Taxation - Fuel ethanol taxation

Budget Review 2010-11 Index

Budget 2010–11: Taxation

Fuel ethanol taxation

Richard Webb

Budget proposals

In the 2010–11 Budget, the Government announced that it would amend a ‘2004–05 Budget measure to introduce an energy content-based fuel excise system’.[1] These proposals would change the way fuel ethanol—ethanol blended with other fuels (mostly petrol)—is taxed. The proposals are estimated to yield a net increase in revenue (revenue would increase by $276.5 million and expenses by $1.5 million over the forward estimates).

The proposals in the Budget are identical to those that the Howard Government intended but never legislated.[2] The latter are outlined below under the heading ‘Howard Government’s proposals’.

Fuel ethanol: current arrangements

Ethanol in fuel is subject to excise at the rate of 38.143 cents per litre. Production of ethanol is also subsidised by the same amount. Consequently, the ‘effective’ rate of excise on fuel ethanol is zero. Table 1 shows the cost of the subsidy since its introduction.

Table 1: Cost of ethanol production subsidy ($ millions)





















Sources: Department of Resources, Energy and Tourism and Department of Innovation, Industry, Science and Research annual reports. Portfolio budget statements 2010–11: budget related paper no. 1.17: Resources, Energy and Tourism Portfolio. Note: figures for 2009–10 and 2010–11 are estimates.

Under the Budget proposals, the excise (and excise‑equivalent customs duty) rate for ethanol would be set at 25 cents per litre from 1 July 2011. This rate would be phased down to a final rate of 12.5 cents per litre with effect from 1 July 2015. The production subsidy to domestic ethanol producers would also be progressively reduced from 22.5 cents per litre on 1 July 2011 to zero from 1 July 2015 (there will be no offsetting grants for excise‑equivalent customs duty). The effect of the proposals is shown in Table 2.

Table 2: Proposed effective excise rates on ethanol (cents per litre)    

1 July 2011


1 July 2012


1 July 2013


1 July 2014


1 July 2015


Source: Department of the Prime Minister and Cabinet, Fuel Excise Reform, Canberra 2004.

Energy content-based fuel excise system

In 2001, the Howard Government established the fuel taxation inquiry. The inquiry recommended an energy content-based excise system whereby all fuels would be taxed on the basis of their relative energy content.[3] The Howard Government rejected this recommendation.[4] In 2010, the inquiry into Australia’s future tax system (the Henry inquiry) recommended that fuel tax should apply to all fuels used in road transport on the basis of their energy content and be indexed to the consumer price index.[5]

Howard Government’s proposals

As noted above, the Rudd Government’s Budget proposals with respect to fuel ethanol are identical to those of the Howard Government. Having rejected the recommendations of the fuel taxation inquiry, the Howard Government subsequently proposed reforms to fuel taxation of which reform of fuel ethanol taxation was part. The reforms included:

  • excise would fall into four bands
    • the bands would be based on energy content, namely, high, medium and low; a fourth band was for ‘other’ fuels such as compressed natural gas
  • so-called ‘alternative’ fuels that were explicitly excise-exempt (liquefied petroleum gas, compressed natural gas and liquefied natural gas) or effectively so (biodiesel and ethanol) would be subject to excise from 1 July 2011
    • excise on alternative fuels would be phased in. Beginning 1 July 2011, credits would be paid that would reduce effective rates below the final rates, which would apply from 1 July 2015, and
    • the final rates on alternative fuels would be half of what they would be if rates were based on energy content (the so-called ‘discount’ for alternative fuels).[6] 


There is little basis for the current arrangements for fuel ethanol. For example, an independent study of government support for ethanol and biodiesel in Australia called into question whether government assistance to biofuel production and use is warranted.[7] Adoption of an energy content-based excise system for all fuels would be a positive development because it would provide a rational basis for taxing fuels in contrast with the history of fuel taxation which is one of ad hoc decisions.[8] The Budget proposal is, however, only a small first step towards what should be a wider move to taxing fuels based on their energy content.

[1].    The budget figures in this brief have been taken from the following document unless otherwise sourced: Australian Government, Budget measures: budget paper no. 2: 2010–11, p. 23, Commonwealth  of Australia, Canberra, 2010, viewed 13 May 2010,

[2].    Explanatory Memorandum, Fuel Tax Bill 2006, p. 14, viewed 13 May 2010, http://parlinfo/parlInfo/download/legislation/ems/r2518_ems_c626a67c-ec10-4a4e-b089-88930fb23397/upload_pdf/303229rem.pdf;fileType=application/pdf#search="Fuel%20tax%20bill%202006%20explanatory%20memorandum

[3].    Fuel Taxation Inquiry Committee,  Report of the inquiry into fuel taxation, Commonwealth of Australia, Canberra, 2002, p. 29, viewed 13 May 2010,

[4].    P Costello (Treasurer), Report of the fuel taxation inquiry, media release, 14 May 2002, viewed 13 May 2010,

[5].    K Henry (chair), J Harmer, J Piggott, H Ridout and G Smith, ‘Part one: overview. Australia’s future tax system. Report to the Treasurer, Commonwealth of Australia, Canberra, 2009, p. 93, viewed 13 May 2010,

[6].    For a fuller description of the proposals, see R Webb, Excise taxation: developments since the mid-1990s, Research brief, no. 15, 2006–07, Parliamentary Library, Canberra, 2006, viewed 13 May 2010,   

[7].    D Quirke, R Steenblik and B Warner, Biofuels-at what cost? Government support for ethanol and biodiesel in Australia. Report prepared for the Global Subsidies Initiative, 2008, Geneva, viewed 13 May 2010,

[8].    See, for example, D James, ‘Beer and cigs up!’: A recent history of excise in Australia, Background paper, no. 5, 1995–96, Parliamentary Library, Canberra, 1996 , viewed 13 May 2010, and R Webb, Excise taxation: developments since the mid-1990s, op. cit.