Bills Digest No. 169 2002-03
Excise Tariff Amendment Bill 2003
WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.
CONTENTS
Passage History
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer & Copyright Details
Passage History
Excise Tariff
Amendment Bill (No. 1) 2003
Date Introduced: 29 May
2003
House:
House of Representatives
Portfolio:
Treasury
Commencement:
18 September
2002
To impose excise duty on fuel ethanol at the
same rate as the excise on petrol and diesel.
Background
The Bill imposes excise on fuel ethanol that
is, ethanol blended with petrol at the same rate as the excise on
petrol, now 38.143 cents a litre. This is the latest in a series of
measures relating to the provision of assistance to the production
of ethanol. Issues surrounding ethanol are canvassed in a
Department of the Parliamentary Library publication titled Fuel
Ethanol Background and Policy Issues.(1)
The main problem
that fuel ethanol faces is that it costs more to produce than
petrol. Ethanol costs around 70 cents a litre compared with around
35 cents (or less) per litre for petrol (depending on world crude
oil prices). Consequently, the production of ethanol requires
government assistance to compete with petrol. This is true even in
the large producers such as Brazil and
the United
States.
Assistance has taken three main forms:
- zero rate of excise
- bounty payments to producers, and
- excise on ethanol offset by an equivalent subsidy.
Zero-rating (often referred to as exemption) has been
the main form of assistance. Zero-rating of ethanol and other
alternative fuels that is, alternative to petrol and diesel was
implemented for fuel security and diversity reasons. In particular,
the aim was to reduce dependence on petroleum products.
The Keating Government introduced the bounty, which
was additional to the excise exemption. The Howard Government abolished the bounty on the
basis of a report that recommended that the bounty cease. The
Report concluded among other things that:
While the Scheme has initiated new production,
distribution and use of fuel ethanol, an economically viable
industry has not been developed.(2)
On 12
September 2002, the Government
announced that it would impose
excise on fuel ethanol. The rate on
the ethanol component would be the same as that on unleaded petrol,
namely, 38.143 cents per litre, with effect from 18 September 2002
until 17 September
2003. At the same time, the
Government introduced a production subsidy of 38.143 cents per
litre. The subsidy thus offsets the excise. The excise on
fuel ethanol was implemented by Excise Tariff Proposal No.4 (2002).
The Excise Tariff Amendment Bill (No. 1) 2003 would give
legislative authority to this Tariff Proposal.
The Government also imposed customs duty
on imports of 38.143 cents per litre. This, together with the
production subsidy that offsets excise, has the effect of
protecting the domestic ethanol industry from imports. An importer
reportedly incurred a loss of $600 000 as a result of this
measure.(3)
Given that the
production of fuel ethanol is commercially unviable without
assistance, the question arises whether assistance is
justified.
Three main arguments
have been advanced in favour of assistance. They are:
- ethanol s environmental and other benefits
- regional development, and
- fuel security and diversity.
Environment
Environmental benefits claimed for ethanol compared
with petrol include:
- ethanol is produced from agricultural crops and so is
'renewable' whereas petrol is produced from crude oil, a
non-renewable resource
- harmful emissions (carbon monoxide, hydrocarbons, 1-3
butadiene, benzene, toluene and xylenes) are reduced
- reduced fuel
lifecycle emissions of greenhouse gases, and
- ethanol can substitute for methyl tertiary butyl ether, a fuel
additive, that can contaminate water supplies.
On the other hand, using fuel ethanol has
environmental disadvantages including:
- some harmful emissions [adelahydes (formaldehyde and acrolein)
and particularly acetaldehydes] are generated, and
- ethanol has an affinity for water. In certain circumstances,
this can lead to vehicle driveability problems and potential engine
damage.
Fuel ethanol has other disadvantages:
- some blends are unsuitable for non-automotive use such as
aviation, boats, and a range of hand-held devices and
lawnmowers
- blends of 20 per cent ethanol are not suitable for some older
cars, and
- the use of fuel ethanol results in a loss of fuel economy
because ethanol has an energy content about two-thirds that of
petrol. The higher the proportion of ethanol in the blend, the
greater the loss (a 10 per cent ethanol blend results in a loss of
fuel consumption of around three per cent).
This raises the question: do the environmental
benefits of fuel ethanol justify assistance?
The Bureau of Transport and Regional Economics, in a
report titled Greenhouse
Policy Options for Transport published in May 2002 that is, before the
Government ended the excise exemption found:
The subsidy inherent in
the excise exemption of alternative fuels [such as ethanol]
probably exceeds the environmental benefits it is meant to target.
As the [Bureau of Transport and Communications Economics]
observed:
On the basis of the
limited emissions costing available, it appears unlikely that the
environmental benefits from most alternative fuels are as large as
the existing 'subsidy' they now receive.(4)
The review of the bounty noted above also cast doubt
on whether the environmental benefits justify
assistance:
Current production and
use of fuel ethanol is not cost effective in reducing emissions of
greenhouse gas and environmental air pollutants. There are both
positive and negative identifiable pollution outcomes. The
evidence, although extensive and complex, is also ambiguous and
often contradictory. Under current use and circumstances it is
difficult to conclude that there are net benefits from displacing
petrol with fuel ethanol.(5)
Regional Development
It has been argued that assisting production of fuel
ethanol benefits regional areas including through flow-through
effects to input producers.
It is important to distinguish between
'redistributed' economic activity and social benefits resulting
from that activity. The level of production of ethanol and
employment in regional areas depends on government assistance, that
is, activity in ethanol production is largely a consequence of the
transfer of income from taxpayers to ethanol producers by means of
assistance. In assessing the consequences of its recommendation
that fuel ethanol should be subject to excise, the Fuel
Taxation Inquiry noted:
The extent of these
impacts is difficult to assess. For some sectors, such as ethanol
and biodiesel, where the industries are at an early stage of
development, the imposition of excise will affect their future
viability, even though it was based on an artificial tax
advantage.(6)
A study for the Australian Bureau of Agricultural and
Resource Economics of the commercial viability of increasing
production of ethanol by the Australian sugar industry
concluded:
It is also clear that
commercial viability of both existing and expanded fuel ethanol
production is dependent on significant levels of government
intervention, including features such as the following:
Continued availability
of full exemption from fuel excise (or an equivalent rebate);
Other financial or
other assistance that the government may provide from time to time
to investment in a fuel ethanol industry (for example, under
G[reenhouse] G[as] A[batement] P[rogramme] and other existing or
new programs).(7)
This raises the question of whether the benefits of
assistance to regional areas are justified. The Fuel Taxation
Inquiry noted:
no analysis has been
undertaken to establish the benefits to rural and regional areas of
the tax concessions and whether they could be achieved at lower
cost by other means.(8)
It has been argued that assistance to ethanol should
be increased to help the sugar industry. In particular, a mandated
level of ethanol in fuel ethanol has been proposed. However, a
Treasury study concluded:
The only effect on
sugar farmers would be that exports would be displaced. The price
received for sugar would remain the same and, overall, sugar
farmers would be no better off.(9)
Fuel Security
As noted, the Government originally introduced the
zero-rating of excise for fuel security and diversity
reasons.
Alternative fuels generally and fuel ethanol in
particular contribute little to reducing reliance on petroleum
products. Ethanol use is equivalent to 0.19 per cent of petrol and
diesel use, 0.33 per cent of petrol use, and 1.5 per cent of petrol
use in greater Sydney, the main
market.
The Fuel Taxation Inquiry questioned the
effectiveness of assistance in achieving fuel security:
Despite the use of
taxation concessions to encourage the use of petroleum substitutes
over the past 20 years, the energy inefficiency, inconvenience and
lack of access to those fuels has restricted their use to a small
proportion of transport fuel. This is not expected to change over
the next 20 years, by which time a new generation of engine
technology, replacing both petroleum products and their substitutes
may have emerged.(10)
To increase fuel ethanol's market share, it would
necessary to increase assistance. A constraint would be the cost to
the Budget.
Assistance to fuel ethanol may be a misallocation of
resources. Resources such as land, labour and capital are said to
be allocated 'efficiently' when they are used to produce the goods
and services that consumers want most and are employed in the most
productive industries. Industry assistance can 'distort' the
efficient allocation of resources by interfering with decisions as
to which goods and services to buy and which industries to invest
in. The Fuel Taxation Inquiry concluded that:
the use of fuel
taxation concessions to encourage the production and use of
alternative fuels has significant resource allocation effects that
can no longer be justified.(11)
In April 2003, the Government announced that
it would set a 10 per cent limit on the proportion of ethanol in
blended fuels and amend the Fuel Quality Standards Act 2000
to require labelling of the ethanol content of
blends.(12)
These decisions were in response to claims
many exaggerated and ill-informed about the alleged damage to car
engines caused by high levels of ethanol in blended fuel. These
claims led to a fall in consumer confidence over the use of fuel
ethanol and so damaged the industry. Labelling should help restore
confidence to consumers. On the other hand, the cap will reduce the
demand for ethanol as some fuels sold contain more than 10 per cent
ethanol.
In the 2003 04 Budget, the Government
announced that it proposes to extend until 30 June 2008 the
existing arrangements that is, excise plus equivalent subsidy for
ethanol (these arrangements are due to expire on 18 September
2003). The cost of the subsidy is estimated at $27 million in 2003
04, $45 million in 2004 05, $61 million in 2005 06, and $62 million
in 2006 07.(13) On 1 July 2008, ethanol will be subject
to a new rate of excise. This rate will based on ethanol s energy
content relative to a fuel such as diesel or petrol. The new rate
is yet to be determined. The new rate will be phased in. Grants
will be paid to importers and producers that reduce the effective
rate of excise that is, excise less the grant below the new rate.
The grants will be reduced in five equal annual instalments from 1
July 2008 to 1 July 2012, when the new rate will apply.
If implemented, these proposals would result in the
withdrawal of assistance, resulting in a contraction of the ethanol
industry.
The Manildra Group
is the largest ethanol producer. Manildra manufactures ethanol from
wheat waste at Nowra in New South
Wales. As a beneficiary of
existing arrangements, Manildra naturally supports
them.(14)
The Australian Democrats welcomed the
Government s decision to rebate the excise on domestically produced
ethanol because of the benefit to local industry and the
environment. The Democrats also advocate mandating the use of
ethanol in petrol.(15) The ALP Shadow Minister for
Regional Development, Transport and Infrastructure, Mr Martin
Ferguson, criticised the Governments support of the ethanol
industry on the grounds that:
Only the ethanol
industry stands to gain from ethanol in fuel, not the consumer or
fuel companies. The ethanol industry is primarily comprised of Dick
Honan, great friend and donor to the Coalition parties. It is
expected that the ethanol excise rebate will continue for another
five years and give Mr Honan and the few other ethanol industry
players another five years of special treatment.(16)
(if any)(if any)
The Bill amends the Excise
Tariff Act 1921 notably section 6G. This section deals with how
the duty payable on excisable blended petroleum products (such as
fuel ethanol) is determined. The Schedule to the Act contains
definitions of goods and the rates of duty that apply to them. The
references to item 11 of the Schedule to the Act relate to the
imposition of excise on petrol, diesel and other fuels, while item
12 of the Schedule relates to excisable blended petroleum products.
The reference to goods with a lead content not exceeding 13
milligrams per litre is, as a practical matter, to so-called
unleaded petrol. Denatured ethanol is ethanol rendered unfit for
human consumption.
Item 2 of Schedule 1 repeals
subsection 6G(2) and inserts a new subsection 6G(2). This
provides that the duty payable on a blended product is worked out
on the basis of a formula if:
- the fuel the ethanol is blended with is classified to item 11
or 12 of the Schedule to the Excise Tariff Act 1921
[paragraph
(2)]
- the fuel the ethanol is blended with is used in internal
combustion engines but not aircraft engines [subparagraph
(2)(a)(i)]
- the fuel that the ethanol is blended with has a low lead
content (less than 13 milligrams per litre, for example, unleaded
petrol) [subparagraph
(2)(a)(ii)] and
- the blend includes denatured ethanol as set out in item 11 of
the Schedule to the Excise
Tariff Act 1921.
In such a case, the amount of excise payable
is the volume of ethanol multiplied by the blending rate less
previously paid duties. For example, if the volume of ethanol were,
say, 10 litres and 90 litres of petrol, the amount of duty payable
would be 100 times 38.143 cents less previously paid duties
[paragraph
(2)(b)]. The insertion of previously paid duties is
necessary to avoid double payment of duty. If, for example, duty
has already been paid on unleaded petrol but is subsequently
blended with ethanol, imposing excise on the blended fuel would
result in the double payment of excise on the unleaded petrol
component of the blend.
Comparable provisions are contained in the
Customs Tariff Amendment Bill (No. 2) 2003.
Concluding
Comments
The main function of assistance to
ethanol production of which this Bill is an integral component seems to be
to transfer income to regional and rural
Australia.
Indeed, the industry s existence is based on an artificial tax
advantage . There seems to be little justification for continuing
assistance. As judged by the Fuel Taxation Inquiry and others, the
environmental and other benefits of alternative fuels including
ethanol are not so great as to justify their continued
subsidisation. Moreover, assistance has done little to achieve fuel
security or diversity away from petroleum products, the original
justification for subsidising ethanol.
1.
Fuel Taxation Inquiry
Report, March 2002.
2.
Department of Primary
Industries and Energy, Portfolio Evaluation for the Ethanol
Bounty Scheme, Canberra,
August 1996, p. 1 6.
3.
J.
Koutsoukis
and I. Howarth, The ethanol
dream runs on empty , Australian Financial
Review, 3 June
2003, p.
61.
4.
Bureau of Transport and
Regional Economics, Greenhouse Policy Options for
Transport, Report 105, 2002, p. 87. The reference in the
quotation is to: Bureau of Transport and Communications Economics,
Alternative Fuels in Australian Transport, Information
Paper 39, AGPS, 1994, p. 213.
5.
Department of Primary
Industries and Energy, Portfolio Evaluation for the Ethanol
Bounty Scheme, Canberra,
August 1996.
6.
Fuel Taxation Inquiry
Report, op. cit., p.
22.
7.
B. Naughten, Viability of Sugar Cane Based Fuel
Ethanol, Australian Bureau of Agriculture and Resource
Economics Report to the Department of Agriculture, Forestry and
Fisheries, Canberra , October 2001, p. 34 at:
http://www.affa.gov.au/content/output.cfm?ObjectID=C966A946-0DB8-4BD3-9EE73220FF10D630
8.
Fuel Taxation Inquiry
Report, op. cit., p.
17.
9.
J.
Koutsoukis
and I. Howarth, op. cit.
10.
Fuel Taxation Inquiry
Report, op. cit.,
pp.42-43.
11.
ibid.
12.
Hon Dr
David Kemp, Minister for the Environment and
Heritage, Federal Government to Set 10 Per Cent Limit , media
release, K0076, 11 April; 2003 at
13.
Sources: Budget
Strategy and Outlook 2003 04, Budget Paper No. 1, pp. 1-23 and
1-24; Budget measures 2003 04, Budget paper No. 2, pp. 40-42 and
222-224; Hon. Peter Costello, treasurer, Fuel Tax Reform for the
Future , press release 31, 13 May 2003; Hon. Peter Costello and
Hon. Dr David Kemp, Minister for the Environment and Heritage,
Incentives to Promote Cleaner Fuels , press release 30, 13 May
2003; and Hon. Dr David Kemp, New Package to Support Uptake of
Biofuels , media release KB11, 13 May 2003.
14.
J.
Koutsoukis
and I. Howarth, op. cit.
15.
For example, the
Democrats advocate that fuel ethanol should have an ethanol content
of two per cent by 2008. Senator Lyn Allison, Welcome boost for Ethanol , press
release, 12
September 2002.
16.
Mr
M. Ferguson, Anderson Goes the Full Monty For Ethanol Mates ,
media statement, 11
May 2003.
Richard Webb
5 June 2003
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