KiwiRail is set to trial biodiesel on some trains and ferries, but it cannot source enough to switch completely anytime soon.
A six-to-12-month trial on off-peak Wellington trains is due to begin midway through this year, according to a briefing to the Minister of the Environment, obtained under the Official Information Act.
A one-month trial on the Interislander Kaiarahi ferry is also due to take place in September, as part of investigations into whether biofuel is viable when the new ferry fleet comes into service from 2024.
Both trials will use biodiesel - biofuel blended with regular diesel - but which type will depend on market availability.
KiwiRail has estimated it could reduce emissions on the Interislander ferries by approximately 3135 tonnes a year if it switches to biodiesel.
Biodiesel was used on passenger trains in 2010, but it became too expensive when subsidies were removed.
Z Energy has constructed a facility that can produce 20 million litres of 100 percent biodiesel, which can be expanded to 400m litres when biodiesel is blended with regular diesel, to create a fuel with 5 percent biodiesel.
KiwiRail used over 78m litres of fuel last year, and the briefing said the lack of supply means a complete switch to biofuel is still "some years away".
"KiwiRail maintains an open dialogue with Z Energy around the potential use of biofuels, however, current fuel contract obligations means that we are somewhat restricted in the short term."
A paper, Bioenergy Options for New Zealand, found that by utilising 30 percent of existing wood harvest biofuels by 2050, it could meet 51 percent of current petrol and diesel demand.
But a feasibility study, Norske Skog Tasman / Z Energy Stump to Pump Project, found that the cost of converting forestry residue to liquid fuels had small margins, because crude oil prices remain relatively low.
KiwiRail is also considering alternative fuels like LNG and methanol and the potential for the new ferry fleet to operate on different fuel types.
"This will allow the ships to more easily change fuel as the supply for less emissions intensive fuels becomes available," the briefing paper said.
The state-owned enterprise has a goal of carbon neutrality by 2050.