Assessment of the biofuels incentive Model – Summary

A PER was commissioned to estimate the costs and test the robustness of the incentives that had been proposed for stimulating bio-fuels production in SA. The review concluded that the proposed scheme was deficient in a number of respects, making it both more expensive than initially anticipated and more generous to producers than it needed to be. The PER identified weaknesses in the conceptualisation of the incentive scheme. These included: The inappropriateness of guaranteeing a 15% return on assets rather than on equity, especially when claw-back provisions kick in only after actual returns exceed 20%; The inappropriateness of allowing “incentive double-dipping” by allowing subsidised firms to qualify for accelerated depreciation incentives; and A lack of clarity about whether incentives should be paid on biofuel produced or biofuel delivered to refineries. In addition, the PER identified numerous weaknesses in the model that had been generated to estimate the cost of the biofuel incentive that collectively made it unsuitable for policy purposes. Reworking the numbers, the PER estimates that the cost of the biofuel incentive will be substantially higher than that projected in the original model.