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
Bills Digest Service
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