Current Issues Brief no. 2 2003-04
Fuel Taxation Proposals
Richard Webb
Economics, Commerce and Industrial Relations Group
21 July 2003
Glossary
Alternative
fuels. Alternatives to petrol and diesel.
Include liquefied petroleum gas, compressed natural gas, ethanol, biodiesel,
methanol, and dimethyl ether. Also referred to as petroleum product
substitutes.
Biodiesel.
Esterified vegetable oil produced from different oil-containing
crops such as rapeseed and canola. Esterification is a way of
transforming vegetable oil molecules similar to diesel
hydrocarbons, although the production cost of such biodiesels
exceeds those derived from crude oil.(1) Biodiesel can
also be made from waste vegetable oils and animal fats.
Biofuels.
The term commonly used to refer to ethanol and
biodiesel.
Diesel and Alternative Fuels
Grants Scheme (DAFGS). This scheme reduces
transport costs to businesses in regional and rural
Australia. The scheme provides a Federal grant
to eligible businesses of 18.51 cents per litre for diesel fuel
used and reduces the cost of eligible alternative fuels (compressed
natural gas, liquefied petroleum gas, recycled waste oil, ethanol
and canola oil). Generally, the grant is available to businesses
for the on-road use of diesel and alternative fuels in vehicles
that have a gross vehicle mass (GVM) of 4.5 tonnes or more and
which are registered for use on public roads. For vehicles with a
GVM of at least 4.5 tonnes but less than 20 tonnes, the grant is
generally not payable for trips that are solely within a defined
metropolitan area. The Government proposes to replace the DAFGS
with the Energy Grants (Credits) Scheme on 1 July
2003. DAFGS is also referred to as the 'off-road'
scheme.
Diesel Fuel Rebate Scheme
(DFRS). The DFRS provides a rebate of customs
or excise duty paid on diesel and 'like' fuels [heavy fuel oil,
light fuel oil, and all fuels which attract the same rate of duty
as diesel (except for gasoline, coal tar and coke oven
distillates)] used in certain off-road business activities (the
DFRS is also referred to as the 'off-road' scheme). Eligible
activities include mining, agriculture, forestry,
fishing, and rail and marine transport. The Government proposes to
replace the DFRS with the Energy Grants (Credits) Scheme on
1 July 2003.
Diesel
sulphur standards. There are
two standards for the sulphur content of diesel. The first500 parts
per million (ppm)came into effect on 31 December
2002. The second standard50 ppmis scheduled to come
into effect on 1 January 2006.
Energy (Grants) Credit
Scheme. Under this scheme, which is scheduled
to come into effect on 1 July 2003,
grants will be paid to certain industries for certain uses of
diesel and alternative fuels on-road and off road. The scheme
largely replicates (with modifications) the Diesel Fuel Rebate
Scheme and the Diesel and Alternative Fuels Grants
Scheme.
Ethanol.
An alcohol
(C2H5OH), used for a variety of purposes.
Fuel ethanol is ethanol blended with petrol and is used as a fuel
for transport. Ethanol can also be blended with diesel to form
diesehol.
Excise
and customs duties. An excise is a tax
imposed on the domestic production of a specified product, for
example, tobacco or petrol. Customs duties are taxes imposed on
imports. To achieve equitable tax treatment, a nexus generally
exists between the rates of excise and customs duties.
Externalities. Air pollution and greenhouse gas emissions are
'external costs' or 'negative externalities' of fuel use.
Externalities arise when one party imposes on, or provides to
others, costs or benefits that are not captured in market
transactions. For example, trucks impose 'negative' externalities
such as noise and air pollution on residents living near highways,
but there is no transaction whereby the users of the truck services
compensate residents for their loss of amenity.
Measures for a Better
Environment. The environmental measures the
Government agreed with the Australian Democrats in order to pass
the goods and services tax legislation through the
Senate.
Regular
diesel. Diesel containing more than 50 parts
per million sulphur. Also referred to as 'high sulphur'
diesel.
Ultra low sulphur diesel
(ULSD). Diesel containing less than 50 parts
per million sulphur. ULSD will be mandated on 1
January 2006. Also referred to as 'low sulphur'
diesel.
The Government, in the 200304 Budget,
proposed changes to the way some fuels are taxed. The proposals, if
implemented, would have important consequences. The broad intent is
to tax fuels on a more 'neutral' base compared with the current
discrimination in the application of the tax burden among fuels,
and to enhance the use of alternative fuels for environmental
reasons.
The main elements of the proposals
are:(2)
-
Excise-exempt fuels (liquefied petroleum gas, compressed
natural gas, liquefied natural gas) will remain exempt until 30
June 2008. All fuels used in internal combustion engines will be
subject to excise from 1 July 2008. The excises will be
phased in five equal annual steps until 1 July
2012 when the final excise rates will
apply.
-
The proposals for ethanol have two
elements. The first is to extend the current arrangementswhich
expire on 18 September 2003until
30 June 2008. Domestic production of ethanol is
currently subsidised. The second element begins on 1
July 2008 and continues until 1 July
2012 when the final excise rate will apply. During
this period, subsidies that reduce the effective rate of excise
below the final rate will be paid for both domestically-produced
and imported ethanol. The subsidies will be reduced in five equal
annual instalments.
-
From 18 September
2003, biodiesel will be subject to excise at the same
rate as diesel. From 18 September 2003
until 30 June 2008, a grant will be
paid for the production or import of biodiesel with the grant
amount the same as the excise. Beginning on 1 July
2008, the grants will be reduced in five equal annual
steps, ceasing on 1 July 2012 when the
final excise rate will apply.
Final excise rates for currently untaxed
fuels and ethanol will have regard to their energy
content.
-
On 1 January
2006, the sulphur standard for diesel is scheduled to
be reduced to 50 parts per million (ppm) (low sulphur diesel).
Under the Measures for a Better Environment program, the
Government is committed to encouraging the early adoption of low
sulphur diesel by taxing regular diesel (more than 50 ppm sulphur)
more heavily than low sulphur diesel. The Government
will increase excise on regular diesel by
one cent per litre on 1 July 2003 and
another cent on 1 January 2004. The Government will
increase grants provided to agriculture claimants under the
off-road component of the Energy Grants (Credits) Scheme (EGCS) to
compensate.
In accordance with the Government's
commitment under the Measures for a Better Environment
package, the environmental component of the EGCS will
comprise:
-
payment
of grants for producing or importing diesel with 10 ppm or less
sulphur for two years from 1 January 2007, funded by an increase in
excise and customs duty of 0.7 cents per litre on all
diesel
-
payment
of grants for producing or importing premium unleaded petrol with
less than 50 ppm sulphur content for two years from 1 January 2006,
funded by an increase of 0.06 cents per litre in excise and customs
duty on all petrol
-
new fuel
quality standards for biodiesel and compressed natural gas,
and
-
inclusion of liquefied natural gas and biodiesel as
alternative fuels in the on-road component of the
EGCS.
The proposals are consistent with some
of the recommendations of the Fuel Taxation Inquiry chaired by Mr
David Trebeck that reported in March 2002, namely, that excise (and
customs duty) should apply to all liquid fuels (irrespective of
their derivation) and liquefied and/or compressed natural and
petroleum gases, and that the rates should be based on the relative
energy content of each fuel. These proposals would eliminate the
discrimination that now exists in the application of the tax burden
among fuels especially in favour of excise-exempt fuels. In making
these proposals, the Government has reversed an earlier decision to
reject these recommendations.
Implementation of the Government's
proposals would have important consequences. Industries directly
and indirectly reliant on excise exemption would contract. On the
other hand, their existence is due largely to this tax advantage.
Further, the cost of the exemptions is considerable. The Fuel
Taxation Inquiry estimated that the total value of excise
exemptions for petroleum product substitutes over the period 199495
to 200405 was about $8.7 billion (in 200001 prices). Basing excise
on energy content would result in a realignment of
relative excise rates.
The imposition of excise on fuels that
were previously exempt would affect the environment. The Fuel
Taxation Inquiry concluded that fuel taxation is generally not an
appropriate instrument to address environmental externalities. The
Governments proposals are consistent with this conclusion as
evidenced by the proposal to remove excise exemptions.
To offset the effect of the increased
excise on regular diesel on the agricultural sector, the grant paid
under the EGCS for the off-road use of diesel in agriculture will
be increased. The proposal is a non-transparent subsidy to
agriculture. It would have the effect of encouraging agriculture to
continue to use regular diesel, contrary to the intent of the
proposals under the Measures for a Better Environment. The
measure is also discriminatory because other industriesnotably
miningare not similarly favoured.
The Governments proposals are consistent
with some of the Fuel Taxation Inquiry's recommendations. This is
perhaps most evident in the decision not to reintroduce indexation
of excise. The decision to levy excise on all fuels could be seen
as a means of clawing back revenue foregone by the decision to end
indexation.
The Government, in the 200304 Budget, proposed
changes to the way some fuels are taxed. The proposals, if
implemented, would have important consequences. This Current Issues
Brief examines the background to the proposals and their possible
consequences.
The main elements of the proposals are:
Excise-exempt fuels. From 1
July 2008, all fuels used in internal combustion engines will be
subject to excise. Hence fuels that are now excise-exemptnotably
liquefied petroleum gas (LPG), liquefied natural gas (LNG) and
compressed natural gas (CNG)will be subject to excise. The
Government proposes to phase in the excises. From 1 July 2008, the
government will pay subsidies that reduce the 'effective' rate of
excise, that is, the excise less the subsidy. The subsidies will be
phased out in five equal instalments. The final excise rateswhich
are to be determined later in 2003will apply on 1 July 2012.
Ethanol. The proposals have
two elements. The first is to extend the current arrangementswhich
are due to expire on 18 September 2003until 30 June 2008.
Currently, ethanol is subject to excise (and customs duty) at the
same rate as excise on petrol and diesel (now 38.143 cents a
litre). Domestically-produced ethanol also receives a subsidy of
the same amount, reducing the effective excise rate to zero. The
customs duty protects domestic production against imports. The cost
of the ethanol production subsidy is estimated at $27 million in
200304, $45 million in 200405, $61 million in 200506, and $62
million in 200607. The Government has introduced legislation to
effect this element of the proposals.(3)
The second element comes into effect from 1
July 2008, when grants that reduce the effective rate of excise
below the final rate will be paid for both domestically-produced
and imported ethanol. The grants will be reduced in five equal
annual instalments from 1 July 2008 to 1 July 2012, when the
final (as yet undetermined) excise will apply.
Biodiesel. This will be
treated much the same as ethanol. From 18 September 2003, biodiesel
will be subject to excise (and customs duty) at the same rate as
diesel. The estimated revenue from this measure is $5 million in
200304, and $10 million in each of 200405, 200506 and 200607. From
18 September 2003 until 30 June 2008, grants will be paid for the
production or import of biodiesel. During this period, the grant
amount will be the same as the excise, reducing the effective
excise rate to zero.(4) The estimated cost of the grants
is $15 million in 200304, $44 million in 200405, $76 million in
200506, and $99 million in 200607. Beginning on 1 July 2008, the
grants will be reduced in five equal annual steps, ceasing on 1
July 2012 when the final (as yet unspecified) excise rate will come
into effect.
The final excise rates on excise-exempt fuels,
ethanol and biodiesel will be based on their energy content.
Low sulphur diesel excise
differential. Since 1 January 2003, the standard for
sulphur content in diesel has been 500 parts per million (ppm). On
1 January 2006, the standard will become 50 ppm under the Fuel
Quality Standards Act 2000 [diesel with less than 50 ppm
sulphur is known as ultra low sulphur diesel (ULSD)].(5)
Under the Measures for a Better Environment program
released in 1999 (see the Appendix for relevant excerpts), the
Government is committed to encouraging the early adoption of ULSD
by differentiating the excise on ULSD and regular (high sulphur)
diesel (diesel containing more than 50 ppm sulphur). The Government
intended to increase the excise on regular diesel by one cent on 1
January 2003 and by another cent on 1 January 2004. In the event,
the Government deferred the implementation of the first one cent
increase from 1 January 2003 to 1 July 2003 because of the
drought.(6) The excise increases will run until 31
December 2005. The differential is designed to help ULSD diesel
compete with regular diesel because it costs more to produce
ULSD.
To offset the effect on agriculture of the
higher excise (and customs duty) on regular diesel, the Government
proposes that the grant paid under the Energy Grants (Credits)
Scheme (EGCS) for the off-road use of diesel in agriculture be
increased. The additional grant amount will be based on a weighted
average of the differences between the excise rates applying to low
sulphur and high sulphur diesel, calculated on the basis of the
market share of each fuel. The cost of these grants is estimated at
$10 million in 200304, $13 million in 200405 and $4 million in
200506.
Low sulphur premium unleaded
petrol. From 1 January 2006, a subsidy will be paid for a
period of two years for the production or import of premium
unleaded petrol with less than 50 ppm sulphur. The Government
estimates that the subsidy will be 1.1 cents a litre. An increase
in the excise (and customs) duty on all petrol for two
years will fund this measure. The Government estimates that the
increase will be 0.06 cents per litre.
Low sulphur diesel. From 1
January 2007, a subsidy will be paid for a period of two years for
the production or import of diesel with 10 ppm or less sulphur. The
Government estimates that the subsidy will be one cent a litre. An
increase in the excise (and customs) duty on all diesel
for two years will fund this measure. The Government estimates that
the increase in excise will be 0.7 cents a litre.
The estimated revenue from the additional
excise on petrol and diesel is $6 million in 200506 and $65 million
in 200607. The estimated cost of the subsidies is $1 million in
200506 and $41 million in 200607.
Energy Grants (Credits)
Scheme(7): LNG and biodiesel. The Government
proposes to make LNG and biodiesel (but not blends of biodiesel and
diesel) eligible as alternative fuels for on-road use in the EGCS.
The EGCS will be extended to LNG from 1 July 2003 and the grant
rate will be 8.130 cents a litre. Biodiesel will be approved for
inclusion in the EGCS when the fuel standard for biodiesel under
the Fuel Quality Standards Act has come into effect. The
grant rate for biodiesel will be 18.510 cents a litre. The
estimated cost is $3 million in 200304, and $5 million in each of
20045, 200506 and 200607.
Fuel Taxation Inquiry
The proposals are consistent with some of the
recommendations of the Fuel
Taxation Inquiry, which reported to the Government in March
2002.(8) The Inquiry's recommendations were based on the
principles that fuel taxes:
-
should not discriminate in the application of
the tax burden between fuels, and
-
should attempt to minimise the application of
fuel taxation to intermediate inputs into production (business
inputs).(9)
The Inquiry recommended, among other things,
that:
-
excise and customs duty should apply to all
liquid fuels, irrespective of their derivation, and liquefied
and/or compressed natural and petroleum gases
-
the rates to apply should be based on the
relative energy content for each fuel, except for aviation fuels
and greases. In determining relative rates, the rate of excise
applying to diesel at the time of implementation would not
change
-
twice-yearly Consumer Price Index indexation of
all fuel excise and customs rates should be reintroduced, and
-
the Commonwealth Government should agree to
implement its proposal for the early introduction of ultra low
sulphur diesel (ULSD) in the form of a supply subsidy to fuel
producers and importers
-
From 1 January 2003, a supply subsidy of one
cent per litreand from 1 January 2004, a subsidy of two cents per
litreshould be provided to offset the additional cost (capital and
production cost) of ULSD
The subsidy should be funded by an increase in the excise on
diesel determined by the Australian Taxation Office for both
regular diesel and ULSD.(10)
The recommendation that all liquid fuels
should be included in the fuel tax system including ethanol,
biodiesel, LPG, LNG and CNG and that excise be levied on the basis
of energy content is based on the non-discrimination principle.
The Government released the Inquiry's report
on Budget night 2002 (14 May 2002) and announced that it had
rejected the Inquiry's main recommendations. In particular, the
Government rejected the recommendation that all liquid fuels be
taxed on the basis of relative energy content:
The proposal to tax all fuels based on their
relative energy content would impose tax on previously unexcised
fuels such as ethanol and LPG. This would have implications for the
LPG retail fuel industry and LPG conversion businesses, and is also
contrary to the Government's election commitment to maintain excise
exemptions for fuel ethanol and biodiesel. For these reasons the
Government will not be implementing this recommendation.
The
Government also rejected the proposal to reintroduce fuel excise
indexation on the grounds of:
community concerns about high petrol
prices.(11)
However, the proposals announced in the 200304
Budget reverse some of the Government's initial response to the
Fuel Taxation Inquiry. In particular, the proposals are consistent
with the recommendations that excise-exempt fuels should be taxed
and that excise rates should be based on relative energy
content.
Implementation of the Government's proposals
would have important consequences. They include the rationalisation
of fuel taxes and the effects on industries dependent on excise
exemptions, and the implications for relative excise rates and for
the environment.
Rationalisation
The proposals to remove the excise exemptions
and to base excise on relative energy content would bring
much-needed rationality to fuel taxation. In particular, these
proposals would eliminate the discrimination that now exists in the
application of the tax burden among fuels especially in favour of
excise-exempt fuels. Taxation has served a wide range of sometimes
conflicting objectives. The Fuel Taxation Inquiry noted that
objectives have changed over time, that there has been a lack of
clear explanation by governments when and why objectives changed,
and that there is no clear statement from government regarding
current objectives.(12)
Some objectives have not been attained. The
Government originally introduced the zero-rating of excise on
alternative fuels for fuel security and diversity reasons. But
alternative fuels generally and fuel ethanol in particular have
traditionally contributed 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.(13)
Industries reliant on excise exemption would
contract if the proposals were implemented. Exempting fuels from
excise encourages their substitution for other fuels by lowering
the relative prices of the exempt fuels. The excise exemption is,
in effect, a subsidy from taxpayers for the use of exempt fuels.
The cost of the excise exemptions is considerable. The Inquiry
estimated that the total value of excise exemptions for petroleum
product substitutes over the period 199495 to 200405 was about $8.7
billion (in 200001 prices).(14) Treasury estimates that
the cost of exempting alternative fuels from excise is $670 million
in 200203.(15)
Removal of the exemption would result in the
contraction of industries directly and indirectly reliant on the
subsidy. The Fuel Taxation Inquiry recognised that its
recommendations would result in the contraction of some
industries:
The inquiry acknowledges that its
recommendations may have a significant impact on some sectors of
the economy, particularly industries involved in the production,
distribution and supply of petroleum product substitutes.
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.
However, the extent of investment in the industry is relatively
small.
The Australian Liquefied Petroleum Gas
Association claims that the proposals have already cast doubt on
investment plans for LPG as an alternative fuel in
cars.(16)
Basing excise on energy content would result
in a realignment of relative excise rates; some rates would fall and others rise. Most
obviously, fuels now excise-free would experience a rise in
relative rates. Rates on fuels now subject to excise would change
relatively. For example, the excise on fuel ethanol is now
the same as the excise on diesel and petrol (now 38.143 cents a
litre). But on an energy content basis,
the excise on fuel ethanol is higher than on diesel. Fuel ethanol
produces only 61 per cent of the energy of diesel when combusted.
The excise on fuel ethanol would be around 23 cents per litre and
33.8 cents on petrol.(17)
Fuel users would be
affected by the proposals. The realignment of relative
excise rates would increase the cost of fuel to some users and
reduce the cost for others. Motorists would face higher costs
resulting from the increase in duty used to fund the premium
unleaded petrol grants, while non-agricultural users of regular
diesel would face an increase in duty of two cents a litre.
A reason often given for exempting alternative
fuels from excise is their environmental benefits. The imposition
of excise on fuels that were previously exempt would therefore
affect environmental externalities (see the Glossary for a
definition of this term).
The Fuel Taxation Inquiry concluded that the
level of environmental benefits of petroleum product
substitutes may be declining relative to petrol and diesel:
[Petroleum product substitutes] have some
environmental benefits relative to petrol and diesel, but even
these are lessening with improved technology.(18)
The implication is that the case for exempting
some fuels from excise is weakening.
As to the means of dealing with
environmental externalities, the Inquiry concluded:
that the changing relationship between fuels,
the nature of external fuel costs and the technology to measure
them mean that fuel taxation is not an appropriate
instrument to address these costs.
The exception would be an externality closely
related to the use of a fuel and not distorted by other variables.
Greenhouse gas emissions fall into this category
(19)
More efficient instruments than fuel taxes are
available to internalise the costs of air pollutant
emissions.(20)
The Governments proposals seem to be
consistent with the Fuel Taxation Inquiry's conclusion that fuel
taxes are generally not appropriate to address environmental
externalities, as evidenced by the proposal to remove excise
exemptions.
As noted, to offset the effect of the
increased excise on regular diesel on the agricultural sector, the
grant paid under the EGCS for the off-road use of diesel in
agriculture will be increased. The proposal is, in effect, a
subsidy to agriculture. It will have the effect of encouraging
agriculture to continue to use regular diesel. This seems to run
contrary to the intent of the proposals under the Measures for
a Better Environment. The measure is also discriminatory
because other industriesnotably miningthat use diesel off-road are
not similarly favoured.
The Government's proposals are consistent with
two of the key recommendations of the Fuel Taxation Inquiry,
namely, to include all liquid fuels in the excise regime and to
base excise rates on relative energy content. A positive
consequence of these proposals would be the elimination of the
discrimination that now exists in favour of excise-exempt fuels. In
making these proposals, the Government has partly reversed its
earlier decision not to accept the main findings of the Fuel
Taxation Inquiry.
The Government's proposals do not take up
other Fuel Taxation Inquiry recommendations. This is perhaps most
evident in its decision not to reintroduce indexation of excise. On
1 March 2001, the Government abolished the half-yearly indexation
of fuel excise revenue. The revenue foregone was estimated to rise
from $425 million in 200203, to $785 million in 200304 to $1,135
million in 200405.(21) The decision to levy excise on
all fuels could be seen as a means of clawing back revenue foregone
by the decision to end indexation. Nor did the Government adopt
some of the Inquirys recommendations regarding the EGCS.
-
Fuel
Taxation Inquiry Report,
March 2002, p. 266.
-
Sources:
Budget Strategy and Outlook 200304, Budget Paper No. 1, pp. 123 and 124; Budget measures 200304, Budget Paper No. 2, pp.
4042 and
222224; 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.
-
See the
Excise Tariff Amendment Bill 2003 and the Customs Tariff Amendment
Bill (No. 2) 2003 introduced into the House of Representatives
on 29 May
2003.
-
Currently, biodiesel blended with diesel
attracts excise at the same rate as diesel, that is, 38.143 cents a
litre.
-
See
Environment Australia,
'Table of National Petrol and Diesel Standards' at
http://www.ea.gov.au/atmosphere/transport/fuel/standardstable.html
-
The
revenue foregone because of the deferral is estimated at $60
million in 200203.
-
For a
description of this scheme, see the Bills Digest for the Energy
Grants (Credits) Scheme Bill 2003 at http://www.aph.gov.au/library/pubs/bd/2002-03/03bd119.pdf
-
Fuel
Taxation Inquiry Report,
op. cit.
-
Fuel
Taxation Inquiry Overview, March 2002, p.
18.
-
ibid.,
pp. 2933.
-
Hon. Peter Costello,
Treasurer, 'Report of the Fuel taxation Inquiry', Press Release no.
027, 14 May 2002 at
http://www.treasurer.gov.au/tsr/content/pressreleases/2002/027.asp
-
Fuel
Taxation Inquiry Overview, op. cit., p. 11.
-
Fuel
Taxation Inquiry Report,
op. cit., pp. 4243.
-
Fuel
Taxation Inquiry Overview, op. cit., p. 17.
-
Treasury, Tax Expenditures Statement
2002, January 2003, p. 51.
-
Australian Liquefied Petroleum Gas Association
Ltd., 'Uncertainty Over Alternative Fuels', Media Release,
19 May 2003.
-
Fuel
Taxation Inquiry Report,
op. cit., p. 110.
-
ibid.,
p. 8.
-
Fuel
Taxation Inquiry Overview, op. cit., p. 15.
-
Fuel
Taxation Inquiry Report,
op. cit., p. 71.
-
Budget Paper No. 2, 200102, p.
40.
Incentive
for Switch to Lower Sulphur Diesels
Differential excise
treatment of low and high sulphur diesel will provide an incentive
to switch demand and speed the introduction of new refinery capital
investment over the period 2000 to 2005, and restrict diesel
eligible for fuel credits to ultra low sulphur diesel 50ppm
(0.005%) from 2006.
Sulphur
levels in diesel are currently on average
1300 parts per million (ppm). Europe will move to
a standard of 50ppm in 2005. The earliest date at which
any significant domestic production of diesel at 50ppm
will occur is 2000, at which time the BP refinery in
Brisbane will commence production. It is unlikely to be able
to produce more than one eighth of Australian demand. Design and
construction of a desulphurisation plant takes of the order of 4
years from the date of decision. Accordingly, it is unlikely that
other significant domestic capacity to produce 50ppm diesel could
be available before 2003.
While the earliest
feasible introduction of Ultra Low Sulphur Diesel (ULSD) is the
aim, there will be advantage in the earlier introduction of an
intermediate level product. Reduction of sulphur levels to 500ppm
is necessary to enable the introduction of Euro 2 standards for
light diesel vehicles. This can occur progressively, initially
focussing on urban areas, and with sufficient capacity being
available to supply the whole Australian market by the end of
2002.
Speeding the
introduction and use of low sulphur diesels market will be
encouraged by:
-
Negotiation with the oil majors of the early
voluntary introduction of diesel at 500ppm in urban areas in 2000,
on a best endeavours basis.
-
Diesel standard set at 500ppm by the end of
2002 for road transport fuel.
-
An increase in the diesel excise for high
sulphur fuel above 50ppm so that the relevant effective
diesel excise payable increases by
1 cent per litre from 1 January 2003
2 cents per litre from 1 January 2004.
-
Private users and urban transport will also
have an incentive to use ULSD due to the excise difference.
-
Introducing a mandatory fuel standard of 50ppm
(through a NEPM, equivalent legislative device or by use of the
definition in the diesel fuel credit scheme) in 2006.
This would
facilitate the introduction of the following diesel vehicle
emission standards:
-
Euro 2 2002/3 all new diesel vehicles
-
Euro 3 2002/3 new medium and heavy diesel
vehicles
-
Euro 4 2006/7 all new diesel vehicles.
The one year lag
from European adoption of Euro 4 in 2005 reflects the practicality
of introducing vehicle support and maintenance
infrastructure.
This initiative will
require a major financial commitment from the Australian refinery
industry (particularly when linked with a move to higher octane
rating and lower sulphur for petrol products).
Bring
forward the introduction of new petrol vehicle and fuel
standards
Euro 2 vehicle
emission standards for new vehicles will be introduced from 2003
and from 2004 for continuing models.
Euro 3 vehicle
emission standards will be introduced from 2005 and from 2006 for
continuing models.
The timetable for
the introduction of Euro 2 needs to allow domestic vehicle
manufacturers sufficient lead time to source new engine technology.
The Government is satisfied that the timetable set out above can be
achieved without disrupting the domestic industry.
Euro 3 will offer
further gains, particularly in "in service" performance, because of
its requirements for on-board diagnostics. It does, however, demand
significantly lower sulphur levels from petrol. It also requires
higher octane, which in turn will facilitate the introduction of
direct injection engines. These engines are important to meeting
fuel efficiency and greenhouse targets. The earliest possible date
for introduction is likely to be 2005/6.
Euro 4 is not yet
sufficiently defined for petrol engines to enable a date for
adoption to be set.
Maintain
the current price relativities between Diesel and CNG and other
alternative transport fuels, by making those transport applications
that are eligible for the diesel fuel credit also eligible for
"clean fuel" credits
Diesel
is currently excised at 43c/l, and CNG
and other alternative fuels (such as LPG, ethanol and other
renewable fuels) are excise free. ANTS will reduce the effective
diesel excise rate for operators of large vehicles.
ANTS will affect the
economics of alternative fuel use by pushing out pay back periods
for conversion or reducing price incentives. Restoring the existing
price differential, in conjunction with a conversion assistance
programme for gaseous fuels, will encourage wider use of
alternative fuels and improve air quality and greenhouse gas
emissions.
Alternative
transport fuels such as CNG, LPG and recycled waste oil; and
renewable transport fuels such as ethanol, canola oil (and other
fuels certified as renewable by the CEO of the Australian
Greenhouse Office); will attract clean fuel credits. A credit of
around 16 cents per litre will apply to retain price relativities
between clean fuels and diesel. For example, the credit for CNG
will be approximately 12.5 cents per litre. Vehicles using these
fuels will be required to meet relevant emissions
standards.
Energy
Credit Scheme
This scheme will be
developed jointly by the Government and the Australian Democrats.
It will replace the diesel fuel credit scheme on
1 July 2002 by a jointly sponsored bill. The existing Diesel Fuel
Credit scheme will have a sunset clause expiring on
30 June 2002. The Energy Credit Scheme will provide price
incentives and funding for conversion from the dirtiest fuels to
the most appropriate and cleanest fuels.
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