Executive Summary
At the request of the Ministry of Economic Development we have prepared this report to assess the relative costs and benefits to the New Zealand economy of a requirement for transport fuels to contain a mandatory percentage of biofuels. Measures aimed at increasing the use of biofuels in the New Zealand economy are part of a series of initiatives being evaluated by the government in an effort to increase the amount of renewable energy used in New Zealand.
The National Energy Efficiency and Conservation Strategy includes a goal of ensuring 30 petajoules of consumer energy used in New Zealand is derived from renewable sources by the year 2012. In the case of renewable fuel use in the transport sector, the government has laid out a target of 2 petajoules (PJ) of energy use from renewable sources by the year 2012. Our report focuses on evaluating the kinds of biofuel use requirements which might best deliver this target for the transport sector.
Three broad scenarios for mandatory biofuel use are considered.
- A mandatory percentage of biodiesel to be blended with automotive diesel
- A mandatory percentage of biofuels, either ethanol or biodiesel to be blended with petrol or automotive diesel
- A mandatory percentage of total transport fuel sales to consist of biodiesel or ethanol
In order to analyse these scenarios we have assessed the economic impacts of various blend levels and of phased requirements for fuel use out to 2012.1 Key issues we have considered in our evaluation are:
- Costs to consumers
- Distortions to productive resource allocation in the economy
- Supply constraints on blend levels and biofuel alternatives
- Benefits from reductions in CO2 emissions
- Reductions in vehicle emissions and associated health effects from pollutant reduction
- Impacts of biofuel blend requirements on competition in the transport fuels market
Our report does not consider the full quantum of costs and benefits to society of biofuel use. This is partly because considering all costs and benefits of biofuel use would require a more substantial research process than has been possible within the scope of this research. As such, this report should not be taken as the final word on biofuel use but rather as a contribution to a larger set of policy research programmes and initiatives of which the cost effectiveness of biofuel targets is a small part.
In our analysis we find that biodiesel is the least cost biofuel for meeting the government's renewable transport fuel target. A mandatory biodiesel blend of 3% of diesel would deliver 2.15 PJ of renewable fuel use in the transport sector by 2012. We estimate the net present value to consumers of such a requirement would be positive with the cost to consumers amounting to $378,000, against a benefit from CO2 emission reductions of $10,127,000.
The cost to the economy overall would in fact be higher than this due to resource allocation distortions valued at $106 million in present value terms (approximately 0.02% of GDP). However, without further analysis it is not possible to say whether any of this cost is a net cost to the New Zealand economy. It is quite possible that additional benefits from biofuel use, such as environmental benefits from mitigated atmospheric pollution, would offset this cost. Our research would be enhanced by further study in New Zealand into the full quantum of benefits (environmental, social, cultural, and economic) from biofuel use.
The results of a requirement to blend ethanol with petrol, in the absence of resource allocation costs, would also be positive. However, the costs would be greater than for biodiesel. For example, assuming no loss in fuel efficiency a 3% ethanol/petrol blend requirement would reduce consumer welfare by $3.4 million in present value terms compared with a benefit from CO2 emission reductions of $9.7 million. Resource allocation distortions are also larger at around $192 million (between 0.01% and 0.04% of GDP between 2006 and 2012).
If we factor volumetric fuel efficiency losses into the price of ethanol, the benefits from CO2 reductions decrease and the cost to consumers increases. A 3% ethanol/petrol blend would result in a $5.8 million reduction in consumer welfare and $9.5 million in benefits from reduced CO2 emissions. Similarly resource allocation distortions increase to $314 million.
In addition to the costs that ethanol/petrol blends impart on the economy over and above those in the case of biodiesel blends, ethanol/petrol blends do not have the same pollutant reduction qualities of biodiesel. This is partly because the conventional alternative to ethanol (i.e. petrol), produces less harmful emissions than diesel fuels which would be displaced by biodiesel. As a result, the cost of reducing vehicle emissions through biofuel blends is higher per tonne of emission reduced in the case of ethanol blends compared with biodiesel blends. In the case of emissions of particulate matter (the emissions which produce the vast majority of costs to human health) the cost of each tonne reduced from ethanol blends is typically hundreds of times greater than cost per tonne of emissions reduced from biodiesel blends.
Ethanol/petrol blends would also deliver less renewable fuel use compared with biodiesel. A 3% ethanol/petrol blend requirement would see 2.05 PJ of renewable fuel use by 2012, compared with 2.15 PJ of renewable fuel use in the case of a 3% biodiesel/diesel blend requirement. As such, biodiesel/diesel blends appear a more desirable biofuel choice than ethanol/petrol blends if the government was to institute a requirement for biofuel blends in transport fuels.
Though ethanol blends are more costly than biodiesel blends, ethanol production is increasing rapidly worldwide. Thus, New Zealand would be able to import ethanol to meet just about any level of ethanol/petrol blend desired by the government and a small amount of ethanol could be sourced domestically.
Conversely, global biodiesel production is small and additional domestic production facilities would need to be constructed to supply biodiesel/diesel blends at any percentage blend level. As a result blends over 3% are not likely to be feasible out to 2012 because of uncertainty over supply of biodiesel. Indeed, in our view a phasing of required blend levels would be prudent. In addition to this, regulations implementing the blend target would need to have a caveat that while a 3% blend was required, supply side shocks or other production delays could be considered in lowering the required blend percentage.
Installing a mandatory requirement for a given percentage of transport fuel sales to include biofuels would help mitigate supply side issues in the case of biodiesel. It would allow firms to vary their use of biofuel blends based on variable supply constraints. Firms would have the flexibility to use biodiesel or ethanol if supply constraints warranted it or if the cost of either fuel fell considerably. It would also allow fuel suppliers to target biofuel provision in a least cost manner - targeting consumers who are least responsive to price changes and possibly targeting wholesale or bulk consumption.
However, a biofuel sales requirement is likely to see biofuel sales restricted almost exclusively to ethanol over the medium term due to issues around security of supply of biodiesel. If sufficient biodiesel production were to come on line in New Zealand to allow widespread use of biodiesel, then we would still expect a significant portion of biofuel sales to consist of ethanol. Therefore, given the cost of ethanol blends against biodiesel blends, a biofuel sales target would not be a least cost option for reaching the government's target of 2 PJ of renewable fuel use in the transport sector by 2012.
The effect of an imposition of a biofuels requirement on transport fuel suppliers would not adversely impact on competition in the transport fuels industry. Sufficient threats to entry would exist that would prevent biofuel suppliers from seeking uncompetitive prices for their products. However, biofuel suppliers, particularly domestic producers would need to be monitored by regulatory authorities in the same manner in which petroleum fuel suppliers are currently monitored to mitigate collusive anti-competitive behaviour.
Summary of Mandatory Blend Options: Thousands of New Zealand Dollars (2004), PJ Used in 2012, Millions of Litres of Biofuels Required| Option | Consumer welfare loss | Benefit from CO2 reduction | PJ of renewable fuels used in 2012 | Resource Cost | Biofuel required in 2012 | Notes |
|---|
| BD3 | $378 | $10,127 | 2.16 | $139,806 | 59.9 | Biodiesel production may not be sufficient |
|---|
| BD5 | $1,000 | $16,854 | 3.59 | $232,519 | 99.9 | Biodiesel production is not likely to be sufficient |
|---|
| BD5 phased from 2006 | $301 | $7,492 | 3.59 | $106,017 | 99.9 | Biodiesel production may not be sufficient |
|---|
| BD5 phased from 2008 | $235 | $5,369 | 3.59 | $77,369 | 99.86 | |
|---|
| E3 | $5,765 | $9,519 | 2.03 | $314,940 | 85.5 | |
|---|
| E5 | $10,195 | $15,866 | 3.4 | $525,822 | 142.5 | The Motor Industry Association has said its members will not accept anything above E3 |
|---|
| E5 phased from 2006 | $3,991 | $6,970 | 3.4 | $221,208 | 142.5 | |
|---|
| 3% sales target | $5,765 | $9,519 | 2.03 | $314,940 | 85.5 | We expect a sales target to be a de facto E3 target in the medium term. Any biodiesel use would lower these figures |
|---|
| 5% sales target | $10,195 | $15,866 | 3.4 | $525,822 | 142.5 | We expect a sales target to be a de facto E5 target in the medium term. Any biodiesel use would lower these figures. |
|---|
Source: NZIER
Back to Top