Clean Transport Fuels – What are the Real Options?

Australia’s carbon price is here, so how can transport operators gain from cleaner fuels?

As a retailer, manufacturer, miner or farmer, where in your supply chain can clean fuels bring real benefits, now?

Biofuels win under Carbon Pricing

Biodiesel and ethanol now have a carbon price advantage over other transport fuels. While gaseous fuels (LNG, LPG and CNG) have lower greenhouse gas emissions than diesel and petrol, on July 1st they copped a tax “double whammy”:

  • Gas excise duty now rises each year while biofuels don’t pay excise until 2021.
  • Gaseous fuels attract a carbon price; biofuels don’t.

But costs continue to rise

Biodiesel and ethanol are made from agricultural commodities and organic waste materials. Rising demand in many industrial uses is pushing up prices of these feedstocks, and some are caught in the “Food versus Fuel” debate. The promise of offsetting society’s dependence on oil is now staged against our ability to feed growing populations. As food prices rise around the globe, economic, environmental and social trade-offs are made in a complex arena. Government support for biofuels in Europe is weakening as new laws narrow the choice of feedstocks.

Our small demand in global terms competes for inputs with big biofuel producers overseas. Australia has only a handful of biodiesel and ethanol plants, and none are world scale. Soaring Asian demand  consumes feedstocks and raises prices, challenging the viability of Aussie producers.

On a positive note, one Queensland company already produces an ultra clean synthetic diesel  and says they can do it for only 20 cents per litre.  20 cents! Is that a typo?

Biofuel blends

In practice, biofuels gain only a small carbon price advantage over other transport fuels. That’s because biodiesel and ethanol need blending with regular diesel and petrol to comply with fuel quality standards and excise rules. This reduces their carbon price advantage by 80% in the case of a B20 blend (20% biodiesel and 80% mineral diesel) down to 1.2 cents per litre. Then the logistical challenges in getting blended products to end users can pretty quickly gobble that up!

Market Reality

Market entry remains the biggest challenge of all:

  • it’s hard to supply biofuels at a competitive price due to the infrastructure and volumes needed
  • business models face rising production costs and can’t rely on government support
  • many people just don’t trust biofuels
  • lack of demand means local plants can’t expand to world-scale
  • fuel retailers need to invest in storage tanks to offer alternative fuels at the bowser

Playing with the Big Boys

Despite volatile prices, oil-based transport fuels dominate the market. Major oil companies have supply networks, production technologies and retail models they have refined for more than 100 years. While a few officially support alternative fuels, their practical steps have been tentative at best.

Getting traction

There’s no silver bullet for introducing cleaner transport fuels – a portfolio of fuels is needed. Today, both biofuels and gaseous fuels are used successfully in various light and heavy vehicle applications. Depending on a vehicle’s work task – it’s payload capacity, speed, stop-start intensity, distance range and fuel efficiency to name a few variables – each fuel has its’ “pro’s and cons”. Thorough due diligence is needed, and the clean fuels industry could better educate and communicate the sweet-spots to end users.

Meanwhile, trials of cleaner jet fuels show that biofuels can be safe, reliable and are ready for use, but would not meet immediate demand if large airlines make the switch. Yet such trials are vitally important, especially with the support of engine makers who remain critical to clean fuels take-up. Truck manufacturers like Scania run ethanol trials in their own operations to prove new clean fuel technologies.

Test & Invest

Yet even with government support, some avid users and a few keen oil companies, all clean fuels have their own market entry challenges. Carbon pricing may help some clean fuels, but it will fall short of what’s needed.

To make real progress, all supply chain partners must work together to understand which clean fuels can help their particular situation. Only through collaborative testing can the right clean fuels be chosen for each supply chain. Then clean fuel producers must make their fuels available at retail and industrial points of use – reliably and cost-effectively.

So if you want to win from cleaner fuels, you’ve got to make it happen. Get with your supply chain partners to test and invest in clean fuels now.

How can Freight Buyers minimise carbon tax in their supply chains?

Moving freight around Australia will soon attract carbon tax.  You can reduce this new cost in 2 ways:

  1. Use less fuel
  2. Use cleaner fuel

While they control fuel use, transporters need their customers’ help to manage carbon liability. Moving the discussion past who carries the carbon tax burden, the question now becomes: How can Freight Buyers minimise carbon tax in their supply chains?

Carbon Tax = More Fuel Tax

Carbon tax on Transport will be applied through the fuel tax system. Fuel tax is a consumption tax, and fuel tax credits are needed to ensure that fuel tax is not burdened on transport businesses, but rather the final consumer. This is consistent with Australia’s tax system more broadly, where consumption taxes are intended to apply to final consumption rather than business inputs.

If transporters pass on carbon tax (that is, reduced fuel tax credits), Freight Buyers wear the cost; and if carbon tax is not passed on, their transport partners may become unviable. So, as a consumption tax based on Freight Buyers’ demand for transport services, carbon pricing gives Australian shippers a clear incentive to make their supply chain buddies improve fuel efficiency and switch to cleaner fuels.

How Transporters improve Fuel Efficiency & Switch Fuels

Using Less Fuel requires efficient equipment and efficient operations. The Australian government’s Energy Efficiency Exchange reviews a wide range of fuel saving measures for rail, road and air transport. If you total the high side of the energy savings estimates, you’d think that 50% fuel savings or more are there for the taking. But it’s never that simple. The success of each measure depends on its operational setting and many only deliver long term results if adopted systematically. For instance, vehicle eco-driving improvements which promise 10% fuel savings need all drivers to have specific training in expected behaviours, backed up by regular refresher training and constant performance management to always maximise fuel savings.

When it comes to Cleaner Fuels, so-called ‘drop-in’ fuels such as ethanol, biodiesel and renewable diesel are the easiest to introduce because they can use existing fuel delivery infrastructure (with some adaptations). And these Biofuels offer great opportunities for immediate reductions in carbon tax due to their zero rating for carbon emissions under the Clean Energy Future laws. Gaseous fuels like LNG and CNG, however, need capital investment in new engine technologies as well as dispensing equipment and infrastructure to create a reliable and extensive supply network.

Ultimately, Transport firms who thrive under carbon pricing will be those using a myriad of actions that lead to lower carbon and energy use.

How Freight Buyers can help

Freight Buyers across the retail, resources, construction, manufacturing, energy and agriculture sectors increasingly insist on low carbon transport. The next step is to think of carbon tax as a shared liability with joint commercial incentives to improve productivity and fuel efficiency. They can help their transport partners by measuring, co-investing and even “opting-in” to manage carbon in their supply chains:

1. Measure

At minimum, an accurate picture of baseline energy use and greenhouse gas emissions is needed. Partnerships can collect,  analyse and verify such data to develop emission reduction plans. Supply chain carbon profiling is the starting point to reduce risk and gain competitive advantage in a low carbon economy.

2. Co-invest

When Freight Buyers invest time and money in fuel use projects, more knowledge and resources can earn a bigger bang for everyone’s buck:

  • Operational changes can boost productivity dividends from investments Transporters have already made. Changing operating hours so delivery vehicles can avoid peak commuter traffic is one. Another is making greater use of High Productivity Vehicles such as B-Double trucks through local road permit applications as well as site works expanding physical access and storage capacity at load and delivery points to allow ordering in larger load sizes.
  • Commercially, Buyers can specify low emission and fuel efficient technologies in their tenders and contracts. Paying a freight price premium supported by contract commitments allows transporters to secure finance and recover the higher capital costs of advanced emissions technology. Large Freight Buyers can even boost their transport partners’ negotiating power with technology suppliers through joint procurement contracts to reduce unit prices.
  • Capital investment can overcome barriers to adopting new technology which the carbon price – by itself – is unlikely to impact. Supporting R&D trials of latest technologies in local conditions will improve joint understanding. This may require funding which shares risks and puts some ‘skin in the game’ with all stakeholders sharing the rewards. LNG and Biofuels, for example, need to be conveniently available. Large freight users could install LNG or biodiesel refuelling stations at their Distribution Centres, which are hubs for regional & interstate linehaul and urban delivery vehicles. This would complement the emerging LNG and Biofuels distributor networks to speed-up trucking industry adoption of cleaner fuels.

3. Opt-In

What if large Freight Buyers could “Opt-in” to emissions trading so they could directly manage their transport carbon liability?  Freight contracts that pass-on carbon property rights would allow Freight Buyers to manage the carbon tax liability for all the transport services they consume, opening up international linkages and domestic offsets on greater economies of scale than only the largest transport firms could contemplate. It may help achieve the economic goal of any emissions pricing regime: To achieve targeted environmental improvements at the lowest marginal cost to society.

Collaborate to Win!

Intelligence on carbon and energy use within supply chains will improve decision-making and is the first step on the path to gaining competitive advantage in a low carbon world. Shared understanding of carbon and energy reveals business opportunities and manages risks. “Without conducting the study,” says one company MD who has done just that, “I have no doubt we would have targeted projects in areas with less potential for both environmental and financial return.”

Cross functional teams of Freight Buyers, transport operators and other stakeholders can develop more powerful business cases for reducing carbon use. Such teams challenge conventional wisdom by asking:

Are we doing everything right to minimise fuel and carbon use, everyday, on every truck, train, ship and plane?

There is no silver bullet; a portfolio of initiatives is needed. It takes more work to be energy-efficient. Efficient operation requires experimentation. And many measures will only deliver consistent, long-term results if businesses adopt them systematically.

Freight Buyers who want their transport providers to do it all alone will miss out on the substantial opportunities that arise from supply chain co-operation.  In the new low carbon economy, the opportunity cost of not collaborating is competitive disadvantage. Stay tuned!

How will Freight Transport Customers Treat the Carbon Tax?

Australia’s carbon tax starts in 3 months time, and customers of freight transport services should have decided by now whether they will accept carbon-related price increases from their transport providers.

What signals are you sending or receiving in the marketplace?

Accept or Reject

Freight customers’ decisions will depend on the price sensitivity of their product, existing margins and profitability targets, and their assessment of transport providers’ ability to absorb these costs while maintaining service levels. Will it be a ‘black and white’ choice or are there shades of grey?

Firstly, shippers can play hard ball and reject any carbon cost pass-through. But what then will become of transporters who can’t absorb the new tax burden? It’s the small & medium-sized firms that will go to the wall first.

Alternatively, shippers may accept pass-through of the full carbon tax cost. Yet where is the incentive for transport companies to minimise their carbon use if the tax costs are directly recoverable from clients? Perhaps a discounted pass-through will allow equitable sharing of the carbon cost.

How Big a Cost?

Both the size of the cost and its relative impact on customers’ end product pricing further influences the decision. There’s two carbon cost penalties to consider:

  1. refiners’ direct permit costs are estimated to increase fuel prices by up to 1 cent per litre
  2. the 6+ cents per litre effective carbon price for rail/sea/air transport companies in July 2012 and trucking in July 2014

Assuming fuel represents one-third of total transport costs in a rise and fall contract mechanism and the retail diesel price is $1.50 cents per litre,  the 1 cent refining cost increase results increases transport prices by about 0.3%, while the 6+ cents per litre effective carbon price will raise transport prices by under 2%.

For some customers a 2% freight increase may be a small cost to absorb when considering the immediate sustainability of their transport service levels. For others the 2% freight cost rise may significantly affect their own competitive advantage. Regardless, relative market power will determine negotiation outcomes.

Of course, this is just one of the estimates being floated 3 months out. After the furore created by its announcement, a 2% carbon tax impact sounds too low, especially when some predict a doubling of transport costs. Its impact will vary by transport task, the proportionate weighting that fuel has in the total costs of each service and how well both fuel and carbon are managed by players in each supply chain. Herein lies a third approach to the “Accept or Reject” decision for shippers.

A Third Way – Collaborate!

Rather than a win-lose position of “Yes” or “No” perhaps “Yes…with Conditions” will allow freight customers to reduce their carbon cost exposure while retaining sustainable service levels. Sharing responsibility for improving fuel and carbon efficiency may be the win-win answer both shippers and transporters need to thrive in the new carbon economy. It will take leadership and innovative partnering, and it won’t be easy.

A lot of trust and an equitable “risk and reward” sharing of cost savings will be needed for transport operators to open their books. Transport is a notoriously competitive market where ultra-low margins mean that any small benefits operators achieve through better fuel management are prized cost-competitive advantages which transport firms will fight to protect. Trade secrets won’t be given away for nothing.

Yet only joint action can realise many of the energy- and carbon-efficiency improvements necessary to better manage carbon risks, whether they be process changes affecting multiple stakeholders or adopting new technologies. Transporters can’t do it alone.

Collaborative problem solving will be the best way to improve carbon and energy profiles along all supply chains in Australia’s new carbon economy. It starts July 1st.

How is your Australian Transport business preparing for its Carbon Price?

Transport companies have fewer options than Australia’s Top 500 energy users to improve their environmental performance under the Clean Energy Future laws. The new tax kicks off in four months and our fuel costs will rise across the board. When permit trading begins in 2015, contrary to the common belief that only the 500 highest greenhouse gas emitters pay a direct carbon price, another 165,000 transport businesses will also be paying an explicit carbon price. And transporters will find reducing emissions much harder and more costly than will the “big polluters”.

So what are you doing about it?

How a Carbon Price on Transport Works

The carbon price on transport fuels will be charged through the existing fuel tax credit mechanism, hitting all heavy freight transporters except trucking from July 2012. Once trucking is brought into the system in July 2014 every Transport & Logistics (T&L) company in Australia which operates heavy equipment will pay carbon tax. According to the Chartered Institute of Logistics & Transport Association there are 165,000 T&L businesses in Australia.

The roughly 7 cents per litre “effective” carbon price on transport fuel will be levied by adjusting existing fuel tax credits (or Diesel Fuel Rebates, which ever you prefer) applied to each transport mode unequally and with variations amongst fuel types and timing of application. This will disadvantage some transport modes and some alternative fuels, some which offer the greatest greenhouse gas emissions savings.

Yes, it’s simple. There’s no new tax; they simply change the rate of tax paid under the existing system. But is its simplicity also a barrier to innovation?

What are our Options?

There’s two ways a transport company can manage its carbon price exposure:

  1. Increase energy efficiency (fuel efficiency)
  2. Switch to lower carbon fuels

Biodiesel, like Ethanol, won’t have a carbon price applied to it. Yet Biodiesel’s lower energy content means more fuel is needed to produce the same energy output as mineral diesel. You got it, this means higher fuel consumption.

Fuel Costs Rise

Most transport operators are Price-Takers with little ability to pass on the extra costs to their customers, be they retailers, manufacturers or larger transport companies. These Carbon-Conscious freight buyers are increasingly insisting on low carbon transport partners in order to contain their supply chain emissions and can manage fuel cost risk in contracts which protect them against future carbon cost pass-throughs. In this situation, a carbon price becomes just another increased cost for T&L companies to absorb into their already slim margins. Of course, no transport company can absorb increases in fuel, its most significant cost. This can turn a Low Margin operation into a No Margin disaster, with an “Out of Business” sign soon to be hung on the front door.

The Clean Energy Future legislation will achieve its aim of raising cost of high polluting activities such as moving freight. Yet complementary laws are needed to help rather than hinder transporters. In road transport, for instance, the legal regime will work against emission reductions because:

–          Engine design mandates favour low carbon technologies which actually increase fuel consumption

–          Local and State regulations restrict higher productivity vehicles (such as B-Doubles and B-Triples) from carrying more freight with less fuel

–          No carbon price differential for fuel used for old or new (cleaner) engines provides no reason to take old vehicles out of service

The higher the fuel tax, the higher the cost of abatement. Reducing fuel tax credits raises the cost of emissions abatement. So while industry laggards risk losing market share to more fuel efficient competitors, they may retain a cost advantage by extending the life of older vehicles which are cheaper to run and with no carbon penalty.

Fewer Abatement Opportunities

Improving energy efficiency and switching to lower carbon emitting power sources are two of the best opportunities to improve environmental performance for any Australian business under the Clean Energy Futures laws, but the regulations restrict opportunities for the T&L industry. Big electricity users will have the flexibility to achieve environmental goals in the most cost-effective manner by being able to purchase domestic and international carbon permits and offsets when they are cheaper than the cost of emission reductions in their own operations.  Such economic efficiency is a fundamental design principle of any emissions trading scheme, allowing participants to optimally use all cheap emissions abatement options to lower marginal compliance costs throughout the economy and make it easier to achieve reduction targets. Transport fuel users won’t have this flexibility.

What to Do?

Clearly T&L companies have fewer options or incentives to innovate under the Clean Energy Future system than the top 500 electricity users do. The “effective” carbon price on transport fuels disadvantages those next 165,000 businesses below the top 500 emitters, and may instead be a somewhat “ineffective” carbon price where increased fuel costs are incurred for small environmental gains.

What do you think?

It’s only a matter of time until carbon pricing hits us all in Australian Transport.