House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 1 - Excise differential for high sulphur diesel and ultra low sulphur diesel and certain similar products

Outline of chapter

1.1 Schedule 1, Part 1, amends the Excise Tariff Act 1921 to introduce on and from 1 July 2003 an excise differential of 1 cent per litre for diesel and certain similar products, based on their sulphur content, and alters the formula for determining the excise duty payable on blended petroleum products to reflect this differential. Part 2 increases the excise duty differential by a further 1 cent per litre on and from 1 January 2004.

Context of amendments

1.2 This measure, announced by the Prime Minister in the Measures for a Better Environment policy initiatives on 31 May 1999, gives effect to the Government's decision to encourage the early introduction of ultra low sulphur diesel, which will be mandated by 1 January 2006 under the Fuel Quality Standards Act 2000.

1.3 Low sulphur fuels provide environmental and health benefits through reduced emissions of hydrocarbons and oxides of nitrogen that affect air quality and particulate emissions known to cause respiratory problems. The measure also facilitates the broader adoption of greenhouse friendly engine technologies that depend on low sulphur fuels.

1.4 In Measures for a Better Environment, the Government made a commitment to apply an excise differential of an additional 1 cent per litre on high sulphur diesel from 1 January 2003 and a further 1 cent per litre from 1 January 2004. The Government deferred the introduction of the differential until 1 July 2003 because of concern at the possibility of raising costs for diesel users at a time when the farming sector was facing serious drought conditions.

1.5 Fuel products with similar chemical properties and that can readily be used as substitutes for diesel in internal combustion engines attract the same excise differential as diesel as a revenue protection measure. These products are heating oil, kerosene, stabilised crude petroleum oil, and topped crude petroleum oil, for use as fuel in an internal combustion engine and certain other uses.

1.6 The excise differential of 1 cent per litre from 1 July 2003 was implemented by the Excise Tariff Proposal No. 1 (2003) and the further 1 cent per litre differential from 1 January 2004 was implemented by the Excise Tariff Proposal No. 2 (2003).

Summary of new law

1.7 The amendments repeal the classification provisions in the Schedule to the Excise Tariff Act 1921 for diesel and similar products and substitute new descriptions that refer to sulphur content, provide an excise rate based on the sulphur content, and amend the formula for determining excise duty payable on blended petroleum products to reflect the excise differential.

1.8 Ultra low sulphur diesel and similar products retain the excise rate of $0.38143 per litre while diesel and similar products with high sulphur content attract excise duty at the rate of $0.39143 per litre on and from 1 July 2003 and $0.40143 per litre on and from 1 January 2004.

Detailed explanation of new law

1.9 The Schedule to the Excise Tariff Act 1921 classifies diesel and similar products, (heating oil/kerosene, stabilised crude petroleum and topped crude petroleum, for use as fuel in an internal combustion engine and 'other' uses) as items with an excise rate of $0.38143 per litre. The amendments repeal each of the existing item references and substitute two items for each product, referring to the product with a sulphur content exceeding 50 parts per million, and with sulphur content not exceeding 50 parts per million. [Schedule 1, Part 1, items 7 to 14]

1.10 The amendments repeal item references to diesel classified on the basis of packaging above and not exceeding 210 litres and substitute:

•

diesel with a sulphur content exceeding 50 parts per million at an excise duty rate of $0.39143 per litre; and

•

diesel with a sulphur content not exceeding 50 parts per million at an excise duty rate of $0.38143 per litre.

[Schedule 1, Part 1, item 10]

On and from 1 January 2004 the excise duty rate for diesel with sulphur content exceeding 50 parts per million increases to $0.40143 per litre [Schedule 1, Part 2, item 18].

1.11 The amendments repeal item references to heating oil/kerosene, for use as fuel in an internal combustion engine, in packages both above and not exceeding 210 litres, and 'other' and substitute:

•

heating oil and kerosene, for use as fuel in an internal combustion engine, in packages both above or not exceeding 210 litres and 'other', having a sulphur content exceeding 50 parts per million, at an excise duty rate of $0.39143 per litre; and

•

heating oil and kerosene, for use as fuel in an internal combustion engine, in packages both above and not exceeding 210 litres and 'other', having a sulphur content not exceeding 50 parts per million, at an excise duty rate of $0.38143 per litre.

[Schedule 1, Part 1, items 7 to 9]

On and from 1 January 2004 the excise duty rate for these heating oil/kerosene items with sulphur content exceeding 50 parts per million increases to $0.40143 per litre [Schedule 1, Part 2, items 15 to 17].

1.12 The amendments repeal item references to stabilised crude petroleum oil for use in an internal combustion engine and 'other' and substitute:

•

stabilised crude petroleum for use as fuel in an internal combustion engine and 'other' respectively, having sulphur content exceeding 50 parts per million at an excise rate of $0.39143 per litre; and

•

stabilised crude petroleum for use as fuel in an internal combustion engine and 'other' respectively, having sulphur content not exceeding 50 parts per million at an excise duty rate of $0.38143 per litre.

[Schedule 1, Part 1, items 11 and 12]

On and from 1 January 2004 the excise duty rate for these stabilised crude petroleum items with a sulphur content exceeding 50 parts per million increases to $0.40143 per litre [Schedule 1, Part 2, items 19 and 20].

1.13 The amendments repeal item references to topped crude petroleum oil for use as fuel in an internal combustion engine and 'other' and substitute:

•

topped crude petroleum oil for use as fuel in an internal combustion engine and 'other' respectively, having a sulphur content exceeding 50 parts per million, at an excise duty rate of $0.39143 per litre; and

•

topped crude petroleum oil for use as fuel in an internal combustion engine and 'other' respectively, having a sulphur content not exceeding 50 parts per million, at an excise duty rate of $0.38143 per litre.

[Schedule 1, Part 1, items 13 and 14]

On and from 1 January 2004 the excise duty rate for these topped crude petroleum items with sulphur content exceeding 50 parts per million increases to $0.40143 per litre [Schedule 1, Part 2, items 21 and 22].

Application and transitional provisions

1.14 Schedule 1, Part 1 commences on 1 July 2003 and Part 2 commences on 1 January 2004.

1.15 Schedule 2, Part 1 provides for minor drafting amendments to incidental references to fuel ethanol in Schedule 1, Part 1, to reflect the terms of the Excise Tariff Amendment Bill (No. 1) 2003 if it commences.

Consequential amendments

1.16 The introduction of two rates for diesel affects the calculations in section 6G that sets out the manner of determining the duty payable on excisable blended petroleum products. The amendments alter section 6G by:

•

providing for the appropriate diesel rate to be applied in calculating duty on blends in subsection 6G(1) [Schedule 1, Part 1, item 2] ;

•

repealing the definition of 'maximum diesel rate' under the current subsection 6G(1A) [Schedule 1, Part 1, item 3] ;

•

inserting as subsection 6G(2B) a formula for diesel/ethanol blends to reflect the duty applicable to each product. The formula includes any other substances at the applicable diesel rate and defines 'volume of other substances' [Schedule 1, Part 1, item 4] ;

•

altering the diesel/water blend formula in subsection 6G(3) to enable the appropriate diesel rate to be applied to the diesel component [Schedule 1, Part 1, item 5] ; and

•

inserting into subsection 6G(3) a definition of 'diesel rate' [Schedule 1, Part 1, item 6].

Regulation Impact Statement

Policy objective

1.17 Introduction of an excise differential for high and ultra low sulphur diesel was announced by the Prime Minister in the Measures for a Better Environment package on 31 May 1999. The measure is intended to provide an incentive for production and use of ultra low sulphur diesel before it is mandated from 1 January 2006 under the Fuel Quality Standards Act 2000.

1.18 The production cost of ultra low sulphur diesel is higher than for high sulphur diesel. Without the differential, ultra low sulphur diesel would be uncompetitive in the market place as users generally regard high and low sulphur diesel as interchangeable and would not be prepared to incur the additional cost of ultra low sulphur diesel. The imposition of a penalty excise duty rate for high sulphur diesel is intended to even up the price between high and ultra low sulphur diesel and reduce the price disincentive for the production of ultra low sulphur diesel.

1.19 The measure provides support for industry in the transition phase from 1 July 2003 until ultra low sulphur diesel becomes the mandated fuel standard on 1 January 2006 and brings forward the benefits from the early production and use of ultra low sulphur diesel.

Implementation

1.20 The excise differentials were implemented by Excise Tariff Proposals, a longstanding mechanism for implementation of government policy introducing new items or altering excise duty rates for items classified in the Excise Tariff Act 1921 pending introduction of a validation bill amending that Act.

Assessment of impacts

1.21 The introduction of the excise differential increases the excise duty rate paid by manufacturers producing high sulphur diesel and similar products and requires manufacturers to record and report on production of high and ultra low sulphur products separately.

1.22 A major impact of the higher excise duty rate for high sulphur diesel is that it provides incentive for manufacturers to invest in the production of ultra low sulphur diesel prior to 1 January 2006. A significant factor in manufacture of ultra low sulphur diesel is the global strategy of diesel manufacturers' parent companies. The excise differential may influence the investment strategy of refiners operating in Australia after 2006 to bring forward the introduction of ultra low sulphur diesel before 1 January 2006.

Impact group identification

1.23 Identified below are the main groups affected by the introduction of the excise differential.

Diesel fuel manufacturers

1.24 Manufacturers of high sulphur diesel and similar products are required to pay an additional 1 cent per litre from 1 July 2003 and a further 1 cent per litre from 1 January 2004. As a consequence of the different rates for high and ultra low sulphur products, manufacturers are required to adjust business systems to include new excise tariff items and statistical codes on relevant accounting systems to record and report products on the basis of sulphur content.

1.25 There would be a price incentive for manufacturers who blend diesel fuels to purchase ultra low sulphur diesel where this is available.

Consumers

1.26 Production and distribution of ultra low sulphur diesel is determined by the production capacity of manufacturers and their distribution networks rather than consumer demand. At this stage of the transition phase ultra low sulphur diesel is not generally available separately from high sulphur diesel at retail outlets, but will become increasingly available closer to 1 January 2006. The market price for diesel will reflect market forces, such as competition, in addition to taxation effects.

1.27 Diesel users in the agricultural sector who are eligible for an off-road grant under the Energy (Grants) Credits Scheme will receive an increased grant to compensate for the additional excise duty on high sulphur diesel. This is a one-off measure for the agricultural sector because of the specific circumstances of the drought. The additional grant amount is based on a weighted average of the differences between the excise applying to high and ultra low sulphur diesel, calculated on the basis of the projected market share of each fuel.

1.28 Other users of diesel fuel eligible for grants under fuel payments schemes will not be compensated for the additional cost of the excise differential. This is consistent with the general principle that fuel users should not be compensated for measures designed to encourage cleaner fuels.

Analysis of costs/benefits

1.29 The cost of administration is minimal, requiring only minor adjustment to the existing Australian Taxation Office (ATO) excise administration system.

1.30 The compliance cost to manufacturers in recording and reporting on the basis of sulphur content is low.

1.31 Revenue gain from the high sulphur diesel differential is estimated at $135 million for 2003-2004 and $110 million for 2004-2005.

Consultation

1.32 Prior to the introduction of the measure consultation was carried out with oil refining industry representatives and other relevant stakeholders through a forum and meetings with major oil refining and importing companies. Consultation indicated that an excise differential would contribute to both air quality and refining industry objectives of an internationally competitive refining industry by encouraging refiners to produce ultra low sulphur diesel ahead of its mandatory introduction.

1.33 The ATO consulted with diesel fuel manufacturers concerning the administrative arrangements before the implementation of the first step of the excise differential on 1 July 2003 and the necessary arrangements were in place by that date.

Conclusion

1.34 The introduction of the excise differential on diesel delivers on the commitment in Measures for a Better Environment to encourage the production and use of cleaner fuels in a manner that assists industry to make the transition to the production of these fuels.