Chapter 1 Analysis of the bills
Background
1.1
On 12 May 2011 the Selection Committee referred the following bills to
the committee for inquiry and report:
n Taxation of
Alternative Fuels Legislation Amendment Bill 2011;
n Excise Tariff
Amendment (Taxation of Alternative Fuels) Bill 2011;
n Customs Tariff
Amendment (Taxation of Alternative Fuels) Bill 2011; and
n Energy Grants
(Cleaner Fuels) Scheme Amendment Bill 2011.
Purpose and overview of the bills
1.2
The Bills impose excise duty or excise equivalent customs duty, on
gaseous transport fuels that are currently untaxed. These are liquefied
petroleum gas (LPG), liquefied natural gas (LNG) and compressed natural gas
(CNG). The legislation ensures that the rate of excise applied to the three
gaseous fuels is based on the energy content of those fuels, discounted by 50
per cent. The new taxation regime will be applied incrementally from
1 December 2011 over a five-year period, so as to give industry and
consumers time to adjust.
1.3
The expected revenue over the forward estimates period is $518 million
which is detailed in Table 1.1.
Table 1.1 Financial Impact
|
Year |
2011-12 |
2012-13 |
2013-14 |
2014-15 |
|
Revenue |
$16.5m |
$102m |
$166m |
$234m |
Source Explanatory
Memorandum, Page 4.
1.4
It is expected that the reform package will:
n increase consistency
in the transport fuel taxation regime to ensure that competition between
untaxed transport fuels and currently taxed fuels does not harm economic
efficiency and create distortions;
n provide certainty to
industry; and
n phase in the changes
while supporting the alternative fuels industry (in recognition of the
potential environmental, fuel security and regional development benefits).
1.5
The reforms will apply generally from 1 December 2011.
Policy history
1.6
Fuel tax policy has been in flux for the better part of a decade, to the
criticism of some elements of the industry which claim that the resulting
uncertainty hinders investment. In the 2003-04 Budget the then Government
announced its intention to tax all fuels (including biodiesel, ethanol, methanol
and the gaseous fuels) on an energy content basis, but with a
50 per cent discount for alternative fuels. The timing for the
proposal was revised in the following budget. All fuels were to be taxed on an
energy content basis consisting of high, medium and low bands, while
alternative fuels were to receive a 50 per cent reduction on their
energy content fuel tax rates. The Assistant Treasurer the Hon Bill Shorten,
MP, in his second reading speech, stated:
In May 2003 the then Treasurer, Peter Costello, announced the
alternative fuels tax arrangements as long-term, important reforms—saying
Australia must have a more consistent and sustainable fuel tax regime.
In December 2003 the then Prime Minster, John Howard, said
the reforms will result in a more consistent and neutral tax regime for fuels
used in vehicles. The then Deputy Prime Minister, John Anderson, at the time
emphasised the importance of investment certainty.[1]
1.7
In 2003 the then Treasurer, the Hon Peter Costello, MP, introduced fuel
tax reforms noting that ‘an efficient and competitive energy sector is a key
priority for the Government’s strategic policy agenda.’[2]
Mr Costello stated:
…today I am announcing important long term reforms to the
excise treatment of fuels. The reforms establish a broad sustainable taxation
framework for fuels, by addressing a number of anomalies in the current fuel
tax system and providing increased long term certainty for investors, while
meeting Government commitments and providing time for industry to adjust.[3]
1.8
In May 2010, the government committed to implementing the alternative
fuels taxation policy previously announced by the previous Government but with
revised phasing in arrangements for the taxation of ethanol. In September 2010,
the Government announced that the changes to the taxation of domestic ethanol
would be phased in over a 10 year period.
1.9
A number of changes were required to implement the government’s policy
including:
n bringing gaseous
fuels and methanol into the fuel tax regime;
n levying fuel tax on
an energy content basis; and
n reducing the excise
rates on alternative fuels by 50 per cent.
Drivers for reform
1.10
Alternative fuels have the potential to reduce environmental harm as
they have the capability to reduce Australia’s carbon footprint. They are an
alternative to conventional fuels which ensures that there is a wider and more
diverse range of energy sources; and the alternative fuel industries create
jobs, particularly in rural and regional areas in Australia.
1.11
Accordingly, to ensure the domestic industry has time to adjust to the
new arrangements, the Government announced on 13 May 2010 a new staged phasing
in of the regime for domestic ethanol. The Government announced on 7 September
2010 that the phasing in arrangements for domestic ethanol were to be extended
further to provide a more gradual transition path.
1.12
Therefore, domestic ethanol producers will receive targeted assistance over
a ten year period to manage the phase in of the new arrangements. Imported
ethanol will experience a phase down in excise-equivalent customs duty over a
five year transition period.
Treasury consultation
1.13
In October 2010 Treasury released a discussion
paper, entitled, Implementation of alternative fuels taxation policy.
Consultation on this paper was conducted between 15 October 2010 and 12 November 2010.
Meetings were held in Perth, Melbourne, Brisbane, Sydney, and Canberra with
separate sessions for biodiesel, ethanol and methanol; and the gaseous fuels,
liquefied petroleum gas (LPG), liquefied natural gas (LNG) and compressed
natural gas (CNG).
1.14
The draft legislation was made available for public consultation in
early 2011, prior to its introduction into Parliament on 12 May 2011.
Types of alternative fuels and their tax treatment
1.15
Taxes are currently applied to some locally produced fuels and an
equivalent rate of customs duty is applied to relevant imported fuels. Such
fuels include petrol, diesel, fuel oil, biodiesel, fuel ethanol and several
others. Fuel tax is primarily levied on the producer or importer at a general
rate of 38.143 cents per litre.
1.16
The bills phase in the new taxation arrangements in relation to
liquefied petroleum gas (LPG), liquefied natural gas (LNG) and compressed
natural gas (CNG). In addition, the bills also clarify the tax treatment of
renewable fuels including ethanol, methanol and biodiesel. The following
discussion provides background information on some of the key biofuels and
their tax treatment under the new legislation. Table 1.2 compares how relevant
alternative fuels are currently taxed against how they will be taxed under the
proposed legislation.
Table 1.2 Comparison of key features of new and current
law
|
|
|
|
LPG
|
|
LPG for
transport use is subject to fuel tax at the rate of 12.5 cpl. The
application of tax is phased in over the period 1 December 2011 to
1 July 2015.
|
LPG is
not subject to fuel tax.
|
|
LNG
|
|
LNG for
transport use is subject to fuel tax at a rate of 26.13 cents per kilogram.
The application of tax is phased in over the period 1 December 2011
to 1 July 2015.
|
LNG is
not subject to fuel tax.
|
|
CNG
|
|
CNG for
transport use (other than home manufacture for transport use and
manufacture for forklift use) is subject to fuel tax at a rate of
26.13 cents per kilogram. The application of tax is phased in over the
period 1 December 2011 to 1 July 2015.
|
CNG is
not subject to fuel tax.
|
|
Biodiesel
|
|
The Energy Grants (Cleaner Fuels)
Scheme Act 2004 is extended to continue the grant
arrangements for biodiesel. Excise or excise‑equivalent customs duty
for biodiesel continues to be imposed at the point of manufacture or
importation.
|
Fuel tax on biodiesel is imposed at the
rate of 38.143 cpl, which also applies to petrol and diesel.
Biodiesel producers and importers are
eligible for a grant of 38.143 cpl paid under the Energy Grants (Cleaner
Fuels) Scheme Act 2004 where the biodiesel meets the relevant fuel
quality standard under the Fuel Quality Standards Act 2000.
|
|
Renewable diesel
|
|
The Energy
Grants (Cleaner Fuels) Scheme Act 2004 is extended
to continue the grant arrangements for renewable diesel. Excise or excise‑equivalent
customs duty for renewable diesel continues to be imposed at the point of
manufacture or importation.
|
Fuel tax
on renewable diesel is imposed at the full rate of 38.143 cpl, which also
applies to petrol and diesel.
Renewable
diesel producers and importers are eligible for a grant of 38.143 cpl paid
under the Energy Grants (Cleaner Fuels) Scheme Act 2004 where the
renewable diesel meets the relevant fuel quality standard for diesel under
the Fuel Quality Standards Act 2000.
|
|
Ethanol
|
|
Domestically manufactured ethanol will
continue to be subject to excise duty of 38.143 cpl.
The existing contract based Ethanol
Production Grants Program will be extended and the rate of the grant
maintained.
Excise‑equivalent customs duty on
ethanol will remain at 38.143 cpl.
The legislated changes from
1 July 2011 to the Energy Grants (Cleaner Fuels) Scheme Act 2004
will not apply to ethanol.
|
Fuel tax on ethanol is imposed at the
full rate of 38.143 cpl, which also applies to petrol and diesel.
Before 1 July 2011, qualifying ethanol
producers are entitled to a grant of 38.143 cpl under the Ethanol Production
Grants Program.
From 1 July 2011 qualifying ethanol
producers are eligible for a grant paid under the Energy Grants (Cleaner
Fuels) Scheme Act 2004 where the ethanol meets the relevant fuel quality
standard under the Fuel Quality Standards Act 2000.
|
|
Fuel tax credits — end users
|
|
An
entitlement to fuel tax credits will apply to LPG, LNG and CNG used in
carrying on an enterprise for off-road use. No net fuel tax credits will be
payable where the fuel is used on‑road in heavy vehicles as the road‑user
charge will exceed the rate of duty payable.
|
There is
no entitlement to fuel tax credits for LPG, LNG or CNG as no fuel tax is
payable.
|
|
Fuel tax credits — LPG unlicensed distributors
|
|
Unlicensed distributors of LPG that acquire LPG that is subject to excise
will be entitled to fuel tax credits to allow the sale of LPG to be
effectively excise‑free if:
• supplied to businesses in tanks of 210 kilograms or less capacity
for non-transport use; or
• supplied to residential premises for non-transport use.
|
No
entitlement to fuel tax credits currently exists for distributors.
|
Source Explanatory
Memorandum, pp. 9-11.
LPG
1.17
LPG is the generic name for mixtures of light hydrocarbon gas,
consisting of mainly propane or propane and butane that have been liquefied
through compression. While it is used as a transport fuel, LPG containing
propane only is used for a range of domestic and commercial purposes including
cooking, drying, heating and water heating.
1.18
Currently, LPG is not subject to excise or excise-equivalent customs
duty. Under the new arrangements, fuel excise and excise-equivalent customs
duty is imposed on LPG at the point of manufacture or importation.
1.19
Under the legislation, LPG is ‘defined in the legislation to include
liquid propane, liquid mixtures of propane and butane; liquid mixtures that are
either predominantly propane and butane mixtures or predominantly butane with
other light hydrocarbons.’[4] The Explanatory
Memorandum notes that ‘accordingly, an excisable product does not come into
existence until such time as the relevant gases are changed into a liquid
form.’[5]
1.20
LPG has a lower energy content relative to petrol or diesel and,
therefore, excise and excise-equivalent customs duty is imposed on LPG at a
lower rate. The amendments impose excise and excise‑equivalent customs on
LPG at a final rate of 12.5 cpl, reflecting the 50 per cent discount for the
alternative fuels. This final rate of excise will apply from 1 July 2015. Table
1.3 shows the rate of excise applying during the phase in period.
Table 1.3 Rate
of excise and excise-equivalent customs duty for LPG during the transitional
period (cpl)
Source Explanatory
Memorandum, p. 19.
1.21
The Explanatory Memorandum notes that distributors of LPG on which
excise duty has been paid will be entitled to claim a fuel tax credit in
relation to the LPG they supply in the following circumstances:
n the LPG has been
acquired to make a supply;
n the LPG is supplied
to a tank at residential premises or a tank that supplies two or more
residential premises and may include business premises; and
n the tank is not for
use in supplying LPG for transport use.[6]
LNG
1.22
LNG is produced from natural gas that is cooled to the point that it
condenses to a liquid (approximately ‑161°C). It is typically exported
but is also used as a transport fuel, generally in heavy-duty long range road
transport.
1.23
LNG is not currently subject to excise or excise equivalent customs
duty. Under the legislative amendments fuel excise and excise-equivalent
customs duty is imposed on LNG at the point of manufacture or importation.[7]
The Explanatory Memorandum notes that ‘excise and excise-equivalent customs
duty is imposed on LNG that is used in an internal combustion engine for
transport use.’[8] The appropriate unit of
measurement for LNG and CNG is cents per kilogram, rather than cpl as with the
other alternative fuels. The final rate of 26.13 cents per kilogram that
applies from 1 July 2015 reflects the energy content of LNG, with a discount of
50 per cent because it is an alternative fuel. Table 1.4 shows how the phase of
excise will occur up to the final rate in 2015.
Table 1.4 Rate of excise and excise-equivalent customs
duty for LNG during the transitional period (cents per kilogram)
|
|
|
|
|
|
|
5.22
|
10.45
|
15.67
|
20.9
|
26.13
|
Source Explanatory
Memorandum, p. 21.
CNG
1.24
CNG is produced from natural gas, which is compressed. It is used in
some bus fleets, street sweepers and garbage collection vehicles. There is no
significant use of CNG in cars in Australia at this stage.
1.25
As with LPG and LNG, CNG is not currently subject to excise or excise-equivalent
customs duty. The Explanatory Memorandum notes that ‘under these amendments
fuel excise is imposed on CNG at the point of manufacture, which is when the
natural gas is compressed for use in a vehicle, or when it is imported for use
in a vehicle.’[9] Excise and
excise-equivalent customs duty is imposed on the manufacture or importation of
CNG where it is manufactured or imported for use in vehicles. However, excise
does not apply:
n where CNG is used or
intended for use for something other than as a fuel for a vehicle;
n to the extent the
process of manufacture is not part of the activities of the enterprise, for
example, excise is not imposed where natural gas is compressed in home
refuelling systems for non-business purposes; or
n where CNG is used in
a forklift off-road or other vehicles prescribed by regulation.[10]
1.26
Excise will be imposed on CNG at a final rate of 26.13 cpg as from
1 July 2015. Table 1.5 shows the phase in period for excise applying
to CNG.
Table 1.5 Rate of excise and excise-equivalent customs
duty for CNG during the transitional period (cents per kilogram)
|
|
|
|
|
|
|
5.22
|
10.45
|
15.67
|
20.9
|
26.13
|
Source Explanatory
Memorandum, p. 23.
Biodiesel
1.27
Biodiesel is a fuel manufactured by chemically altering vegetable oils or
animal fats or oils (or recycled oils from these sources). It can also be
produced from various non-food crops such as pongamia, jatropha curcas and
algae.
1.28
Biodiesel is generally used as a transport fuel and sold as B5 or B20
(comprising diesel together with up to 5 per cent biodiesel or more than
5 per cent and up to 20 per cent biodiesel respectively). The AIP notes
that ‘biodiesel has a slightly lower energy content than conventional diesel
although this is not significant when operating vehicles on biodiesel blends.’[11]
1.29
The use of biodiesel requires additional engine maintenance. While there
are some engine manufacturers with engines capable of using fuels above B5
there are only a ‘limited number of such engines in use in Australia.’[12]
1.30
While biodiesel attracts an excise and excise-equivalent customs duty of
38.143 cents per litre, it also attracts a grant payable of
38.143 cents per litre under the Energy Grants (Cleaner Fuels) Scheme for
both imported and domestically produced biodiesel, provided the fuel meets
standards set by the Fuel Quality Standards Act 2000.
Renewable diesel
1.31
Renewable diesel is ‘a product derived from tallow that is co-produced
with petroleum-derived diesel and is chemically indistinguishable from
petroleum-derived diesel.’[13]
1.32
Excise and excise-equivalent customs duty is imposed on renewable diesel
at the point of manufacture or importation at a rate of 38.143 cpl. Similar to
biodiesel, the Energy Grants (Cleaner Fuels) Scheme Act 2004 is extended
to provide an ongoing grant to eligible manufacturers or importers.
Ethanol
1.33
Ethanol is a liquid alcohol usually produced through fermentation and
distillation from crops rich in sugar or starch. Ethanol contains 68 per cent
of the energy content of petrol and can be mixed with petrol to produce an
ethanol blend motor fuel. [14] In Australia, the most
common ethanol blend is E10. The Australian Institute of Petroleum (AIP) notes
that ‘ethanol up to a 10 per cent blend with petrol can be used
satisfactorily in most new and many older vehicles.’[15]
1.34
In relation to greenhouse benefits, the AIP notes that ‘most ethanol
currently produced in Australia will be able to demonstrate moderate levels of
greenhouse gas abatement.’[16]
1.35
Domestically produced ethanol attracts an excise of 38.143 cents per
litre plus a grant under the Ethanol Production Grant Program. Imported ethanol
attracts an excise-equivalent customs duty of 38.143 cents per litre (and
ad valorem duties of customs up to 5 per cent depending on origin) but no
grant. The goods and services tax (GST) applies to the excise-inclusive price
of petrol and diesel at a single uniform rate of 10 per cent. GST also applies
to biofuels and gaseous fuels.
1.36
The existing Ethanol Production Grants Program operates on an
administrative basis and is entered into contractually by producers. The
program was to expire on 30 June 2011, and the Energy Grants (Cleaner Fuels)
Scheme Act 2004 was legislated to apply to the manufacture of ethanol from
1 July 2011. The Ethanol Production Grants Program will be extended and the
rate of grant will continue to be 38.143 cpl.[17]
1.37
The 2010‑11 Budget made targeted assistance available to domestic
ethanol producers, and phased down over the transition period. In addition,
imported ethanol would also experience a more gradual reduction in
excise-equivalent customs duty over the transition period than previously
announced. Subsequently, the Government announced on 7 September 2010 that
there will be a more gradual phase down of the transitional arrangements for
domestically produced ethanol over a 10 year period.
1.38
Domestic producers of ethanol produced entirely in Australia from
biomass feedstock which is to be used in, or as, transport fuel in Australia
will be eligible for the targeted assistance.
Committee objectives and scope
1.39
Last year, the Government held public consultations on a discussion
paper on taxing alternative fuels and released draft legislation in January
this year, which has also been subject to comment. Therefore, the committee is
examining a package of bills that have already been refined to take into
account many of the views of industry.
1.40
At the same time, the committee notes that the Bills fulfil policy
objectives first proposed by the then Howard Government in the 2003-04 Budget.
The objective of the inquiry has therefore been to test the technical adequacy
of the proposed legislation and ensure that there are no unintended
consequences.
Conduct of the Inquiry
1.41
Information about the inquiry was advertised in The Australian on
15 December 2010. Details of the inquiry and the Bill were placed on the
committee’s website. A media release announcing the inquiry and seeking
submissions was issued on 10 December 2010.
1.42
Submissions received as part of this inquiry are listed at Appendix A.
Those persons and organisations appearing at public hearings are listed at
Appendix B. Exhibits are listed at Appendix C.
1.43
Public hearing was held in Canberra on 23 May 2011 and in Sydney on 27
May 2011. The submissions and transcript of evidence are available from the
committee’s website at http://www.aph.gov.au/house/committee/economics/index.htm.
Analysis of the bills
Electric vehicles
1.44
During the inquiry, the Energy Networks Association, the Australian
Automotive Association and the NRMA noted that electric vehicles had been
excluded from the bills.[18] Although the number of
electric vehicles is very small now, this is an important observation for the
future, given that one of the key motivators behind the legislation is to
reduce distortions in the fuels sector.
1.45
The committee does not have significant comment to make on an
excise-equivalent tax on the electricity used by electric vehicles, except to
note the observation of the Australian Automotive Association that, ‘It is very
much an emerging one that is going to emerge a lot quicker than everybody
thinks’.[19] Because this matter has
the potential to quickly become a major issue, the committee would prefer that
Treasury commence consultations on policy now, so that it can be developed in a
timely way and give industry adequate time to adjust.
Recommendation 1 |
| 1.46 |
Treasury and other relevant agencies commence consultations
with industry with a view to developing an excise-equivalent tax for the
electricity used by electric vehicles in the medium term. |
Food for fuel
1.47
The Australian Lot Feeders’ Association raised the question of whether
increased demand for grain, such as wheat and sorghum, by ethanol producers
might push up grain prices to the detriment of other parts of the economy.
1.48
The Association was presenting this argument as the peak body
representing the $2.7 billion industry that produces beef through feedlots,
including beef that is finished in feedlots. In all, the feedlot industry
contributes 40 per cent of Australia’s total beef supply.[20]
The Association’s membership could be adversely affected if increased demand
for ethanol through the grants system in the bills increased grain prices.
1.49
Currently, 52 per cent of Australia’s ethanol capacity depends on grain.[21]
The Association argued in evidence that, if the New South Wales mandate that
10% of passenger vehicle fuels be ethanol is applied during a drought year,
then the fuel industry would consume 22 per cent of the State’s grain
production. The Association also noted that, while cattle can eat the byproduct
of grain ethanol production, it is an inferior product to grain due to its high
water content and short shelf life.[22]
1.50
The ethanol industry rejected these claims. For example, Dalby
Biorefinery stated that grain prices are largely determined by world prices and
that only 3 per cent to 5 per cent of world grain production is used to produce
ethanol. Dalby Biorefinery noted that its local grain prices had increased by
up to $10 a tonne, which is not substantial when prices exceed $200 a tonne.
Finally, it stated that it sells all its byproduct as feed to reputable, large
scale producers.[23]
1.51
The Biofuels Association of Australia also commented. Its argument was
that a number of recent reports have been published that find that the effect
of biofuels on food prices is much less than originally thought. The
organisations behind these reports include the World Bank, which was one of the
first organisations to originally raise this matter.[24]
1.52
The food for fuel debate within Australia is difficult to resolve at
this point. Both sides to the debate have plausible arguments, which revolve
around the question of whether the ethanol industry will get to sufficient size
to affect grain prices, taking into account the quality of their byproduct as
feed. It is a matter of time as to who might be proved correct. The committee
is of the view that it is important to monitor the relationship between grain
and fuel prices within Australia into the future.
Recommendation 2 |
| 1.53 |
The Treasury and other relevant Commonwealth agencies
monitor the relationship between fuel and grain prices. Where subsidised
domestic ethanol production is beginning to have a significant adverse effect
on competitors for grain, these agencies are to conduct consultations with
the industries to minimise market distortions. |
Increased consistency and reductions in distortions
1.54
In the view of Smorgon Fuels, the bills will increase the degree of
consistency in the taxation of fuels for transport purposes. In their
submission, Smorgon Fuels noted the changes between earlier versions of the
legislation and the latest ones, stating that:
In the Early Exposure Draft of the legislative package, a
marked difference in treatment between ethanol and biodiesel was proposed. This
would have introduced an unnecessary and unhelpful distortion. The biofuels
industry worked hard to explain that the two fuels do not compete with one
another and are in fact complimentary and therefore warrant equal support....We
are pleased this message was heard and the legislation now before the House
proposes to retain the...grant which fully offsets excise for both ethanol and
biodiesel until 30 June 2021.[25]
1.55
Treasury also made this argument, noting that the bills will lead to
improved economic efficiency:
One of the principal objectives of the arrangements proposed
for alternative fuels is essentially to introduce greater certainty in the
taxation of fuels used for transport purposes to ensure that competition
between transport fuels that are currently untaxed and transport fuels that are
currently taxed does not harm economic efficiency and create distortions. That
is essentially the objective of bringing alternative fuels into the fuel tax
net.[26]
1.56
The committee notes the importance of the efficiency argument. A similar
point was made by the previous Treasurer, Mr Peter Costello MP, when he
announced a similar policy in 2003.[27]
Certainty for industry
1.57
The proposed bills were highly valued because of the important role that
they would play in assisting investors make decisions. In their submission,
Smorgon Fuels noted that the biofuels industry urgently requires strong
investments signals in order ‘to underpin investment decision making and to
realise commercial success with second and third generation feedstocks and
technologies.’[28]
1.58
A number of witnesses from the biodiesel industry emphasised the
fact the industry was essentially an infant industry, one in the very early
stages of development. For this reason, many suggested that the certainty that
the bills provided would be invaluable for the further development and eventual
maturation of the industry.
1.59
In evidence, Biodiesel Industries Australia stated that it had only
spent funds on repairs and maintenance for the past two years due to policy
uncertainty.[29]
1.60
Similar points were made by other witnesses before the committee. The
Department of the Treasury, for example, were explicit in their acknowledgement
of this issue, advising the committee as follows:
It provides certainty to industry. At the moment there is no
final legislation in place. The policy was announced in the 2003-04 budget. So
there has been a period of seven or eight years of uncertainty about what the
final legislative product will be. The passage of the bills will finally
provide that certainty for industry, so they will know exactly how the law
applies rather than having a policy statement with no enacted law. A number of
times in consultation we did hear from industry that they would prefer to have
the final certainty rather than simply having the government announce policy
that is not implemented.[30]
1.61
The improved certainty for industry is a key positive about the bills.
Many of these technologies are undergoing sustained research and development.[31]
The bills will assist in creating a positive investment climate, which will
assist in generating a more efficient industry in the long run.
Industry assistance
1.62
A common argument in industry policy is whether the general public would
be better off if firms did not receive assistance and had to make profits on
their own. The Australian Lot Feeders’ Association made such an argument during
the inquiry:
The bills will also continue the misallocation of resources
towards inefficient and unviable ethanol production and away from the
commercialisation of superior advanced and second generation ethanol
technologies. ... Governments should not provide such assistance for industries
that are unable to be commercially viable without it. The answer for Government
is not to increase industry assistance as proposed but to remove it so that
market forces can prevail and companies are forced to be competitive and
efficient.[32]
1.63
The Association was not alone in expressing anxieties or concerns with
government assistance. The Australian Institute of Petroleum recommended that
all such assistance should:
n be transparent;
n be regularly reviewed
to ensure that the objectives of the assistance are still relevant; and
n should allow for a
clear transition period prior to an appropriate expiry date.[33]
1.64
The arrangements on these bills apply to a ten year limit to assistance
to be followed by a review. In evidence, the industry has argued that it has
not had consistent government policy,[34] even though the first
ethanol assistance was provided 20 years ago.[35] The biofuels industry
also stated that the ten year period in the legislation would provide it with
sufficient certainty into the future.[36] Given this extended
period, it would be possible to incorporate some of the ideas of the Institute
into the bills, such as phasing in a level of excise over five years at the
conclusion of the ten year exemption period. This might provide a more suitable
background to the proposed review in 10 years time.
Conclusions about the bills
1.65
A number of witnesses who appeared before the committee at its public
hearings to support the bills emphasised the urgency of passing the bills.
Smorgon Fuels, for example, a biodiesel producers with a 100-million-litre
capacity plant at Laverton North in Victoria, were concerned that any failure
to pass the bills would have a negative effect on the very viability of the
biodiesel industry itself. Asked by the committee what would happen if the
bills were not passed by 1 July 2011, Smorgon Fuels advised: ‘That is pretty
simple; we would stop.’[37]
1.66
This urgency was broadly supported by expert testimony from outside the
industry. For example, Treasury stated in evidence:
As I mentioned earlier, the reality is that longstanding
legislation does impact on the availability of production grants from 1 July.
So there would be a significant impact from 1 July in the absence of
alternative legislation of this sort to rectify the situation from 1 July for
both biodiesel and the ethanol industry.[38]
1.67
The bills are an important reform to fuel excise in Australia. They will
help remove distortions in the pricing of fuels leading to improved economic
efficiency. They will also provide certainty to industry and create a positive
climate for investment. Indeed, the Australian Financial Review has
referred to these bills as ‘rational fuel taxation’.[39]
1.68
The committee also notes that the then Treasurer, the Hon Peter Costello
MP, originally announced similar measures in 2003. Mr Costello stated:
The reforms will establish a fairer and more transparent fuel
excise system with improved competitive neutrality between fuels. They will
provide the opportunity for currently untaxed fuels to establish their
commercial credentials in the market place.[40]
1.69
Therefore, the committee recommends that the bills be passed as a matter
of urgency in order to meet the 1 July deadline for extending the grants
program supporting biofuels.
Recommendation 3 |
| 1.70 |
The House of Representatives pass the bills as a matter of
urgency. |
Mr Craig Thomson
MP
Chair
31 May 2011