Biofuel plan to hit households and clip GDP by $1.2 billion in first three years

Pain at the pump: Mandate biofuel use set to cost households an extra $7.41 per week in 2025. Photo / 123RF

A Government plan to mandate biofuel use in transport would cost the economy $1.245 billion in lost GDP over its first three years, and consequent fuel price increases would cost households an extra $7.41 per week in 2025, when the policy comes into full effect.

"The decline in economic activity reflects the cost challenge of having to transition away from fossil fuels at a time when biofuels cost more to produce," officials said in a consultation document which contains the estimates.

Officials expect that under the scheme, baseline petrol prices would rise 0.4 cents per litre, baseline diesel prices would rise 5.8 cents per litre and baseline jet-fuel would rise 7.1 cents per litre.

The projected reduction in real GDP cited was the upper bound; a range was not given.

Further price rises are expected beyond 2025, the document said, "as the emissions reduction percentage sought by the Sustainable Biofuels Mandate rises". The size of expected increases beyond mid-decade is not made clear.

The proposal is part of the Government's recently announced "clean car package". Last month it introduced a suite of measures aimed at reducing transport emissions, including a controversial "feebate" scheme that will tax the purchase of relatively high greenhouse gas (GHG) emitting vehicles to subsidise the purchase of electric and hybrid vehicles.

The planned biofuel component is currently subject to public consultation, and is intended to help mitigate rising emissions as electric vehicles remain considerably more expensive than the alternatives and uptake remains slow.

Under the proposal, the Government would require transport fuel suppliers (the likes of BP, Z Energy and Gull) to reduce the GHG emissions of their fuels by 1.5 per cent in 2023, 2.3 per cent in 2024 and 3.5 per cent in 2025. Thereafter, mandated reductions would be reviewed.

Suppliers would have discretion over what fuels they target — across petrol, diesel and jet-fuel — to achieve the mandated reductions, and over what biofuel blend levels they use.

The consultation document produced by the Ministry of Transport and the Ministry of Business, Innovation and Employment said that by 2025 the proposed biofuel rules would reduce annual transport emissions by 4 per cent.

Critics, however, said the proposal is unnecessarily expensive, because it bypasses the Government's own Emissions Trading Scheme (ETS).

Eric Crampton, chief economist at the New Zealand Initiative, said cheaper ways to achieve the same level of emissions reductions would mean less harm for those who bear the costs.

"The numbers here [in the consultation document] suggest a sustainable biofuels mandate would reduce emissions by 1.342 megatonnes at a cost of $1245 million. When I pull out my calculator, that gives me a cost per tonne of $927. The ETS price is currently $43. So if the numbers presented in the report are correct, the Government could achieve more than 20 times as much emission reduction, at the same cost, by buying ETS credits and shredding them – at current prices. Simply reducing the [ETS] cap, without the biofuels mandate, would be better."

Crampton said that as total credits are reduced the scheme naturally abates emissions in the most cost effective way; this is because carbon emitters must bid at auction for credits that allow them to emit.

The Government, however, seems determined to target emissions reduction in transportation in particular, and remains concerned that New Zealand's uptake of electric and hybrid vehicles is too slow (the transport sector contributes some 21 per cent of gross domestic greenhouse gas emissions).

Energy Minister Megan Woods. Photo / Sylvie Whinray

A recent paper brought to Cabinet by Energy Minister Megan Woods states that the Ministry of Transport is updating its projection of road transport emissions.

The ministry currently predicts that road transport emissions will continue to rise until around 2024, at which point they will plateau, before slowly declining close to 2030.

However, Woods' Cabinet paper said officials now consider this projection "too optimistic".

"It is more likely that transport emissions will continue to rise beyond 2024, reflecting that EV purchase price parity is unlikely to occur in our market until much later in the 2020s," the paper said.

Biofuels are made from plant and animal material, commonly ethanol, which is a petrol substitute and biodiesel, which is a diesel substitute. Most are blended with fossil fuels.

Any exported fuel would be exempt from the proposed rules, including fuel used by aircraft and ships serving international routes.

It's not clear whether domestic biofuel production could meet the demand that would be ushered in by the proposal, though some local producers have been lobbying for the change.

Last year Z Energy mothballed its biodiesel plant in Wiri because of the escalating price of tallow, which it used as feedstock.

The company said the price rise was driven by overseas demand for feedstock, in turn driven by biofuel subsidies abroad.

Julian Hughes, general manager transition at Z Energy, said the proposed biofuel mandate would "assist with investment certainty" though the company isn't yet sure whether it would be sufficient to warrant reopening the plant.

New Zealand's use of biofuel is currently less than 0.1 per cent of total liquid fuel sales.