Budget Review 2014–15 Index

Richard Webb

Introduction

The Budget contains proposals for ethanol and biodiesel that are similar. Similarities include:

• grants for both will be reduced to zero
• the current excise rate—which applies to both fuels—of 38.143 cents per litre (cpl) will fall to zero from 1 July 2015 to 30 June 2016
• from 1 July 2016, excise rates on both fuels will rise over five years

–      the ‘final’ rates will be based on 50 per cent of the energy content-equivalent tax rate, and

•  the current customs rate of 38.143 cpl—which also applies to both fuels—will remain.[1]

Ethanol

The Ethanol Production Grants (EPG) Programme provides a grant of 38.143 cpl on fuel supplied for transport where production inputs are sourced domestically.[2] Thus the effect of the EPG is to reduce the ‘effective’ rate of excise to zero.

Imported ethanol is subject to customs duty and a value duty of five per cent. Together, the duties and the EPG protect the domestic industry against imports.

The EPG will cease on 30 June 2015. The Government proposes to replace the EPG with excise. The following table shows the resulting differences between the excise and customs duty rates.

Table: Proposed excise and customs duty rates on fuel ethanol (cents per litre)

Source: Australian Government, Budget measures: budget paper no. 2: 2014–15, 2014, p. 165, accessed 15 May 2014.

Under the proposals, the level of protection for ethanol will fall: the bottom row of the table shows that the difference between the excise and customs rates will decline. Further, with inflation, the real value of the customs duty will also fall.

Bureau of Resources and Energy assessment  

In 2014, the Bureau of Resources and Energy (BRE) assessed the costs and benefits of the EPG.[3] The assessment found that the EPG has little merit. The BRE’s findings include:

•  the EPG distorts resource use in the economy by retaining resources in an uneconomic industry
• the financial cost to the taxpayer is significant
• regional employment and greenhouse gas abatement are relatively modest but come at a very high cost
• there is no real benefit to liquid fuel security
• there is no net benefit to agricultural producers and
• the industry is unlikely to be viable in the absence of the EPG.

The benefit to motorists in the form of lower prices for petrol containing ethanol is also limited. The Australian Competition and Consumer Commission found that in 2012–13, petrol containing 10 per cent ethanol (E10) was, on average, around only two cpl cheaper than regular unleaded petrol despite E10 having the advantage of the grant.[4]

In sum, the proposals will reduce the distortion of resources in the economy by reducing protection to an uneconomic industry, and contribute to the goal of reducing the budget deficit through net savings. The savings result from the combination of the cessation of the EPG and its replacement with excise. The savings, which extend beyond the forward estimates period, are expected to amount to amount to $120 million over six years from 2015–16.[5]

Biodiesel

Similar to ethanol, producers (and importers) of biodiesel are eligible for a grant of 38.143 cpl but theirs is under the Cleaner Fuels Grants Scheme (CFGS). Since the CFGS grant equals the excise rate, the ‘effective’ rate of excise on biodiesel is also zero.

As with ethanol, reducing the excise on biodiesel to zero from 1 July 2015 to 30 June 2016 will, for that year, maintain the same level of protection to domestic biodiesel producers as now, that is, 38.143 cpl.

However, unlike ethanol, Budget Measures: Budget Paper No. 2: 2014–15 does not state what the proposed biodiesel rates will be from 1 July 2016.

Expected net savings from the biodiesel measure are $156 million over four years.[6]

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