposes as and would avoid expensive chemical or enzyme treatments to decompose their polysaccharides and complex sugars.

2) The genetic engineering of plants to produce biodiesel (instead of using oils

that then need chemical conversion to biodiesel. Such a system has the obvious benefits of reducing the cost of processing oils).

3) The use of algae to produce biodiesel. A number of possible systems have

been proposed for producing biofuels in this manner including:

a) The capturing of carbon dioxide from plants such as coal fired power stations and running that carbon dioxide through bioreactors that continually grow algae. The algae contain oil which can be harvested for biodiesel.

b) The use of extensive ponds to grow algae in a similar manner that is

used to grow algae to harvest materials for pharmaceutical and cosmetic purposes.

c) Harvesting of algae from pre-existing ponds used for the processing of

waste. d) Harvesting algae in the sea using semi-permeable systems that contain

the algae in a similar manner to fish farms.

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4) The creation of new microbes that can produce ethanol or hydrogen with

high levels of efficiency. Craig Venter, who led the commercial race for the human genome project, believes that he can produce specially designed artificial organisms that are significantly more efficient than existing organisms because they have been designed with a specific purpose in mind.10

5) The production of plants and microbes through genetic engineering and

synthetic biology that can produce hydrocarbons through their normal metabolic pathways to produce fatty acids11

10 see http://www.businessweek.com/magazine/content/07_26/b4040047.htm?chan=search 11 LS9 is an example of one of these companies (http://www.ls9.com/technology.htm)

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3 Costs of Various Biofuels

3.1 Grain Based Ethanol

The cost of producing grain based ethanol is primarily dependent on three factors:

• The cost of the grain input into the plant.

• The cost of the processing in the plant, including energy costs, labour, enzymes, etc

• The offset produced by the sale of by products such as DDGS which is

the matter left after the starch from the grain has been removed and processed for ethanol production. DDGS is used primarily as an animal feed.

Most of the grain based ethanol production in the world is being carried out in the USA. A significant large scale study looking at commercial operations in the USA by the National Renewable Energy Laboratory found the following costs of production in US dollars for ethanol production from corn in 1999:

Figure 7 – Costs of Producing Ethanol from Corn in the USA

Source: NREL study TP-580-28893 12- Determining the cost of producing ethanol from corn starch and lignocellulosic feedstocks.13

12 NREL, October 2000, Determining the Cost of Producing Ethanol from Corn Starch and Lignocellulosic Feedstocks 13 These costs are US$/US gallon and a US gallon is only 3.785412 litres.

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Translated into Australian costs, at a current exchange rate of $0.884714 this equates to a cost of A$0.263 cents per litre. On first examination this looks very competitive against petrol at current prices but, there are several factors which indicate that current costs of production in Australia will be much higher than this figure. These factors stem from two core differences between Australian and US ethanol markets which are described below. It is also important to note that ethanol only contains approximately two-thirds of the energy of petrol so any cost comparison with petrol needs to be adjusted by this factor. Additionally, there have been considerable process improvements since the 1999 study but the general view in the industry in the USA is that the cost reductions resulting from those process improvements have been offset by the increase in energy costs since 1999.15 The USA grain based ethanol market is constantly held up as an example of what might be able to be achieved in Australia. In order to make a viable comparison between the US and Australian ethanol markets and thereby gain some insight as to what might occur with grain based ethanol costs in Australia, it is critical to first understand the core differences between the USA and Australian ethanol markets. Following is a discussion of the differences between Australia and the United States: 1. In the USA corn production far exceeds domestic demand. As a result, large volumes are exported. This means that the price of corn in the USA is likely to stay lower than Australian energy grains into the future.16 In contrast to the USA, the supply demand situation in Australia is much tighter. While the figures on feed grain supply are more difficult to estimate in Australia due to the lack of a large dedicated feed grain industry, it is clear that supply is close to demand, especially when climate variability is brought into the equation. Meat and Livestock Australia (MLA) commissioned a report in 200317 where it was forecast that demand from the current livestock feed grain users would result in feed grains having to be imported into the east coast of Australia in the next 10 years. In the last 15 years the domestic price of grain on the east coast has been significantly affected three times by drought – in 1994/95, 2002/03 and 2006/0718. As a consequence the price of grain for end users in Australia has been much higher than world prices during those three periods. If grain demand from ethanol plants is then injected into the analysis, grain prices must rise in response to demand. While this sounds good in theory to grain growers, driving up the price of grain will also drive up the price of

14 http://www.rba.gov.au/Statistics/exchange_rates.html 15 Personal experience of Paul Higgins from a study tour of North America for a GRDC report on the North American Ethanol Industry, January 2006. 16 There have been significant increases in the price of corn recently – see Appendix 4 for the effects of subsidised biofuels on grain pricing 17 MLA Report – Review options to reduce feedstuff supply variability in Australia. FLOT.123 November 2003. 18 ABARE Commodity Statistics 2006, Table 52 for data on 1994/95 and 2002/03

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ethanol production. This will make grain ethanol plants less competitive against petrol and, depending on the price of oil, could drive them out of business. If biofuels are mandated the plants could charge enough to recover their costs, whether that price is competitive or not, to the cost of consumers. If prices are driven up in this manner by an artificial demand then the prices for all other end users of the grains will be adversely affected.

To try and understand what impact mandating of biofuels in Queensland (QLD), New South Wales (NSW) and Victoria (VIC) will have on ethanol demand and grain demand on the east coast, we have extrapolated trends for fuel consumption for these States as shown in Table 1.

Table 1– Projected Annual Petrol Consumption (ML)19

2005-06 2010-11 2015-16 2020-21 QLD 4 250 4 948 5 271 5 595 NSW 6 032 6 454 6 876 7 299 VICVIC 4 886 5 228 5 570 5 912

Table 2 shows various scenarios for ethanol demand in the face of various mandating scenarios for ethanol on the east coast of Australia. Based on the technical limitations of Australian motor vehicles, we believe that it is only possible to mandate a maximum of 5% ethanol in petrol in 2011 (see Section 8 on Mandating Policy). Therefore we have highlighted two critical points in the table:

• A 5% mandate in NSW and QLD in 2010-11 since these states have already committed to some sort of mandate by 2011.

• A 5% mandate in NSW, QLD and Victoria in 2010-11.

19 Calculations based on ABARE data on sales of petroleum products by State for 2005-06 and growth projections, with a flat increase of 1.4% p.a. (ie non compounded) on average for VIC and NSW and faster growth for QLD to compensate for increased population growth.

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Table 2– Ethanol Consumption Figures in Various Mandating Scenarios (ML)*

2005-06 2010-11 2015-16 2020-21 QLD 2% 85 99 105 112 5% 213 247 264 280 10% 425 495 527 560 NSW 2% 121 129 138 146 5% 302 323 344 365 10% 603 645 687.65 730 QLD + NSW 2% 206 228 243 258 5% 514 570 607 645 10% 1028 1140 1215 1289 VIC 2% 97 105 111 118 5% 244 261 279 296 10% 489 523 557 591 QLD, NSW and VIC 5%

758 831 876 941

QLD and NSW 5% plus VIC 10%

1003 1093 1164 1236

*Figures are an approximation only.

It is likely that an ethanol mandate in QLD will be partly filled by sugar cane based ethanol because QLD already has a small operating capacity for producing ethanol from sugar in QLD. However, in general the sugar industry seems reluctant to commit to building new plants at this point in time. Therefore, the most likely scenario is that if we have a 5% mandate for ethanol down the length of the east coast then it will be supplied as:

• Sugar based ethanol 57ML-150ML20

• Grain based ethanol 681ML – 774 ML

This does not consider the possibility of importing ethanol from countries such as Brazil. Despite the production cost differences, it is unlikely that much ethanol will be imported from Brazil in the short term due to production being tied up in various markets (see Section 3.3 on Imported Ethanol). If we assume that production of ethanol from grain in Australia yields 380 L per tonne of grain then these scenarios would require 1.79 – 2.04 million tonnes of grain on the east coast. 20 57mL is the current plant capacity for sugar based ethanol in QLD.

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It is difficult to estimate how the price of grain may change in response to increased ethanol demand on a yearly basis due to climatic variability and grain production volume varying considerably. Proponents of the plants claim that new grain supply will come on line to meet this demand. While this is probably true it is likely that it will only do so at higher grain prices and possibly stimulate demand on marginal grain producing areas, exacerbating erosion and other environmental issues. What can be stated with certainty is that the creation of a significant grain based ethanol demand will increase the number of years where grain has to be imported into eastern Australia. If this occurred as a result of normal commercial competition, then the results would play out in the market place and the industries that provided the best commercial return to the economy would triumph. However demand based on a biofuels mandate will also lead to a significant increase in grain prices in eastern Australia which will severely disadvantage existing users of feed grains. This is because a biofuels mandate will allow ethanol plants to pay increasingly more for grain no matter what the cost of producing ethanol. Such a distortion in the market is likely to destroy jobs in one sector of the economy, while creating jobs in another, at great cost to the economy (see our summary of the ABARE analysis in Section 8 on Mandating Policy). 2.

In the USA the total transport fuel market is 655 billion litres while in Australia it is only 33 billion litres.

Given the size of the US market, the fact that some US states mandate biofuel and the fact that there are 4.5 million flex fuel vehicles21 in the USA means there is much more scope for large scale commercial plants in the USA than in Australia. As shown in Figure 8 a large scale plant is much cheaper to construct and has much lower operating costs. This leads to a paradox in grain based ethanol in Australia:

In order to produce grain based ethanol at an internationally competitive price you need to build a large scale commercial plant. However, the market size in Australia is too small to justify the investment in a large scale commercial plant.

21 Flex fuel vehicles are those that will run on anywhere from zero to 85% ethanol combined with petrol. There are a large number of these vehicles in the USA as tax incentives to vehicle manufacturers resulted in the flex fuel vehicles being cheaper than standard vehicles. Consequently a lot of these vehicles were constructed. However most of them are only using petrol because their owners do not even know they will run on ethanol. This means that if ethanol becomes significantly cheaper than petrol there is a huge market of ready made vehicles available to use lots of ethanol. For instance, if each of those vehicles uses 50 litres per week and they used on average 50% ethanol the market is 5.85 billion litres of ethanol.

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Figure 8 shows a visual representation of the economies of scale that accrue to larger plants compared to smaller scale plants. The figure clearly shows that the cost of construction per gallon with an annual operating capacity of a 50 million US Gallon is only 52% of the cost compared to a 10 million US gallon plant. This means that the cost of producing ethanol in Australia from grain will be significantly higher than production costs in the USA due to the smaller scale plants that are being proposed here. While the costs of building a plant have increased since these figures were calculated the relative cost differences remain valid.

Figure 8 – Reductions in Capital Costs for Ethanol Plants with Increasing Scale22

Capital Cost per US Gallon of Production Capacity

$-

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

$1.40

$1.60

$1.80

$2.00

50 45 40 35 30 25 20 15 10

Plant Size (million US Gallons)

If we assume that ethanol will only go into petrol in significant volumes, then this means that a grain based ethanol plant of 200 million litres would have to capture 10% of the total petrol market in Australia if E10 was used. This is because Australia used just under 20 billion litres of petrol last year23 and to consume 200 million litres of ethanol you would need to sell 2 billion litres of E10 fuel. Therefore a plant producing 200 million litres of ethanol would have to capture 10% of the total petrol market.

22 Data supplied by National Renewable Energy Laboratory, Boulder Colorado, Graph created by Emergent Futures Pty Ltd. 23 ABS Vehicle statistics

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These factors have led to the proposed construction of small scale plants in Australia. For example of the proposed plant at Dalby in Queensland, in its the first stage of the plant proposes an investment of $130 million for a 90ML plant. This means construction costs will be $1.44 million per ML versus $448,000 per ML for a 200 ML facility in the USA24. Hence building such a plant will be well below world best practice in costs of construction and operation.

Table 3 shows our calculations of a matrix of ethanol production costs against various prices of grain and DDGS. ABARE calculated that the cost of ethanol production from grain with $152/tonne for grain and DDGS at $220/tonne was 36 cents per litre25. Our estimate of the real cost in the market is much higher than ABARE’s calculation because we believe that:

• A smaller plant scale (as described above) will mean operating costs are higher. We have added 3 cents per litre on for smaller scale plants;

• The price of DDGS of $220 a tonne at the ethanol plant gate is unlikely to be achieved (as described in more detail on the next page); and,

• Forward grain prices are likely to be much higher than $152 a tonne due to increased international biofuel demand driving up international grain prices (see Appendix 4).

We have provided more detail on the highlighted production price points in two alternative scenarios detailed below. Table 3– Matrix of Ethanol Cost of Production against Various Grain and DDGS Prices

Grain Price (A$/tonne)

152 175 200 225 250 DDGS Price (A$/tonne

74.09 80.14 86.72 93.3 99.88 100 66.78 72.83 79.41 85.99 92.57 125 59.47 65.52 72.1 78.68 85.26 150 52.16 58.21 64.79 71.37 77.95 175 44.85 50.9 57.48 64.06 70.64 200

39 45.05 51.63 58.21 64.79 220

For the purposes of the scenarios we have highlighted two price points: Scenario 1

24 US$1.5 million per million US gallons annual production capacity at an exchange rate of 0.8847. 25 This is the cost of production of ethanol calculated by ABARE for the Prime Minister’s Biofuels Task Force Report.

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1) Grain at $152/tonne, described as the forecast long run price for the ABARE analysis26, plus DDGS at $150 per tonne. This results in a cost of production for ethanol at 59.5 cents per litre. For this scenario, DDGS is priced much lower than the ABARE analysis based on the following: i) DDGS has sold in Australia at less than $110 a tonne at the distillery

gate27. We accept that the price for DDGS is likely to be higher than this once experience creates more skill in its use and therefore have used a higher figure of A$150 per tonne.

ii) In work undertaken by Emergent Futures for MLA on the possibility of importing DDGS, Tony Edwards (Nutritionist, ACE Livestock Consulting, South Australia) calculated the following values for DDGS in Australia:

− With wheat at A$180/tonne, sorghum at A$170/tonne and 48% full

fat soy at $420/tonne, the value of DDGS once it is mixed into a feed ration for pigs was $200-$230/tonne, the value for feedlot cattle was $140-$270/tonne and the value for dairy cattle was $180-$190 per tonne. Given the lower ABARE forecast grain price the value of DDGS should be lower than in these calculations. The price that is actually received by the ethanol distillery will be the price paid by the end user minus the transport costs of getting the DDGS to the end user. Therefore the likely net price received for DDGS to offset the cost of producing ethanol is likely to be significantly below $220/tonne.

-

iii) The extra production of DDGS in the USA from the expansion of the US ethanol industry is likely downward pressure on world protein prices, which in turn will push the protein value for DDGS in Australia downwards (the higher price in the beef feedlot calculations was based on protein value). However displacement of soybean production by increased corn prices will also reduce the availability of soybean meal placing upward pressure on protein prices. What actually happens will be a complex interaction of a number of factors including the use of DDGS in rations. Therefore, while our judgment is that there will be an overall weakening of protein prices, we have not factored this into our assessment of DDGS prices in this report.

Scenario 2 2) A second price point with grain at $225 a tonne and DDGS at $175 a tonne,

giving a price calculation of 71.4 cents per litre for ethanol. We have based

26 ABARE analysis for the Prime Minister’s Task Force on Biofuels 27 Paul Higgins personal experience from purchasing DDGS as part of a group milling arrangement with Ridley Corporation.

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this price point on extra demand for grain pushing up feed grain prices and the increase in grain price resulting in extra value for DDGS. More detail on our reasoning on this pricing is included in Appendix 4.

Once the costs of production, as described in the two scenarios above, are factored in with the proposed excise rates and distribution costs, the following petrol equivalent costs of ethanol under the various exercise regimes can be calculated. These costs are shown in Table 4.

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Table 4 – The Costs and Petrol Equivalent Costs of Ethanol Under Various Excise Regimes

Ethanol Production Cost (c/L)

Excise Rates (cents/litre)

2.5 5 7.5 10 12.5

Ethanol Cost at Refinery Gate with Excise (c/L) 59.5 62 64.5 67 69.5 72 71.4 73.9 76.4 78.9 81.4 83.9

Equivalent Petrol Cost At Refinery Gate (c/L)28 59.5 92 96.3 100 103 107.5 71.4 110.3 114 117.8 121.5 125.2 Equivalent Petrol Cost At The Pump (c/L)29 59.5 116.6 121.3 125.4 128.7 133.7 71.4 136.7 140.8 145 149 153

At 27 July 2007 the prices for retail unleaded petrol were $1.267 to $1.314 per Litre in Victoria, NSW and South Australia30 with the price of oil having been in the low to mid seventies range for the previous two weeks on a West Texas Intermediate Crude Basis. The actual retail price of petrol will vary both with the exchange rate and the international price for oil given that we price petrol using an international pricing model. However what these numbers mean is that oil has to remain above current prices for ethanol to be competitive with petrol at a retail level in all excise circumstances where the grain price remains elevated due to international and domestic demand. These figures also mean that even if grain prices return to their historical averages (which we would argue is unlikely given international demand for grain and extra domestic demand for grain from ethanol – see Appendix 4) the oil price will have to remain at or above current rates for ethanol to be competitive with petrol once the excise rate reaches 7.5 cents per litre for ethanol. Given that OPEC announced in the last week of July 2007 that they were increasing output in order to keep oil in the US$60-$65 a barrel range31 this

28 This price is before GST and before distribution costs and adjusts for the relative energy levels in ethanol and petrol, assuming they are directly competitive on an energy basis. 29 Assumes distribution costs and retail margins of 14 cents per litre plus 10% GST 30 http://www.exploroz.com/OntheRoad/FuelPrices/Default.asp?sc=1& 31 OPEC Monthly Oil Report July 2007: “However, considerable uncertainties continue to surround world oil demand and demand for OPEC oil. But combination of current high inventory levels and increasing OPEC spare capacity, which is expected to reach around 15% in the second half of this year, means there are adequate supplies available to cope with any upward revisions to oil demand forecasts. OPEC notes oil markets remain well supplied and market fundamentals do not require any additional supply from the Organization at this time. OPEC will

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means that in most scenarios ethanol produced from grain in Australia (and most ethanol sold in Victoria will be produced from grain under a mandating scenario, unless it is trucked from the sugar cane areas of Queensland or imported from Brazil) will be more expensive than petrol, increasing costs on household budgets. This is because under a mandate the ethanol produced has to be sold whether it is competitive or not. The proponents of ethanol will argue that Peak Oil32 means that oil will be priced above this range and therefore there is no political risk. This is a circular argument because if oil is priced well above current levels then ethanol will be highly competitive as a cheaper fuel and no mandating would be required.

continue to monitor developments and is prepared to help mitigate any tightness which may emerge at any future stage.” 32 In the context of models of the depletion of resources, notably Hubbert peak theory, peak oil is the date when the peak of the world's petroleum (crude oil) production rate is reached. After this date the rate of production will by definition enter terminal decline. According to the Hubbert model, production will follow a roughly symmetrical bell-shaped curve. Source: http://en.wikipedia.org/wiki/Peak_oil

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3.2 Sugar Based Ethanol

While we believe it unlikely that sugar based ethanol from Queensland will fill supply in Victoria if an ethanol mandate is put in place we have included some costings on sugar based ethanol for completeness. Table 5 provides a summary of ethanol prices that would be required to produce an equivalent return to sugar production, at various prices for raw sugar, with C molasses priced in at $60/tonne.

Table 5 – Ethanol Prices Required to Produce Equivalent Revenue to Sugar Production at various sugar prices. (A$/Litre)

Sugar Price (A$/tonne) $200 $300 $400 Ethanol price to receive equivalent revenue by utilising C Molasses

$0.36 $0.36 $0.36

Ethanol price to receive equivalent revenue using B molasses $0.33 $0.38 $0.44 Ethanol price to receive equivalent revenue using A molasses $0.39 $0.50 $0.61 Ethanol price to receive equivalent revenue converting the whole sugar yield to ethanol

$0.45 $0.61 $0.77

The costs of ethanol production used in this calculation include operating costs at world best practice based on a return on capital invested of eight per cent. Australian sugar based ethanol plants are unlikely to have the scale to achieve these processing costs so Table 6 shows our view of the costs of producing ethanol from sugar in Australia.

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Table 6 - Ethanol Prices Required to Produce Equivalent Revenue to Sugar Production at various sugar prices. (A$/Litre)

Sugar Price (A$/tonne) $200 $300 $400 Ethanol price to receive equivalent revenue by utilising C Molasses $0.40 $0.40 $0.40 Ethanol price to receive equivalent revenue using B molasses $0.37 $0.42 $0.48 Ethanol price to receive equivalent revenue using A molasses $0.43 $0.54 $0.65 Ethanol price to receive equivalent revenue converting the whole sugar yield to ethanol

$0.49 $0.65 $0.81

To calculate the Australian numbers we have added a further four cents per litre processing cost including capital recovery. This is the difference between the best practice figures we have sourced and the cost used in the ABARE analysis for the Prime Minister’s Biofuels Task Force Report. It is important to note that while the capital recovery involved in the processing cost is an important figure for assessing new investment and monitoring existing investments, the operating costs of a plant which is already established will be lower than this figure. In addition to these figures, we have calculated a different set of figures that show the level of ethanol price required to give a 15 per cent Internal Rate of Return for a sugar based ethanol plant, both with full and partial fuel excise rates, as shown in Table 7. This indicates the sort of prices that need to be achieved if investment in a new sugar based plant is to occur that meets the required investment hurdles.

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Table 7- Required Ethanol Prices for a 15% Internal Rate of Return for various sugar prices at half excise rates and zero excise rates33

Sugar Price (A$/tonne) 200 300 400 Price to give IRR of 15% - once excise at half of petrol[1] Resulting Ethanol Prices C Molasses ($/litre) $0.66 $0.66 $0.66 B Molasses ($/litre) $0.69 $0.75 $0.81 A Molasses ($/litre) $0.66 $0.77 $0.88 Total to ethanol ($/litre) $0.63 $0.79 $0.95 Price to give IRR of 15% - no excise Resulting Ethanol Prices C Molasses $0.54 $0.54 $0.54 B Molasses $0.57 $0.63 $0.68 A Molasses $0.54 $0.65 $0.75 Total to ethanol $0.51 $0.67 $0.82

In order to gauge where the actual sugar price might be over the medium term, Table 8 shows the ABARE projections for sugar price through to 2011. ABARE is projecting a significant fall in sugar prices despite extra demand from ethanol production due to increasing sugar cane production.

Table 8 - Projected World Raw Sugar Prices34

2004 2005 2006 2007 2008 2009 2010 2011

US c/lb 11.2 16.3 11.5 9.3 7.6 7 8.2 8.9

AU$/t $301 $438 $309 $250 $204 $188 $220 $239 • Above calculations are based on an exchange rate of 82 cents and 2204.623 lb sugar

per tonne If these projections are taken as a reasonable forecast of forward sugar prices it can be seen that the costs of ethanol production are likely to be at the lower end of our cost estimates. Whether the Australian sugar industry can survive in its current form if these price forecasts are realised is a serious question and one that must be factored into a more comprehensive analysis than these scenarios allow. 33 The data in this table is based initially on data presented at the Australian Ethanol Conference 2006 by John Hodgson of Mackay Sugar. These figures are those under the $300 per tonne sugar price. We have made the calculations for sugar priced at $200 per tonne and $400 per tonne. 34 Source: ABARE Outlook March Quarter 2007, http://www.abareconomics.com/interactive/ac_mar07/htm/sugar.htm

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3.3 Imported ethanol (most likely Brazilian Ethanol)

Table 9 shows our estimates of various scenarios for the importation of Brazilian ethanol with the current full excise of 38 cents per litre applied.

Table 9 - Cost of importing Brazilian ethanol

Sugar price $200.00 $300.00 $400.00 Best Case Ethanol Export Price $0.45 $0.61 $0.77 $0.33 Duty $0.02 $0.03 $0.04 $0.02 Transport Costs $0.09 $0.09 $0.09 $0.09 Excise Applied $0.38 $0.38 $0.38 $0.38 Total $0.94 $1.11 $1.28 $0.82

These estimates are based on several assumptions:

• While the general commentary on the Brazilian ethanol industry is that they are the lowest cost producers of ethanol in the world because of the efficiency of their sugar operations, we believe this is nonsense. Saying this is like saying that Australia has the best pork farmers in the world because we have an efficient grain production sector. It is clear that the Brazilian ethanol and sugar industries are closely interlinked and that lower costs through the system, including low land prices and low sugar production costs, can make them competitive and financially sustainable. However it is also very clear that they have the ability to look at markets on a week to week basis and decide whether they make more money from selling raw sugar or turning that sugar or part of its production chain into ethanol. This supply and market variability together with recovery of the cost of capital invested in ethanol production makes modeling based on the Brazilian experience difficult. Therefore we have chosen to use the costs of producing ethanol from sugar in our model..

• The import duty is levied at 5 per cent of the value of the imported

ethanol under current legislative and regulatory arrangements.

• Transport costs are based on the work by CIE on Federal mandating impacts on feed grain users at current exchange rates (US$0.82 to the Australian dollar)35

• Under current arrangements the excise of A$0.38 per litre is applied to

all fuel ethanol sold in Australia. Australian producers are then rebated 35 Impact of ethanol policies on feedgrain users in Australia- Centre for International Economics August 2005

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a credit, currently equal to the full excise. Brazilian ethanol would be subject to a net excise level of 38 cents per litre at all times up to 2011 when the excise arrangements change.

To an extent the calculation of all these numbers is somewhat irrelevant. What we know is that Brazilian ethanol will have the following costs applied to it that are not applied to Australian ethanol:

Table 10 – Various Cost Imposts on Imported Ethanol not Applied to Locally Produced Ethanol

Up to

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16

Excise equivalent* $0.38 $0.0 $0.00 $0.0 $0.0 $0.0

Transport Costs $0.09 $0.09 $0.09 $0.09 $0.09 $0.09 Duty (at least) $0.02 $0.02 $0.02 $0.02 $0.02 $0.02

TOTAL $0.49 $0.11 $0.11 $0.11 $0.11 $0.11

* From 2011/12 the excise arrangements for local and imported ethanol become the same with access to the excise credit arrangements that phase in excise up to 12.5 cents/litre to 2015. While it can be argued that most of the above transport costs for imported ethanol might be offset by similar costs incurred by regional domestic Australian ethanol plants transporting ethanol to refineries/storages for blending, there is still a large cost difference between imported ethanol and the local product due to the excise and duty requirements up until 2011. These cost differences will not be overcome by efficiency of ethanol plants in Brazil as compared to Australian ethanol production as both industries will be subject to world prices for sugar and sugar production by-products as their feed stocks. Therefore it is unlikely that Brazilian ethanol importation will be competitive with Australian sugar based ethanol production while the current effective tariff barrier mechanisms remain in place. This view is reinforced by international reports that countries such as Japan are tying up investment and supply contracts with Brazil for ethanol, further restricting export opportunities to Australia. However this story completely changes in 2011/12 with changes in the excise arrangements placing local and imported ethanol on the same competitive footing. If this arrangement stays in place, despite protests from local producers, it will change the competitive nature of the imported product. Because demand for ethanol is so strong in Brazil and USA and that other countries such as Japan are tying up supply contracts, we believe that it is unlikely that large volumes of ethanol will be imported into Australia. However with the supermarkets controlling large volumes of retail petrol sales it would be reasonable to expect the imported price of ethanol to be used as a tactical leverage by retail petrol buyers in price negotiations with domestic

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plants. How this plays out in a year where climatic conditions mean grain supply is below domestic demand on the east coast due to increased demand from mandated ethanol is difficult to calculate. However there could be significant economic difficulty for grain based ethanol plants in such a scenario which could lead to a call on governments for additional support given that it was government public policy of mandating that shaped the market signals driving the investment and building of plants.

3.4 Various Biodiesels

Because the transesterification process is a relatively simple process it is possible to build biodiesel production plants of varying sizes. The main cost of producing biodiesel is the cost of the oil or fat feed stock. These costs vary considerably between feedstocks and the prices appear to be changing in response to the demand for biodiesel with prices of products such as palm oil rising significantly in recent times. Therefore the main cost of producing biodiesel will be the feed stock cost which in turn will be affected by supply and demand from both biodiesel producers and other customers for the feed stocks. While tallow is traditionally one of the cheapest form of feedstock to produce biodiesel, international demand and recent good rains in Australia have contributed to a price increase of A$300 a tonne - making it almost as expensive as canola.36 The latest MLA co-products monitor results for June 2007 quote tallow prices as high as $808 per tonne but this is expected to reduce by about $100 for July in line with a decrease in palm oil price and then rise again in August with expected shortages of tallow. Figure 9 shows the significant increases in tallow prices since 2001.

36 ABC news, 7/6/07, Tallow Prices Skyrocket http://www.abc.net.au/rural/nt/content/2006/s1945134.htm

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Figure 9 - Australian Tallow Prices Since 199537

Other feedstocks for biofuels have also increased significantly in price since 2001 as highlighted in Figure 10 below.

37 ARW Prospectus, 2005, http://www.egoli.com.au/clientserVICes/documents/GeneralDocuments/ARW_JACLM_20050503_egoli.pdf

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Figure 10- Average Monthly Prices for Four Major Oils – 1995 to 200638

Palm oil prices peaked at US$850 per tonne FOB Malaysia in early June 2007.39 Canola seed prices have increased 26 per cent from last year to A$435 per tonne in June 2007.40 ABARE forecasts canola prices may fall in 2007-08 as some of the drought related pressure on supplies ease but still project and average of around A$430 per tonne.41 These feedstock price rises have been widely attributed to biofuels development. For example, the MLA co-products monitor42 reports that the demand for vegetable oils is being encouraged by the interest in oils for renewable energy and a potential reduction in soy plantings in the USA in favour of corn to produce fuel alcohol. This is creating volatility in the vegetable oil market and tallow is seeking a level alongside vegetable oil prices. Tallow prices continue to increase following the trends set by palm stearine and soy oil. With palm stearine remaining firm and competition from export markets and domestic users looking for tallow for oleochemical production and biodiesel, tallow prices should continue to be firm.

38 Rabobank, 2006, Biodiesel, Global Trends, EU Focus http://www.rabobank.com/content/images/biodiesel_eu_tcm43-36338.pdf 39 MLA June 2007, Co-products monitor http://www.mla.com.au/NR/rdonlyres/FD474D17-8133-4BAF-BA18-CA2E1F50689D/0/Jun07coproductssummary.pdf 40 Westpac-NFF Commodity Index July 2007 www.nff.org.au/get/2433298071.pdf 41 ABARE Australian Commodities Report, June Quarter 2007 http://www.abareconomics.com/interactive/ac_june07/htm/oilseeds.htm 42 MLA, February & June 2007, Co-products monitor http://www.mla.com.au/topichierarchy/marketinformation/domesticmarkets/processing/coproducts/co-products per cent2Bmonitor.htm

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ABARE estimated the costs of operating a biodiesel plant as shown in Tables 11 and 12.43 Current and projected tallow feedstock prices at around A$700-800 are 55-80 per cent higher than the cost of tallow used by ABARE to estimate biodiesel cost (see Table 12 below), while only a small portion of this cost is offset by the return from glycerol by-product. This has potential to increase the price of biodiesel above that of regular diesel.

Table 11 – ABARE Analysis of Biofuel Plant Operating and Fixed Capital Costs

Table 12 - ABARE Analysis of Biofuel Feedstock Costs and By-product Revenues

For example with tallow at $800 per tonne instead of $450 per tonne the price of producing biodiesel from tallow rises to A$1.045 per litre in these calculations. The extra production of glycerol from the expanded biodiesel production is also putting downward pressure on the offset from sales of glycerol. However

43 ABARE Supplementary Analysis of 350 million litre biofuels target.

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a 10% movement in glycerol prices only means a difference of 0.9 cents per litre in cost difference so we have not included an analysis on these effects. With the intended expansion of the US corn and Asian palm oil biofuel industries and the flow on impacts on prices for biodiesel feedstocks, it is likely we will see continued increase in the cost of biodiesel production in Australia. Limited availability of feedstocks for biodiesel and competition for other uses will also put pressure on these feedstock prices. These higher prices mean there is a significant chance that biodiesel will be more expensive than diesel in the medium term, which will limit investment in production in a non-mandated situation, but will cost consumers and businesses more money if a mandate is enforced.

3.5 Biomass Based Ethanol

There are no verifiable numbers for the cost of producing commercial quantities of biomass based ethanol simply because there are no commercial operations. The following information gives some estimates of the projections that are being used for biomass plants. However until there are commercially operating plants it is not possible to know what the real costs are. What we can say is that the amount of money being invested by the six commercial companies and the US government (after careful assessment of their technologies) means that there is a reasonable likelihood that biomass production of ethanol will be commercially competitive with existing technologies by 2011/12. This is more likely if our outlook that international production of grain based biofuels is moving grain pricing to a new level is correct, because the price of grain based ethanol will rise at the same time as the cost of producing biomass based ethanol will be falling (see Appendix 4). Table 13 shows Pearson Technologies estimates of producing ethanol from wood chips at US$15/tonne which is A$0.18/litre at current exchange rates. We believe these estimates are very optimistic but it should be noted even if the cost of wood chips is tripled and the operating costs are 50 per cent higher, the costs of producing biomass ethanol (using their numbers) amounts to A$0.305/litre.

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Table 13 – Pearson Technologies Assessment of the Potential Cost of Producing Ethanol from Wood Chips at US$15/wet tonne (US$/US Gallon)

Ethanol Plant (25 million gallons per year)

Shelled Corn to Ethanol (1999 $ )

Wood Waste to Ethanol Pearson Process

Utilities $ 0.16 $ 0.14 Labor, Supplies and Overhead 0.13 0.16 Feedstock - Corn at $1.94 per bushel 0.68 - Feedstock - Wood waste at $15.00 per wet ton - 0.13 Other Raw Materials 0.06 - Denaturant 0.03 0.03 Total Operating Costs 1.06 0.46 Depreciation of Capital 0.11 0.15 Total Operating Cost and Capital Recovery 1.17 0.61 By-product Credit (DDG at $90 per ton) (0.29) Net Cost After By-product Credit 0.88 0.61

3.6 Third Generation Technologies

There is no way of estimating the costs that third generation technologies may achieve because we have no way of knowing which technologies will succeed and what their operating costs will be.

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4. The Global Situation for Biofuels Production of ethanol globally in 2006 is shown in Figure 11.

Figure 11 - Global Production of Ethanol44

The USA and Brazil are the big producers in the world, producing nearly 70 per cent of the entire world’s ethanol. The USA produced 14.7 billion litres in 2005 and 18.4 billion litres in 2006, with growth continuing to escalate (see Figure 26 in Appendix 4). Based on our survey of USA ethanol plants we have forecast that production in 2008 in the USA will be 47 billion litres. This production growth has been underpinned by a large range of Federal and State Programs in the USA but the main factors in the current expansion have been the increase in oil price and that US ethanol producers receive a credit of US 51 cents per US gallon of ethanol they produce. They are also protected from imports by an import tariff of US 54 cents per US gallon. The combination of these factors has created a situation where the Renewable Fuel Standard requirements set by the government for 2012 are likely to be passed in 2007/2008 due purely to the fact that investment returns have been high enough to justify the production investment. It is highly unlikely that such investment would have occurred without the range of support that ethanol producers have received even with the higher oil price. World biodiesel production in contrast is much lower. According to FO Licht45 world production of biodiesel was 3.0 million tonnes in 2005, rising to 5.4 million tonnes in 2006, with a forecast for 7.9 million tonnes in 2007 (although growth is predicted to slow after that). Europe is by far the largest producer of

44 Sourced from The Rush to Ethanol: Food & Water Watch and Network for New Energy Choices In collaboration with Institute for Energy and the Environment at Vermont Law School. July 2007 45 http://www.planetark.com/avantgo/dailynewsstory.cfm?newsid=41147

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biodiesel, producing 3.96 million tonnes or 73 per cent of world output, largely due to the penetration of diesel vehicles in the market place and support programs of the EC (See Appendix 5 for EU support mechanisms). The International Energy Agency has created two forward scenarios for the development of biofuels globally to 2030 as shown in Figure 14.

Figure 12– Scenarios for Global Development of Biofuels

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Units: Million Tonnes of oil equivalent (Mtoe) IEA World Energy Outlook 2006 The blue columns in the graph represent the forecast growth under existing policies while the orange column reflects the forecast growth under accelerated policy adoption. The situation with biofuel development is complex with its interaction with subsidies, political interference, oil pricing, competition for food, and new technology developments that the actual forecasts are unlikely to be true in numerical terms. However, the general trend for significant increases in production volumes are likely to hold true as long as support programs are maintained. The biofuels industry world wide has developed through a multitude of support programs, subsidies and mandates. There are now serious concerns surfacing on the effects of this support on food prices, land utilisation, the intensification of agriculture and the use of water. For more detail on this issue we refer the Review Committee to “The Rush to Ethanol: Not All Biofuels Are Created Equal” by Food & Water Watch and Network for New Energy Choices

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in collaboration with Institute for Energy and the Environment at Vermont Law School, July 2007, which provides far more detail on these issues than is possible in this submission.46

46 Available at www.newenergychoices.org/uploads/RushToEthanol-rep.pdf

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4 Greenhouse Gas Benefits

4.1 Grain Based Ethanol

The only way to measure the greenhouse gas benefits from the use of grain based ethanol in motor vehicles is to conduct a life cycle analysis of the whole production and supply chain and compare it to the whole of the production and supply chain for fossil fuels. There is considerable controversy and variation in this field of study because of two key issues:

1. There is considerable debate on what should be included, and what should be excluded from the life cycle analysis.

2. The field is rapidly moving and changing as process improvements in

ethanol production and the efficiency of fossil fuel vehicles change. The vast majority of this work has been done in the USA because most of the grain based ethanol in the world is produced there. Figure 13 shows a number of papers by various authors mapped over time supplied to us by Michael Wang of Argonne National Laboratories, Chicago, USA in January 2006. The information in this graph shows two things:

1. That there is a general trend in moving from a net negative energy balance to a positive energy balance in the production of corn based ethanol.

2. That Pimentel and Patzek are consistent outliers in the literature in

believing that the production of corn based ethanol uses more energy that it produces.

Emergent Futures visited David Pimentel last year at Cornell University and believe that the conclusions of his papers should be discounted on two grounds: Firstly the papers by Pimentel expand the boundaries of the life cycle analysis well beyond the limits of most authors in the field. Most authors use logical energy basis for their analysis such as:

• The energy used to build farm equipment that is used to grow and harvest corn including energy in the production of steel, etc. This includes tractors and trucks.

• The energy used to produce and transport nitrogen fertiliser to the farm.

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• The energy in fuel used to plant, fertilise, spray and harvest corn.

• The energy used to transport corn to the ethanol plant.

• The energy used to run the ethanol plant.

Figure 13 – Various Papers on the Energy Balance of Corn Based Ethanol over Time

Source: Michael Wang, Argonne National Laboratories, Chicago Pimentel tends to expand the life cycle analysis to include the energy used in producing the food that the farm workers eat, and the energy they use to drive to work, etc. It is logical to say that if corn is used to produce ethanol, then the tractors used to grow that corn need to have all their energy utilisation (both in their production and their use) applied to the ethanol life cycle. However, we disagree that the same applies to farm workers who would be eating food whether they worked or not. Secondly, the efficiency of farm production of corn and the energy used in ethanol plants is changing rapidly and we believe that some of the information used by Pimentel is old enough to give a false representation of the current situation. This does not mean however that we and the main authors of the life cycle analyses believe that corn based ethanol produces huge amounts of net energy.

-120,000

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Shapouri e t al.

Wang et al.

Agri. Canada

Kim &DaleGrabosk i

Wang

Pim entel

Shapouri e t al.

Pim ente l&Patzek

Weinblatt e t al.

NR Canada

Cham bers et al.

Patzek

DelucchiKim &Dale

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The best estimates from a summary of the papers represented above is that for every unit of energy that goes into the corn based ethanol system we obtain about 1.29 units i.e. a net energy gain of 29 per cent. The following information explains some of the reasons why we have seen significant gains in the energy ratios in corn based ethanol over the last 15-20 years. The production and transport of nitrogen fertiliser is an extremely energy intensive process. Figure 14 shows that there has been significant improvement in the yield of corn per unit of nitrogen fertiliser over the last 20 years or so. This has been driven by a reduction in input costs rather than a drive to reduce energy inputs into corn based ethanol. Nevertheless, the results have been the same: the amount of energy used to produce a bushel of corn has been significantly reduced.

Figure 14 – Improvements in Corn Output per Pound of Nitrogen Fertiliser (bushels/lb)

Source: Michael Wang, Argonne National Laboratory Figure 15 shows that there have been considerable improvements in the amount of energy used per gallon of ethanol produce in dry ethanol mills and wet ethanol mills in the USA. These gains have been realised both from increasing the efficiency of the ethanol production process and by reducing energy inputs into the mash, fermentation, distillation and DDGS drying processes.

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Figure 15 – Energy Use Improvements per Gallon of Ethanol produced

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Source: Michael Wang, Argonne National Laboratory However, the energy balance and the production/reduction of greenhouse gas emissions are not the same because different types of energy are used at different points in the life cycle of corn based ethanol, and greenhouse gas emissions vary with the type of energy and the technologies used to produce it. Figure 16 shows a summary of the greenhouse gas emissions reductions that result from using ethanol that has been produced from different sources and then used as a transport fuel in different ways in the USA. There is limited information on life cycles using grain in Australia. However a recent presentation by Tom Mascara from AgriEnergy Limited47which is building the ethanol plant at Swan Hill stated that using the Greenhouse Gas Office Methodology on life cycles their work had indicated that the use of E10 would produce a slight increase in greenhouse gas emissions over standard unleaded petrol in Australian conditions. This is a significant statement from a company promoting the use of ethanol. What is clear from this data is that while the use of grain based ethanol in E10 or E85 percentages does result in a reduction in greenhouse gas emissions on a full life cycle basis in the USA, the reductions are relatively small when compared to the use of biomass based ethanol.

47 Australian Cereal Chemistry Conference, Melbourne, Australia August 2007.

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Figure 16 – Reductions in Greenhouse Gas Emissions per Mile by use of Ethanol from Different Sources in Petrol

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Source: Michael Wang, Argonne National Laboratory

• E10 GV: DM Corn EtOH = 10 per cent ethanol in petrol using ethanol from a dry mill ethanol plant utilising corn

• E10 GV: WM Corn EtOH = 10 per cent ethanol in petrol using ethanol from a

wet mill ethanol plant utilising corn

• E10 GV: Cell. EtOH = 10 per cent ethanol in petrol using ethanol from a cellulosic ethanol (biomass) plant

• E85 FFV: DM Corn EtOH = 85 per cent ethanol in petrol utilising a Flex Fuel

Vehicle48 using ethanol from a dry mill ethanol plant utilising corn

• E85 FFV: WM Corn EtOH = 85 per cent ethanol in petrol utilising a Flex Fuel Vehicle using ethanol from a wet mill ethanol plant utilising corn

• E85 FFV: Cell. EtOH = 10 per cent ethanol in petrol utilising a Flex Fuel Vehicle

using ethanol from a cellulosic ethanol (biomass) plant This work is supported by the conclusion in the Prime Minister’s Biofuel Task Force Report which states:

On life-cycle analysis, savings from E10 in greenhouse gas emissions over neat Petrol are generally from 1 per cent to 4 per cent, depending on feedstock. However, a recent life-cycle analysis for a proposed ethanol plant has suggested that savings of between 7 per cent and 11.5 per cent

48 A Flex Fuel Vehicle is one that is able to utilise petrol that contains anywhere in between 0 per cent and 85 per cent ethanol. They were developed to get around the problems of using more than 10 per cent ethanol in fuel with low numbers of petrol stations stocking petrol with 85 per cent ethanol.

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can be achieved with optimum use of non-ethanol co-products.49 We would argue that such results need to be tested once a plant is actually built.

4.2 Sugar Based Ethanol

The Australian Greenhouse Office’s independent assessment of the sugar industry submission50 makes the following observations/statements with regard to the emissions reduction capacity of sugar based ethanol:

CSIRO et al completed a study titled ‘The Comparison of Transport Fuels’ for the Australian Greenhouse Office in 2001. The study assessed greenhouse gas and air quality emissions for 15 types of transport fuel (including a range of ethanol based fuels such as hydrated ethanol, diesohol, and premium unleaded petrol with a 10 percent ethanol blend), taking into account different feedstocks and processes used in the production of the fuels. Fuels' emissions were compared with low sulfur diesel (LSD) on a full fuel cycle basis (i.e. emissions during the extraction, production, transport, processing, distribution and combustion).

Based on typical current production in Australia, the CSIRO study showed that for hydrated ethanol using C molasses as a feedstock, there was a 53 per cent reduction in greenhouse gas emissions on the full fuel cycle and an 18 per cent reduction in air quality emissions over the reference fuel of Low Sulphur Diesel. For diesohol, which is a blend of 15 per cent hydrated ethanol with diesel (and an emulsifier), greenhouse emissions were 7 per cent lower than the reference fuel using a C molasses feedstock and 12 per cent lower for air quality emissions using the same feedstock For 10 per cent ethanol blended with Premium Unleaded Petrol, there was no greenhouse benefit for C molasses and only a minor benefit for air quality emissions. However, the Australian Greenhouse Office notes that less greenhouse intensive production methodologies for fuel ethanol are being developed. Such methodologies are likely to lead to E10 blends being less greenhouse intensive than petrol on a full fuel cycle basis. The results of the study indicate that where ethanol is produced from a sugar waste product or a sugar by-product of little commercial value, then it achieves both greenhouse and air quality benefits in an unblended form. However when blended with diesel, its greenhouse and air quality benefits are significantly diminished. Sugar derived ethanol is currently marginal in

49 Australian Biofuels Task Force Report p69 50 Australian Greenhouse Office, Independent Assessment of the Sugar Industry Submission by the AGO, http://www.daff.gov.au/__data/assets/word_doc/0010/182764/greenhouse.doc

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greenhouse and air quality terms when blended in a small quantity with premium unleaded petrol. It should be noted that these results only relate to ethanol using a C molasses feedstock. If sugar was specifically grown for the purposes of producing fuel ethanol, then the greenhouse and air quality emissions would be significantly higher. This is because the emissions from producing the crop would also be attributed to the ethanol fuel in a full fuel cycle analysis. Ethanol as a transport fuel would be unlikely to deliver greenhouse or air quality benefits under this scenario, based on current production methods in Australia.

4.3 Biomass Based Ethanol

There have been a wide range of estimates in relation to the greenhouse gas emission reduction potential of biomass based ethanol. The data in the previous section of this submission shows a 64 per cent reduction in the greenhouse gas emissions of transport fuel when using biomass based ethanol. However, sourcing accurate data is complicated by three factors:

• There are a wide range of proposed feed stocks for biomass based plants. Therefore a different life cycle analysis has to be researched for each total production chain, allowing for greenhouse gas emissions in the production of the feedstock and differences in the operating plants.

• There are no commercial operating biomass plants to undertake a proper

life cycle analysis on.

• There is still a reasonable amount of controversy about the accounting principles that are to be used to allocate the greenhouse gas emissions and energy inputs into the life cycles.

What can be stated with some certainty is that biomass based ethanol is likely to create a far higher reduction in greenhouse gas emissions for two reasons:

1. Where “waste products” or by-products are used, the general consensus is that only the energy consumed in collecting and transporting the feed stock should be fed into the life cycle analysis. This is because this material is produced as a result of the primary production process. For example, wheat straw will be produced if you grow wheat for human consumption.

2. Where specific energy crops are grown, one of the major aims is to grow

perennial plants such as woody switchgrass that can be harvested and re-grown. The advantage with these crops is that when they reach senescence the plant withdraws most of its nitrogen into its roots,

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leaving the cellulose and hemicellulose above ground. This system therefore minimises the nitrogen applications required in growing the crop. As the nitrogen cycle and creation of nitrogen fertiliser is one of the biggest energy consumers and greenhouse gas emission creators in the production cycle, minimising nitrogen fertiliser application greatly reduces greenhouse gas production in the growing cycle.

4.4 Biodiesel

The greenhouse gas emission savings for the life cycle analysis of biodiesel are highly dependent on the feedstock that is used. When waste oil is used, the greenhouse gas emissions created in the production of the waste oil are assumed to be allocated to its primary use – cooking. Therefore, the life cycle analysis only looks at energy use and greenhouse gas production in the collection, transport and processing of the waste oil. The Prime Minister’s Biofuels Task force concluded that:

On life-cycle analysis B100 from waste cooking oil produces 90 per cent less greenhouse gas emissions than XLSD (extra low sulphur diesel).51

The production of biodiesel from other sources such as canola oil and tallow creates a lower level of greenhouse gas emission reduction than biodiesel made from waste oil. This is because the energy used in producing the feedstock has to be taken into account. However because the biodiesel production process does not use a great deal of energy there are still significant reductions in greenhouse gas emissions. The Prime Minister’s Biofuels Task force concluded that:

On life-cycle analysis of B100 ……….Biodiesel from tallow or canola reduces emissions by less than 30 per cent. 52

51 Prime Minister’s Biofuel Task Force Report p70 52 Prime Minister’s Biofuel Task Force Report p70

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5 Environmental Impact and Sustainability

5.1 Pollution Issues

As with data on greenhouse gas emissions, there is considerable variability in data from studies around the world with regard to biofuels impact on pollution. Variability of biofuels, the fuels they are blended with and the nature of the air shed all impact on resulting emissions and their air pollution potential. Exhaust emissions are also dependent on a wide range of variables including: driving patterns, various vehicle and engine-specific factors such as design, size, state of tune and type and condition of emission control systems. Consequently, there is considerable uncertainty associated with tailpipe vehicle emissions and air pollution impacts. Tailpipe emissions from fuels include regulated pollutants (i.e. emissions regulated under Australian Design Rules), greenhouse gases, air toxics, particulate matter and secondary pollutants. This section focuses on biofuel impacts on air quality and human health, with greenhouse gas emissions having been discussed in Section 5 of this submission. In terms of human health, the main areas of concern are air toxics and particulate matter (PM) which increase health risks such as cancer and respiratory disease with a significant linkage between PM and morbidity and mortality. Particulates come from tailpipe emissions but there are also secondary organic aerosol particles formed in the atmosphere which may be impacted by adding ethanol to petrol.

The Biofuels Taskforce Report noted that further work was needed to more effectively assess air quality impacts of biofuels under Australian conditions. An indicative value of 40 per cent reduction in PM tailpipe emissions for E10 over petrol was used by the Taskforce, but it also stated that this was a scientifically accepted value and not an assertion.53

Below is a summary of pollution impacts for different biofuels from the Biofuels Taskforce report:

5.1.1 Ethanol

• Emissions of carbon monoxide (CO) are reduced under E10 compared with

neat petrol; there is little change in volatile organic compounds (VOC) emissions; and nitrous oxides (NOx) emissions are increased.

• The impact on air toxic levels in the atmosphere from the use of E10, relative to petrol, is difficult to assess. Combustion of E10 results in lower

53 Biofuels Taskforce Report, p69

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tailpipe emissions of some toxic compounds (e.g. benzene and 1,3 butadiene), but higher levels of others (e.g. the aldehydes).

• Studies by the Orbital Engine Company (2004) found statistically significant results for reductions in only in the BTEX group of toxics (benzene, toluene, ethylbenzene and xylene) for benzene and toluene for post-1986 vehicles over the highway cycle, indicating average decreases of approximately 24 per cent and 30 per cent, respectively for these emissions. Acetaldehyde emissions generally increased when using E10 with both new and old (pre-1986 and post-1986) vehicle groups, with the majority of the aldehyde emissions for the post-1986 vehicles emitted during the cold start and warm-up phase of the drive cycle.

• Most studies do not include the impact of evaporative emissions, or the air toxic implications of atmospheric reaction products of the emissions. The impact of increased evaporative emissions from E10 (benzene) would be expected to offset, to some extent, calculated improvements in air quality.

• Ethanol blended fuels also pose an additional pollution risk of groundwater contamination - studies have shown that E10 increases the risk of groundwater contamination compared with neat petrol.

5.1.2 Biodiesel

• The benefits of the 5 per cent biodiesel blend (B5) diminish against

increasingly lower sulphur diesel, with PM emissions even increasing slightly over extra low sulphur diesel (XLSD) (to be introduced in 2009). However, on life-cycle analysis, pure biodiesel (B100) has significant benefits over XLSD for CO, VOC and PM (especially with waste cooking oil as the feedstock), but NOx emissions increase by between 16 and 30 per cent. The increase in NOx emissions is a concern, as it could contribute to ozone formation.

• There are insufficient data at the present time to assess the air toxic emissions from biodiesel. A US EPA (2002) study indicated that total air toxics, polycyclic aromatic compounds (PAH) and n-PAH emissions decline with biodiesel. Aldehydes appear to diminish, or stay the same, but an alternative study by Krahl (1997) showed a 20 per cent rise in aldehydes. Inconsistent results also appear for benzene, 1,3-butadiene, and toluene (increase or decrease), and show that more research is required to identify the potential effects of biodiesel on the air toxics.

• Overall, based on the data available to date, it would appear that biofuels offer some benefits over ULP and diesel in terms of pollution reduction. The extent of these are however unclear and it may be possible that some of these reductions may be similarly achieved through advances in engine technology and improvements in existing fuels. Some of the benefits of biofuels are also offset by increases in certain pollutants. More data on impacts in Australian conditions is required before a definitive case for pollution reduction advantages of biofuels can be made.

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5.2 Land Use, Availability and Sustainability

Demand for agricultural land and products are likely to increase with the increase in biofuel demand. This, in turn, will impact on land sustainability, land values, land use and availability, which could ultimately lead to an inflation spiral that drives up interest rates. Concerns about these impacts are already emerging in the US and are detailed in the following extract from ‘The Rush to Ethanol’ report:54

In 2006, 78.4 million U.S. acres were planted with corn. In 2007, corn fields are expected to expand by 15 percent to meet higher demand caused by the growth of the ethanol industry. This represents a planted area of 93 million acres of corn, the largest increase since the early 1944. As corn prices continue to rise and government subsidies continue to flood the ethanol industry, there will be pressure to use a greater percentage of the corn harvest for ethanol production and to plant additional land with corn. There are only two ways to do this: by switching from other crops to corn or by appropriating currently idle lands for crop production. Pressure on farmers to switch from soybeans or other crops to corn will contribute to the environmental problems already affecting industrial corn cultivation. Abandoning crop rotation to raise corn year after year will necessitate more fertilizer and pesticide use, due to increasing resistance of weeds and insects to chemicals meant to contain them, and further soil depletion. Moreover, as ethanol technology develops toward using crop residues as an additional feedstock, there will be less organic matter left on the fields after each harvest, diminishing soil fertility and speeding erosion. As demand for ethanol feedstocks grows, there will be pressure to expand crop farming onto land that is currently fallow or in conservation programs in the United States, as well as to clear-cut rainforest in the developing world. Some experts have expressed concerns about the possibility that demand for feedstocks, or “energy crops,” will dissuade farmers from participating in the Conservation Reserve Program (CRP), the largest program that encourages conservation of private-lands in the country. The U.S. Farm SerVICe Agency (FSA) oversees the CRP, which was set up more than 20 years ago as a voluntary program for farmers to set aside highly erodible and depleted lands for conservation. Under CRP contracts, landowners receive rental payments to establish long-term vegetative cover on eligible farmland. High demand for corn could deter farmers from putting acres into the CRP and could encourage farmers

54 The Rush to Ethanol – Not All Biofuels Are Created Equal, 2007, by Food & Water Watch and Network for New Energy Choices in collaboration with Institute for Energy and the Environment at Vermont Law School, www.newenergychoices.org/uploads/RushToEthanol-rep.pdf

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participating in the CRP to bring those acres back into production. According to the FSA, by stimulating the cultivation of resource-conserving vegetative covers, the program protects topsoil from erosion, improves the condition of water bodies, and is a major contributor to increased wildlife populations in many parts of the country. By the end of 2005, almost 35 million acres of cropland or pastureland across the country were under CRP contracts, resulting in substantial environmental benefits, including the sequestration of some 48 million metric tons of CO2 annually. However, as CRP contracts covering 26 million acres of land are due to expire at end of the decade, there is concern for the long-term conservation of these lands. Steve Chick, head of the Natural Resources Conservation SerVICe office in Nebraska, has stated his concerns over whether “people will be more reluctant to get into CRP contracts, because they are waiting to see if they can increase their production and get more money by raising corn for ethanol.”

US ethanol production increases have resulted in significant increases in corn prices. This has lead to increased corn plantings displacing other crops such as soybeans, cotton and wheat. Reduced supply of these crops, in turn, increases their prices and the price of feed for livestock users. As the cost of intensive animal production systems (which are feed grain dependent increase, the competitiveness of grass-fed production systems increases. Demand for land for both crops and grazing drives up land values and therefore the cost of producing all agricultural products. This flows on to food pricing. These impacts will be felt in Australia and similar ramifications could be expected from the development of subsidised biofuels in this country. With food, alcohol and tobacco in Australia accounting for more than 22% of the consumer price index, the magnitude of these potential price rises has significant bearing on inflation and potential for interest rate rises. In Australia and South America, if more grain is planted for biofuels or is grown to replace grain used for biofuels production in other countries, then that land cannot be used for other agricultural purposes. In the Western District of Victoria, for example, it is likely that people will plant more high rainfall wheats, displacing dairy farm production. In South America, land that was going to be used for dairy production, or to produce fodder for dairy production, will be used for grain or soy production. If dairy farmers want to compete for those assets, this will reduce the growth of dairy production or push up the cost of dairy production and in turn the price of final dairy product. Competition for land may force some industries onto more marginal land. This has a range of environmental and social costs. Marginal lands that may have previously been intended to be reserved for conservation purposes are less likely to be set aside in favour of using them for agricultural purposes. This could lead to land degradation and reduced sustainability of both the environment and farming enterprises. Farming on marginal land has greater risks due to lower productivity and greater susceptibility to adverse climatic

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conditions which reduce overall farm viability. Some proponents argue that improvements in plant breeding can alleviate some of these issues and improve yields in drought years. These improvements will be made regardless of biofuel demand and therefore the biofuel demand effects will be additive above other changes In addition there are concerns that increasing intensification of cropping operations in response to greater grain demand from biofuels may lead to increased degradation of high value cropping land, increased nutrient run off and increased use of herbicides and pesticides.

A 2006 submission by CSIRO to the inquiry into production and/or use of biofuels in Victoria55 highlighted potential concerns about the sustainability of biofuels and raised a number of questions that they felt would be valuable for further consideration including: - Could the production of feedstock for biofuels lead to degradation of soil and

water resources, or impact negatively on water flows for environmental or other production and consumption needs?

- What are the implications of biofuel production for biodiversity? For example, will the production of feedstocks to meet biofuel demands require clearing of native vegetation? What are the potential benefits in terms of improved habitat values of agricultural landscape through reintroduction of woody perennials?

Water is also an emerging concern in relation to biofuels. Crops such as corn in the US are high users of water and ethanol plants themselves also require significant volumes of water. Reports in the press of local concerns over their effects on water supplies are appearing with increased regularity.56 With the current water crisis that Australia faces, added pressure from mandating biofuels could have significant adverse impacts. The actual water use for ethanol production will vary depending on which crops are used for fermentation into ethanol. The use of irrigated crops to maintain grain supply all year round will significantly increase the amount of water required for ethanol plants. The ethanol plants themselves also require significant amounts of water. Agri Energy Limited, the company which is building the grain ethanol plant in Swan Hill in Victoria has stated that their plant will require 5 litres of water for every litre of ethanol produced.57 This is despite the plant being designed with modern water saving and recycling systems in place. This means that every 200 ML of ethanol production in Australia will require at least a billion litres of water just at the processing plant alone.

55 CSIRO, September 2006, Production and/or Use of Biofuels in Victoria, Submission to inquiry by Environment and Natural Resources Committee of the Parliament of Victoria 56 Biofuels - at what cost? Government support for ethanol and biodiesel in the US http://www.globalsubsidies.org/IMG/pdf/biofuels_subsidies_us.pdf 57 Presentation to the Cereal Chemistry Conference. Melbourne, Victoria August 2007

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6 Current Incentives and Benefits for Biofuels

Neither biodiesel produced from waste oil, animal fats, canola oil or palm oil, nor ethanol produced from sugar cane or grains, are new technologies. The truth is that the production of biodiesel or ethanol is a simple and common industrialised process that has been around for decades. Despite this long standing history, the industry in Australia is now receiving plenty of support including: • Capital Grants from the Federal Government.

• Excise Credit support from the Federal Government.

• State Government assistance packages

6.1 Capital Grants from the Federal Government.

The Federal Government has supported the biofuels industry by a series of one off grants under the Capital Grants Program, which has now ceased. The grants were for 16c/L of capacity for plants with the capacity of producing a minimum of 5ML per year with the grants capped at $10m per plant, although a single company could apply for multiple grants if they proposed plants at different sites. Total grant allocations were $37.6 million.58 Companies that received grants include:59

Australian Renewable Fuels Pty Ltd60

ARF is a partly owned (67 per cent) subsidiary of Amadeus Energy Limited. The company received a grant for $7.15 million dollars to build a biodiesel plant based on low grade tallow and vegetable oils at Port Adelaide in South Australia which will produce 44.5 ML/yr. ARF are also constructing a second plant at Picton, WA, which will produce 44.4 ML/yr.

Biodiesel Producers Limited (BPL) BPL gained a capital grant of $9.6 million to construct a biodiesel plant for the production of 60 ML/yr biodiesel from tallow and yellow grease at Barnawartha in Victoria.61 58 Invest Australia, accessed 1 August 2007, http://www.investaustralia.gov.au/index.cfm?menuid=94B2003B-D0B7-180C-1610699D0B337DF9 59 Invest Australia, accessed 1 August 2007 60ARF company website http://www.arfuels.com.au/default.asp 61 Company website, accessed 1 Aug 2007, http://www.biodieselpl.com.au/

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CSR Distilleries Operations

An ethanol plant at Sarina, QLD ($4.16m), with current capacity of 32 ML/yr and 128 ML at full capacity.62

Biodiesel Industries Australia

A biodiesel plant at Rutherford, NSW ($1.28m) producing 3 M gallons/yr and expanding to 6 M gallons. 63

Schumer (Rocky Point Sugar Mill and Distillery)

An ethanol plant at Woongoolba, QLD ($2.4m), currently 5 ML with 20-25 ML capacity and full capacity of 80-100 ML.64

Lemon Tree Ethanol Pty Ltd It was announced on 23 December 2004 that Lemon Tree Ethanol Pty had been granted $5.85 million for an ethanol plant on a beef feedlot at Millmerran in Queensland in the second round of funding from the grants. It is expected that the plant will produce around 60ML of ethanol a year and utilise around 150,000 tonnes of grain.65

Riverina Biofuels It was also announced in December 2004 that Riverina Biofuels had received a grant of $7.15 million for a 40 ML tallow based biodiesel plant at Deniliquin in Southern NSW.66

6.2 Federal Government Incentives

Current Australian government policy is for an excise holiday for ethanol until 2011, and then phasing in excise levels to half the level for petrol on an energy equivalent basis by 2015 as shown in

62 ABARE Commodities Report, March Quarter 2007, Outlook for Biofuels in Australia, http://www.abareconomics.com/interactive/ac_mar07/htm/a5.htm 63 Company website, accessed 1 Aug 2007, http://www.biodieselindustries.com/ 64 ABARE Commodities Report, March Quarter 2007 65 Queensland Country Life, http://qcl.farmonline.com.au/news.asp?editorial_id=61409&class_id=1 accessed 12 Jan 2005 66 http://minister.industry.gov.au/index.cfm?event=object.showContent&objectID=FD4C1CAC-65BF-4956-B05276BF916A975E - accessed Jan 13 2005

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Table 14.

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Table 14 – Government Excise Levels

Source- ABARE analysis for Prime Minister’s Biofuel Task Force

The excise holiday for ethanol acts as both a subsidy against competing fuels and a tariff barrier against imported ethanol because all suppliers of ethanol pay the excise on their fuel. This excise is rebated back to Australian producers. Proponents of grain based ethanol in Australia claim it is not a subsidy but if the same support is not available to Brazilian or North American exporters of ethanol it cannot be called anything else. Based on a yield of 380 L of ethanol per tonne of grain used, the full excise holiday equals a subsidy of $95 a tonne for every tonne of grain used at zero excise applied, and $47.50 a tonne once the half excise is applied. Current Federal Government policy is that imported ethanol will be placed on the same excise footing as local ethanol from 2011. This means that the current excise level of 38 cents per litre levied on imported ethanol will fall to 2.5 cents, rising to 12.5 cents in 2015-16 (in nominal terms). This will completely change the relativity between locally produced and imported ethanol.

6.3 State Government Incentives

Grants from Queensland Government

In addition to Federal Government assistance, direct assistance has been provided to the ethanol industry by the Queensland Government:

1. $7.3m for the 2005-07 Queensland Ethanol Industry Action Plan which includes:

a). $2.2m for extensive marketing/communication campaign to increase

public awareness b). $5.1m Ethanol Conversion Initiative - assistance for fuel industry

distributors for infrastructure-based projects including: i) Conversion of existing fuel storage tanks

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ii) Signage, rebadging, promotional and advertising activities associated with the marketing of ethanol blended fuel

iii) Establishment of plant capacity to blend ethanol with petrol and/or diesel

iv) Distribution, storage and handling facilities for ethanol blended fuels

v) Conversion of operational fleet vehicles for the use of ethanol blended diesel fuel.67 68

2. In addition, other indirect initiatives supporting development of the

Queensland ethanol industry include:

- Sugar Industry Innovation Fund ($10m to December 2006), which provided grants directly related to ethanol infrastructure projects to the value of at least $800,000.

- State Government policy for its own motor vehicle fleet use of ethanol blends – the fleet now uses more than half a million litres of ethanol blended fuels each month.

67 Queensland Ethanol Strategy, 2005, www.sd.QLD.gov.au 68 Queensland Government Achievements 2007 report, Nine Years of the Beattie Government http://www.thepremier.QLD.gov.au/library/office/2007Achievements.doc

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7 Mandating Policy Issues

There are a range of problems with mandating, with the primary concerns discussed below:

7.1 Mandating distorts the market place by forcing consumers to take product whether they want it or not.

The mandate would interfere with consumer choice, forcing greater fuel consumption and/or increased cost in an environment where there is already substantial consumer concern over impacts of ethanol on engines. While around 60 per cent of existing vehicles are able to accept ethanol blends, this still leaves 40 per cent of the existing fleet unsuited to ethanol blends over five per cent. While this percentage will diminish with turnover of vehicles between now and 2010, a number of vehicles will still require alternative fuel to ethanol blends and will be forced to use higher cost options. The lower energy content of ethanol also means consumers will be forced to use more fuel to cover the same distances as regular fuels, or would have to purchase higher priced premium unleaded fuel to achieve similar mileage per volume of fuel. The Royal Automobile Club of Queensland (RACQ) submission on mandating in Queensland states that the discount of 2-3 cents currently offered for E10 relative to regular unleaded petrol is inadequate to compensate for the 2.6-5 per cent higher fuel consumption associated with that fuel. The increase in octane rating of petrol containing ethanol would not compensate for the increase in fuel costs that consumers and businesses would be compelled to incur as a result of the mandate.69 With mandating, there is also no guarantee that the current discount for ethanol blends would be maintained, further exacerbating this situation. The RACQ submission also asserts that, unlike existing ethanol protection instruments, a mandate will exert upwards pressure on prices motorists pay for petrol. The reasons given for fuel prices rising were:70

- the mandate would drastically reduce inter-fuel competition; - blending and additional distribution and dispensing costs would be

passed on; - the ethanol production industry is more heavily concentrated than the

oil refining and oil product importation sectors, facilitating pricing above competitive levels;

- imports are blocked by a prohibitive import duty until 2011, drastically reducing competition; and

69 RACQ, March 2007, An Assessment of Queensland Government’s Proposed Ethanol Mandate 70 RACQ

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- expansion of ethanol production would bid up prices of inputs such as grain, sugar and molasses, and supply responses would be muted by rising costs associated with expansion of cropping on to marginal lands.

While other subsidies remain in place, consumers are protected from higher fuel prices. However if subsidies are removed and a mandate remains, consumers will be required to pay more for fuel reflecting the actual costs of biofuel production. This could be substantial, depending on a complex array of factors. In the US for instance, corn ethanol is only cost-competitive to gasoline in the first few years due to the Federal tax credit of 51 cents per gallon of ethanol.71

7.2 Mandating reduces innovation and incentives in the industry.

In a protected market, particularly when protected from import competition, there is little incentive for ethanol producers to innovate as they have a guaranteed market for their product. New entrants are also discouraged as there is limited market scope. As alternative vehicles with capacity for use of higher levels of ethanol blends emerge, this may stimulate growth. Changes in 2011 that enable imports to compete directly with local ethanol production may however stimulate greater innovation. Industries established on the basis of government subsidisation can tend to have higher expectations of continued assistance and often exert more pressure for future industry adjustment assistance. Not having started with a culture of self-reliance and innovation, such industries are more exposed and less able to manage downturns. There is a tendency for assistance demands to governments to be met to prevent the appearance of failure of the initial investments.

7.3 Technical issues limiting mandating of ethanol

In order to mandate the use of ethanol, the government either requires that petrol retailers only sell petrol with the required amount of ethanol in it, or, requires petrol wholesalers and retailers to include a certain amount of ethanol in their whole production and retailing system.

71 Global Insight, "Winners and Losers of Ethanol Mandates," pp. 28–34, and U.S. Department of Energy, Energy Information Administration, "Renewable Fuels Legislation Impact Analysis," http://tonto.eia.doe.gov/FTPROOT/serVICe/s606_s650_analysis.pdf

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The Federal Government commissioned the Orbital Energy Company to examine the vehicle fleet in Australia for its suitability in utilising ethanol blended petrol.72 The report shows there are significant technical barriers to going much higher than five per cent ethanol content across all of petrol. The main obstacle is the ability of the car fleet to use E10 fuel. The report estimates that 59.5 per cent of the car fleet is capable of currently using E10 and 60.6 per cent of the fleet is capable of currently using E5. While this percentage will rise over time as older vehicles are phased out of the car fleet, it is still likely that less than 70 per cent of the fleet will be able to utilise E5 or E10 by 2011 based on the trends identified in the report. These facts lead to a technical difficulty in the adoption of a 10 per cent target as it will be impossible to legislate that E10 is the standard unleaded fuel to be used as many cars will not be able to utilise that fuel. This situation is analogous to the introduction of unleaded fuel where an alternative fuel had to be supplied for vehicles that were not able to utilise the new fuel. Once choice is present in the market place then it will be no longer possible for the fuel companies to guarantee reaching a high target. It is our view that the fuel companies will argue that while they can put one per cent ethanol in all petrol, they will have to market E10 to the less than 70 per cent of owners whose vehicles can take that fuel. However they cannot force those customers to buy that fuel, although they can clearly market E10 in attractive ways if they choose to do so.

If 50 per cent of vehicle owners that own vehicles capable of using E10 use E10 all the time and all other vehicle owners use petrol containing one per cent ethanol, that will still only constitute 4.15 per cent of total petrol sold being ethanol. Therefore we regard a maximum of five per cent ethanol as a percentage of all petrol sold as the maximum technically achievable target.

7.4 Mandating biofuels drives up the prices of the feed stock in the market place reducing any value of any regional development and employment benefits of the biofuel development.

Mandating creates an artificial demand for biofuels, setting a permanent minimum requirement for biofuel supply, either from local or imported sources. The additional competition this creates for feedstocks used in the manufacture of biofuels drives up the price of feedstocks putting biofuel in direct competition with existing feedstock users including the intensive 72 Assessment of the Operation of Vehicles in the Australian Fleet on Ethanol Blend Fuels Report to Department of the Environment and Water Resources, February, 2007 by ORBITAL AUSTRALIA PTY LTD

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livestock sector. This form of government intervention essentially discriminates between businesses competing for common inputs. The assistance provided to the biofuels industry through mandating increases the production of ethanol and employment in regional areas. But much of this is activity 'redistributed' from other parts of the economy. Estimates of this redistribution vary: - It has been estimated that a mandatory 10 per cent ethanol mix in petrol

would transfer a $3 billion slice of the fuel market from the oil companies to ethanol producers such as the plant in Manildra NSW. Treasury would lose more than a $1 billion a year in petrol excise while the excise holiday is in place. But such a move could create 90,000 jobs, mostly in the bush. Other analyses indicate much lower cost estimates. For example, the Australian Institute of Petroleum estimates that 10 per cent of the petrol market has a value of the order of $600 to $700 million. A study for the Australian Bureau of Agricultural and Resource Economics estimates that if fuel ethanol were to capture ten per cent of the petrol market by 2010, the annual loss to government revenue (in the form of zero excise) would be about $688 million.73

Economic modeling by the Australian Bureau of Agricultural and Resource Economics (ABARE) for the Prime Minister’s Biofuels Task Force in 74 in2005 estimated that, under current policy settings, and with current ethanol processes, the net cost to gross national income of meeting the biofuels target would be about $90 million per year in 2010. The economic cost (gross national income loss) of each direct biofuel related job in 2010 was estimated to be about $417,000 each year. The cost to government expenditure was estimated to be about $545,000 each year (2005 prices in both cases).75 This is money that may otherwise have been spent on health, education, defence and other social benefits. Details of this data are shown in Figure 17

Figure 17 – Costs of Job Creation from Biofuel Production

73 Parliament of Australia, 2003, Current Issues Brief no. 12 2002-03, Fuel Ethanol – Background and Policy Issues 74 Prime Ministers Biofuel Task Force Report 2005. ABARE Analysis Appendix 3, p 30 and 31 75 RACQ, March 2007

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Any advantages in terms of regional employment from ethanol are also potentially offset by the diminished competitiveness of existing regional industries that are reliant on grains/ethanol feedstocks as a consequence of higher feedstock prices. As these industries are faced with higher input costs or potential shortages of feedstocks in years of low supply (as has been seen in the current drought situation), this in turn may result in a reduction in on-farm employment to offset the higher cost of inputs, thereby negating any positive impact on employment that biofuels may have. The ABARE analysis did not include such effects. The Fuel Taxation Inquiry noted that no analysis has been undertaken to establish the social benefits of assistance to regional areas and whether the benefits could be achieved at lower cost by other means.76 Research into social benefits of ethanol mandating in the United States has been undertaken. In 2003, the Reason Public Policy Foundation undertook a benefit cost analysis of mandating ten per cent ethanol in petrol in the United States in conjunction with existing protective arrangements for ethanol similar to those in Australia. Under assumptions favourable to ethanol, the study yielded a benefit/cost ratio of less than 0.15. That is, social benefits would be only fifteen per cent of social costs.77 A mandate along with the existing fuel tax excise credit provides a subsidy to the biofuel industry and protects it from potentially cheaper biofuel imports. However, with ethanol imports to be on a parity with locally produced ethanol in 2011, when customs duty is removed and the excise rate is the same for both, a mandate becomes a support mechanism for cheaper imports, (if these are available), resulting in no advantage for local production or regional job creation.

76 Parliament of Australia, 2003, Current Issue Brief 77 RACQ, March 2007, p3

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If local production is unable to compete with imported ethanol, which may be the case particularly for grain-based ethanol when excise arrangements change78, then significant ethanol infrastructure investments will be at risk. Collapse of established plants before return on capital investment is realised will be damaging to investors and may cause a slump in feedstock prices if sudden feedstock oversupply results. If local production is unable to compete with imported ethanol or second generation biofuels, which evidence suggests is the case in the medium term, then significant ethanol infrastructure investments will be at risk. Collapse of established plants before return on capital investment is realised will be damaging to investors and may cause a slump in feedstock prices if sudden feedstock oversupply results. While this may provide short term benefit to livestock industries, the long term viability and stability of a feed grains sector is more critical to sustainability of livestock industries.

Support for an industry that has not been established anywhere else in the world without significant government assistance, at the expense of existing competitive industries, is not justified unless the biofuels industry offers significant environmental, social and economic benefits. Numerous studies highlight the limited benefits biofuels provide in terms of social benefits, fuel security, and greenhouse gas reductions. The Fuel Taxation Inquiry concluded that assistance to alternative fuels, including ethanol, has significant resource allocation effects that can no longer be justified79 Mandating and support for biofuels not only impacts on our local environment, but also has wider impacts as highlighted in the following statement from a report by the International Institute for Sustainable Development on US biofuel support mechanisms:80

There are many niche markets for which biofuels production— especially cellulosic ethanol—that can co-exist with food production. However, by mandating biofuel consumption and, worse, providing subsidies to ensure that the mandate is met, the federal and state governments have interfered with the workings of a market that previously was geared to the production of food, animal feed and a small volume of industrial products. While we have not examined the question of fuel-food competition, we would note that many economic assessments of feedstock outlet

78 See Section 3 on costs, and the CIE 2005 report Impact of Ethanol Policies on Feedgrain Users in Australia, p14, quotes “it is estimated that ethanol from Brazil could be landed excise and duty paid in Australia at around $0.63 per litre … at this price, some proposed local ethanol production may be financially quite marginal given current processing and feedstock prices.” 79 Parliament of Australia, 2003, Current Issue Brief 80 International Institute for Sustainable Development, Global Subsidies Initiative, October 2006, Biofuels – At What Cost? Government Support for Ethanol and Biodiesel in the United States

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markets under increasing demand for biofuels are projecting declining crop exports to price-sensitive countries abroad. With demand growing so fast, it is likely that shifts in the food-fuel balance could also occur quickly, with important social implications.

There is growing concern that the rapidly emerging biofuels industry is creating higher food prices, disadvantaging some of the world’s poorest people in particular.81 While there may be some advantage in higher food prices for Australian producers, the ability of the production sector to capture a fair share of the higher prices remains a challenge in a system where large retailers hold the majority of market power.

81 See articles on price of tortillas, and the End of Cheap Food: http://www.yobserver.com/opinions/10012563.html , and palm oil increasing noodle price in China: http://www.forbes.com/markets/economy/2007/07/25/china-noodle-pricehike-markets-equity-cx_vk_0724markets02.html .

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8 Costs to the Pork Industry of Mandating Biofuels

8.1 Increased Cost of Production

The mandating scenario of five per cent ethanol in Victoria, NSW and Queensland described in Section 3 results in a demand of 831 ML of ethanol on the east coast of Australia which we estimate will create a demand for 1.8-2.0 million tonnes of grain.

It is difficult to give precise descriptions of what effects this will have on grain pricing due to the fact that Australia does not really have a specific feed grain industry as seen with corn in the USA. Availability of feed grains in Australia varies significantly from year to year due to climatic variation changing overall grain production levels and varying the amount of feed grain produced due to changes in grain quality from climatic conditions. On the surface there appears to be plenty of grain in Australia. Figure 18 shows the projected feed grain use in Australia and Figure 19 shows the projected production of grains in Australia. Figure 18 – Projected Feed Grain Demand in Australia82

Figure 19 – Grain production Projections in Australia83

82 Impact of Ethanol Policies on Feed Grain Users in Australia – Centre for International Economics, August 2005, p22 83 Impact of Ethanol Policies on Feed Grain Users in Australia – Centre for International Economics, August 2005. p21

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Therefore on the surface there is a considerable excess of available grains in Australia. However below this surface analysis are a number of limiting factors:

• The numbers in Figure 19 are for the whole of Australia while most of the demand is on the east coast.

• The numbers for barley include the production of malting barley which

is not used for feed and is normally exported at a much higher price than feed grains.

• During drought there is a considerable fall in production. For example

coarse grain production84 in 2000-01 was 10.9 million tonnes, in 2001-02 it was 13.05 million tonnes and in 2002-03 it was 6.92 million tonnes while it bounced back to 15.63 million tonnes in 2003-2004.

• ASW wheat normally trades at a premium to feed wheats but as shown

in Figure 20 this gap closes significantly in drought years.

• While the numbers may appear okay on the surface forward contracts for the export of grain are entered in to. Even when the price rises domestically exporters are reluctant to damage relationships with their customers. Therefore grain is exported rather than being kept on the domestic market.

Figure 20 – Comparison of Feed Wheat and ASW Wheat Prices85

84 Corn, oats, barley, triticale, sorghum 85 Impact of Ethanol Policies on Feed Grain Users in Australia – Centre for International Economics, August 2005. p24

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All of this means that it is very difficult to give precise effects of increased ethanol demand for grain on the domestic grain price and therefore the pork industry. What we can say for certainty is that:

• In the last five years we have seen imports of feed grain into the east coast of Australia during the 2002-03 drought and in the current drought.

• The injection of a demand stream of up to two million tonnes of grain

will increase the number of times that grain has to be imported into the east coast of Australia.

Figure 21 shows the difference between import parity for feed sorghum in Australia. Generally the difference between the domestic price and the import parity price has been around $80 a tonne which corresponds with the cost of importing grain from overseas or Western Australia into metropolitan areas on the east coast. We have seen this sort of effect on domestic prices with the import of grain as stated in the CIE report86: During the 2002-03 drought, the domestic sorghum price was greater than import parity. Only a relatively small amount of grain was imported during this time from the UK — but it was enough to have a profound effect with the sorghum prices which dropped by $80 per tonne.

Figure 21 – Import Parity Comparisons for Sorghum87

86 Impact of Ethanol Policies on Feed Grain Users in Australia – Centre for International Economics, August 2005. p28 87 Impact of Ethanol Policies on Feed Grain Users in Australia – Centre for International Economics, August 2005. p26

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From this information we have constructed the following information as shown in Table15 which shows the average cost increase over the medium term of imports of grain under various scenarios. The three scenarios are:

1. Mandating of ethanol causes an extra year in every 10 years where grain has to be imported into the east coast over and above what otherwise might have happened.

2. Mandating of ethanol causes an extra year in every five years where

grain has to be imported into the east coast over and above what otherwise might have happened.

3. Mandating of ethanol causes an extra year in every three years where

grain has to be imported into the east coast over and above what otherwise might have happened.

Table 15 – Increases in Grain Costs per Tonne in Various Scenarios

Years in Which Ethanol Demand Caused Import of Feed

Grains into Eastern Australia Import Cost 1 yr in 10 1 Yr in 5 1 Yr in 3

$60 $6/tonne $12/tonne $20/tonne $80 $8/tonne $16/tonne $26.67/tonne $100 $10/tonne $20/tonne $33.33/tonne If we take the middle of these scenarios, which has been highlighted in yellow, then the cost to the pork industry would be $16 per tonne on average over the

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medium term, with the total cost to the industry using the projected feed usage in Figure 18 projected to be:

• $21.2 million in 2007-08

• $21.78 million in 2009-10

• $25.84 million in 2014-15 Put in another way the cost per pig would be approximately $3.62 or five cents a kilogram.88 This would equate to a loss of return on capital of 1.8% on a piggery selling 20 pigs per sow per year and valued at $4000 per sow space.89 The CIE report has suggested that a 700 million litre biofuel target, which would use less ethanol than suggested in these scenarios, would cut production in the pork industry by 32 thousand tonnes in 2010 – as shown in Figure 22.

88 Therefore each $1 increase in the grain price costs the industry approximately 0.33 cents per kilogram in production costs or $1.27 million per year based on the May 2007 Moving Annual Total slaughter figures from the ABS (sourced from Australian Pork Limited) 89 Industry data in the 2005 Pig Annual (Australian Pork Limited) shows the benchmarking data for the industry at 19.37 pigs sold per mated sow per year. We have chosen 20 pigs per sow per year for future analysis on the basis of productivity improvements in the herd over time. The capital investment figure is based on a reasonable estimate an average investment in the industry which ranges between $6000 per sow space ($4800 for all construction costs and $1200 for stock to first sale) and fully depreciated farms which would be valued at the stock value plus minimal capital value for the buildings. This is based on the author’s own experience in the industry, both building pork farms and consulting to pork farmers.

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Figure 22 – Possible Impacts on Meat production in Australia90

Beyond these possible impacts, there would also be ongoing regional impacts; if the establishment of an ethanol plant in a region caused grain demand in that region to be higher than local production. Grain prices in that region would then rise by the cost of transporting extra grain onto that region. The effects of these changes would vary from region to region depending on transport distances, climatic variability effects on production, and the size of the plant that was built. Overall we can state with some confidence that a situation where a significant ethanol mandate occurred on the east coast, the average price of grain would rise over the medium term, making the industry less competitive against its major international competitors.

90 Impact of Ethanol Policies on Feed Grain Users in Australia – Centre for International Economics, August 2005. p39

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8.2 The Fallacy of Dried Distillers Grains Benefits

A number of nutritionists and proponents of Dried Died Distillers Grains have argued that the inclusion of high levels of DDGS in the diets of cattle, poultry and pigs will ameliorate some of the effects of higher grain and soybean prices from increased ethanol demand driving up grain prices. More recent modelling in the US has indicated that inclusion rates of DDGS in the diets of dairy cattle, pork and poultry will be much lower than previously thought. Figure 23 shows the results of the modelling

Figure 23 – Projected use of Distillers Grain in US Animal Feeds91

In the report the CARD centre notes that “In the earlier work, a rapid increase in production of DG caused a reduction in soybean meal prices and a reduction in soybean prices. In the new model we find that DG enter the rations of ruminant animals, and that they replace corn mostly and soybean meal only to a limited extent. With a large U.S. and international market for DG in ruminants, the DG price reflects its feed value in ruminant rations as a replacement for corn. This means that DG prices will track corn prices. Poultry and pork rations initially respond to a surplus of DG

91 Centre for Agricultural and Rural Development. Emerging Biofuels: Outlook of Effects on U.S. Grain, Oilseed, and Livestock Markets Staff Report 07-SR 101May 2007, p18

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with relatively high inclusion rates, but as markets adjust and as DG prices rise, these species eventually revert to a corn-soybean meal diet. The inclusion of DG in the model produces some profound and somewhat counterintuitive effects. For example, we had originally assumed that the impact of the ethanol boom would be lower for beef producers than for hog and poultry producers because DG can more readily be included in ruminant rations that in hog and poultry rations. Instead, because DG prices track corn prices, the impact on cattle feed is as great as the impact on hog feed.”92

If we look at this information in an Australian context it is likely that DDGS use will be even lower in Australia due to the following factors as stated to us by QAF meats:93

“1. DDGS has quite a low digestible energy and we are buying energy. It has particularly low digestible energy compared to the equivalent to corn in the US)”

“2. It has a very poor amino acid profile and we have to actually supplement amino acids when we use DDGS, particularly with lysine.”

“3. It has very variable digestibility, between 30% and 70% so you have to pick a level you are confident in.”

“4. It has high moisture content and is difficult to include - particularly in pellet diets - which are the majority of the form in which pigs are fed in Australia.”

In addition, as it is unlikely that there will be very high levels of DDGS produced in Australia, it is unlikely here will be low prices for DDGS resulting from surpluses. Therefore, the long run analysis for the USA is likely to apply from the beginning in Australia resulting in inclusion rates of less than 5% of the diet. Therefore it is the view of the industry that the value of Dried Distillers Grains to the industry is much less than the proponents of the ethanol industry have stated, exacerbating the negative production costs of any increase in demand from mandated ethanol

92 Centre for Agricultural and Rural Development. Emerging Biofuels: Outlook of Effects on U.S. Grain, Oilseed, and Livestock Markets Staff Report 07-SR 101May 2007, p4 93 Supplied by QAF Meats, Corowa to the Economic Development and Infrastructure Committee "Inquiry into Mandatory Ethanol and Biofuels Targets in Victoria."

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9 Forward Policy Recommendations

9.1 That biofuels not be mandated.

It is clear from the information contained in this submission that mandating of biofuels is neither the answer to issues of greenhouse gas production from fossil transport fuels nor an efficient method to assist regional development. Mandating does not allow for an efficient allocation of resources in the economy to reduce greenhouse gases and it is clear that mandating is a hugely expensive way of stimulating regional employment and development.

9.2 That the Victorian Government support the development of required infrastructure such as tanks for E10 in a similar manner to the Queensland Government.

While it is clear that grain based ethanol and biodiesel are mature technologies and there is little or no case for subsidising or assisting the transfer of mature technologies, there is a role that government can play in assisting in the removal of market bottlenecks where there is clear failure in the market place. Assistance given to petrol retailers to provide the infrastructure to allow the market place to efficiently decide between different fuel types falls into this category.

9.3 That the Victorian Government support an excise/carbon trading structure that brings in the externalities of pollution to even up the playing field between fossil fuels and biofuels

The most efficient allocation of resources in the economy to reduce greenhouse gas production and pollution will be achieved if the externalities associated with transport fuels are built into the costs of those fuels in the market place. This does not mean that the fuel excise needs to be changed so that only those relativities are built into the system, rather there needs to a strong distinction between the various fuel types that clearly reflect the externalities, including assistance programs for all types of fuels. The Victorian Government does not have direct responsibility for these issues but should be supporting a carbon trading system that clearly brings into the market place the costs of greenhouse gas production to ensure that that the most efficient measures for greenhouse gas reduction are created in an open, transparent and efficient economy. Such a trading system will place the value of biofuels in competition with other methods.

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9.4 That the Victorian Government put in place a long term strategy for moving to biomass based biofuels as part of the long term solution to reducing greenhouse gas emissions from transport. The Victorian Government should focus on adoption of existing alternative strategies - including fuel efficient cars, efficient diesel engines, modifying vehicle use and design, changing car usage and driving behaviour, full implementation of existing technologies, improving city and road design to minimise fuel use, and increasing incentives for low emission vehicles etc.

Frequently biofuels are promoted by their supporters as the solution without ever properly defining the question. What Australia needs is a detailed strategy for reducing greenhouse gas production and other pollution from the transport fleet. The solution has to meet consumer needs for transport mobility and flexibility rather than trying to force people into low value options (as perceived by them). More details on a possible strategy are given in Appendix 3 but some of the basic components of such a strategy are:

1. The production and adoption of lightweight motor vehicles that are as safe,

if not safer than the current vehicle fleet. Most of the energy that is used to move people and goods around is expended in moving the weight of the vehicles around. Lightweight vehicles can be produced that are far more efficient.

2. The use of hybrid vehicles that utilise the high efficiency of the internal combustion engine under high loads, while replacing the low efficiency of the internal combustion engine at low loads with electric power, and harvesting breaking energy. The first generation of these vehicles are now available and on the road, but the next generation is likely to be plug in hybrids that can be powered up at the home to reduce petrol use further.

3. The use of second and third generation biofuels to replace fossil fuels in a manner that is efficient in reducing greenhouse gas emissions. We need to move beyond grain based ethanol systems and on to biomass based biofuels, with third generation genetic engineering/algal biodiesel systems providing the promise of far more elegant and efficient processing systems than are currently available.

4. Public policy initiatives such as “feebates” that support the turnover of the car fleet to accelerate adoption of new technologies.

5. Smart traffic systems that reduce fuel use by reducing idling and braking time in motor vehicles.

6. More efficient public transport systems.

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10 Appendices

10.1 Appendix 1 – Details of Second Generation Biofuels

Second generation biofuels are produced from less mature technologies utilising more complex feed stocks94. These technologies have been around for a long time with the US producing ethanol from wood chips for its war effort in World War 2. However the costs of these technologies have always been much higher than sugar or starch based ethanol and biodiesel transesterification due to the complex nature of the process. There are two main processes that have been used to decompose plant material and turn it into biofuel. These are chemical/enzyme treatments and a process called gasification. Figure 24 shows the basic process of producing glucose from cellulose via the enzyme process.

Figure 24 - Enzyme Production of Glucose from Cellulose

CellobioseGlucose

Source – NREL Publication – Unravelling the Structure of Plant Life The company most well known for its enzyme processes for the production of ethanol is a Canadian company, Iogen. Iogen has been developing a commercial enzyme technology for a long time and have been strongly supported by Shell, which is a major investor in the company. Figure 25 shows an extract from Iogen’s material showing a simple schematic of their production process.

94 We are able to produce ethanol from biomass material other than starch and sugar essentially because most plants are mostly comprised of sugar. This sugar is tightly bound up in complex polysaccharides in cellulose and hemi-cellulose. Plants have built up strong defence mechanisms to prevent these sugars being easily dissolved into their component sugars. Consequently it has been technically difficult to access those component sugars.

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Figure 25 – The Iogen Process for Making Ethanol from Biomass.

The production of sugars in this way also produces lower concentrations of sugar than sugar cane or grain based systems which results in higher costs in the fermentation and distillation phases of ethanol production. If second generation biomass based systems are to be competitive against other types of biofuels and fossil fuels, then the following cost barriers need to be resolved:

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1. Cost effective ways of handling, storing and transporting biomass which

tends to be much more bulky than grain or sugar. 2. Cost effective methods of breaking down biomass materials into their

component sugars. 3. Cost effective methods of fermenting a multiple sugar mix. 4. Cost effective methods of increasing sugar concentrations from the process

to reduce fermentation and distillation costs. The other method of producing biofuels from plant biomass is by gasification where the original biomass is turned into a gas called Syngas. That gas is then reacted with catalysts to produce biofuels. One company working on this process is Pearson Gasification in Aberdeen, Mississippi, USA. Figure 26 shows the process that the company follows in producing ethanol95.

Figure 26 – The Pearson Gasification Process

The basic process is: 1. Biomass (wood waste, rice straw, etc) is fed, along with superheated steam,

into a gas fired primary reformer96.

95 Pearson claims two distinct advantages to this process: the ability to manipulate the production of the Syngas so they can alter the chemical composition of that gas, and in particular the carbon and hydrogen ratio to gain maximum yields and to be able to produce different chemicals; and the ability to recycle products, such as butanol, produced out of the process back into the system in order to turn them back into ethanol. 96 As water is one of the components that goes into the Syngas the moisture content of the feed stock is not critical, although most of the development work has been done with a standardized 15 per cent moisture.

Gasifier or Heat Gas

Alcohol Product Dryer Grinder Reformer Recovery Clean up Synthesis Separator

Biomass

~50% H2O ETHANOL

Catalytic

Steam Converter

Ash Butanol / Propanol

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2. The reformer is externally heated and air is removed from the biomass to

minimise contamination with nitrogen. 3. The organic component of the biomass is effectively completely gasified (98

per cent) with the inorganic components remaining as ash97 4. A five step cleaning process to remove any ash or tars that could cause

problems later on the process.98 5. The Syngas then goes through a series of Fischer-Tropf processes using

proprietary catalysts, and temperature/pressure settings. During these steps surplus gases are separated using a swing absorption system and recycled back into the process. This means that in theory all of the carbon in the feed stock can be converted into Syngas and/or ethanol.

6. This process produces multiple alcohols which are then sent to a distillation

column to separate them. Many different biomass sources can be used to produce ethanol. Some of these include wood chips, wheat straw, rice hulls, waste wood products, and specifically grown energy crops. Work undertaken by Emergent Futures and Neil Clark and Associates in Bendigo for the Grains Research and Development Corporation (GRDC) included preliminary mapping of the possible sources of crop biomass such as sugar cane bagasse and wheat and barley straw. This mapping process identified a number of possible areas- “hot spots” - that may be suitable for harvesting these by-products and turning them into ethanol. Of particular interest for the inquiry would be the hot spot in the Wimmera/Mallee as identified in Figures 5 and 6.

97 Ash content varies depending on the biomass feed stock. Some wood waste has only 1 per cent ash, while rice straw contains around 17 per cent ash, primarily as silica. 98 The presence of contaminants is one of the key problems with biomass gasification.

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10.2 Appendix 2 – USDOE Funding Support for Biomass Plants in the USA

NEWS MEDIA CONTACT: FOR IMMEDIATE RELEASE Craig Stevens, (202) 5864940 Wednesday, February 28, 2007 DOE Selects Six Cellulosic Ethanol Plants for Up to $385 Million in Federal Funding Funding to help bring cellulosic ethanol to market and help revolutionize the industry WASHINGTON, DC – U.S. Department of Energy (DOE) Secretary Samuel W. Bodman today announced that DOE will invest up to $385 million for six biorefinery projects over the next four years. When fully operational, the biorefineries are expected to produce more than 130 million gallons of cellulosic ethanol per year. This production will help further President Bush’s goal of making cellulosic ethanol cost competitive with gasoline by 2012 and, along with increased automobile fuel efficiency, reduce America’s gasoline consumption by 20 percent in ten years. “These biorefineries will play a critical role in helping to bring cellulosic ethanol to market, and teaching us how we can produce it in a more cost effective manner,” Secretary Bodman said. “Ultimately, success in producing inexpensive cellulosic ethanol could be a key to eliminating our nation’s addiction to oil. By relying on American ingenuity and on American farmers for fuel, we will enhance our nation’s energy and economic security.” Today’s announcement is one part of the Bush Administration’s comprehensive plan to support commercialization of scientific breakthroughs on biofuels. Specifically, these projects directly support the goals of President Bush’s Twenty in Ten Initiative, which aims to increase the use of renewable and alternative fuels in the transportation sector to the equivalent of 35 billion gallons of ethanol a year by 2017. Funding for these projects is an integral part of the President’s Biofuels Initiative that will lead to the wide scale use of nonfood based biomass, such as agricultural waste, trees, forest residues, and perennial grasses in the production of transportation fuels, electricity, and other products. The solicitation, announced a year ago, was initially for three biorefineries and $160 million. However, in an effort to expedite the goals of President Bush’s Advanced Energy Initiative and help achieve the goals of his Twenty in Ten Initiative, within authority of the Energy Policy Act of 2005 (EPAct 2005), Section 932, Secretary Bodman raised the funding ceiling.

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“We had a number of very good proposals, but these six were considered ‘meritorious’ by a merit review panel made up of bioenergy experts. So I thought it would be best to front end some more funding now, so that we could all reap the benefits of the President’s vision sooner,” Secretary Bodman said. Combined with the industry cost share, more than $1.2 billion will be invested in these six biorefineries. Negotiations between the selected companies and DOE will begin immediately to determine final project plans and funding levels. Funding will begin this fiscal year and run through FY 2010. EPAct authorized DOE to solicit and fund proposals for the commercial demonstration of advanced biorefineries that use cellulosic feedstocks to produce ethanol and co-produce bioproducts and electricity. The following six projects were selected: Abengoa Bioenergy Biomass of Kansas, LLC of Chesterfield, Missouri, up to $76 million. The proposed plant will be located in the state of Kansas. The plant will produce 11.4 million gallons of ethanol annually and enough energy to power the facility, with any excess energy being used to power the adjacent corn dry grind mill. The plant will use 700 tons per day of corn stover, wheat straw, milo stubble, switchgrass, and other feedstocks. Abengoa Bioenergy Biomass investors/participants include: Abengoa Bioenergy R&D, Inc.; Abengoa Engineering and Construction, LLC; Antares Corp.; and Taylor Engineering. ALICO, Inc. of LaBelle, Florida, up to $33 million. The proposed plant will be in LaBelle (Hendry County), Florida. The plant will produce 13.9 million gallons of ethanol a year and 6,255 kilowatts of electric power, as well as 8.8 tons of hydrogen and 50 tons of ammonia per day. For feedstock, the plant will use 770 tons per day of yard, wood, and vegetative wastes and eventually energy cane. ALICO, Inc. investors/participants include: Bioengineering Resources, Inc. of Fayetteville, Arkansas; Washington Group International of Boise, Idaho; GeoSyntec Consultants of Boca Raton, Florida; BG Katz Companies/JAKS, LLC of Parkland, Florida; and Emmaus Foundation, Inc. BlueFire Ethanol, Inc. of Irvine, California, up to $40 million. The proposed plant will be in Southern California. The plant will be sited on an existing landfill and produce about 19 million gallons of ethanol a year. As feedstock, the plant would use 700 tons per day of sorted green waste and wood waste from landfills. BlueFire Ethanol, Inc. investors/participants include: Waste Management, Inc.; JGC Corporation; MECS Inc.; NAES; and PetroDiamond.

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Broin Companies of Sioux Falls, South Dakota, up to $80 million. The plant is in Emmetsburg (Palo Alto County), Iowa, and after expansion, it will produce 125 million gallons of ethanol per year, of which roughly 25 percent will be cellulosic ethanol. For feedstock in the production of cellulosic ethanol, the plant expects to use 842 tons per day of corn fiber, cobs, and stalks. Broin Companies participants include: E. I. du Pont de Nemours and Company; Novozymes North America, Inc.; and DOE’s National Renewable Energy Laboratory.

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Iogen Biorefinery Partners, LLC, of Arlington, Virginia, up to $80 million. The proposed plant will be built in Shelley, Idaho, near Idaho Falls, and will produce 18 million gallons of ethanol annually. The plant will use 700 tons per day of agricultural residues including wheat straw, barley straw, corn stover, switchgrass, and rice straw as feedstocks. Iogen Biorefinery Partners, LLC investors/partners include: Iogen Energy Corporation; Iogen Corporation; Goldman Sachs; and The Royal Dutch/Shell Group. Range Fuels (formerly Kergy Inc.) of Broomfield, Colorado, up to $76 million. The proposed plant will be constructed in Soperton (Treutlen County), Georgia. The plant will produce about 40 million gallons of ethanol per year and 9 million gallons per year of methanol. As feedstock, the plant will use 1,200 tons per day of wood residues and wood based energy crops. Range Fuels investors/participants include: Merrick and Company; PRAJ Industries Ltd.; Western Research Institute; Georgia Forestry Commission; Yeomans Wood and Timber; Truetlen County Development Authority; BioConversion Technology; Khosla Ventures; CH2MHill; Gillis Ag and Timber. Cellulosic ethanol is an alternative fuel made from a wide variety of nonfood plant materials (or feedstocks), including agricultural wastes such as corn stover and cereal straws, industrial plant waste like saw dust and paper pulp, and energy crops grown specifically for fuel production like switchgrass. By using a variety of regional feedstocks for refining cellulosic ethanol, the fuel can be produced in nearly every region of the country. Though it requires a more complex refining process, cellulosic ethanol contains more net energy and results in lower greenhouse emissions than traditional corn based ethanol. E85, an ethanol fuel blend that is 85 percent ethanol, is already available in more than 1,000 fueling stations nationwide and can power millions of flexible fuel vehicles already on the roads. For more information on President’s Bush’s Twenty in Ten Initiative, visit: http://www.whitehouse.gov/stateoftheunion/2007/initiatives/energy.html. DOE

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10.3 Appendix 3 – Possibilities for a Victorian Road Map to Reduce Greenhouse Gas Emissions.

In order to tackle the issue of reducing greenhouse gas emissions and reducing dependence on fossil fuels for transport a comprehensive strategy which involves a combination of government policy and public and private investment needs to be followed rather than a piecemeal approach. We believe that tackling the problem of greenhouse gas emissions and reducing fossil fuel use is a huge task and we are concerned that a lot of effort is being put into second rate solutions. We believe that we need to concentrate on first rate solutions or too many resources will be wasted and we will not be able to achieve our goals. We recommend that the committee members all read ‘Winning The Oil End Game’ which can be accessed at www.oilendgame.com. This book is a strategy written by Amory Lovins and other authors from the Rocky Mountain Institute in the USA. The project was financed by the Pentagon with the aim of reducing America’s dependence on oil and significantly reducing oil imports. While we are doubtful of some of the technological optimism which is contained within the book’s policy prescription we believe that the overall model, where an economic benefit that cannot be captured by any one commercial company is still captured by the country through a comprehensive strategy involving all sectors of the community, is one that has great merit. Some examples of what is possible in Australia as a combined policy are listed below.

10.3.1 Light weighting of Motor Vehicles

The sad truth is that most of the energy that goes into our cars as petrol is used to move the vehicle around rather than the passengers and most of it is lost. The following is information from Winning The Oil End Game: In the USA a typical mid size production car uses approximately 8.4 litres of fuel per 100km on level city streets. The energy that is placed in to the vehicle in the form of petrol is used as follows99: 1) 85-87% is lost as heat and noise in the power train (engine, pollution

controls, drive train or idling at 0 km per hour (which wastes 17%) 2) 17 % in EPA testing (or 12-13% in actual conditions utilising accessories)

reaches the wheels and approximately 6% accelerates the car.

99 Winning the Oil End Game Box 6 p46-49

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3) As only 5% of the mass moved in such a vehicle with only a driver present is the human being then less than 1% of the energy that is placed in the petrol tank actually moves the person which would seem to be the prime purpose of the car in the first place.

4) Of the 12-13% of energy that actually reaches the wheels it goes in three

directions in roughly the following proportions:

i) Nearly 1/3 heats the air that the car pushes aside (aerodynamic drag). This rises as the cube of driving speed (in miles) – doubling between 89Km per hour and 113Km per hour

ii) Nearly 1/3 heats the tyres and the road (rolling resistance) iii) The rest accelerates the car and heats the brakes when slowing down

(inertia load) Rolling resistance and inertia load are largely weight dependent as is energy used for climbing hills. Therefore 2/3-3/4 of energy use in light vehicles is weight dependent. This makes weight a key target for fuel use reduction If we can produce a significant reduction in the weight of motor vehicles while maintaining or improving car safety then we can make large inroads into fossil fuel use and greenhouse gas emission reduction. The good news is that Victoria and Australia already have some significant developments in this area which mean that we have existing capability in pursuing the lightweighting strategy:

• VCAMM100 has been involved with Perth based Quickstep Technologies101 102 with the aim to commercialise the Quickstep process of composite material manufacturing. The Quickstep process utilises low pressure mould systems suspended in heat transfer liquids. This process reduces the costs of moulds and as the cure reaction can be stopped at any point one composite can be bonded to another composite using a process that the company calls melding.

• A new Cooperative Research Centre for Advanced Automotive Technology, Manufacturing Sector was announced by the Federal Government on December 21, 2004103. This centre has received $38.35 million dollars in Federal funding over the next seven years and is

100 Victorian Centre for Advanced Material Manufacturing. This centre is a collaborative effort between Deakin University, Monash University, CSIRO - Manufacturing & Infrastructure Technology, Australian National University, University of Wollongong, LaTrobe University, and the CRC for CAST 101 http://www.quickstep.com.au/ 102 http://www.vcamm.com.au/case_studies.html 103 Australian Federal Department of Education, Science and Training – 2004 Successful Round CRCS. Announced by Federal Minister Brendan Nelson December 21 2004.

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particularly focused on “the development of new materials to meet the challenges of weight reduction, increased safety and greater functionality.

• The CAST CRC104 which was established in 1993 under the Cooperative

Research centre System was given a third round of funding under the new CRC funding round announced by the Federal Minister for Education Science and Training on 21st December 2004. This cooperative research centre focuses on the research into light metal production and manufacturing systems and received a further $33.5 million in Federal funding in the new round.

• Quickstep Technologies is now Listed on the Australian Stock Exchange

and has announced a development deal with Eurocopter105

10.3.2 Hybrid Motor Vehicles

Standard internal combustion engines and high compression diesel engines are most efficient at high power and yet they run mostly at low power (11% of their capacity in country driving and 8% in city driving). This is due to the fact that because modern light vehicles are built primarily out of steel and steel is heavy and therefore a large engine capacity is required to accelerate that weight at a sufficient performance level for the consumer (think of all the advertisements describing vehicle acceleration in terms of seconds required to accelerate from 0-100kmh or the Kilowatt output of the engine). This performance is particularly important to the consumer for acceleration, going up hills, towing trailers and horse floats, or overtaking safely. Therefore consumer requirements for performance under current car manufacturing systems create an inherently inefficient energy system in light vehicles. Hybrid motors turn the wheels with a mixture of power transmitted from an engine and from one or more electric motors that decouple traction from the engine. The electricity comes from the engine or from energy recovered from braking or coating on hills. There are basically two types of hybrids:

Mild hybrid or hybrid assist vehicles. In these systems a small electric motor boosts the engine power for hill climbing or acceleration. This boosts power of a smaller engine which can then run more efficiently because it operates closer to its maximum operating efficiency.

104 https://www.cast.org.au/index.php? 105 http://www.quickstep.com.au/

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In the Toyota Prius there is full hybrid technology which splits the engines shaft power between driving the wheels and generating electricity. The ratio is computer controlled which allows maximum efficiency of the two technologies.

The fuel savings in hybrid vehicle are obtained through capture of braking and coasting energy, but primarily from operating the electric motor components of the system when the smart technology in the vehicle measures that the internal combustion engine is running inefficiently, which is quite common, particularly in city traffic. There have been significant improvements in the hybrid technology over the last few years. For example the 2004 Toyota Prius gets 38% more tonne kilometres per litre than the 1998 Prius.

10.3.3 Plug in Hybrids

Plug in hybrids are a step beyond traditional hybrid vehicles in that they carry a battery system that can be charged from the standard electricity distribution system. This means that they reduce the requirement to generate electricity from the internal combustion engine and increase the electrical capacity of the vehicle. This means that in city driving where the average distance between charges can be quite low the reductions in petrol or diesel use can be very significant. Of course the use of plug in hybrids may be able to significantly reduce fossil transport fuel use. This would be mitigated if the power source is derived from technology that is resource intensive and produces significant amounts of greenhouse gases. There will be large losses between generating capacity and delivery to the motor vehicle, which will increase the greenhouse gas emissions for a calculated life cycle. The Electric Power Research Institute106 and the Natural Resources Defence Council released a report in the USA in July 2007 examining possible greenhouse gas emission benefits from the adoption of plug in hybrid vehicles. The following is an excerpt from the summary of this report:

This report describes the first detailed, nationwide analysis of greenhouse gas (GHG) impacts of plug-in hybrid electric vehicles. The “well-to-wheels” analysis accounted for emissions from the generation of electricity to charge PHEV batteries and from the production, distribution and consumption of gasoline and diesel motor fuels. Researchers used detailed models of the U.S. electric and transportation sectors and created a series of scenarios to examine assumed changes in both sectors over the 2010 to 2050 timeframe of the study.

106 http://my.epri.com/portal/server.pt?

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Three scenarios represent high, medium, and low levels of both CO2 and total GHG emissions intensity for the electric sector as determined by the mix of generating technologies and other factors. Three scenarios represent high, medium, and low penetration of PHEVs in the 2010 to 2050 timeframe. From these two sets of scenarios emerge nine different outcomes spanning the potential long term GHG emissions impacts of PHEVs, as shown in the following table.

Researchers drew the following conclusions from the modeling exercises:

• Annual and cumulative GHG emissions are reduced significantly across each of the nine scenario combinations.

• Annual GHG emissions reductions were significant in every scenario combination of the study, reaching a maximum reduction of 612 million metric tons in 2050 (High PHEV fleet penetration, Low electric sector CO2 intensity case).

• Cumulative GHG emissions reductions from 2010 to 2050 can range from 3.4 to 10.3 billion metric tons.

• Each region of the country will yield reductions in GHG emissions. From these results it seems obvious that an examination of Plug in Hybrid Vehicles for Australian driving and electricity generation systems is warranted.

10.3.4 Cellulosic Ethanol and 3rd Generation Biofuels Plus Flex Fuel Vehicles

We have discussed the possibilities for biomass ethanol and the third generation technologies that may follow them in the main party of this submission document. We believe there is a lot of scope for Australia to produce ethanol from biomass sources without competing for land and water resources dedicated to food production. Beyond the production of ethanol there are two other major blockages to achieving a significant ethanol based transport fuel industry in Australia:

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• The size of the total fuel market is relatively small by world market standards leading to problems with economies of scale in production.

• If people wish to purchase a vehicle that runs on ethanol they need to be

able to ensure that they can re-fuel that car anywhere in the country. Unless they can do so then they will not have enough confidence in purchasing the car. It is a standard axiom of transport systems that you need to overcome this limitation.

We believe that the answer is the promotion of Flex Fuel Vehicles in Australia. Flex Fuel vehicles are those that can run on anywhere between 0% and 85% ethanol. Therefore they can be refueled with normal petrol or use a fuel with 15% petrol and 85% ethanol in it. The use of flex fuel vehicles in the economy solves both problems at one stroke by increasing the total market for ethanol and solving the transport problem. Flex-fuel technology was created by Ford Motor Company in the mid-1980s. Flexible fueled vehicles (also called variable fuel vehicles) have been produced by a number of manufacturers such as Ford (Ranger, Crown Victoria and Taurus), GM (Chevy S-10 and GMC Sonoma), and Daimler-Chrysler (Plymouth Voyager and Dodge Caravan) and Saab (Saab 9.5 BioPower). The figure below shows a picture of the Saab BioPower 9.5

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The SAAB 9.5 BioPower model

Source : SAAB website

Support of Flex Fuel Vehicles needs to be one of the forward strategies to tackle greenhouse gas emissions because it allows the market place to then efficiently choose between ethanol and petrol and diesel depending on their costs and properties

10.3.5 Feebate Incentive Systems

Winning The Oil Endgame recommends a series of Feebates which are a combination of fees and rebates based on the fuel efficiency of vehicles. This method is not a taxation collection process but a scheme which gives incentives for consumers to buy more fuel efficient cars and for manufacturers to supply more fuel efficient cars to the market. The key principles of such a scheme are:

• That the scheme be revenue neutral. Therefore the fees which are collected must equal the rebates that are paid out plus the administrative costs of the scheme.

• That the scheme is neutral across classes of vehicles to maintain

maximum consumer choice. Therefore the scheme does not push consumers towards smaller vehicles but towards the most efficient vehicles within a class. The policy framework that is recommended is based on measurement of interior volume or footprint area of a vehicle. Therefore if you and your family wish to buy a large four wheel drive vehicle rather than say a standard four cylinder car the feebates will push you towards the most efficient large four wheel drive.

• That the feebates be based on a dollar of fee or rebate per litre of fuel

consumed per 100 kilometre traveled (lp100k)107 . The figures that have

107 In WTOEG US gallons are used which equals 3.785 litres. One mile equals 1.609 kilometres. The conversion factor from US gallons per mile to litres per kilometre is 0.425 (divided by 3.785

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been used in the US study are a payment of US$1000 per 0.01gpm, which translates into A$1130 per 0.425 lp100k.

• That there is a pivot point for each class of vehicle where the feebate is

zero. This point will have to be adjusted on an ongoing basis as the spread of vehicles and their sales figures change in order to make the whole scheme cash neutral after allowing for administrative costs.

The system maintains consumer choice of vehicles while pushing manufacturers towards more efficient vehicles in each class because they will be much cheaper. Under the dollar figures used above a vehicle that is 1.275 litres per 100 km traveled better than the pivot point for the class of vehicle will be A$6780 cheaper than a vehicle that is 1.275 litres per 100km above the pivot point. This system is far more effective at driving people towards more efficient vehicles than carbon taxes built into petrol because decision point is clear at purchase. We believe that both systems should be combined to give clear financial pointers towards reducing fossil fuel use and greenhouse gas emissions.

10.3.6 Intelligent Traffic Flow and Telematics108

SO-CALLED intelligent cars fitted with sensors to predict traffic flows can deliver the same fuel efficiency as hybrid vehicles, according to a study. Hybrid vehicles such as the popular Toyota Prius have an electric motor and a fossil-fuel engine, which are deployed at different stages of the driving cycle to deliver fuel economy.

In contrast, intelligent cars are conventional vehicles fitted with telematics. These are sensors and receivers that work in a network, swapping information about the traffic ahead to speed up the car or slow it down so that the ride is smooth and avoids the stop-start phenomenon, which drains fuel. The technology for road telematics already exists, but given questions on safety and other issues that surround it, it is only being deployed in a small handful of field tests.

Engineers at Melbourne University compared how the two novel technologies matched up on fuel efficiency. For the test runs they used an unconverted saloon, or sedan, as the benchmark and three driving cycles, configured to the and multiplied by 1.609). Rather than use litres per kilometre as a direct conversion we have used the convention litres per 100 kilometre which is more commonly used and understood in Australia. Therefore the conversion factor from gpm to lp100k is 42.5. We used an exchange rate of 0.8847 which has been used in the rest of the report.

108 Directly copied from The Australian IT May 22nd 2007

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Australian, North American and European urban lifestyles. A hybrid version of the car would deliver fuel economy of 15-25 per cent over the unconverted vehicle, they calculated. This saving was matched when the benchmark car was fitted with basic telematics that predicted traffic flows as little as seven seconds ahead, using the Australian drive cycle. Using the US and European cycles, hybrid-matching fuel economy was reached with a look-ahead predictability of less than 60 seconds. If the predictability was boosted to 180 seconds, the newly intelligent car was 33 per cent more fuel-efficient than when it was unconverted.

In their computations, the authors included factors such as the presence of "unintelligent" cars on the road that would impede the efficiency of the look-forward technology. The study appears in Transport Research Part C: Emerging Technologies, a journal published by the Elsevier group. The authors say the figures are a useful contribution to the public policy debate about fuel economy, which is also a key issue in efforts to reduce greenhouse gas emissions. If simple and effective sensor networks can be installed in cities and cars, people who are interested in fuel-savings benefits will question the value of purchasing hybrids, given their hefty price tag, the paper suggests.

10.3.7 Supermarket Smart Card Incentives

If we move to lightweight vehicles with hybrid and/or plug in hybrid technologies then fuel consumption will fall significantly and the current strategy of the supermarkets to attract customers via petrol discounts will be significantly less attractive. If customers only fill their cars up once every three weeks instead of once a week then the incentive of the fuel discount is much lower. One new strategy would be for the supermarkets to partner with finance companies to finance new vehicles with the advanced technologies in them. Group purchasing systems would reduce the initial cost of the vehicles and if a reduction on lease purchase payments was coupled to a smart card used at a particular supermarket the incentive to shop at that supermarket would be maintained and the system would accelerate the turnover of the vehicle fleet, accelerating greenhouse gas emission and fuel reductions.

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10.4 Appendix 4 - Reasoning for Higher Grain Pricing

Our reasoning for the possible scenarios of higher grain prices than in the last decade is relatively straightforward. There has been a significant increase in grain based ethanol production in the USA in the last two years: • Production of ethanol in the USA in 2005 was 14,740ML109 • The production in 2006 was 18,400 ML • In a survey we have just completed by reconciling the four available ethanol

plant lists suggests that the production capacity in the USA when the current construction is completed will be almost 59,000 ML or 4 times the 2005 production levels as shown in Table 16.

Table 16 – Emergent Futures Survey of US Ethanol Plants

The World Watch Institute has suggested that these production numbers will be 53,000 ML. Even if we take a conservative line and accept that some of these plants will not be completed and drop the predicted volume to 47,000ML this is still 3.2 times the production in 2005. If this extra production comes on line then it will take an extra 84 million tonnes of corn as compared to the 2005 year and 76 million tonnes more than the 2006 year. To put this in perspective this is between 73 and 81% of all coarse grain trade (barley, oats, sorghum, maize and triticale) in the world based on the average of the five years up to and including 2004/2005.110, and between 145% and 160% of the average US exports in that time. As a cross check against this data we looked at the ethanol production figures from the Renewable Fuels Association in the USA as shown in Figure 27.

109 International Energy Agency World Energy Outlook 2006 110 ABARE Commodity Statistics

Currently Producing 29708.5 Under Construction 29180.5

Total 58888.9

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Figure 27 – Ethanol Production in the USA (from the Renewable Fuels Association)111

Monthly Ethanol Production (Billion Litres)

1

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2006-2007

If you look at the data in figure 27 we can see two startling indicators. Firstly production in the first five months of 2006 was largely flat (black line) so the rise of an annual increase of 25% from 2005 to 2006 took place in the last 7 months of the year (blue line). Secondly the data for the November 2006 – January 2007 period seems to indicate that the growth has reached a new level of acceleration. This information backs up the survey work we have done and illustrates the rapid growth.

There has been a response to this demand spike with corn futures on the Chicago Board of Trade (CBOT) rising significantly in the last few months. In response to these price signals there has been a massive increase in new plantings for corn in the USA. The USDA reported at the end of March that there had been a 15% increase in planting intentions to 90.5 million acres. This report caused the futures market to fall significantly but still remain well above the recent historical prices. Figure 28 shows the CBOT corn futures pricing on the June 13, 2007. Compared to these prices the average price per bushel for the previous 8 years at harvest has been US$2.05 per bushel. Therefore we have seen a rise of around 80-110% on this recent average price once prices on the CBOT are adjusted relative to harvest delivery pricing. And the futures markets are factoring in these rises for a number of years. Due to tightness of supply the price on the CBOT for corn and what is quite volatile. As of the day of finalising this report the futures

111 RFA data, Emergent Futures graph and trend lines.

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prices had fallen at the trading limit for both commodities due to more bullish predictions of rain and crop finishing and harvesting conditions.

Figure 28 – Chicago Board of Trade Corn Prices July 31 2007 (US cents per bushel)112

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Sep-07 Dec-07 Mar-08 May-08 Jul-08 Sep-08 Dec-08 Mar-09 Jul-09 Dec-09 Mar-10 Jul-10 Dec-10

CBOT Corn Prices 31 July 2007

The other important point is that the pricing of corn in the US market has historically been driven by supply levels within the US market. Figure 29 shows the relationship between supply and price in the US market between 1975 and 2005. It can be clearly seen that the general relationship between price and supply is that low production numbers have given higher prices while high production levels have given lower prices. This is a function of the fact that the US market has been largely export parity priced and the fact that US production is such a large percentage of total world coarse grain trade that fluctuations in the US production levels have impacts on total world supply. However in 2007 we have record proposed plantings (and recent reports show that actual plantings are matching intentions) and extremely high prices by historical standards. Therefore we believe that it is highly likely that we have reached a new plateau in feed grain pricing with the twin demands of feeding livestock and supplying ethanol plants driving demand to unprecedented levels. It is true that biofuel demand is not the only factor driving this equation but biofuel demand has contributed to the low stock levels that are part of the equation that is driving risk views on risk.

112 CBOT data, Emergent Futures graph

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Figure 29– USDA Corn Harvest Yields (million bushels) and prices (US$/bushel) 1975-2006113

It can be argued that production will rise in response to price increases and the market will drop back in price. While this may be a factor we would argue that some price increase is inevitable in the long term due to the following factors:

• It is likely that biofuel demand will continue to grow.

• Increased plantings of corn will displace the production of other crops. This is already evident in the USA where the extra corn plantings have come at the expense or soybeans by changes in rotation practices, and by replacing wheat plantings.

• There are physical global limits to the ability to grow grains and these

are being strengthened by reductions is available arable land and concerns over water supplies.

• Farmers will not continue to plant corn and other feed grains in extra

quantities if the market falls back to historical levels, providing a natural feed back loop that will sustain prices.

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Therefore we would argue that the twin demands of livestock feeding and new demand for biofuels have the potential to reverse grain farmers’ terms of trade and underpin much higher prices for feed grains. What actually happens will be a complex interaction of biofuel demand, changes in livestock demand with higher feed grain prices, farmer’s responses to price signals, political decisions and the availability of arable land and water. The effects of these interactions will be far reaching across a wide range of agricultural industries.

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10.5 Appendix 5 - European Union Biofuel Policy and Subsidies

The European Union (EU) policy on biofuels is part of a larger plan for increasing renewable energy use. It has a target of 5.75% of biofuels on transportation fuel by 2010 which is not mandatory and individual member states are free to establish higher standards. A ‘Fuel Quality Directive’ was also established in 2003 with the European Committee for Standardization (CEN) setting limits on biodiesel blending to no more than a 5% share by volume (or 4.6% in energy terms) for technical reasons.114 The European Council most recently on 9 March 2007 backed proposals on energy and climate change to have an energy policy in place by 2009 which would include the following commitments for renewable energy:115

• A binding target to have 20% of the EU’s overall energy consumption coming from renewables by 2020, and;

• as part of the overall target, a binding minimum target for each member state to achieve at least 10% of their transport fuel consumption from biofuels. However, the binding character of this target is "subject to production being sustainable" and to "second-generation biofuels becoming commercially available".

Existing EU subsidies for biofuels are as follows:116

• Taxation relief - variable amounts as this is determined by each Member state

• Feedstocks for biofuels receive support: o ‘Energy Crop Payment’ (introduced in the 2003 CAP reform) that

amounts to Euro 45 per hectare, with a ceiling of Euro 90 millions. o Agricultural raw materials used for biofuel production also

benefit from the substantial support granted to traditional food crops. Oilseed producers received compensatory payments to the tune of Euro 1.3 billion a year in 2004, which since 2005 has been channeled through the ‘single farm payment system’ under the new CAP. Cereals also receive payments through market price support that is equal to Euro 101.31 per ton; in 2004 this amounted to Euro 11.9 billion. Sugar beet for ethanol has not been granted any additional direct support other than the energy crop aid.

114 CRS Report for Congress, 16 March 2006, European Union Biofuels Policy and Agriculture: An Overview, http://italy.usembassy.gov/pdf/other/RS22404.pdf 115 Euractive, 13 March 2007, EU energy summit: a new start for Europe?, http://www.euractiv.com/en/energy/eu-energy-summit-new-start-europe/article-162432 116 ICRIER-SRTT Quarterly WTO Newsletter Vol.3 No.2, April-June 2007, Subsidies on Biofuel Crops: Farm Support or Industrial Subsidy, http://www.icrier.org/news_events/wtonews_vol3no2/lead_article.html

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o CAP ‘Set aside’ compensation payments for the requirement to set aside 10% of land still apply when the land is used for oilseed and sugar beet crops provided these are not sold into food or feed markets. 117

10.6 Appendix 6- Background into Australian Pork Limited and the Australian Pork Industry

Australian Pork Limited (APL) is the national representative body for Australian pig producers. It is a producer-owned, not-for-profit company combining marketing, export development, research and innovation and policy development to assist in securing a profitable and sustainable future for the Australian pork industry. APL works in close association with key industry and government stakeholders. APL is a unique rural industry service body for the Australian pork industry. The framework for APL was established under the Pig Industry Act 2001118. Operating and reporting guidelines are provided for in the Funding Agreement with the Commonwealth of Australia. This forms the basis of APL’s operations. APL’s primary funding is derived from statutory pig slaughter levies collected under the Primary Industry (Excise) Levies Act 1999119. The levy amounts to $2.525 cents per carcase levy at slaughter. APL receives $1.65 for Marketing activities, $0.70 cents for Research and Innovation activities, and $0.175 for the National Residue Survey (NRS)120. Additional research-specific funds are also received from the Australian Government under the portfolio of the Federal Minister for Agriculture, Fisheries and Forestry. In addition to APL’s primary audience of levy-paying pork producers, there are a number of other groups who are considered as stakeholders of APL including: • the Australian Government, state and local governments and their agencies; • processors and exporters; • wholesalers, distributors and retailers; • other agricultural industry associations; • consumers and the community; • finance and business community;

117 CRS Report for Congress, 16 March 2006 118 http://www.comlaw.gov.au/ComLaw/Legislation/ActCompilation1.nsf/0/935C1FDED0B51DF1CA256F71005501E2/$file/PigIndustry2001.pdf 119http://www.comlaw.gov.au/ComLaw/Legislation/ActCompilation1.nsf/0/E231CA546E7CC2DBCA25703F001AA557/$file/PrimIndExciseLevies1999_WD02.pdf 120 http://www.daff.gov.au/agriculture-food/nrs/industry-info/animal

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• APL staff and suppliers; • industry employees and suppliers; and • Research institutions and providers. The following objectives for the 2005-2010 Strategic Plan focus on a central strategy to drive up domestic demand for Australian pork, while building the industry’s capacity to expand exports and compete successfully against pork imports: • increasing fresh pork demand; • increasing carcase value; • reducing supply chain costs; • contracts and measurements systems; • ensuring industry capability; and • managing risk.

10.6.1 Structure and regional distribution of the industry

There are currently an estimated 1,500 pork producers in Australia with total pig numbers at approximately 2,702,000. APL’s members own approximately 85 percent of the Australian pig production. The estimated Gross Value of Production (GVP) for pig production is $1,008m for the period 2006/07.121 Pork represents 2.38% of total Australian farm production.122 During 2005-2006, the pig industry had a farm gate value of $867 million (ABARE). The Australian pork industry provides a significant positive impact to local, regional, state and national economies through substantial income generation and employment. The In 2004, the pork industry directly generated approximately 6,000 full time jobs with a further 35,000 jobs generated indirectly throughout the pork production chain.123 The chain was valued in 2005-2006 at $2.6 billion.

10.6.2 The geographical make-up of the Australian pork industry

The Australian pig meat industry is highly dispersed in the grain producing regions in each state. The quantity of pork produced in each state is linked to

121 Australian Bureau of Statistics (2007). Value of Principal Agricultural Commodities Produced: Australia Preliminary – 2005-2006. [Online]. Accessed July 13, 2007: http://www.ausstats.abs.gov.au/ausstats/subscriber.nsf/0/E6AF653115ACB249CA25730200194FD6/$File/75010_2005-06.pdf, Vol 7501.0. pp. 5. 122 Australian Bureau of Statistics (2007). Value of Principal Agricultural Commodities Produced: Australia Preliminary – 2005-2006. [Online]. Accessed July 13, 2007: http://www.ausstats.abs.gov.au/ausstats/subscriber.nsf/0/E6AF653115ACB249CA25730200194FD6/$File/75010_2005-06.pdf, Vol 7501.0. pp. 5. 123 http://www.daff.gov.au/__data/assets/pdf_file/0018/18081/2004-01b.pdf, (2004) pp. 20.

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the size of its major grain growing regions but is also influenced by proximity to major population centres. New South Wales produces the most pig meat (30 per cent of Australian production), followed by Queensland (21 per cent), Victoria (19 per cent), South Australia (17 per cent) and Western Australia (12 per cent).124 Australian pig production is located Australia-wide reflecting transport costs and also historical factors such as storage, technology, grain producing areas and demand for fresh product by consumers. This spatial distribution has probable implications for realization of scale economies and specialization in pig production and processing. The pig industry, closely associated with the dairy industry locations in the past, is now largely located in the grain growing regions. Grain growing areas of Australia are found in two relatively narrow inland belts; the eastern Australian grain belt, which stretches through central Queensland, New South Wales, Victoria and South Australia, and the Western Australian grain belt, which is in an area bordered by Geraldton in the north, Albany to the south and Esperance to the east.125 Intensive farming, environmental concerns, and nutritional research showing increased productivity through grain feeds, is largely behind the move toward the grain based diets and the separation from the dairy sector into the grain belts. The number and kind of pig by state are as follows:

124 http://www.abareconomics.com/interactive/ausnz_ag/htm/au_pig.htm 125 Feed Grains – Future supply and demand in Australia, ABARE E Report 03.21, Prepared for the Grains Research and Development Corporation, Amhed Hafi and Peter Connell, November 2003

*126 Australia NSW VIC QLD SA WA TAS NT

Boars (‘000) 12 3 3 3 2 2

Breeding Sows (‘000)

302 73 68 73 51 34 2

Gilts intended for breeding (‘000)

50 19 10 10 6 4

All other pigs 2,338 565 524 630 367 238 14 2

TOTAL PIGS (‘000)

2,538 660 605 715 427 277 16 2

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10.6.3 The importance of feedgrain to the Australian pork industry127

Feed costs are the largest cost item for pig producers in Australia, typically accounting for about 60 per cent of total costs. Grain makes up about 80–85 per cent of feed costs, for a typical cost share of 55 to 60 per cent. Common grains for feed in Australia are wheat, barley and sorghum. Many of the grains produced by the Australian cropping industry are of high quality and can be used for human consumption (such as wheat for flour production), and generally are not grown for specific feed grain uses such as feed for the pig industry. In contrast, overseas pig producers, such as those in North America, have access to a feed grain industry (corn and soybean). Unless the relative profitability of growing feed grain increases, Australian grain producers will continue to produce grain for human consumption, and the pigmeat industry will remain at a competitive disadvantage in this area. The Australian Government recently announced funding of $25.75 million for a Cooperative Research Centre for the pigmeat industry. This centre will focus on reducing feed costs, improving herd feed conversion efficiency and demonstrating the health benefits of consuming nutritionally enhanced pigmeat products. Feed grain costs are a key competitive disadvantage for Australian pork producers. With biofuel production increasing with consumer interest and uptake via ethanol content mandates and government encouragement to industry, demand for feedgrain for human consumption and livestock production will increase grain prices.

126 ABS Principal Agricultural Commodities, (2007), 7111.0, 2005-2006. [Online]. Available August 2: 2007: http://www.abs.gov.au/AUSSTATS/[email protected]/DetailsPage/7111.02005-06?OpenDocument 127 http://www.pc.gov.au/inquiry/pigmeat/finalreport/pigmeat.pdf