The Local Government and Environment Committee has examined the Biofuel Bill and recommends by majority that it be passed with the amendments shown.
Introduction
The Biofuel Bill implements the biofuel sales obligation, updates the regulatory regime for petroleum to incorporate all modern fuels including biofuels, and amends other legislation to provide for the introduction of biofuels and biofuel blends. The bill makes amendments to the Energy (Fuels, Levies, and References) Act 1989, the Customs and Excise Act 1996, the Tariff Act 1998, the Local Government Act 1974, and consequential amendments to a number of other Acts.
The bill includes biodiesel within the Customs regime to allow the collection of the levy and facilitate the administration of the obligation.
We recommend a number of changes to the bill as introduced. This commentary addresses the major issues considered and recommended amendments. It does not discuss minor and technical amendments.
Submissions received
We received 36 submissions on the bill representing a range of interests, including the oil industry, the transport sector, environmental groups, the energy and renewables sector, and the scientific and academic communities. The majority of submitters supported the introduction of a biofuel sales obligation to promote sustainability, security of energy supply, and the reduction of greenhouse gas emissions.
Submitters raised a number of technical and logistical matters regarding the implementation of the obligation. Apart from these, a number of issues emerged repeatedly:
ensuring the standards (including sustainability standards) of qualifying biofuels
the social, economic, and environmental impacts of biofuel production
the actual effect of biofuel production and use on greenhouse gas emissions
costs to and communication with consumers.
Commencement
The bill as introduced provides that clauses 7 and 19 would come into force on 1 July 2008, with the remainder coming into force on 1 April 2008. We recommend that all provisions in the bill should come into force on 1 October 2008.
Obligation levels
The bill as introduced requires petrol and diesel suppliers to also supply biofuels with an initial level of 0.53 percent in 2008 increasing to an upper level of 3.4 percent in 2012. In the bill’s policy development, an upper level of 2.25 percent was consulted on. During the 2006 consultation process, an opportunity was identified for the domestic production of maize ethanol. As a result, the 2012 obligation level was increased to 3.4 percent in the bill as introduced, with a significant rise of 1.67 percent to 3.35 percent occurring between 2010 and 2011.
We received submissions from various parties suggesting that lowering the mandate would mean that suppliers would incur lower costs and that concerns about ensuring the sustainability of qualifying biofuels would be lessened. As the opportunities for domestic maize ethanol production are now unlikely to occur in the initial obligation period, we recommend that the mandate be amended to begin on 0.5 percent in 2008, increasing annually by 0.5 percent to a level of 2.5 percent in 2012.
We were advised that the level of 2.5 percent by 2012 could be met through domestic production. We note that Gull has already sold an amount equal to its first-year obligation.
Sustainability of qualifying biofuels
There has been much discussion internationally and in New Zealand about the effects of biofuel production and use, what biofuel sustainability actually means, and how it can be determined. A major challenge in our consideration was to ensure that only biofuels that are truly sustainable would qualify for inclusion in the biofuel sales obligation.
We recommend amending the purpose provision, new section 34A, as inserted by clause 9, of the Energy (Fuels, Levies, and References) Act relating to the biofuel sales obligation. The word “sustainable” should be inserted, so that it reads: “The purpose of this part is to ensure that sustainable biofuels are supplied in New Zealand.”
Principles
Biofuels are commonly perceived as carbon-reducing substitutes for fossil fuels, with the carbon they release as they are burned in engines being offset by that absorbed into the atmosphere as the crops grow. But certain factors, including energy used to produce the fuels, cultivation time, and dedication of existing fields to the production of biofuel crops, mean that reductions vary significantly and a biofuel may create more greenhouse gas emissions than it saves over its life-cycle. When specifying required minimum reductions in emissions for biofuels relative to petroleum-based fuel, we were advised that the measured percentage reduction can vary greatly depending on the methodology used.
Another major concern regarding sustainable biofuel production is competition for arable land with food production. Worldwide arable land is a scarce resource. Biofuels may be grown on the best quality land, leaving cereals and other food crops to lower-quality land. In her submission to the committee, the Parliamentary Commissioner for the Environment noted further concerns about food security: many first-generation biofuels that utilise feedstocks such as soy, corn, sugarcane, and rapeseed may compete directly with food and animal feed. We note that there is concern here and internationally about subsidies and protective tariff policies for biofuels in the United States, and their impact on the availability of certain food crops for human consumption.
We are also concerned about the impact on biodiversity of conversion of land from native forest, food crops, or other current uses to biofuel production. For example, a native forest might be cleared to either grow biofuel crops or to grow food crops displaced by biofuel crops.
We recommend the insertion of new section 34GA to the Energy (Fuels, Levies, and References) Act, as inserted by clause 9 of the bill. Under new section 34GA(1), the Minister of Energy would have to recommend, as soon as practicable after the section came into force, an Order in Council which would specify the criteria for biofuels to be included in the biofuel sales obligation. Before making the Order in Council, the Minister would have to be satisfied that the Order ensured that qualifying biofuels were sustainable, that it appropriately considered the indirect effects of biofuel production, and that it was consistent with the three principles of sustainable biofuels established in new section 34GA(3).
We accordingly recommend that the following principles of sustainable biofuels be inserted into the bill:
that they must emit significantly less greenhouse gas over their lifecycles than fossil fuels
that they must not compete with food production or be produced using land of high value for food production
that their production must not reduce indigenous biodiversity or adversely affect land with high conservation values.
In order to clearly signal the sources of biofuel associated with food production that we believe should count towards the obligation, we recommend that the bill state that the following biofuels do not contravene the second sustainability principle, regarding competition with food production:
by-products of food production described in the Order in Council
ethanol from sugarcane grown in circumstances and areas described in the Order in Council
rotational oilseed crops grown not more than 12 months in any 24-month period on the same land, or as otherwise specified in the Order in Council.
In addition we recommend, under new section 34GA(3), that the Minister’s Order in Council would have to specify various matters in relation to the three sustainability principles:
a methodology to assess lifecycle greenhouse gas emissions from engine fuels
minimum levels of greenhouse gas emission reductions for qualifying biofuels relative to fossil fuels, which must be no less than 35 percent
a methodology to assess the effect of the production of a biofuel on food production and for assessing whether those effects amount to competition
a mechanism for recognising particular land (including land outside New Zealand) as having high value for food production
a mechanism for recognising particular land (including land outside New Zealand) as having high conservation value
a methodology for assessing the effects of the production of a biofuel on indigenous biodiversity and on land of high conservation value.
If an Order in Council were not recommended by 30 June 2009, proposed new subsection 34GA(4) would require the Minister to report to the House of Representatives explaining why he or she had not recommended that such an order be made, explaining any alternative methods of ensuring that qualifying biofuels are sustainable, and indicating the time within which the Minister would make his or her recommendation.
While the principles would only apply when the Order in Council is made, we believe their inclusion in the bill would send a clear signal to obliged persons as to which biofuels were acceptable.
Information to be supplied by obliged persons
Clause 12 amends current section 36 of the Energy (Fuels, Levies, and References) Act, which empowers the Minister of Energy to request any specified information at any time about engine fuel (which includes biofuels). We recommend that the type of information that may be required be expanded to reflect the insertion of sustainability principles into the bill. For this purpose, information to be supplied might include, amongst other matters, the source of the biofuel, the process by which it was produced, its qualities, its intended end use, and its consistency with the sustainability principles outlined in new section 34GA(3).
The bill provides for the making of entitlement agreements, under which an obliged person can become entitled to count the ownership of another person’s qualifying biofuel. We recommend that the type of prescribed information that can be specified in an entitlement agreement, as provided in new section 34R(3), be similarly expanded for consistency with the recommended amendments to clause 12.
Domestic biofuel industry
We are aware that the biofuel industry in New Zealand is developing rapidly and believe that the implementation of the biofuel sales obligation sends an important signal that the domestic production of biofuels should be promoted and supported.
First-generation biofuels are proven and in current production around the world in commercial quantities. They are mostly produced from food-related feedstocks or wastes, typically biodiesel from pure plant oil or tallow, sugarcane ethanol, or starch-based or corn ethanol. Second generation biofuels are commercially unproven. They are typically derived from non food-related agricultural and forest biomass, algae and wastes. Some can be grown on marginal land.
Major oil companies suggested that they would have difficulty accessing the volume of biofuel required to meet the 3.4 per cent obligation specified in the bill as introduced, which would require up to eight petajoules of biofuel. The potential for domestic production over the period to 2012 of up to four petajoules of biodiesel from tallow, around two petajoules of biodiesel from rapeseed, and 0.3 PJ of ethanol (mainly whey) has been identified. Some companies are already producing modest amounts of biodiesel and ethanol domestically and we were told in submissions that there are a number of companies interested in investing in New Zealand for biofuel production (mainly biodiesel), but some investment decisions would rely on the outcome of this bill.
Officials advised that if the various domestic biofuel production projects in development progress to completion, the obligation could be met from domestic supply, especially as we now recommend that the 2012 obligation level be lowered to 2.5 percent. However, we recognise that imported bioethanol is probably the most cost-effective supply option for oil companies at present, and that bioethanol inevitably represents the main focus of their current policy on biofuels.
Excise treatment of biodiesel and bioethanol
We remain concerned that the bill maintains the existing excise regime for biodiesel and fuel ethanol, and thus provides an advantage to the latter because fuel ethanol, including imported ethanol, is exempt from New Zealand excise tax. The exemption effectively represents a subsidy for ethanol and submitters told us that this is likely to undermine support for biodiesel, which is currently the most commercially available biofuel produced in New Zealand.
We considered various options for levelling the comparative advantage of ethanol over biodiesel, including
imposing excise on fuel ethanol
providing some kind of refund for the use of biodiesel in vehicles subject to road user charges
providing an appropriate level of subsidy for biodiesels.
We believe that there is merit in each of these options but accept that they have implications beyond this bill and should be the subject of further policy development and consultation.
We note that the Government intends to examine the relative tax treatments of biodiesel and ethanol in its 2010 review of the biofuels obligation policy. We believe that this review will be very important for ensuring that secure and sustainable energy sources are encouraged in New Zealand. We strongly recommend that the scope of the review be broadened to consider the relative tax treatment of all engine fuels, including LPG, CNG, and electric cars, and recommend that the tax advantage currently enjoyed by ethanol be removed at this time.
Impact on the cost of fuel
Given the current high levels of fuel prices and the volatility of fuel markets, we believe it is important that the possible impact of the biofuel sales obligation on consumers is understood.
Submissions from oil companies and biofuel producers revealed a range of views on the anticipated costs of introducing biofuel blends. One estimated that B5 biodiesel could be up to 6 cents per litre more expensive than diesel, but that E10 ethanol could be up to 4 cents per litre cheaper than petrol on the basis of fuel costs and not including infrastructure costs. Other estimates of prices for B5 were that it could be between 0 and 1.7 cents per litre more expensive than mineral diesel or up to 4.5 cents per litre more expensive.
Officials advised that the extent to which the obligation may increase fuel prices at the pump is determined by the required infrastructure investments and the relative costs of biofuels in comparison with petrol and diesel.
Some oil companies informed us that distributional infrastructure investments required to meet the original obligation of 3.4 percent would be in the range of $50–100 million. This would equate to approximately 0.2 to 0.4 cents per litre if fully recovered over the 2008–2012 period.
Actual costs of fuel following the implementation of the biofuel sales obligation would depend on number of factors, including
the cost of oil
the cost of biofuels
how oil companies decide to implement the obligation
the price of the New Zealand dollar
the level of competition in the market.
Further suggested amendments
We received a number of supplementary submissions from the major oil companies suggesting further amendments to the bill to address various technical compliance issues. The main issues of concern were:
the point of removal for home consumption (the point at which the relevant duty for imported fuels and fuels manufactured in New Zealand is payable), from the current point of import or refinery to the terminal gate
the requirement that blending of biofuel blends take place in a licensed manufacturing area
the excise-equivalent duty that applies to imports of undenatured ethanol
changes to the assessment point for the fuel monitoring levy.
We were advised that these matters are continuing to be discussed by officials and industry.
Annual returns
The bill as introduced requires a person subject to the biofuel sales obligation to file an annual return, which provides calculations of the amounts of biofuel an obliged person is required to sell, the amount of actual qualifying biofuel sold, and any information prescribed in regulations.
We recommend the insertion of new section 34U(2)(b), as inserted by clause 9, to require obliged persons to provide information in their annual returns on the sustainability of the biofuels supplied towards the obligation.
We recommend the insertion of new clause 34U(3) to require that an obliged person must file a replacement annual return within four months of becoming aware that an annual return it has filed is incorrect or incomplete. Failure to do so would be an offence with the same penalty as other offences related to the filing of annual returns.
Civil penalties
New sections 34W and 34X establish the civil penalties and procedures that would apply when an obliged person’s actual amount of qualifying biofuel failed to equal or exceeded their required amount (34W), or a person’s actual amount of a class of qualifying biofuel did not equal or exceed the required amount (34X).
The requirement to file an annual return also has implications for the time within which an application to a court seeking a civil penalty must be made.
The bill as introduced states that an application is to be made within two years of the date the annual return should have been filed. We recommend that the commencement of the limitation period be set at the latest of the date on which an annual return should have been filed, the date on which a revised return should have been filed, or the date on which an obliged person would be convicted of an offence under new section 34U in relation to that year’s annual return.
We also recommend that new sections 34W(5) and 34X(6) be amended to extend the limitation period within which an application for a civil penalty must be made. We recommend that the limitation period be three years, which we believe would provide sufficient time to discover, investigate, and respond to a breach or potential breach.
National Party minority view
The biofuels policy provided for in this bill fails to heed the widespread international concern about mandatory sales obligations, and particularly their effect on food supply and biodiversity, and recent research showing minimal real reductions in greenhouse gas emissions.
National is concerned that in proceeding with this bill, the Government is ignoring the advice of the OECD Roundtable on Sustainable Development, the UK House of Commons Environmental Audit Committee Report, the G8 Conference of Legislators, the UK Chief Scientist, the World Food Organisation, the Royal Society, the World Bank and the United Nations Secretary General all of whom have expressed serious concerns about biofuels.
National is particularly concerned that the advice of New Zealand’s Parliamentary Commissioner for the Environment that the bill not proceed, is being ignored. This advice notes that biofuels pose a risk to New Zealand’s clean green image. The Commissioner wisely notes the huge difficulty and cost in verifying the sustainability of imported biofuels and the risk of monopoly pricing associated with mandating a limited domestic supply.
The committee attempted to resolve the issues over food supply, biodiversity and the questionable reductions in emissions by requiring “sustainable” biofuels. Legislators have been struggling with the definition of sustainability for twenty years and the committee has been no more successful in giving it clear and precise meaning. The committee has opted to pass the problem on to officials who are to resolve this fundamental issue through regulations. Officials are being given a hospital pass.
Officials initially told the committee that setting a sustainability standard would take until 2011. This is consistent with the European timeline for developing their biofuel sustainability standard. This timeline is not surprising given how complex it is to define and measure direct and indirect effects on emissions, food supply and biodiversity. The assumption in the bill that New Zealand is able to quickly resolve this, despite years of angst in far larger countries, is naive and unwise.
The Bill is seriously flawed in its timing. The biofuels sales obligation is to take effect on 1 October 2008, yet the sustainability standard will not come into effect, at the earliest, until 1 July 2009. There is no guarantee it will come into effect then, as all the bill requires is for the Minister to notify the House by 30 June 2009 as to why a sustainability standard for biofuels has not been implemented. National is sure, whoever becomes the next Government, that this cannot be done properly in the timeframe of the bill.
It is madness that the mandatory sales obligation comes into effect before the regulations defining sustainable biofuels. Climate change is a long-term issue. The bill is only requiring 0.5 percent of biofuels for the first year, and the environmental benefits are negligible. National can only conclude that this deliberate placing of the cart before the horse is for political reasons.
The major problem of proceeding with the requirement for biofuels before the standards are set is that expensive investments in infrastructure have to be made without knowing the rules of what fuels from what sources are to be acceptable under the legislation. National attempted to advance a simple amendment that required the standards to be set before the mandatory sales obligations could take effect but this was not successful.
A further mess in the policy is the incentive to use ethanol over biodiesel to meet the mandatory sales obligation. Ethanol has no greater environmental benefit than biodiesel yet receives a 42 cents per litre advantage, being exempt from excise tax. These two fuels should be treated equally and this should be resolved prior to fuel suppliers making long term investments in meeting their biofuels obligations. Instead this problem is being deferred until 2012.
National’s final concern is cost. Officials advised that every cent per litre on fuel costs New Zealanders an additional $60 million per year. At a time when families are under extreme budgetary pressure from rising food, housing and energy costs, Parliament needs to be very sure that any additional costs are well justified. It also needs to consider the wider economic effects of contributing to inflationary pressures.
Submitters’ estimates on the cost of this bill ranged from biofuel suppliers of 1.5 cents per litre to fuel companies’ estimates of 7 cents per litre. A midrange figure of 4 cents per litre is reasonable and amounts to a $240-million-per-year cost to the economy. This annual cost is significantly out of step with the amounts being spent on greenhouse gas emissions from animals ($5 million per year), solar water heating ($4 million per year), geothermal energy ($1 million per year), and tidal energy ($1 million per year).
National also notes that this biofuels policy contradicts the underlying principles of an emissions trading scheme (ETS). The scheme will equally assist carbon emission reductions across various sectors and does not play favourites. When implemented, an ETS will give further price advantage to biofuels and we question why biofuels justify double assistance from an ETS as well as a biofuels sales obligation. This point is particularly relevant when fossil fuels have increased so dramatically in price over the past six months, substantially improving the economic viability of biofuels.
National concludes that this Biofuel Bill is very poor public policy. It has high costs for small, if any, environmental benefits. There is no certainty that the sustainability issues can be resolved. It is irresponsible to be proceeding with the compulsory biofuels requirement ahead of implementing the necessary regulations. National strongly opposes the passage of this bill.
Appendix
Committee process
The Biofuel Bill was referred to the committee on 16 October 2007. The closing date for submissions was 31 January 2008. We received and considered 36 submissions from interested groups and individuals. We heard 24 submissions.
We received advice from the Ministry of Economic Development.
Committee membership
Moana Mackey (Chairperson) (from 7 November 2007)
John Carter (Deputy Chairperson)
Hon David Benson-Pope (from 7 November 2007)
Mark Blumsky
Hon Mark Burton (from 7 November 2007 until 2 April 2008)
Commentary
Recommendation
The Local Government and Environment Committee has examined the Biofuel Bill and recommends by majority that it be passed with the amendments shown.
Introduction
The Biofuel Bill implements the biofuel sales obligation, updates the regulatory regime for petroleum to incorporate all modern fuels including biofuels, and amends other legislation to provide for the introduction of biofuels and biofuel blends. The bill makes amendments to the Energy (Fuels, Levies, and References) Act 1989, the Customs and Excise Act 1996, the Tariff Act 1998, the Local Government Act 1974, and consequential amendments to a number of other Acts.
The bill includes biodiesel within the Customs regime to allow the collection of the levy and facilitate the administration of the obligation.
We recommend a number of changes to the bill as introduced. This commentary addresses the major issues considered and recommended amendments. It does not discuss minor and technical amendments.
Submissions received
We received 36 submissions on the bill representing a range of interests, including the oil industry, the transport sector, environmental groups, the energy and renewables sector, and the scientific and academic communities. The majority of submitters supported the introduction of a biofuel sales obligation to promote sustainability, security of energy supply, and the reduction of greenhouse gas emissions.
Submitters raised a number of technical and logistical matters regarding the implementation of the obligation. Apart from these, a number of issues emerged repeatedly:
ensuring the standards (including sustainability standards) of qualifying biofuels
the social, economic, and environmental impacts of biofuel production
the actual effect of biofuel production and use on greenhouse gas emissions
costs to and communication with consumers.
Commencement
The bill as introduced provides that clauses 7 and 19 would come into force on 1 July 2008, with the remainder coming into force on 1 April 2008. We recommend that all provisions in the bill should come into force on 1 October 2008.
Obligation levels
The bill as introduced requires petrol and diesel suppliers to also supply biofuels with an initial level of 0.53 percent in 2008 increasing to an upper level of 3.4 percent in 2012. In the bill’s policy development, an upper level of 2.25 percent was consulted on. During the 2006 consultation process, an opportunity was identified for the domestic production of maize ethanol. As a result, the 2012 obligation level was increased to 3.4 percent in the bill as introduced, with a significant rise of 1.67 percent to 3.35 percent occurring between 2010 and 2011.
We received submissions from various parties suggesting that lowering the mandate would mean that suppliers would incur lower costs and that concerns about ensuring the sustainability of qualifying biofuels would be lessened. As the opportunities for domestic maize ethanol production are now unlikely to occur in the initial obligation period, we recommend that the mandate be amended to begin on 0.5 percent in 2008, increasing annually by 0.5 percent to a level of 2.5 percent in 2012.
We were advised that the level of 2.5 percent by 2012 could be met through domestic production. We note that Gull has already sold an amount equal to its first-year obligation.
Sustainability of qualifying biofuels
There has been much discussion internationally and in New Zealand about the effects of biofuel production and use, what biofuel sustainability actually means, and how it can be determined. A major challenge in our consideration was to ensure that only biofuels that are truly sustainable would qualify for inclusion in the biofuel sales obligation.
We recommend amending the purpose provision, new section 34A, as inserted by clause 9, of the Energy (Fuels, Levies, and References) Act relating to the biofuel sales obligation. The word “sustainable” should be inserted, so that it reads: “The purpose of this part is to ensure that sustainable biofuels are supplied in New Zealand.”
Principles
Biofuels are commonly perceived as carbon-reducing substitutes for fossil fuels, with the carbon they release as they are burned in engines being offset by that absorbed into the atmosphere as the crops grow. But certain factors, including energy used to produce the fuels, cultivation time, and dedication of existing fields to the production of biofuel crops, mean that reductions vary significantly and a biofuel may create more greenhouse gas emissions than it saves over its life-cycle. When specifying required minimum reductions in emissions for biofuels relative to petroleum-based fuel, we were advised that the measured percentage reduction can vary greatly depending on the methodology used.
Another major concern regarding sustainable biofuel production is competition for arable land with food production. Worldwide arable land is a scarce resource. Biofuels may be grown on the best quality land, leaving cereals and other food crops to lower-quality land. In her submission to the committee, the Parliamentary Commissioner for the Environment noted further concerns about food security: many first-generation biofuels that utilise feedstocks such as soy, corn, sugarcane, and rapeseed may compete directly with food and animal feed. We note that there is concern here and internationally about subsidies and protective tariff policies for biofuels in the United States, and their impact on the availability of certain food crops for human consumption.
We are also concerned about the impact on biodiversity of conversion of land from native forest, food crops, or other current uses to biofuel production. For example, a native forest might be cleared to either grow biofuel crops or to grow food crops displaced by biofuel crops.
We recommend the insertion of new section 34GA to the Energy (Fuels, Levies, and References) Act, as inserted by clause 9 of the bill. Under new section 34GA(1), the Minister of Energy would have to recommend, as soon as practicable after the section came into force, an Order in Council which would specify the criteria for biofuels to be included in the biofuel sales obligation. Before making the Order in Council, the Minister would have to be satisfied that the Order ensured that qualifying biofuels were sustainable, that it appropriately considered the indirect effects of biofuel production, and that it was consistent with the three principles of sustainable biofuels established in new section 34GA(3).
We accordingly recommend that the following principles of sustainable biofuels be inserted into the bill:
that they must emit significantly less greenhouse gas over their lifecycles than fossil fuels
that they must not compete with food production or be produced using land of high value for food production
that their production must not reduce indigenous biodiversity or adversely affect land with high conservation values.
In order to clearly signal the sources of biofuel associated with food production that we believe should count towards the obligation, we recommend that the bill state that the following biofuels do not contravene the second sustainability principle, regarding competition with food production:
by-products of food production described in the Order in Council
ethanol from sugarcane grown in circumstances and areas described in the Order in Council
rotational oilseed crops grown not more than 12 months in any 24-month period on the same land, or as otherwise specified in the Order in Council.
In addition we recommend, under new section 34GA(3), that the Minister’s Order in Council would have to specify various matters in relation to the three sustainability principles:
a methodology to assess lifecycle greenhouse gas emissions from engine fuels
minimum levels of greenhouse gas emission reductions for qualifying biofuels relative to fossil fuels, which must be no less than 35 percent
a methodology to assess the effect of the production of a biofuel on food production and for assessing whether those effects amount to competition
a mechanism for recognising particular land (including land outside New Zealand) as having high value for food production
a mechanism for recognising particular land (including land outside New Zealand) as having high conservation value
a methodology for assessing the effects of the production of a biofuel on indigenous biodiversity and on land of high conservation value.
If an Order in Council were not recommended by 30 June 2009, proposed new subsection 34GA(4) would require the Minister to report to the House of Representatives explaining why he or she had not recommended that such an order be made, explaining any alternative methods of ensuring that qualifying biofuels are sustainable, and indicating the time within which the Minister would make his or her recommendation.
While the principles would only apply when the Order in Council is made, we believe their inclusion in the bill would send a clear signal to obliged persons as to which biofuels were acceptable.
Information to be supplied by obliged persons
Clause 12 amends current section 36 of the Energy (Fuels, Levies, and References) Act, which empowers the Minister of Energy to request any specified information at any time about engine fuel (which includes biofuels). We recommend that the type of information that may be required be expanded to reflect the insertion of sustainability principles into the bill. For this purpose, information to be supplied might include, amongst other matters, the source of the biofuel, the process by which it was produced, its qualities, its intended end use, and its consistency with the sustainability principles outlined in new section 34GA(3).
The bill provides for the making of entitlement agreements, under which an obliged person can become entitled to count the ownership of another person’s qualifying biofuel. We recommend that the type of prescribed information that can be specified in an entitlement agreement, as provided in new section 34R(3), be similarly expanded for consistency with the recommended amendments to clause 12.
Domestic biofuel industry
We are aware that the biofuel industry in New Zealand is developing rapidly and believe that the implementation of the biofuel sales obligation sends an important signal that the domestic production of biofuels should be promoted and supported.
First-generation biofuels are proven and in current production around the world in commercial quantities. They are mostly produced from food-related feedstocks or wastes, typically biodiesel from pure plant oil or tallow, sugarcane ethanol, or starch-based or corn ethanol. Second generation biofuels are commercially unproven. They are typically derived from non food-related agricultural and forest biomass, algae and wastes. Some can be grown on marginal land.
Major oil companies suggested that they would have difficulty accessing the volume of biofuel required to meet the 3.4 per cent obligation specified in the bill as introduced, which would require up to eight petajoules of biofuel. The potential for domestic production over the period to 2012 of up to four petajoules of biodiesel from tallow, around two petajoules of biodiesel from rapeseed, and 0.3 PJ of ethanol (mainly whey) has been identified. Some companies are already producing modest amounts of biodiesel and ethanol domestically and we were told in submissions that there are a number of companies interested in investing in New Zealand for biofuel production (mainly biodiesel), but some investment decisions would rely on the outcome of this bill.
Officials advised that if the various domestic biofuel production projects in development progress to completion, the obligation could be met from domestic supply, especially as we now recommend that the 2012 obligation level be lowered to 2.5 percent. However, we recognise that imported bioethanol is probably the most cost-effective supply option for oil companies at present, and that bioethanol inevitably represents the main focus of their current policy on biofuels.
Excise treatment of biodiesel and bioethanol
We remain concerned that the bill maintains the existing excise regime for biodiesel and fuel ethanol, and thus provides an advantage to the latter because fuel ethanol, including imported ethanol, is exempt from New Zealand excise tax. The exemption effectively represents a subsidy for ethanol and submitters told us that this is likely to undermine support for biodiesel, which is currently the most commercially available biofuel produced in New Zealand.
We considered various options for levelling the comparative advantage of ethanol over biodiesel, including
imposing excise on fuel ethanol
providing some kind of refund for the use of biodiesel in vehicles subject to road user charges
providing an appropriate level of subsidy for biodiesels.
We believe that there is merit in each of these options but accept that they have implications beyond this bill and should be the subject of further policy development and consultation.
We note that the Government intends to examine the relative tax treatments of biodiesel and ethanol in its 2010 review of the biofuels obligation policy. We believe that this review will be very important for ensuring that secure and sustainable energy sources are encouraged in New Zealand. We strongly recommend that the scope of the review be broadened to consider the relative tax treatment of all engine fuels, including LPG, CNG, and electric cars, and recommend that the tax advantage currently enjoyed by ethanol be removed at this time.
Impact on the cost of fuel
Given the current high levels of fuel prices and the volatility of fuel markets, we believe it is important that the possible impact of the biofuel sales obligation on consumers is understood.
Submissions from oil companies and biofuel producers revealed a range of views on the anticipated costs of introducing biofuel blends. One estimated that B5 biodiesel could be up to 6 cents per litre more expensive than diesel, but that E10 ethanol could be up to 4 cents per litre cheaper than petrol on the basis of fuel costs and not including infrastructure costs. Other estimates of prices for B5 were that it could be between 0 and 1.7 cents per litre more expensive than mineral diesel or up to 4.5 cents per litre more expensive.
Officials advised that the extent to which the obligation may increase fuel prices at the pump is determined by the required infrastructure investments and the relative costs of biofuels in comparison with petrol and diesel.
Some oil companies informed us that distributional infrastructure investments required to meet the original obligation of 3.4 percent would be in the range of $50–100 million. This would equate to approximately 0.2 to 0.4 cents per litre if fully recovered over the 2008–2012 period.
Actual costs of fuel following the implementation of the biofuel sales obligation would depend on number of factors, including
the cost of oil
the cost of biofuels
how oil companies decide to implement the obligation
the price of the New Zealand dollar
the level of competition in the market.
Further suggested amendments
We received a number of supplementary submissions from the major oil companies suggesting further amendments to the bill to address various technical compliance issues. The main issues of concern were:
the point of removal for home consumption (the point at which the relevant duty for imported fuels and fuels manufactured in New Zealand is payable), from the current point of import or refinery to the terminal gate
the requirement that blending of biofuel blends take place in a licensed manufacturing area
the excise-equivalent duty that applies to imports of undenatured ethanol
changes to the assessment point for the fuel monitoring levy.
We were advised that these matters are continuing to be discussed by officials and industry.
Annual returns
The bill as introduced requires a person subject to the biofuel sales obligation to file an annual return, which provides calculations of the amounts of biofuel an obliged person is required to sell, the amount of actual qualifying biofuel sold, and any information prescribed in regulations.
We recommend the insertion of new section 34U(2)(b), as inserted by clause 9, to require obliged persons to provide information in their annual returns on the sustainability of the biofuels supplied towards the obligation.
We recommend the insertion of new clause 34U(3) to require that an obliged person must file a replacement annual return within four months of becoming aware that an annual return it has filed is incorrect or incomplete. Failure to do so would be an offence with the same penalty as other offences related to the filing of annual returns.
Civil penalties
New sections 34W and 34X establish the civil penalties and procedures that would apply when an obliged person’s actual amount of qualifying biofuel failed to equal or exceeded their required amount (34W), or a person’s actual amount of a class of qualifying biofuel did not equal or exceed the required amount (34X).
The requirement to file an annual return also has implications for the time within which an application to a court seeking a civil penalty must be made.
The bill as introduced states that an application is to be made within two years of the date the annual return should have been filed. We recommend that the commencement of the limitation period be set at the latest of the date on which an annual return should have been filed, the date on which a revised return should have been filed, or the date on which an obliged person would be convicted of an offence under new section 34U in relation to that year’s annual return.
We also recommend that new sections 34W(5) and 34X(6) be amended to extend the limitation period within which an application for a civil penalty must be made. We recommend that the limitation period be three years, which we believe would provide sufficient time to discover, investigate, and respond to a breach or potential breach.
National Party minority view
The biofuels policy provided for in this bill fails to heed the widespread international concern about mandatory sales obligations, and particularly their effect on food supply and biodiversity, and recent research showing minimal real reductions in greenhouse gas emissions.
National is concerned that in proceeding with this bill, the Government is ignoring the advice of the OECD Roundtable on Sustainable Development, the UK House of Commons Environmental Audit Committee Report, the G8 Conference of Legislators, the UK Chief Scientist, the World Food Organisation, the Royal Society, the World Bank and the United Nations Secretary General all of whom have expressed serious concerns about biofuels.
National is particularly concerned that the advice of New Zealand’s Parliamentary Commissioner for the Environment that the bill not proceed, is being ignored. This advice notes that biofuels pose a risk to New Zealand’s clean green image. The Commissioner wisely notes the huge difficulty and cost in verifying the sustainability of imported biofuels and the risk of monopoly pricing associated with mandating a limited domestic supply.
The committee attempted to resolve the issues over food supply, biodiversity and the questionable reductions in emissions by requiring “sustainable” biofuels. Legislators have been struggling with the definition of sustainability for twenty years and the committee has been no more successful in giving it clear and precise meaning. The committee has opted to pass the problem on to officials who are to resolve this fundamental issue through regulations. Officials are being given a hospital pass.
Officials initially told the committee that setting a sustainability standard would take until 2011. This is consistent with the European timeline for developing their biofuel sustainability standard. This timeline is not surprising given how complex it is to define and measure direct and indirect effects on emissions, food supply and biodiversity. The assumption in the bill that New Zealand is able to quickly resolve this, despite years of angst in far larger countries, is naive and unwise.
The Bill is seriously flawed in its timing. The biofuels sales obligation is to take effect on 1 October 2008, yet the sustainability standard will not come into effect, at the earliest, until 1 July 2009. There is no guarantee it will come into effect then, as all the bill requires is for the Minister to notify the House by 30 June 2009 as to why a sustainability standard for biofuels has not been implemented. National is sure, whoever becomes the next Government, that this cannot be done properly in the timeframe of the bill.
It is madness that the mandatory sales obligation comes into effect before the regulations defining sustainable biofuels. Climate change is a long-term issue. The bill is only requiring 0.5 percent of biofuels for the first year, and the environmental benefits are negligible. National can only conclude that this deliberate placing of the cart before the horse is for political reasons.
The major problem of proceeding with the requirement for biofuels before the standards are set is that expensive investments in infrastructure have to be made without knowing the rules of what fuels from what sources are to be acceptable under the legislation. National attempted to advance a simple amendment that required the standards to be set before the mandatory sales obligations could take effect but this was not successful.
A further mess in the policy is the incentive to use ethanol over biodiesel to meet the mandatory sales obligation. Ethanol has no greater environmental benefit than biodiesel yet receives a 42 cents per litre advantage, being exempt from excise tax. These two fuels should be treated equally and this should be resolved prior to fuel suppliers making long term investments in meeting their biofuels obligations. Instead this problem is being deferred until 2012.
National’s final concern is cost. Officials advised that every cent per litre on fuel costs New Zealanders an additional $60 million per year. At a time when families are under extreme budgetary pressure from rising food, housing and energy costs, Parliament needs to be very sure that any additional costs are well justified. It also needs to consider the wider economic effects of contributing to inflationary pressures.
Submitters’ estimates on the cost of this bill ranged from biofuel suppliers of 1.5 cents per litre to fuel companies’ estimates of 7 cents per litre. A midrange figure of 4 cents per litre is reasonable and amounts to a $240-million-per-year cost to the economy. This annual cost is significantly out of step with the amounts being spent on greenhouse gas emissions from animals ($5 million per year), solar water heating ($4 million per year), geothermal energy ($1 million per year), and tidal energy ($1 million per year).
National also notes that this biofuels policy contradicts the underlying principles of an emissions trading scheme (ETS). The scheme will equally assist carbon emission reductions across various sectors and does not play favourites. When implemented, an ETS will give further price advantage to biofuels and we question why biofuels justify double assistance from an ETS as well as a biofuels sales obligation. This point is particularly relevant when fossil fuels have increased so dramatically in price over the past six months, substantially improving the economic viability of biofuels.
National concludes that this Biofuel Bill is very poor public policy. It has high costs for small, if any, environmental benefits. There is no certainty that the sustainability issues can be resolved. It is irresponsible to be proceeding with the compulsory biofuels requirement ahead of implementing the necessary regulations. National strongly opposes the passage of this bill.
Appendix
Committee process
The Biofuel Bill was referred to the committee on 16 October 2007. The closing date for submissions was 31 January 2008. We received and considered 36 submissions from interested groups and individuals. We heard 24 submissions.
We received advice from the Ministry of Economic Development.
Committee membership
Moana Mackey (Chairperson) (from 7 November 2007)
John Carter (Deputy Chairperson)
Hon David Benson-Pope (from 7 November 2007)
Mark Blumsky
Hon Mark Burton (from 7 November 2007 until 2 April 2008)
Hon Steve Chadwick (until 7 November 2007)
Jacqui Dean
Russell Fairbrother (until 7 November 2007)
Martin Gallagher (until 7 November 2007)
Hon Marian Hobbs
Su’a William Sio (from 2 April 2008)
Hon Dr Nick Smith
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