Australia’s proposed low carbon liquid fuel demand measure: international lessons and infrastructure implications

Disruption and instability affecting the Strait of Hormuz have brought Australia’s fuel security risks into sharper focus. Australia remains among the most import-dependent advanced economies for aviation fuel, with the vast majority refined offshore and reliant on complex and fragile supply chains.

Against that backdrop, the 2026-2027 Federal Budget included an important announcement for Australia’s transport, infrastructure and energy sectors:

“We are continuing to develop a domestic low carbon liquid fuel industry, along with a green fuel bunkering strategy. Working with industry, we will introduce a demand measure that provides certainty for new Australian low carbon liquid fuel production and stimulates investment in new, clean fuel refining capacity. This will reduce our reliance on imported fuels, improving the resilience of our domestic transport industry.”

While the announcement provides little detail, it signals a meaningful policy shift: Australia is moving beyond supply-side support towards market intervention designed to create bankable demand for low carbon liquid fuels (LCLFs), including sustainable aviation fuel (SAF).

The underlying challenge is commercial rather than technological. SAF can be produced and aviation will continue to rely on liquid fuels for decades. The central policy question is therefore not whether LCLFs can be produced, but how governments create sufficient demand certainty to support investment in domestic production.

The design choices made over the next 12–24 months may determine where future refining capacity is built, who controls emerging fuel supply chains and whether Australia captures greater value from its feedstock advantages. This article considers how international demand measures operate, what legal architecture Australia may adopt and what the implications are for infrastructure, investment and fuel supply chains.

What does the Budget announcement actually tell us?

Three elements of the announcement warrant close attention:

1. The measure is framed around LCLFs, rather than SAF specifically. This suggests the Government is considering a broader market framework that may encompass renewable diesel, marine fuels and other LCLFs alongside SAF.

2. The emphasis on “new Australian production” and “new, clean fuel refining capacity” indicates that this is not solely a decarbonisation measure. Fuel security, industrial development and domestic refining capability appear equally important policy drivers.

3. The reference to a “demand measure” suggests the Government will introduce a market intervention that creates ongoing offtake certainty rather than a one-off grant or subsidy program.

The announcement should also be understood against the backdrop of the Australian Government’s broader Future Made in Australia agenda, which identified LCLFs as a priority sector. In the 2024-25 Federal Budget, the Government announced $250 million in LCLF grants and $1.1 billion in production incentives, alongside $18.5 million over four years for developing a certification scheme. The Government has also committed to completing a regulatory impact analysis of demand-side measures.

Industry consensus: demand certainty is the missing ingredient

Industry submissions to the Australian Government’s 2024 Low Carbon Liquid Fuels Consultation Paper were notable for the degree of alignment around one central proposition: production incentives alone are unlikely to deliver a commercially viable domestic LCLF industry without complementary demand-side measures.

Although participants differed on design – including mandates, fuel standards and certificate mechanisms – there was broad agreement that demand certainty remains the principal constraint on domestic investment.

The Australian Institute of Petroleum recommended introduction of a demand-side measure by 2027 and expressed support for a Low Carbon Fuel Standard (LCFS) approach based on lifecycle emissions intensity. Similarly, bp Australia submitted that production incentives alone would be insufficient and that both supply-side and demand-side interventions would be required to unlock investment.

Airlines and aviation stakeholders broadly reached similar conclusions, although often through different policy preferences. Qantas and Airbus, in a joint submission with Deloitte, recommended the introduction of a demand mandate commencing from 2030 with progressively increasing blending targets.

Although industry remains divided on the optimal mechanism, the consensus is that the status quo is unlikely to deliver sufficient investment in domestic refining capacity or LCLF production.

How have other jurisdictions created demand?

Internationally, governments have generally used four main approaches:

1. supplier obligations or blending mandates, which require fuel suppliers or importers to ensure a minimum volume of LCLF enters the market;

2. tradeable certificate schemes that allow compliance flexibility and support book-and-claim arrangements before physical supply infrastructure is fully developed;

3. carbon intensity frameworks that reward lower-carbon fuels based on lifecycle emissions intensity regardless of technology pathway; and

4. financial support mechanisms including production tax credits, passenger levies and government offtake commitments.

A comparison of the key international frameworks is set out in the table below.

What legal architecture is Australia likely to adopt?

International experience suggests that the model that best aligns with Australia’s objectives of fuel security, domestic production and infrastructure investment will dictate the legal framework. A likely outcome is a Commonwealth scheme designed around supplier obligations, potentially supported by tradeable credits or certificates.

While a blending mandate appears the most likely mechanism, it is not the only model under consideration. One proposal advanced by former Clean Energy Finance Corporation CEO Oliver Yates and Elizabeth Thurbon of the Green Energy Statecraft Project would see a central government buyer sign long-term contracts with SAF producers, funded by a small passenger levy administered through the Clean Energy Regulator. Airlines would buy fuel at market prices; the levy would fund the green premium separately. The design choice will materially affect who bears compliance obligations and how investment risk is allocated across the supply chain.

The legislative pathway for implementing a demand measure remains uncertain and the Budget announcement provides little indication as to the Government’s preferred approach. However, the breadth of the Government’s stated objectives – spanning fuel security, domestic production, refining capacity and decarbonisation – suggests implementation may require a combination of legislative instruments rather than reliance on a single statute.

The Government could amend existing Commonwealth legislation, including fuel security and fuel quality frameworks, to impose supply obligations, establish fuel eligibility criteria and create compliance mechanisms. Existing certification, reporting and industrial policy frameworks may also play supporting roles in relation to emissions accounting, origin verification and investment support.

Alternatively, if the Government pursues a certificate-based market, tradeable compliance mechanisms or a broader market redesign, it may prefer to enact a bespoke legislative framework. International experience suggests that the critical design questions are likely to focus on which entities become obligated parties, how compliance is demonstrated and how technical rules are delegated and administered.

Australia has domestic precedent for volumetric fuel mandates. New South Wales and Queensland have each introduced legislated biofuel mandates imposing minimum supply requirements on fuel market participants.

In New South Wales, fuel retailers are subject to ethanol and biodiesel sales obligations under the Biofuels Act 2007 (NSW), while Queensland’s biofuel mandates impose minimum requirements for biobased petrol and diesel sales through obligations applying to fuel retailers and wholesalers. Although these schemes relate to road transport fuels rather than aviation fuels, they demonstrate that volumetric demand-side interventions in liquid fuel markets are not novel in Australia.

More importantly, they provide practical examples of how governments have previously allocated obligations to market participants, implemented reporting frameworks, introduced exemptions and phased implementation, and used fuel regulation to stimulate domestic production and investment.

Who bears the cost?

The design of any demand measure will determine not only whether domestic production occurs, but who ultimately pays for it. While policy discussions often focus on producers and investors, the commercial reality is that the additional cost of LCLFs will be allocated across supply chains through regulation, contracts and pricing mechanisms.

Fuel suppliers and refiners

If obligations are imposed on suppliers, refiners or importers, these entities may initially bear compliance responsibility through blending obligations, certificate purchases or sustainability requirements. However, suppliers are unlikely to absorb these costs permanently. Over time, compliance costs will likely be reflected in fuel pricing and passed through contractual arrangements where market conditions permit.

Airlines

Airlines are likely to experience increased fuel costs regardless of whether they become direct regulated entities. Higher fuel costs may arise through supplier pass-through mechanisms, SAF premiums, infrastructure charges or costs associated with complying with international frameworks such as the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) and overseas SAF mandates. Contract structures and fuel supply arrangements will therefore become increasingly important mechanisms for allocating regulatory risk.

Passengers and freight customers

International experience suggests that at least part of the green premium is ultimately passed to end users. This may occur explicitly through levies or surcharges, or implicitly through higher ticket prices and freight costs. The extent of pass-through will depend on competition, route economics and the scale of any mandate.

Taxpayers

Government funding is likely to remain necessary during early market development. Production incentives, grants, certification schemes and enabling infrastructure all require public investment. The policy challenge for Government is therefore balancing fiscal exposure against the need to create sufficient market certainty to attract private capital.

Infrastructure owners

Airport operators, storage providers, terminal operators and logistics businesses may also bear costs associated with adapting infrastructure for new fuel pathways. Storage expansion, blending capability, quality assurance systems and access arrangements may require significant capital investment before demand reaches scale.

Ultimately, demand measures do not eliminate the cost premium associated with LCLFs they determine how that premium is allocated. For market participants, understanding where regulatory obligations sit may therefore be less important than understanding where the economic burden ultimately lands.

Market implications: infrastructure, commercial relationships and investment

A future demand measure is unlikely to affect all market participants equally. However, its design will reshape infrastructure requirements, commercial relationships and investment decisions across the fuel supply chain.

Infrastructure and access constraints

Demand-side regulation may accelerate scrutiny of whether existing fuel infrastructure is capable of supporting new fuel pathways, increased volumes and greater supplier diversity.

Many airport fuel systems and downstream fuel supply chains were developed around centralised infrastructure models and stable imported fuel supply arrangements. As domestic production scales and new fuel pathways emerge, infrastructure requirements are likely to expand across:

• storage and blending infrastructure;

• terminal and port capacity;

• logistics networks;

• quality assurance systems; and

• airport fuel infrastructure.

Infrastructure access may become increasingly important. Independent fuel producers require access to storage, logistics and airport infrastructure to achieve scale, yet access constraints can increase costs and slow market entry. This creates risks that infrastructure – rather than feedstock availability or technology – becomes the principal bottleneck to market development.

For airports specifically, demand-side regulation may prompt increased focus on whether existing fuel infrastructure arrangements are sufficiently flexible to accommodate multiple suppliers, new fuel pathways and competitive access. As airports expand capacity or relocate fuel systems, ownership and investment models may come under increasing scrutiny. In some cases, this may accelerate consideration of whether infrastructure ownership structures designed for conventional fuel supply remain appropriate for emerging LCLF markets.

Contracting and allocation of regulatory risk

Existing fuel contracts were largely designed for conventional fuel supply chains and may not adequately address future regulatory obligations.

Market participants may increasingly need to allocate responsibility for:

• blending obligations;

• certificate costs;

• sustainability compliance;

• emissions reporting;

• carbon intensity requirements; and

• supply assurance.

This may lead to greater focus on:

• change in law provisions;

• pass-through mechanisms;

• certification obligations;

• long-term offtake arrangements; and

• regulatory risk allocation.

Investment and project bankability

Investors have historically viewed Australian low carbon fuel projects cautiously because of uncertain demand and limited revenue visibility.

A credible demand measure may materially improve project bankability by creating greater certainty around future demand and reducing revenue risk. This has implications beyond production facilities themselves and may support investment opportunities across refining, storage, logistics, port infrastructure and airport fuel systems.

However, policy support alone is unlikely to eliminate risk. Scheme design, implementation timing, infrastructure constraints and long-term policy stability will remain central considerations for investors assessing whether projects progress to final investment decision.

The APAC competitive landscape: a narrowing window

International competition may ultimately prove as important as domestic policy design. Australia does not operate in a policy vacuum. Across the Asia-Pacific, momentum behind SAF is accelerating. Singapore has adopted binding targets with a 1% SAF requirement from 2026, rising to 3-5% by 2030. South Korea has announced a 1% mandate for international uplift from 2027. Japan is consulting on a 10% SAF target by 2030 with substantial capital and tax support. Indonesia, Malaysia, India and Thailand have either implemented or are actively developing SAF mandates or roadmaps.

Australia’s comparative advantages remain significant. It has access to competitive and sustainable feedstocks at scale, advantaged renewable energy potential for power-to-liquid pathways, established refining expertise, a large domestic aviation market, and geographic positioning within the APAC region. Several major Australian companies – including Ampol, bp, GrainCorp and IFM Investors – have signed memoranda of understanding and commenced feasibility studies for domestic renewable fuel production. However, these projects require policy certainty to reach final investment decision. The proposed demand measure, if well-designed, could provide precisely the market signal that converts these announcements into operating assets.

Looking ahead

The Budget announcement is short on detail but long on implications.

Australia is moving from supply-side assistance towards demand creation. The pace of that transition – and how quickly regulation reshapes supply chains, infrastructure requirements and investment decisions – is now the central question for industry participants.

For industry participants across aviation, fuel, infrastructure and investment markets, the central question is no longer whether LCLF markets will emerge, but whether Australia develops the regulatory architecture and infrastructure necessary to participate as a producer rather than remaining a feedstock exporter and fuel importer.

As Infrastructure Minister Catherine King recently observed, Australia cannot continue exporting feedstocks only to import refined fuels back at a premium. A well-designed demand measure is the policy mechanism that may determine whether that model changes.