Ethanol-blended Fuels Policy

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November 2016 Ethanol-blended Fuels Policy Ethanol-blended fuels, a blend of mineral petrol and ethanol, have been available in Australia for more than 10 years. The most common ethanol-blended fuel is E10, which consists of up to 10% ethanol and 90% mineral petrol. E10 is currently widely available in metropolitan areas of Queensland and there is an established and stable market, however availability is limited in regional Queensland. E10 has had a steady 10% market share in Queensland since late 2011. The recently legislated Queensland ethanol mandate comes into force on 1 January 2017 and will require the volume of E10 sold in Queensland to increase. New South Wales (NSW) is the only other state to implement an ethanol mandate. The Queensland mandate initially requires 3% of the combined sales volume of Regular Unleaded Petrol (RULP) and Ethanol Blended Petrol (EBP) to be ethanol. In effect, this requires at least 30% of combined RULP and EBP sales to be E10. The mandated ethanol volume increases to 4% after 18 months on 1 July 2018. At this time 0.5% of all diesel will also be required to be bio-based diesel. The Queensland mandate is different from the NSW mandate and previously proposed mandates by measuring the ethanol volume only against RULP and EBP sales. The NSW mandate measures ethanol sales against total sales of all unleaded petrol (EBP, RULP and Premium Unleaded Petrol PULP). Accompanying the Queensland mandate is an extensive public education campaign the E10 OK campaign (E10OK.com.au). The Queensland Government also requires all government vehicles to use E10 where practical to do so. The NSW ethanol mandate requires 6% of the total volume of all petrol sales to be ethanol, that is 60% of all petrol sales would need to be E10. The NSW mandate did not include an education campaign and does not require government vehicles to use E10. The practical result of the NSW policy has removed regular unleaded petrol from many fuel outlets, yet at no stage has it been met. Benefits of Ethanol Blended Petrol Increased E10 use provides environmental benefits such as improving urban air quality. Studies show an E10 blend emits less carbon monoxide and unburnt hydrocarbons than 100% mineral petroleum. However, the cleaner burn achieved by E10 leads to an increase in tailpipe CO 2 emissions. The CO 2 produced in burning ethanol is offset by the CO 2 sequestered in the feedstock as it grows. The amount of sequestered CO 2 depends on the feedstock and production process. Ethanol produced from sugar cane has a positive energy balance and will reduce greenhouse gas emissions. The emission reduction benefit is less for ethanol produced using grains as the energy balance is less favourable. The possible adverse environmental impacts of sugarcane production are addressed in the Queensland Ethanol Mandate in the sustainability criteria. These criteria require sugarcane to be grown following the Smartcane BMP (Best Management Practice). The Smartcane BMP covers soil health, plant nutrition, pest and weed management, and drainage and irrigation management. While there are similar management systems for grain production, these systems appear to be less robust. New ethanol production processes have potential to further improve the environmental benefits, for instance by using virgin sugar cane crops. The whole crop is processed by fermenting the raw sugar cane to produce ethanol and burning the bagasse (the fibrous material that remains after the distilling process is completed) to produce the electricity required for production.

Using ethanol supports regional development and regional jobs. Locally produced ethanol improves Australia s energy security by reducing dependency on imported oil and refined fuels. Costs of Ethanol Blended Petrol Evidence from NSW suggests that the NSW mandate has led to an increase in the use of PULP, unnecessarily increasing costs for motorists. The lower energy content of E10 compared to RULP and modest price difference makes E10 less cost effective than RULP. In Brisbane, in October 2016 the price of E10 was 2.4 cpl less than RULP. While E10 appears a cheaper fuel option, cars use about 3% more E10 compared to RULP. For most cars, the cost of increased fuel consumption will be greater than the savings from buying E10. At current prices, E10 would need to be 4.0 cpl cheaper than RULP before it became more economical to buy. The food verses fuel debate has been addressed to some degree, but there are on-going concerns with indirect land-use change which is the loss of natural habitat to food crops previously displaced by fuel crops. Ethanol Sales in Queensland Chart 1 shows the volume of EBP, RULP and PULP sold in Queensland, as a percentage of total petrol sales volumes and EBP sales as a percentage of RULP sales. For comparison, NSW sales data is also presented in Chart 1. The data presented in Chart 1 was sourced from the Federal Government publication Australian Petroleum Statistics 1. In August 2006, the first Queensland Ethanol Mandate was announced, set at 5% of total volume and to be implemented on 31 December 2010. From 2006 to 2010 the volume of EBP sales in Queensland increased as retailers prepared for the imposition of a 5% mandate. The Queensland Ethanol Conversion Initiative provided substantial financial support for retailers to prepare tanks, bowsers, signage and other equipment in preparation for the mandate. In Queensland, EBP sales peaked in September 2010 at 22.5% of total volume (or 28.1% of RULP). Following the abandonment of the proposed mandate, sales of EBP began to fall and by the beginning of 2012, EBP accounted for 10% of total petrol sales in Queensland and have remained relatively stable since, equivalent to 12 to 14% of RULP sales. In NSW, the ethanol mandate caused a sharp increase in E10 sales, a comparable drop in RULP sales, and an increase in PULP sales during 2010. In January 2010 PULP accounted for 21.6% of all petrol sold in NSW, but this increased to 30.9% by December 2010. Sales of PULP continued to increase throughout 2011 and 2012. In August 2016, PULP accounted for 44.0% of all petrol sales in NSW and was the largest selling petrol grade. The NSW ethanol mandate has achieved only a 2.6% ethanol volume share (26% share for EBP) despite the current legislation prescribing a 6% ethanol volume share The NSW mandate demonstrated that when the choice to buy RULP is removed, many motorists will buy the more expensive PULP rather than E10. Some motorists have no choice as their vehicle is not E10 compatible and PULP is the only non-ethanol blended fuel offered. Many motorists, however, may be buying PULP because they are unsure whether their vehicle will be damaged by ethanol blended fuels. 1 Source: Office of the Chief Economist, Department of Industry and Science (Federal), Australian Petroleum Statistics, 2010 to 2016, www.industry.gov.au/industry/office-of-the-chief-economist and Department of Resources, Energy and Tourism (Federal), Australian Petroleum Statistics, 2005 to 2009. 2

Aug-05 Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Aug-05 Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 90% 80% NSW ethanol mandate set at 2% QLD ethanol mandate abandoned Chart 1: Relative Sales Volumes of EBP, RULP and PULP in Queensland (and New South Wales) 2005 to 2016 70% 90% NSW ethanol mandate increased to 4% 60% 50% 40% 30% 80% 70% 60% 50% 40% 30% QLD ethanol mandate announced, to be set at 5% NSW ethanol mandate increased to 6% NSW regular ULP prohibition abandoned E10OK education campaign launched QLD ethanol mandate legislation enacted EBP-QLD PULP-QLD RULP-QLD EBP as a % RULP - QLDRULP-QLD EBP-NSW PULP-NSW RULP-NSW EBP-NSW PULP-NSW RULP-NSW EBP-QLD PULP-QLD EBP as a % RULP - QLD 20% 20% 10% 10% 0% 0%

E10-Compatible Vehicles While most petrol vehicles in the Australian fleet can use E10 fuel, a proportion cannot. As older vehicles are retired from the fleet, the proportion of vehicles that cannot use E10 will fall. Research undertaken by the University of Queensland 2 in 2011, commissioned by the Biofuels Association of Australia and supported by RACQ, calculated that in 2017 11% of vehicles in Australia would not be E10 compatible. This was predicted to reduce to 7% by 2020. The table below displays the predicted percentage of E10-compatible petrol vehicles. This percentage data is a maximum estimate calculated from a table of absolute numbers of vehicles, presented in the UQ research, and includes vehicles designed to run on regular and premium ULP. Year Percentage of E10 Compatible Vehicles Percentage of E10 Non-Compatible Vehicles 2009 69.8% 30.2% 2010 72.8% 27.2% 2011 75.7% 24.3% 2012 78.4% 21.6% 2013 80.9% 19.1% 2014 83.2% 16.8% 2015 85.3% 14.7% 2016 87.2% 12.8% 2017 89.0% 11.0% 2018 90.5% 9.5% 2019 91.9% 8.1% 2020 93.1% 6.9% Supporting Ethanol Production In the design of the Queensland Ethanol Mandate, the Queensland Government has avoided many of the problems in the NSW ethanol mandate. The E10 OK education campaign provides information to motorists about the benefits of ethanol. By making quality information easily available, motorists whose vehicles can use ethanol will be less likely to purchase the more expensive PULP. RACQ welcomed the Queensland Government s education campaign and commitment to maintaining choice for motorists, ensuring RULP will remain available. Any displacement or removal of RULP pumps from many retail outlets would lead to the adverse outcomes observed in NSW. Considering regional development benefits of increased ethanol production, the potential air quality benefits and other environmental and energy security benefits, RACQ believes that the Queensland Ethanol Mandate strikes the right balance. 2 Wilson A, Bolton N, Thomas S and Dargush P, (2011), The E10 compatibility of the Australian fleet, UQ SMART.

Monitoring and Evaluating the Ethanol Mandate The mandate level legislated by the Queensland Government is a little higher than RACQ suggested. The mandate prescribes 3.0% of RULP sales to be ethanol from 1 January 2017 and 4.0% from 1 July 2018. To avoid the adverse impacts observed in NSW, RACQ believes that the Queensland Government should closely monitor and report on changes in fuel type purchases. An increase in PULP use compared to states without a mandate (such as Victoria) would indicate the Queensland Ethanol Mandate is driving motorists to use PULP and increasing their fuel bills. The scheduled increase to 4.0% should be delayed if adverse impacts are found. The NSW mandate has increased the cost of motoring through higher fuel bills across NSW while failing to sustain an increase in the use of E10. In the long-term, the fuels that drive our vehicles could be quite different from those we use today. Government should not constrain options by trying to pick the winners with legislation, rather Australia needs an integrated national fuel policy that promotes fuel security and encourages the uptake of affordable and sustainably produced fuels. Conclusions A national policy approach considering ethanol in the context of all transport sector objectives, including fuel security, affordability and sustainability, as well as regional development and environmental impacts remains the best option. The RACQ welcomes the Queensland Government s E10 OK campaign and supports the Ethanol Mandate as it promotes the ethanol industry without removing the opportunity for motorists to purchase regular ULP. On-going monitoring and reporting of any changes in fuel type purchases is required to ensure the mandate delivers benefits for Queensland without adverse impacts on motorists. Contact: RACQ Public Policy Department, policy@racq.com.au 5