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CONTENTS
Passage History
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer & Copyright Details
Excise
Tariff Amendment
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.
The
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
Assistance has taken three main forms:
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
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:
Environmental benefits claimed for ethanol compared with petrol
include:
On the other hand, using fuel ethanol has environmental disadvantages
including:
Fuel ethanol has other disadvantages:
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)
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)
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
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
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
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
The
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:
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.
The
main function of assistance to ethanol production—of which this
1. Fuel Taxation Inquiry Report, March 2002.
2.
Department of Primary
Industries and Energy, Portfolio Evaluation for the Ethanol Bounty
Scheme,
3.
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,
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.
10. Fuel Taxation Inquiry Report, op. cit., pp.42-43.
11. ibid.
12.
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.
15.
For example, the Democrats advocate
that fuel ethanol should have an ethanol content of two per cent by 2008.
16.
Richard Webb
5 June 2003
Bills Digest Service
Information and Research Services
This paper has been prepared for general distribution to Senators and Members of the Australian Parliament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document.
ISSN 1328-8091
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