CHAIR—Thank you and welcome. I am not going to read out the terms of reference because I am sure you know them. We will be reporting on 19 October. These proceedings are public, although you may agree to a request to hear evidence in camera, and we will then determine whether it is appropriate. I remind you that giving evidence to the committee is protected by parliamentary privilege. It is unlawful for anyone to threaten or disadvantage a witness on account of evidence given to a committee, and such evidence may be treated as contempt by the Senate. It is also a contempt to give false or misleading evidence to the committee.

If you object to answering a question you should state the grounds on which you object. The committee will then determine whether we would like to insist on you answering a question. If we do, you may then request to provide that evidence in camera. I would like to invite whoever is going to give evidence to make an opening statement and then we will ask you some questions.

Mr Lake—I would like to make a short opening statement, if I may. Australia has an emerging biofuels industry. Several years ago the industry looked to have the support of federal, state and local government. From a promising start with the commitment of the federal government’s apparent certainty of intent of the excise position and the energy grants credit scheme, the industry has grown and flourished from zero production in 2004 to about 215 million litres per annum by the end of the first quarter this year.

With projects currently under way or in planning, that will potentially rise to over 1.1 billion litres per year by the end of 2008. This is nearly three times the government’s objective for 2010 of 350 megalitres. Forty to fifty per cent of this burgeoning demand will be met by existing oil and tallow production and oils from the oil seed industry. This will be supplemented by used cooking oil collection. It will also mean a constant increased domestic demand, offsetting current exports of fats and oils.

To meet the full demand of 1.1 billion litres, it will also require the importation of some fats and oils to meet that production. That will also create a stable base and a showcase for the establishment of a regional and rural development to meet the increased demand. Potentially this will become a multibillion dollar industry for regional Australia.

The changes to the treatment of biodiesel under the new tax excise regime mean that from 1 July 2006 there will be a severe impediment to biodiesel production. This has the effect of making biodiesel more expensive than diesel. As outlined earlier, the industry has been working with a time line of 2015 to establish itself with all its infrastructure for distribution, production and integration to market awareness.

Under the current market for automotive diesel oil, biodiesel will become more expensive than fossil diesel. This result can be attributed to the interpretation by Treasury, as borne out in a letter by Mal Brough to Len Humphreys of ABG. The cleaner fuels grant was not intended as a stimulus package for the biodiesel industry. This contradicts the understanding of the intent by members of the upper and lower house as suggested by Senator Brandis on 5 June in the economics legislation committee:

... let us not kid ourselves. The whole point of the package was to provide a stimulus.

The current pricing position, combined with the energy grants credit scheme and rebates for on-road and off-road applications with primary production, has assisted in the creation of a strong demand for biodiesel. There will be a cost to government to maintain the status quo, as sought by industry at the inquiry of 5 June. However, for every cost there needs to be a balance. In this case the benefit would be the formation of a sustainable biodiesel industry with more than $500 million as investment in infrastructure and resulting jobs. This would mean the development of a new agricultural paradigm where regional prosperity will be assisted by the strength of demand from the food energy industries in this nation and internationally.

The support from local councils and government can be demonstrated in that almost all new contracts and tenders show the addition of biofuels. The state governments of New South Wales, Queensland and Victoria are currently preparing a position paper for the adoption of biofuels across the state fleet. The Northern Territory, with the natural fuels plant up there, have made a statement where they intend to use 100 per cent biodiesel in all their fleet. So from state and local government it has been a very strong growth of support.

If industry receives the support that we need federally, the time frame to develop these additional areas of feedstock production—meaning the 500 million litres additional production—would be about five to seven years. Without the assurance of demand over the long term, this is not going to happen.

I have with me representatives from the biodiesel production side of things who are Len Humphreys, currently CEO of the largest biodiesel producer in Australia; Chris Mapstone from Gardner Smith who has taken a very strong position and has been a very strong supplier of fats and oils, and also an oil seed crusher in Australia. I also have letters of support from the Australian Oilseeds Federation, who have announced their intent to work more closely with the biodiesel industry and the association to develop these agricultural opportunities, and a position paper from the state government showing the current potential for biomass and biofuels using current agrinomic systems. Thank you.

CHAIR—Senator Joyce, I think it might be your turn first.

Senator JOYCE—You talk about the cost trade-off. Can you elaborate on that? In this current bill that is before the House, can you explain some of the sections of that bill that are going to have the effect of reducing the capacity for you to remain competitive in the market? I know you touched on them, but can you just give a little bit more elaboration on exactly that issue?

Mr Lake—Certainly. Under the current system with the combination of the producer grant and the effect of the offset of excise, and also the energy grants credits and other schemes available for biodiesel and all other alternate fuels, the new bills which are to be enacted as of 1 July effectively reduce and wipe out the energy grants credit offset in a very short time frame. The way the tax system is evaluated effectively puts an additional 38c for all on-road and off-road applications for biodiesel. I have with me a copy of a paper which was tabled on the 5th which shows the change in ballots, where biodiesel in an establishing market can be a cost benefit at the moment and, as of next month, there will be a cost penalty to adopt it.

For the case of on-road applications that penalty is anywhere from about 10c. By 2015 it goes up considerably. For off-road applications it is effectively the full excise rate.

Senator JOYCE—B5 is still seen as five per cent. That is being produced by the major oil companies at the moment, and will still get the—

Dr Humphreys—Sorry, Senator. That is not actually being produced. There is no oil company today blending B5 in any shape or form.

Senator JOYCE—So they are not in the market at all?

Dr Humphreys—No, zero. Let me give you, if I may, two examples of the impact of the c