Summary: The Australian Government has introduced a comprehensive legislative package aimed at fostering the growth of the low carbon liquid fuels (LCLF) industry. This initiative, part of the broader Future Made in Australia agenda, aims to support the transition to net zero emissions by 2050, create jobs, and build sovereign capability in critical sectors. This report provides business leaders with a detailed guide to understanding the LCLF opportunity, the government’s supportive measures, and strategic insights for investment.
Embracing a Future Made in Australia
The Australian Government’s Future Made in Australia Act aims to anchor a coordinated suite of reforms and initiatives designed to boost investment, create jobs, and build sovereign capability in areas of national interest. A key pillar of this legislative agenda is the development of the low carbon liquid fuels (LCLF) industry, which is set to play a crucial role in Australia’s transition to net zero emissions by 2050.
Purpose of This Report
This report aims to guide business leaders in understanding the emerging LCLF industry in Australia, highlighting its potential, the government’s supportive measures, and the strategic opportunities for investment. It draws insights from the consultation paper “A Future Made in Australia: Unlocking Australia’s Low Carbon Liquid Fuel Opportunity,” issued by the Australian Government.
The Low Carbon Liquid Fuels Opportunity
Strategic Importance of LCLFs
Australia’s reliance on liquid fuels is substantial, particularly in the transport sector, which accounts for around 70% of the nation’s refined liquid fuel consumption. With legislated commitments to reach net zero emissions by 2050 and emissions levels 43% below 2005 levels by 2030, a pathway to decarbonise sectors reliant on fossil liquid fuels is essential.
Potential and Challenges
LCLFs, including Sustainable Aviation Fuels (SAF) and renewable diesel, offer a viable decarbonisation pathway for sectors where electrification or renewable hydrogen are not feasible. However, LCLFs are currently 2 to 5 times more expensive than their fossil counterparts. Achieving commercial viability will require aligning sufficient offtake agreements with feedstock providers and establishing production facilities at scale.
Australia’s Competitive Advantages
Australia’s large landmass, advanced farming practices, access to renewable feedstocks, and renewable energy potential position it favorably for LCLF production. Already a competitive producer of feedstocks, Australia exported significant quantities of tallow and canola seed in 2022, demonstrating its capacity to support a domestic LCLF industry.
Government Actions and Policy Settings
Recent Government Announcements
In response to feedback from various consultations, including the Aviation Green Paper and the Electricity and Energy Sector Plan, the Australian Government announced several measures in the 2024-25 Budget to support the LCLF market. These include:
- Guarantee of Origin Scheme: Expanding this scheme to track and verify emissions from LCLF production.
- Future Made in Australia Innovation Fund: Allocating $1.7 billion to support the development of nascent LCLF production pathways.
Supply-Side Support Options
To develop a domestic LCLF industry, the government is considering several mechanisms for production incentives:
Contract for Difference (CfD) Scheme
A CfD scheme provides revenue certainty by covering the difference between market price and a predetermined strike price, set through competitive auctions. This scheme incentivizes producers to offer their lowest possible price, ensuring efficient allocation of funds.
Fixed-Grant Amount Per Production Unit
Fixed grants can be provided per production unit, set either through competitive auctions or a predetermined rate. This method offers straightforward support but lacks the market responsiveness of a CfD scheme.
Production Tax Incentive
A tax-based production incentive offers uniform access to support, promoting diversity among producers. This model can be structured as a refundable tax offset with rates linked to the lifecycle emissions of the fuels produced.
“Achieving commercial viability will require aligning sufficient offtake agreements with feedstock providers and establishing production facilities at scale.”
Demand-Side Options
Mandates and Targets
Demand-side interventions, such as mandates or non-binding targets, can drive demand for LCLFs, providing assurance to producers about market uptake. Mandates enforce minimum proportions of LCLFs in fuel mixes, while low carbon fuel standards set emissions intensity reduction targets.
Examples from International Jurisdictions
- US Inflation Reduction Act: Provides tax credits for SAF production, incentivizing lifecycle emissions reductions.
- EU ReFuel Initiative: Mandates incremental increases in SAF uptake, reaching 70% by 2050.
- Singapore and Japan: Implementing SAF mandates starting at 1% and 10% respectively.
Tailoring Demand-Side Measures
The Australian Government is exploring how these measures could be applied in the local context, considering the unique characteristics of various sectors and the potential need for mandates to be technology-agnostic.
“Mandates enforce minimum proportions of LCLFs in fuel mixes, while low carbon fuel standards set emissions intensity reduction targets.”
Eligibility Criteria and Emissions Reduction
Guarantee of Origin Scheme
The Guarantee of Origin Scheme will certify the emissions and sustainability profile of LCLFs, ensuring alignment with international standards like the International Civil Aviation Organization’s (ICAO) CORSIA scheme. This scheme will play a crucial role in setting eligibility criteria for production incentives.
Community and Environmental Benefits
Developing a domestic LCLF industry will have significant community benefits, including job creation, regional economic development, and enhanced agricultural income streams. The sustainability criteria will ensure that LCLF production supports broader environmental goals, such as land-use optimization and soil health.
Detailed Analysis of Government Actions
Existing Policy Framework
Existing policies such as the Safeguard Mechanism, National Reconstruction Fund (NRF), and Clean Energy Finance Corporation (CEFC) provide a foundation for supporting renewable and low carbon technologies. These measures create an enabling environment for investment by encouraging demand certainty, lowering initial investment costs, and establishing certification and regulatory arrangements.
2024-25 Budget Commitments
The government’s recent budget announcements include several initiatives to support the LCLF market:
- Certification Scheme Expansion: Extending the Guarantee of Origin scheme to include LCLFs.
- Innovation Fund Allocation: Dedicated funding to support the development of new LCLF production technologies.
- Production Incentive Consultation: Seeking views on the best mechanisms to incentivize domestic LCLF production.
Assessing Production Incentive Mechanisms
The government is evaluating various production incentive mechanisms to determine the most effective approach:
- Competitive Grant-Based Production Incentives: Providing support through competitive auctions to cover the gap between production costs and market prices.
- Production Tax Incentives: Offering tax credits or offsets based on the volume of LCLF produced, incentivizing production through the tax system.
“The government’s recent budget announcements include several initiatives to support the LCLF market.”
Strategic Insights for Business Leaders
Leveraging Competitive Advantages
Business leaders should leverage Australia’s competitive advantages in feedstock availability and renewable energy potential. Investing in LCLF production can capitalize on these strengths and position companies at the forefront of the emerging market.
Engaging with Government Initiatives
Active participation in government consultations and aligning with supportive policies can help businesses secure funding and navigate regulatory requirements. Collaboration with government agencies and industry stakeholders will be crucial for success.
Innovating and Collaborating
Exploring partnerships and technological innovations can reduce production costs and enhance sustainability. Businesses should focus on developing advanced production pathways and diversifying feedstock sources to build resilience and competitiveness.
Future Outlook and Industry Trends
The LCLF industry is poised for significant growth, driven by increasing demand for sustainable fuels and supportive government policies. Business leaders should stay informed about industry trends and regulatory developments to identify emerging opportunities and challenges.
“Exploring partnerships and technological innovations can reduce production costs and enhance sustainability.”
Conclusion
Next Steps
The Australian Government is seeking industry feedback on the design of production and demand-side support measures to shape a robust LCLF industry. This input will inform the Transport and Infrastructure Net Zero Roadmap and the Electricity and Energy Sector Plan.
Strategic Takeaways
Business leaders should:
- Leverage Australia’s competitive advantages in LCLF production.
- Engage actively with government initiatives and policy developments.
- Innovate and collaborate to enhance production efficiency and sustainability.
Developing a domestic LCLF industry presents a strategic opportunity to contribute to Australia’s net zero transition while driving economic growth and job creation. Business leaders are encouraged to actively participate in shaping this emerging industry to ensure its success.
Source:
Australian Government Consultation Paper: Low Carbon Liquid Fuels, A Future Made in Australia: Unlocking Australia’s low carbon liquid fuel opportunity