Canadian biofuels plan 'could backfire'

A Canadian government proposal to claw back biofuel subsidies from profitable processors could backfire and discourage investment in the sector, a vice-president of Archer Daniels Midland (ADM) said today.

The Conservative government announced in its budget on Monday that it would spend C$2 billion ($1.7 billion) over seven years to boost ethanol and biodiesel capacity, including incentives of 20 Canadian cents a litre for producers.

But after three years, those incentives would be clawed back from producers achieving a rate of return of 20% or more, although details are still unclear, said Greg Webb, vice-president of public affairs for ADM.

"Our concern is when you start making comments about clawing back and putting rate caps of returns on industries that it may retard or may even discourage the kind of vibrant industry that we all seek," Webb said in a speech to a canola industry conference in Victoria.

Canada is the world's largest producer of canola, a variant of rapeseed that has become a sought-after feedstock for biodiesel producers around the world as governments seek to cut the use of fossil fuels and limit the production of greenhouse gases.

But Canada's biodiesel production has been stalled by a lack of government incentives compared with those offered in the US and Europe.

Ottawa said last year it would require 2 percent renewable fuel content in diesel and heating oil by 2012, a mandate that would create demand for an estimated 600 million litres of biodiesel, according to industry figures.

Canada was projected to product 95 million litres of the fuel in the 2006-07 marketing year, which ends 31 July.

On the drawing board are a 378-million-litre plant proposed for the province of Alberta by private equity firms Carlyle Group and Riverstone Holdings, and a 114-million-litre plant by privately held Canadian Bioenergy Corporation, also in Alberta.

US-based agrifood giant ADM is the largest biodiesel producer in Europe and largest ethanol producer in the US, and is spending $30 million to build a 322 million litre canola-fuelled biodiesel plant just south of the Canadian border at Velva, North Dakota.

Webb declined to say whether ADM is actively considering investing in a Canadian biodiesel plant.

"We are looking at the opportunity," Webb told reporters, noting the company is also considering other biofuel opportunities around the world.

ADM owns large crushing plants in Canada and is a principal shareholder in the country's largest grain company, Agricore United .

Ottawa's new incentives are "a very good start" for the nascent industry, but the proposed clawback could put Canada at a disadvantage to competing regions, Webb said.

"For the investor, it's a flag that goes up to say there might be some impediment here to developing the kind of vitality here for the industry," he told reporters.

"The government then would be in the industry, if you will, in a very intimate way," he said.

The Canola Council of Canada is concerned about how the clawback would be applied, and plans to discuss soon it with government, its president said.

"The issue for biodiesel is, if you set that (clawback) level too low, people simply won't build here, because there's good years and bad years," Barb Isman told Reuters.

"We're happy to have something to work with, but ... before we see plants actually under construction, we are going to have to get that resolved," she said.