1. Introduction
The Ministry of Economic Development (MED) has requested a report detailing the costs and benefits of mandatory biofuel blends for transport fuels.
MED has asked that three alternatives for mandatory biofuel blends be considered:
- A mandatory percentage of diesel to comprise biodiesel.
- A mandatory percentage of transport fuels to comprise biofuels (biodiesel or some other biofuel).
- A mandatory percentage of transport fuel sales to comprise biofuels.
This report focuses on the use of ethanol and biodiesel blended with petrol and diesel respectively. While these fuels can, under some circumstances, be used on their own and there are other bio-fuels which may be investigated, we have chosen to look entirely at these two fuel blends because on the face of it they represent the most feasible bio-fuel options to meet a renewable fuels target for transport biofuels in New Zealand.
Additional potential elements related to biofuel use, other than mandatory blends, such as fuel quality standards, tax exemptions, and grants or subsidies are not considered in this report.
1.1 Policy Context
The policy context surrounding bio-fuels for transport is articulated in a range of policy initiatives including:
- the Sustainable Development Programme of Action which identifies principles for sustainable development policy and decision-making. Sustainable energy is one of the key action areas with desired outcomes including energy use in New Zealand becoming progressively more efficient and less wasteful, and renewable sources of energy are developed and maximised;
- the New Zealand Transport Strategy which sets out the government's overall vision for the transport sector. One of the objectives of this strategy is ensuring environmental sustainability through reducing local and global environmental effects and shifting from non-renewable to renewable resources;
- climate change, air quality and waste policies which support greater supply of renewable transport energy;
- the National Energy Efficiency and Conservation Strategy which promotes energy efficiency, energy conservation and renewable energy with the objective of moving New Zealand towards a sustainable energy future. It contains an overall target of an additional 30 petajoules (PJ) of consumer energy from renewable sources by 2012 and includes an indicative target of at least 2 PJ per year for transport.
These policy initiatives provide the framework within which biofuel use is being considered by the government. Our consideration of the cost effectiveness of various biofuel targets is but a contribution to this wider body of work. Moreover, ours is but one contribution to work being conducted by officials looking at the costs and benefits of biofuel use in the transport sector (amongst other things).
1.2 Approach
Our over-arching approach to assessing the relative costs and benefits of transport bio-fuel targets is a cost effectiveness framework. Assessing the costs and benefits of renewable energy sources can be confounded by the fact that the full benefits of renewable energies are not likely to be accrued until some time in the future and that the precise nature of these benefits is difficult to forecast. This means that the costs of renewable fuel use in today's terms is often perceived or assessed to be in excess of the benefits. This is where policy intervention is necessary to make a judgement on the desirability of renewable fuel use. As a consequence the focus of this report is on how a renewable fuels target might be achieved, the relative costs, benefits, and implementation issues of different approaches rather than whether renewable transport fuels are valuable in and of themselves.
Within our cost-effectiveness framework, our analytical approach is both quantitative and qualitative. In the case of quantitative analysis we utilise a partial equilibrium framework to assess the relative costs and benefits of various mandatory bio-fuel blends. In this part of the report we assess the costs to consumers and to the economy, in dollar terms, of instituting mandatory biofuel blend requirements. We then compare these costs against the quantifiable benefits of reductions in greenhouse gas emissions and derive a net present value of the benefits (positive or negative) for various fuel types and blend percentage scenarios.
Time constraints on the production of this report mean that we have not been able to fully explore all of the economic issues around biofuel use. In particular we have not fully assessed the impact on industry of implementing biofuel blend requirements. To do so would require greater time and resources necessary to use a general equilibrium model of the New Zealand economy. That said, through the paper we provide a qualitative assessment of the effects of mandatory biofuel blends on industry and other areas of the economy.
The scope of our brief and time available also mean that we have not considered the full quantum of social, environmental, and cultural costs and benefits associated with biofuel use. In our view these are important and best investigated within a more comprehensive and resource intensive research process than the one which underpins this study.
In our analysis we have relied heavily on existing literature regarding the unit costs and technical feasibility of bio-fuels. We are especially indebted to the work of Duncan and Copeland (2004) and have drawn on their estimates of the non feed stock costs of ethanol and biodiesel use and their estimates of reductions in vehicle emissions from biofuel use.
Our report begins by outlining the nature of biodiesel and ethanol as biofuels. We sketch briefly the relative merits of each type of biofuel and provide an assessment of the likely impact of these biofuels on transport fuel prices, taking into account the probable unit costs of producing each type of fuel. We also discuss issues around the supply of each biofuel.
Section 4 of the report discusses our partial equilibrium framework for analysing the impacts of ethanol and biodiesel blends. Section 5 provides the results of our analysis in terms of costs of biofuel blends to consumers and to allocative efficiency in the economy compared against the benefits of reductions in CO2 emissions from combustion of transport fuels.
In section 6 we provide a method for assessing the cost effectiveness of biofuel blends in reducing non-CO2 vehicle emissions. In that context we also provide an analysis of the relative allocative distortions arising in the economy from mandatory biofuel blends.
Following from our largely quantitative analysis we discuss potential for biofuel blends to be mandated on a per-sales basis, rather than a percentage of fuel basis. We then discuss additional costs and benefits of mandatory biofuel blends which are not included in the partial equilibrium framework.
Section 9 provides our assessment of potential competition issues arising in the transport fuels supply industry.
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