There are two main biofuels with commercial prospects in Australia: ethanol and biodiesel. These biofuels currently comprise less than 0.1% of the Australian automotive gasoline market. The Federal Government has announced the objective that biofuels, produced in Australia from renewable resources, should contribute at least 350 million litres to the total fuel supply by 2010 – or approximately 1% of the Australian automotive gasoline market at that time. Other western countries, including the United States and the United Kingdom, have mandated various levels of biofuel use.

Ethanol is an alcohol made by fermenting and distilling simple sugars. Ethanol can be used for a variety of purposes, including as a beverage, in industrial applications and as a fuel. While ethanol can be produced from a variety of feedstock, it is predominantly produced from agricultural sources, such as waste starch, C molasses, corn, sorghum and feed wheat. The next generation of technology involves ethanol production from cullulosic feedstocks such as crop waste, grasses and trees. This technology, whilst not yet commercially proven, promises to allow ethanol to be produced more economically, with significant reductions in life-cycle carbon dioxide emissions than current processes, from a more widely available feedstock.

Biodiesel is normally produced from a reaction of vegetable oil or animal fat with an alcohol, such as ethanol or methanol, in the presence of a catalyst to yield mono-alkyl esters and glycerine, which is removed. Potential feedstocks for biodiesel include vegetable oils, animal fats and used cooking oils and fats. Biodiesel is used in conventional diesel engines. Subject to the manufacturer’s advice, it can be used as a direct replacement or blended with petroleum based diesel fuel.

Biofuels are not cost-competitive compared with conventional fuel alternatives and are expected to continue to require substantial and ongoing support to maintain their production and use. Therefore, achieving a level of biofuels production and use high enough to make a meaningful contribution to energy security (whether through excise subsidies or higher costs to consumers imposed through a mandate arrangement) would impose significant economic costs.

On 14 August 2006 the Prime Minister announced new energy and alternative fuel initiatives. These included grants to service stations to encourage the development of infrastructure to deliver and sell E10 blended fuel. The Queensland Premier has announced that he would introduce legislation to mandate petrol refiners to put five percent ethanol in fuel in Queensland by 2010. In the longer term, this would be increased to ten percent. On 23 August 2006 NSW Premier Morris Iemma announced that he would establish an E10 Taskforce. Subject to the Taskforce’s findings, the Government will mandate the use of E10 petrol in NSW, with a target date of 2011. The NSW Opposition Coalition welcomed the Premier’s ‘belated conversion to ethanol’, and restated its position that it would mandate ethanol use if necessary.