A move to full scale biofuel production in Australia - as has happened in other countries - offers many opportunities to Australian agriculture, but also some risks. This report by CSIRO was commissioned by RIRDC with the National Farmers' Federation to provide information which would enable an assessment of the levels of risks and opportunities - now and into the future. This report reviews and compiles available published data from a broad range of sources as well as new CSIRO data.

Findings related to the following central questions are summarised in this report:

• What are the drivers for a biofuel industry? To what extent can biofuels:
• reduce greenhouse emissions?
• provide for fuel security?
• provide land and water benefits?
• improve human health?
• provide benefits to regional Australia?
• What is the nature of feedstocks for biofuel production - now and in the future?
• Will there be competition for crops with alternative markets?
• Will there be impacts on the livestock industry?
• What are the sustainability issues for biofuels?
• How comparable are biodiesel and ethanol to fuel reference standards?
• What infrastructure is currently in place for biofuel production? What infrastructure would be required in the future?
• Which policies affect biofuels?
• How can demand for biofuels be expanded?
• Are there options for encouraging future capital investment?

Each of these questions corresponds to a chapter in the report that examines in more detail the scale of the current industry, future potential, state, national, international contexts, and major unknowns that will require future research.

Addressing the drivers of change
Greenhouse gas emissions

• The greenhouse gas benefits obtained from a renewable fuel such as ethanol or biodiesel are greater than the greenhouse gas benefits obtained from the use of a fossil fuel such as Compressed Natural Gas
• (CNG) or Liquified Petroleum Gas (LPG). However, the emissions are very sensitive to the feedstock production system and must take into account the complete lifecycle of the agricultural production system.
• Blends of E10, and B5, B20 and B100 are the most likely combinations to be used in Australia in the short term.
• When used in an E10 blend, greenhouse gases (compared to unleaded petrol) are lower by 1.7% (from wheat) to 5.1% (C-molasses using co-generation). There is no

Australian passenger car data for E85 (using compatible methods) to directly compare against these E10 data, but the greenhouse gas emissions for E85 would be substantially lower than for E10 because there is less petrol in the blend.
Greenhouse gas emissions for biodiesel:

• waste vegetable oil range from 89.5% lower for B100 to 4.2% lower for B5 as compared to diesel;
• tallow range from 29% less for B100 to 1.5% less for B5 as compared to diesel;
• canola range from 15% less for B100 to 1.5% less for B5 as compared to diesel.
• The benefits of biofuels are not fully realised when they are used in blends dominated by fossil fuels.

Fuel security

• Based on the last 10 years of commodity statistics in Australia, estimates for the upper limits of production from first generation processes (ie currently commercial and in use technologies) and domestic feedstock are:
• Ethanol - Conversion of export fractions of wheat and coarse grains could theoretically have supplied upper limits of 11-22% of Australia's current petrol usage (taking lower energy value of ethanol into account).
• Biodiesel - Conversion of domestic waste oil, tallow exports and oilseed exports could have theoretically provided upper limits of 4-8% of Australia's current diesel usage.
• If all of the ethanol capacity that is currently proposed was to be fulfilled by existing crops (principally wheat and sugar), or if a national E10 target were to be met (eg. by 5.5 Mt of wheat as the feedstock), it could force the import of wheat in drought years. There are biosecurity issues restricting the import of grain from overseas markets.
• There is potential for biofuels to have a role in achieving fuel security with second generation technologies based on lignocellulosic feedstocks, or from new trees and crops for biodiesel. Preliminary estimates show that upper limits for second generation biofuels to replace petrol may be between 10-140% of our current petrol useage. The high uncertainty is due to lack of knowledge on ecologically sustainable and economically feasible production of lignocellulose feedstocks.
• Land and water benefits
• Land and water impacts will depend on the scale of the industry - a small industry based on diverting a proportion of our current crop production to biofuels would not change the current land use impacts, whereas a large scale industry might rely on expanding or intensifying cropping or forestry activities which would change the impacts.
• The impacts will also depend on where the biomass is grown, as well as the type of crop.
• The impacts may be neutral, for example in the case of ethanol based on existing grain or sugar production, because these activities will not significantly change the existing land use impacts.
• The impacts may be positive in situations were trees and shrubs are planted for biofuel production. There are many parts of Australia where planting large areas of woody perennials may have significant dryland salinity and biodiversity benefits. However, extensive tree planting may exacerbate water yield and river salinity in other areas and careful sustainability analysis will be needed.

Health
The benefits of biodiesel are

• all criteria air pollutants except oxides of nitrogen (NOx) are significantly reduced when replacing low sulphur diesel with biodiesel.
• particulate matter emissions are significantly lower for pure biodiesel (B100) from tallow, canola and waste oil than for diesel.
• the benefits of lower particulate matter emissions are greatest for pure biodiesel, and lowest in B5 blends where the benefits are swamped by the diesel.

The benefits of ethanol, particularly in an E10 blend, are less clear.

• There may be benefits from reductions in particulate emissions from the tailpipe.
• However there are increased evaporative emissions of smog-forming organic compounds which may have a negative impact on air quality and lead to worse health outcomes in some circumstances.
• Rough estimates of the potential health costs avoided range from $3.3 million per year (1.4c/L in 2003 dollars) to $90.4 million per year (30.4c/L in 2004-05 dollars). Some of the assumptions are contestable and the Department of Environment and Water Resources (DEW) has in 2007 commissioned a project led by CSIRO and Orbital Engine Corporation to study the health impacts of E5 and E10.

Benefits to regional Australia

• Local studies on ethanol plants in NSW showed for plant capacities ranging 50-80 ML/yr that there would be 6-34 permanent direct jobs, 125-357 permanent flow-on jobs, 49-68 construction direct jobs and 63-87 construction flow-on jobs. A case study for Sarina ethanol from sugar showed that the plant created 36 permanent jobs and 222 flow-on jobs, 389 construction direct jobs and 256 flow-on jobs, and added $7.7 million to household income in the region. However caution is required in extending the results more broadly across regions which do not take into account potential impacts on associated industries.
• New regional industries based on woody perennials and mosaic farming are being investigated. Woody perennial species and commercially viable production systems and industries have been identified, with bioenergy and biofuels as two of the key product markets.
• Work is underway in the sugar industry to assess potential opportunities including improvements in efficiency of supply chain logistics, and diversifying sugar cane products to energy (co-generation), biofuel and biorefineries/bioproducts.
• If the new structures of emerging value chains are to be realised or managed, a national understanding of location, type and size of regional opportunities is required for:
• a diversified supply system (based on agriculture and forestry);
• biofuel production;
• blending and distribution.

Competition for crops with alternative markets

• Food, livestock and biofuel producers are competing for the same commodity crops in the international arena. About 61% of the world's ethanol production comes from sugar crops. Corn-based ethanol production is growing by about 30% per year in the USA.
• Impacts include doubling of USA corn prices in 2006-7; rising prices of milk, eggs, chicken and tortillas in China, India, Mexico and the USA; in Europe rapeseed (canola) oil prices doubling over the last five years and the price of cereals, starches and glucose increased by about 20 % in the last year.
• Biofuel induced increases in global grain commodity prices are having an impact on Australian agricultural commodity prices, particularly on our grain commodities. Non-grain agricultural commodity prices are also being buoyed by substitution of global planting area with biofuel crops.
• Competition with food producers for crops has thus far not been a significant issue for Australia's few ethanol producers - as current production is predominantly based on waste starch and C-molasses.
• Currently ethanol from waste starch and C-molasses, and biodiesel from waste oil can be produced at a cost less than 45c/L (roughly competing with oil at US$40/barrel). Ethanol from sugar, and biodiesel from tallow and canola can be produced for less than 80c/L (roughly competing with oil at US$80/barrel). High variability in cost of production is largely due to variations in the cost of feedstock.
• There will be increasing competition with grains for food, and with feedgrain for the livestock industry if the Australian ethanol industry expands to its planned production capacity and beyond. Likewise, expansion of Australia's biodiesel industry will increase competition with soap and detergent manufacturers for feedstock.
• There will be a whole new set of markets for second generation (lignocellulosic) feedstocks, which have not been developed or explored in Australia. Although some existing biomass sources do not have existing markets, they may have existing uses (eg retaining carbon in ecosystems, providing habitat).
• In the case of a large scale biofuel industry, there are likely to be competing markets not just for the feedstocks, but also the factors of production including land, water and labour which would then impact on many other industry sectors especially in regional Australia.

Feedstocks for biofuel production

• Land and water will increasingly be contested for human food, animal feed, fibre, energy, water yield and environmental services. Evaluating the production capacity and sustainability (sustainable yield) of increased production or use of biomass resources is critical to underpin development of new biofuel or bio-based industries.
• There are opportunities to transform Australia's agriculture and forestry sectors by moving towards a 'bio-economy'. Using biorefineries and other new processing technologies could open the door for agricultural and forest industries to expand their product bases into valuable industrial products.
• Nonfood feedstocks outperform food-based feedstocks on energetic, environmental, and economic criteria. Trees, other woody plants, and various grasses and forbs (weeds), which can all be converted into synfuel hydrocarbons or cellulosic ethanol, can be produced on poor agricultural lands with little or no fertilizer, pesticides, and energy inputs. Their production rates will not be as high as when grown on richer agricultural land with high inputs.

The biomass resources in Australia can be categorised for the purposes of biofuels (or bioenergy):

• current production base
• First generation feedstocks based on sugar or starch crops already widely grown in Australia for ethanol, or oilseeds and tallow for biodiesel.
• Second generation feedstocks - lignocellulosics for ethanol, butanol, methanol, biogas or electricity including cereal crop (stubble) and sugar (trash and bagasse) residues, annual and perennial grasses, farm forestry crops such as oil mallee, forest products including native forest and plantation residues and thinnings, firewood, and waste streams such as urban woodwaste. Sustainability issues including effect of removal of crop and forest residues on ecosystem carbon, and biodiversity must be addressed.
• future production base
• First generation - includes any expansions of crops (eg wheat could expand into higher rainfall areas, sugar beet, sweet sorghum, mustard).
• Oil bearing trees such as Pongamia pinnata and genetically modified crops are also promising candidates.
• Second generation - biorefineries for range of high value biobased products, with biofuel and energy as co-products. The second generation feedstocks of the future could greatly expand supply - for example, large scale planting of oil mallee, other native woody species are being investigated for a range of new products including novel wood products, bio-based products as well as energy, grasses, GM crops, and algae.

Impacts on livestock industry

• A growing ethanol industry (that utilises grain) will affect the supply of feedgrain for livestock, particularly in drought years. This will place upward pressure on the price of grain. If quarantine allows, it may also induce more imports of grain in drought years. If E10 based on wheat were to be met in drought years such as 2001-02, import requirements might range from 2 550 to 5 640 kt. Planned expansion of ethanol production capacity in Australia of 897?ML will require 2 770 kt of grain. This requirement may not be met by export substitution alone in drought years.
• There may be some global expansion of grain supply in response to the increased demand, and economic theory predicts that the cost of the grain would stabilise slightly above the cost of production.
• There are some good opportunities for the intensive livestock producers to gain from biofuels production. These include:
• Availability of high-protein meal should moderate the price of livestock feed protein.
• Dried Distillers Grain with Solubles can be added to the diet at rates of 20-40% in cattle, 10-25% in pigs, 9-15% in poultry, and 15-22.5% in fish. Higher nitrogen excretion rates will require good management of animal waste.
• High protein meal can supplement ruminants grazing low-protein pastures for survival during drought, and can also improve breeding and other production traits.
• Vertically integrated systems of cereal cropping, ethanol production and dairies or feedlots could be set up to use Wet Distillers Grains with Solubles, with economic benefits from co-location.
• Wet Distillers Grains with Solubles could replace a portion of the grain (and offset lower supply of grain).
• Integrated ownership could provide the ethanol producer with some surety for the disposal of wet co-products.

Sustainability

• Sustainability is a critical issue for the biofuels industry - there is no point in replacing one unsustainable system with another. A 'main game' (10-20% of transport fuels) industry would place a large demand on biomass, which must be produced in a sustainable manner.
• There is international concern at the rapid growth in the palm oil industry due to biodiesel demand. From the 1990s to the present time, the area under palm oil cultivation has increased by about 43%. Clearing rainforest not only endangers biodiversity and creates social conflict, but releases vast amounts of carbon and thus exacerbates the very problem that a move to biodiesel in Europe is seeking to address. The Roundtable for Sustainable Palm Oil (RSPO) is an international group to promote sustainability through a Code of Conduct for its members.
• Australia has processes at various levels of government for dealing with sustainability issues. These include ecological sustainability criteria and indicators for agriculture and forestry, as well as mature processes for Environmental Impact Assessment and Social Impact Assessment for specific projects.
• If Australia develops the capacity to produce feedstock or fuel which can be certified as 'sustainably produced', it could be a potential market advantage in the future.

Comparisons of biodiesel and ethanol with reference standards

• Ethanol and biodiesel must meet the standards set under the Fuel Quality Standards Act (2000) administered by the Department of Environment and Water Resources (DEW).
• Biodiesel made from tallow or palm oil will solidify in cold weather.
• Because of their difficulty in meeting the standards, the biodiesel industry seeks liberalisation of the Australian biodiesel standard.
• To receive the rebate that alternative fuel manufacture attracts, a certificate costing $3 000/batch to show the fuel meets the Australian fuel quality standard is required.
• The motor industry does not warrant vehicles for blends containing more than 10% ethanol, and individual manufacturers may have warranty thresholds lower than this.

Infrastructure for biofuel production

• Ethanol from fermentation of starch/sugars, and biodiesel from transesterification of fats and oils are the two first generation biofuels currently produced worldwide. The existing and planned facilities in Australia use these technologies for conversion to biofuels.
• The current processing capacity for ethanol in Australia in 2007 is 140 ML, with planned capacity of 1155 ML. The current biodiesel capacity is 323 ML with a planned capacity of 1122 ML.
• There are a range of other second generation fuels for which new feedstocks and processes are being developed and commercialised. These are largely based on lignocellulosic feedstocks. Many of the new technologies are in demonstration phase, and not yet cost competitive although there is some indication that within 3-5 years some of these might become competitive with oil (within the oil price ranges experienced in 2005-2007).
• The USA government has announced the granting of US$385 million for the construction of six cellulosic ethanol pilot plants in the United States.
• Second generation processing relying on fermentation following enzyme processing of lignocellulosic material will be able to use the infrastructure of fermentation and distillation facilities for first generation ethanol production. Some modification - largely 'bolt-on' equipment - will be required to handle initial breaking down of the lignocellulose.
• However, second generation processing which requires high temperature and pressure equipment (eg gasification, pyrolysis) is not compatible with first generation infrastructure.
• For many new types of energy crops such as short rotation or coppicing crops, the harvesting machinery is not yet developed. Systems which can compact the large volumes into high density briquettes or pellets in the field or forest may help to overcome this problem. The logistics and economics of harvesting and transport in the Australian sugar industry are well understood. Transport distances much greater than 50 kms are difficult to justify from a financial perspective.
• B5 and E10 (provided that they meet the relevant diesel standard and petrol standard respectively) are considered equivalent to diesel and petrol and do not need any infrastructure changes. ?For marketing reasons, separate pumps are generally used. Blending of ethanol with petrol, and biodiesel with diesel, can only be carried out by licensed blenders.

Policies affecting biofuels

• Estimates of subsidies to fossil fuel use in Australia range from 2.2 to 10 billion dollars per year. These estimates include perverse subsidies which increase GHG emissions and reduce economic efficiency, and subsidies to motorists - which would still apply if the motorists were running their vehicles on alternative fuels instead of fossil fuels. These need clarification in terms of the categories, values and beneficiaries across the fossil fuel value chain.
• Assistance currently provided to producers includes (a) a production grant of 38.1 cents per litre (c/L), which fully offsets the excise paid on biofuels; (b) a capital grant for new facilities that effectively provides around 1c/L in additional assistance over the lifetime of the plant.
• Assistance to biofuels is scheduled to fall to 12.5c/L for ethanol and 19.1c/L for biodiesel by 1?July 2015. A banded excise system will impose rates on different fuels, classified into high, medium and low energy groups. This strategy broadly keeps constant the excise payable per kilometre travelled by vehicles using the fuel, with biofuels retaining a 50% discount on this excise.
• Ethanol imports are subject to both a general tariff of 5% (zero if imports are from the USA) and the full excise of mid-energy fuels of 38.1c/L. Between 2011-2015, the net excise payable on ethanol by domestic manufacturers will increase on a sliding scale from 0-12.5 cents per litre. From 2011, the effective excise cost imposed on imported ethanol will be also be reduced to be the same as that faced by domestic manufacturers.
• Recent changes in the Fuel Tax Act 2006 have had a major impact on the biodiesel industry. Since the changes, off road users of biodiesel blends can no longer claim 38.1c/L on the biodiesel component of the blend unless the fuel qualifies for the Australian Diesel Standard.

Options for expanding demand
Total demand has two components:

• Intermediate demand - purchasing patterns of intermediate producers such as oil companies, services stations, farming co-operatives etc who process, blend and distribute fuels for eventual sale to customers.
• Only about 5% of the 8 000 plus service stations across Australia are now selling ethanol or biodiesel blends.
• Ethanol and biodiesel blends are provided mostly by independent, small scale fuel providers - oil majors are slowly increasing their involvement.
• There is a lack of availability of E10 and B5 in southern and western states.
• Final demand - purchase by consumers. Consumer confidence is the major barrier. Motorists are concerned that ethanol will damage their engines. This concern is unfounded for modern cars running on E10.

Strategies to stimulate demand include industry-based information dissemination; more marketing and promotional activity; simplification of the Federal Chamber of Automotive Industries (FCAI) vehicle list on E10 suitability; further E10 vehicle operability testing; simplification and modification of the current fuel ethanol information standard; removal of demand barriers (such as lower consumer confidence and limited service station outlets); rollout incentives; price discounting; producing and/or mandating of flexi-fuel vehicles; tax, excise and import incentives.

Options for encouraging future capital investment

• Australia's policy platforms for biofuels differ significantly from Europe, America and other nations which actively promote the production and use of biofuels. Some of the intended and unintended consequences of these proactive policies are currently unfolding - eg increases in the grain price, and impacts for the human and livestock food supplies.
• There are opportunities to use targeted incentives in the area of biofuels. For example, if a set of criteria were developed based on a set of preferred outcomes (eg power greenhouse gas emissions, improved energy input:output ratios, health or regional outcomes) then incentives could be targeted and scaled on this basis.
• An emissions trading scheme could promote the use of biofuels, if the sale of renewable fuels did not require the purchase of emissions allowances. Fossil fuel suppliers would be obliged to purchase such emissions allowances, in order to sell fossil fuels. There is currently a Prime Ministerial Task Group on Emissions Trading which will help to set the parameters for this discussion.?

Conclusions

• This report has reviewed the positive and negative impacts of biofuels across the value chain. The emergence of a 'main game' biofuels (or bio-based products) industry (which contributes 10-20 % of transport fuels) has the potential to significantly shift agriculture, forestry, environmental and fuel value chains - towards the emergence of a bio-based economy.
• Likely benefits along these value chains have been quantified where possible, but many of these are poorly understood. Transition pathways to realise the potential benefits of these value chains are not well understood. Development of a financially viable and ecologically sustainable industry will require a better understanding of these so that policy measures can be taken to achieve the desired outcomes, and manage potential unintended consequences.
• Biofuels are only a part of the solution to our future transport and energy needs. A range of strategies will be required to address the drivers of environment, energy security, health, and regional opportunities. In the case of the major driver - greenhouse emissions and climate change - this will include mitigation (reducing emissions) and adaptation (preparing to deal with higher CO2 levels in our socio-ecological systems).
• To be effective in achieving intended outcomes, these strategies will need to be embedded in a strategic alternative energy framework. A roadmap to focus disparate frameworks and goals, value chains, industry efforts, public benefit and government policy would provide a useful step forward.

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