House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP, and the Minister for Home Affairs, the Hon Brendan O'Connor MP)

Glossary

The following abbreviations and acronyms are used throughout this combined explanatory memorandum.

General outline and financial impact

The 2011 Clean Energy Legislative Package

The Clean Energy (Fuel Tax Legislation Amendment) Bill 2011, the Clean Energy (Excise Tariff Legislation Amendment) Bill 2011 and the Clean Energy (Customs Tariff Amendment) Bill 2011 are part of the Clean Energy Legislative Package. These Bills legislate the fuel tax amendments which will apply, through the existing fuel tax regime, an effective carbon price on business liquified and gaseous fuel emissions. These fuel tax arrangements, as part of the Government's climate change plan, complement the carbon pricing mechanism as set out in Securing a clean energy future: the Australian Government's climate change plan.

The full policy context and background to the mechanism is set out in the explanatory memorandum for the Clean Energy Bill 2011. A description of the Bills which will introduce the mechanism is set out below.

The Bills need to be read in the context, in particular, of the Clean Energy Bill 2011.

Fuel tax adjustment arrangements

The current fuel tax regime provides fuel tax credits that remove or reduce the incidence of fuel tax from business inputs so that fuel tax falls primarily on consumers and business use of light commercial vehicles.

As households and light on-road commercial vehicles (4.5 tonnes and under) pay the full rate of fuel tax, they will not also face a carbon price on the fuel they use for transport. They will continue to pay fuel tax under the current arrangements.

Businesses generally pay no effective excise on the fuel they use as their excise is offset under the fuel tax credit scheme. By reducing existing fuel tax credits by an amount equal to the carbon price, the Government will impose, through the existing fuel tax regime, an effective carbon price on business liquified and gaseous fuel emissions.

Fuel tax credits will not be reduced for the agriculture, forestry and fishery industries. Therefore, these industries will not pay an effective carbon price. The fuel tax credits will remain at 100 per cent of the effective fuel tax for these industries.

Heavy on-road vehicles (over 4.5 tonne gross vehicle mass) will not face a carbon price from the commencement of the scheme. The Government intends to introduce further legislation to apply a carbon price on heavy on-road vehicles from 1 July 2014, but notes this measure was not agreed to by all members of the Multi-Party Climate Change Committee.

Gaseous fuels (liquified petroleum gas (LPG), liquified natural gas (LNG), compressed natural gas (CNG)) used for heavy on-road transport will not be subject to an effective carbon price as their eligibility for a fuel tax credit is reduced to zero due to the road user charge.

Aviation fuel is not eligible for a fuel tax credit and non-transport gaseous fuels receive either an exemption or automatic remission from fuel tax and therefore are not part of the fuel tax credit system. An effective carbon price will be imposed on the emissions of these fuels through an increase in the aviation fuel tax and applying a partial exemption or remission of fuel tax on gaseous fuel used for non-transport purposes.

Current fuel tax arrangements

Unlike other emissions sources, fuels are currently subject to their own tax regime.

Fuel tax is currently applied through the provisions of the Excise Tariff Act 1921 for domestically manufactured fuels and the Customs Tariff Act 1995 for imported fuels. There is currently no indexation of the fuel tax rates on fuel products.

In the Schedule to the Excise Tariff Act 1921, liquified and gaseous fuels are classified in item 10. The equivalent imported products to the liquified and gaseous fuels classified to item 10 in the Excise Tariff Act 1921 are classified mainly in Chapters 27, 29 and 38 of Schedule 3 to the Customs Tariff Act 1995.

The Taxation of Alternative Fuels Legislation Amendment Act 2011, the Excise Tariff Amendment (Taxation of Alternative Fuels) Act 2011, the Customs Tariff Amendment (Taxation of Alternative Fuels) Act 2011 and the Energy Grants (Cleaner Fuels) Scheme Amendment Act 2011 brought the gaseous fuels (LPG, LNG and CNG) into the excise system.

Under the alternative fuels legislation, grants to ethanol, biodiesel and renewable diesel producers will offset the fuel tax paid on these fuels until 2021. The grants will be set with reference to the relevant excise rate for each fuel. Blends are entitled to grants that offset the fuel tax paid on the biofuel component of the blend. These programs are the main grant and subsidies that reduce the amount of effective fuel tax on bio-fuels.

LPG, LNG and CNG will be progressively brought into the fuel tax system over a transitional period from 1 December 2011 to 1 July 2015. Over the transition period the fuel tax rates will be progressively increased until on 1 July 2015 they reach their full excise rate which will be benchmarked on the petrol/diesel excise rate, adjusted for the lower energy content of the gaseous fuels and with a further 50 per cent discount.

Fuel tax will apply to all LPG, LNG and transport use CNG. LPG and LNG used for non-transport purposes are subject to a full fuel tax remission. Non-transport use CNG is exempt from excise. The effective fuel tax on non-transport gaseous fuels is therefore zero.

Business users of liquified and gaseous transport fuels are generally eligible for fuel tax credits under the Fuel Tax Act 2006 which fully or partially offset the effective fuel tax paid on the fuel used or consumed by a business in carrying on its enterprise.

Businesses are eligible for a fuel tax credit of:

•

100 per cent of the effective fuel tax paid on any fuel used by businesses previously eligible for off-road credits under the Energy Grants (Credits) Scheme Act 2003;

•

100 per cent of the effective tax on the alternative fuels brought into the tax system under the Taxation of Alternative Fuels Legislation Amendment Act 2011 (as ethanol, biodiesel and renewable diesel are eligible for a tax offsetting grant, their effective tax is zero); or

•

50 per cent of the effective fuel tax paid on any fuel used by businesses previously ineligible for off-road credits under the Energy Grants (Credits) Scheme Act 2003 (by 1 July 2012, all registered businesses will be eligible for a fuel tax credit equal to the effective fuel tax on their fuel).

The amount of the effective tax on which the fuel tax credit is based is defined in section 43-5 of the Fuel Tax Act 2006.

•

It is the amount of fuel tax that was or would be payable on the fuel less any grant or subsidy amount. Subsection 43-5(3) provides a list of grants that are excluded from the grant or subsidy amount and subsection 43-5(4) provides a special effective fuel tax rate for blended fuels that meet the fuel standard for petrol or diesel fuel.

•

The fuel tax credit entitlement for heavy on-road vehicle users is further reduced by the road user charge. When the road user charge is greater than the fuel tax credit, as it will be for the gaseous fuels, the fuel tax credit is set at zero.

•

Heavy vehicles are those with a gross vehicle mass exceeding 4.5 tonnes. A grandfather provision in the Fuel Tax Act 2006 also provides a partial credit amount to vehicles of 4.5 tonnes where the vehicle was acquired before 1 July 2006.

•

The road user charge can be altered through provisions located in section 43-10 of the Fuel Tax Act 2006. Under these provisions, the Minister for Transport can determine a new amount by issuing a legislative instrument. It is current Government policy that the charge be adjusted every year on 1 July

No fuel tax credits are provided for:

•

business use of fuel on-road in vehicles which do not meet the gross vehicle mass requirements outlined above or environmental criteria outlined in section 41-25 of the Fuel Tax Act 2006; or

•

fuel used in aviation.

Fuel tax adjustment

Fuel tax credit reduction

The current fuel tax regime provides fuel tax credits that remove or reduce the incidence of fuel tax from business inputs so that fuel tax falls primarily on consumers and light commercial vehicles. By reducing existing fuel tax credits by an amount equal to the carbon price, the Government will impose an effective carbon price on businesses liquified and gaseous fuel emissions through the existing fuel tax regime.

As different fuels emit different amounts of carbon when they burn, the fuel tax credit changes for petrol and diesel will be determined according to their specific level of emissions. Fuel tax credit changes for liquified fossil fuels other than petrol and diesel will be based on the diesel emission rate. Fuel tax credits changes for gaseous fuels will reflect the effective carbon price, based on their specific emission rates.

Non-transport gaseous fuel tax adjustment

Non-transport LPG and LNG receive a remission, and non-transport CNG receives an exemption from the excise and excise equivalent customs duty imposed on gaseous fuels, so that effective tax falls only on gaseous fuels for transport use.

To ensure consistent coverage of non-transport use of gaseous fuels, such as emissions from bottled LPG and reticulated gas, an effective carbon price will apply through a reduction in the automatic remission or exemption of excise or excise equivalent customs duty.

Under the Government's plan for a clean energy future, the fuel tax remission or exemption for non-transport LPG, LNG and CNG will be adjusted on a 'cent-for-cent' basis equivalent to the carbon content price on the fuels, had the gaseous fuels been subject to carbon pricing.

Aviation fuel tax adjustment

As aviation fuels do not receive fuel tax credits, domestic aviation fuel excise will be increased by an amount equivalent to the carbon price on the fuel emissions. International aviation fuel use is not subject to Australian fuel tax and will therefore not be subject to an effective carbon price.

Periodic adjustment mechanism

Fuel tax credit reductions for businesses, and the fuel tax rate increases for aviation and non-transport gaseous fuels, will be calculated for fuels acquired after 1 July 2012 based on the amount of the fixed carbon price as set at the beginning of each of the fixed price years from 2012-13 to 2014-15.

When Australia moves to an emissions trading scheme in 2015-16, the fuel tax credit changes and fuel tax adjustments will be determined on a six-monthly basis, based on the average carbon price over the previous six-months.

Assistance to business

Fuel tax credits will not be reduced for the agriculture, forestry and fishery industries. These industries will not pay an effective carbon price. The fuel tax credits will remain at 100 per cent of the effective fuel tax for these industries.

Heavy on-road vehicles will not face a carbon price from the commencement of the scheme. The Government intends to apply a carbon price on heavy on-road vehicles from 1 July 2014.

Gaseous fuels such as liquified petroleum gas, liquified natural gas and compressed natural gas used in heavy on-road transport will not be subject to an effective carbon price as their eligibility for a fuel tax credit is reduced to zero due to the road user charge.

While transport fuel emissions will generally not count towards an entity's liable emissions under the carbon pricing mechanism, large carbon emitters will have the choice to opt-into the carbon pricing mechanism for their fuel emissions. In return they will not be subject to the carbon reduction to their fuel tax credit entitlement.

Date of effect : These provisions commence on 1 July 2012 subject to section 3 of the Clean Energy Bill 2011 commencing on that date.

Proposal announced : The measures are based on the Government's announcement of its Australia's plan for a clean energy future on 10 July 2011 as set out in Securing a clean energy future: the Australian Government's climate change plan.

Financial impact : The financial impact statement is included in the explanatory memorandum for the Clean Energy Bill 2011.

Summary of regulation impact statement

Impact : The Regulation Impact Statement (RIS) for the mechanism, entitled Australia's plan for a clean energy future, is available at http://ris.finance.gov.au. The RIS was prepared by the Department of Climate Change and Energy Efficiency and has been assessed as adequate by the Office of Best Practice Regulation.

Chapter 1 - Fuel tax credit reduction

Outline of chapter

1.1 This chapter outlines amendments by the Clean Energy (Fuel Tax Legislation Amendment) Bill 2011 to the Fuel Tax Act 2006 which will reduce the business fuel tax credit (FTC) entitlement for liquified and gaseous transport fuels in order to provide a carbon emission charge on business through the fuel tax system.

Context of amendments

1.2 The Government proposes, under the Clean Energy Plan, to provide a 'cent-for-cent' impact on businesses equivalent to the carbon emission price that would have been included in their transport fuel costs, had transport fuels been subject to carbon pricing.

1.3 Households, commercial on-road light vehicles, the agriculture, forestry and fishery industries and, for two years, the heavy on-road transport industry, will not face a carbon price on the fuel they use for transport.

1.4 While transport fuel emissions will generally not count towards an entities liable emissions under the carbon pricing mechanism, large carbon emitters will have the choice to opt-into the carbon pricing mechanism for their fuel emissions in return for not being subject to the carbon reduction to their fuel tax credit entitlement.

Summary of new law

1.5 Under the Clean Energy Plan, the Government will reduce the business FTC entitlement for liquified and gaseous transport fuels to provide a 'cent-for-cent' impact on businesses equivalent to the price on the carbon emission from their use of these fuels

1.6 The FTC entitlement reductions of diesel, petrol and the gaseous fuels will be based on the emission rates for each of these fuels. The FTC entitlement reductions for the other liquified transport fuels will be based on the diesel emission rate.

1.7 Agriculture, fishing and forestry will be excluded from FTC reductions. No FTC reductions will be made to heavy on-road transport industries during 2012-13 or 2013-14. It is the Government's intention that separate arrangements will be made so that heavy on-road transport will become liable for a carbon charge after 30 June 2014.

1.8 Large users of fuel will have an option to manage their carbon liability for liquified fuel under the carbon pricing mechanism rather than the fuel tax system. In doing so, entities would opt-in to the carbon pricing mechanism and be considered liable entities under the carbon pricing mechanism and simultaneously be excluded from paying an equivalent carbon price through the excise or FTC systems.

1.9 If the opted-in entity is a user of aviation fuel, they will be eligible for a FTC equal to the carbon component of the fuel tax on the fuel.

1.10 The renewable fuels (ethanol, biodiesel and renewable diesel) are zero rated for emissions and therefore their FTC entitlement will not be reduced.

Comparison of key features of new law and current law

Detailed explanation of new law

1.11 Under the Clean Energy Plan, liquified and gaseous fuels will not be subject to a carbon emission charge. However, the Fuel Tax Act 2006 will be amended to the effect that the business users of these fuels will have their FTC entitlements reduced by the equivalent of the carbon charge on the fuel had these fuels been subject to the carbon charge. [ Schedule 1, item 11, subsection 43 - 5(1 )]

Timing of the credit reduction

1.12 The first reduction of the FTC entitlement for transport fuels will take effect from 1 July 2012. There will be two further yearly adjustments on 1 July 2013 and 1 July 2014 followed by six-monthly adjustments beginning on 1 July 2015. [ Schedule 1, item 12, subsection 43 - 8(1 )]

Carbon emission price

1.13 The amount of the FTC carbon reduction will be based in 2012-13, 2013-14 and 2014-15 on a carbon charge of $23.00 per tonne, $24.15 per tonne and $25.40 per tonne respectively. [ Schedule 1, item 12, subsection 43 - 8(1 )]

1.14 From 1 July 2015, the FTC carbon reduction will be based on the preceding six-month average carbon auction price. The average auction price used on 1 July 2015 will be for the proceeding six-month forward permit auctions. For subsequent periods the average priced used will be for the actual six-month period. [ Schedule 1, item 12, subsection 43 - 8(1 )]

1.15 As the average carbon price may decrease rather than increase over the subsequent six-month adjustment periods, the corresponding FTC carbon reduction amount may be adjusted down as well as up.

Credit reduction amount

1.16 The formula for calculating the fuel tax credit entitlement will be:

FTC entitlement = current effective excise rate - FTC carbon reduction.

1.17 Each fuel emits a different amount of carbon when it is burnt and, accordingly, the emission-based FTC credit reduction could be expected to lead to a different FTC reduction for each fuel. However these multiple FTC reduction rates would cause significant compliance costs for businesses claiming FTCs. Therefore, apart from petrol, the liquified fuels which have a similar emission rate have been grouped to have the same FTC reduction rate as diesel. [ Schedule 1, item 12, paragraph 43 - 8(1 )( g )]

1.18 The gaseous fuels have substantially different emission rates from the liquified fuels and from each other and therefore require differentiated FTC reduction rates.

1.19 Diesel and the other liquified fuels apart from petrol will have an FTC reduction expressed in cents per litre and calculated by multiplying the relevant period carbon charge by the emission rate for diesel, which is 0.0027 tonnes of carbon emission per litre. [ Schedule 1, item 12, paragraph 43 - 8(1 )( g )]

1.20 Petrol will have the FTC reduction expressed in cents per litre and calculated by multiplying the relevant period carbon charge by the emission rate for petrol, which is 0.0024 tonnes of carbon emission per litre. [ Schedule 1, item 12, paragraph 43 - 8(1 )( a )]

1.21 Liquified petroleum gas (LPG) will have the FTC reduction expressed in cents per litre and will be calculated by multiplying the relevant period carbon charge by the emission rate for LPG, which is 0.0016 tonnes of carbon emitted per litre. [ Schedule 1, item 12, paragraph 43 - 8(1 )( b )]

1.22 Compressed natural gas (CNG) and liquified natural gas (LNG) will have the FTC reduction expressed in cents per kilogram and will be calculated by multiplying the relevant period carbon charge by the emission rate for natural gas, which is 0.0029 tonnes of carbon emitted per kilogram. [ Schedule 1, item 12, paragraphs 43 - 8(1 )( c ) and ( d )]

1.23 The fuel blends will have the FTC reduction apply to each portion of the fuel and accordingly the FTC reduction (zero for the renewable fuels) will apply on a pro-rata basis to each of the component fuels. [ Schedule 1, item 12, subsection 43 - 8(3 )]

1.24 The manufacturer, importer or acquirer of taxable fuel for use in their enterprise will be excluded from the FTC reduction for fuels that are for use other than by combustion of the fuel. [ Schedule 1, item 12, paragraph 43 - 8(4 )( d )]

1.25 Table 1.1 lists the relevant FTC reduction per fuel type over the three-year transitional assistance period. Figures are in cents per litre except for CNG and LNG which are in cents per kilogram.

Assistance to the agriculture, fishing, forestry and heavy on-road transport industries

1.26 The agriculture, fishing, forestry and heavy on-road transport industries will be excluded from FTC reductions. That is, the FTC entitlement for the agriculture, fishing, forestry and heavy on-road transport industries will remain as a 100 per cent offset of the current excise rate for the relevant fuel. [ Schedule 1, item 12, paragraph 43 - 8(4 )( b )]

1.27 Clean Energy (Fuel Tax Legislation Amendment) Bill 2011 will insert Subdivision 43B into the Fuel Tax Act 2006 to define the agriculture, forestry and fishing industries.

Arrangements for fuels to opt-into the carbon pricing mechanism

1.28 Under the Clean Energy Bill 2011, large users of fuel will have the option to manage their carbon liability for liquified fuel under the carbon pricing mechanism rather than the fuel tax system. In doing so, entities would opt-in to the carbon pricing mechanism and be considered liable entities under the carbon pricing mechanism for their fuel emissions.

1.29 If a fuel is covered under the Opt-in Scheme, the amount of the carbon reduction that applies to the fuel is nil. [ Schedule 1, item 12, paragraph 43 - 8(4 )( a )]

1.30 Aviation fuel will be subject to a 'carbon component rate' increase in the excise and excise equivalent customs duty rate to apply an effective carbon price on aviation fuel emissions.

1.31 Aviation fuel covered under the Opt-in Scheme will be eligible for an FTC. The amount of the FTC for the taxable fuel is reduced by the amount of fuel tax that would have been payable on the fuel if the carbon component rate that affected the rate of fuel tax on the fuel had instead been nil. [ Schedule 1, item 14, subsection 43 - 11(2 )]

Application and transitional provisions

1.32 The FTC reductions will commence from 1 July 2012 assuming that section 3 of the Clean Energy Bill 2011 commences on that date.

Chapter 2 - Adjustment of fuel tax rates - excise duty

Outline of chapter

2.1 This chapter outlines the operation of the amendments to the Excise Tariff Act 1921 by the Clean Energy (Excise Tariff Legislation Amendment) Bill 2011 to provide a 'cent-for-cent' impact on the use of aviation and non-transport gaseous fuels, equivalent to the carbon emission price of the fuel, had the gaseous fuels been subject to carbon pricing.

Context of amendments

2.2 Aviation fuels, although subject to a small hypothecated levy to fund the Civil Aviation Safety Authority (CASA), do not receive fuel tax credits (FTC)s for the hypothecated levy. Non-transport liquified petroleum gas (LPG) and liquified natural gas (LNG) receive a remission, and non-transport compressed natural gas (CNG) receives an exemption from the excise and excise equivalent customs duty imposed on gaseous fuels. As the non-transport gaseous fuels are not currently subject to tax they are outside of the FTC system.

2.3 Therefore aviation fuels and non-transport gaseous fuels are not eligible for FTCs and are not covered by the Government's Clean Energy Plan mechanism to impose a carbon content price on their fuel costs, through FTC reductions.

Summary of new law

2.4 To bring these fuels into the Government's Clean Energy Plan, domestic aviation fuel excise will be increased by an amount equivalent to the carbon price, to provide an effective carbon price for aviation. Similarly, the fuel tax exemption on non-transport CNG and the fuel tax remission for non-transport LPG and LNG will be adjusted on a 'cent-for-cent' basis equivalent to the carbon content price on the fuels, had the gaseous fuels been subject to carbon pricing.

Comparison of key features of new law and current law

Detailed explanation of new law

Adjustments of excise equivalent customs

2.5 The aviation fuels (items 10.6 and 10.17 in item 10 of the Schedule to the Excise Tariff Act 1921) are subject to a relatively small fuel tax (excise and customs duty) hypothecated to fund CASA. While keeping distinct the hypothecated CASA funding, the fuel tax rates will be adjusted by the amount of the notional carbon price that would be put on the fuel emissions, had aviation fuel been subject to a carbon charge. [ Schedule 1, item 2, subsections 6FA and 6FB )]

2.6 The formula for calculating the aviation fuel excise rate will be:

Aviation fuel excise rate = hypothecated CASA levy + aviation fuel carbon component rate

2.7 A new tariff item will be created for non-transport CNG (item 10.19D of the Schedule to the Excise Tariff Act 1921). [ Schedule 2, item 2, subsection 3(1 )]

2.8 The formula for calculating the non-transport CNG partial excise exemption rate will be:

Non-transport CNG excise rate = CNG carbon component rate

2.9 The formula for adjusting the remission on the non-transport LPG and LNG fuel will be established in excise and customs regulations.

Aviation fuel and non-transport CNG carbon component rate

2.10 The aviation gasoline and aviation kerosene carbon component rate on which the excise increases are based, will be expressed in cents per litre and will be calculated by multiplying the relevant period carbon charge by the emission rate for the respective fuel. The relevant emission rate for aviation gasoline is 0.0022 tonnes of carbon emission per litre, and for aviation kerosene the relevant emission rate is 0.0026 tonnes of carbon emission per litre. [ Schedule 1, item 2, sections 6FA and 6FB )]

2.11 Table 2.1 lists the notional carbon emission charge in cents per litre of aviation fuel over the fixed carbon price period.

2.12 The excise exemption for non-transport CNG in section 77HA of the Taxation of Alternative Fuels Legislation Amendment Act 2011 will be amended so that non-transport CNG becomes subject to excise at a rate equivalent to the CNG carbon component rate provided it is not for private use. [ Schedule 2, item 1, section 77HA ]

2.13 The CNG carbon component rate will be expressed in cents per kilogram and will be calculated by multiplying the relevant period carbon charge by the CNG emission rate of 0.0029 tonnes of carbon emission per kilogram. [ Schedule 2, item 4, subsection 6H(3 )]

2.14 Table 2.2 lists the CNG and LNG carbon component rate in cents per kilogram.

Timing of the excise tariff adjustment

2.15 The first adjustment of the fuel tax for aviation and non-transport gaseous fuels will take effect from 1 July 2012. There will be two further yearly adjustments on 1 July 2013 and 1 July 2014 followed by six-monthly adjustments beginning on 1 July 2015. [ Schedule 1, item 2, sections 6FA and 6FB )]

2.16 The amount of the fuel tax adjustment will be based in 2012-13, 2013-14 and 2014-15 on a carbon charge of $23.00 per tonne, $24.15 per tonne and $25.40 per tonne respectively.

2.17 From 1 July 2015, the fuel tax adjustment will be based on the preceding six-month average carbon auction price. The average auction price used on 1 July 2015 will be for the preceding six-month forward permit auctions. For subsequent periods the average price used will be for the actual six-month period. As the average carbon price may decrease rather than increase over the six-month period, the corresponding aviation fuel tax adjustment could be a decrease rather than an increase. [ Schedule 1, item 1, subsection 3(1 )]

Application and transitional provisions

2.18 The amendments to the Excise Tariff Act 1921 will commence on 1 July 2012 assuming that section 3 of the Clean Energy Bill 2011 commences on that date.

Chapter 3 - Adjustment of fuel tax rates - customs duty

Outline of chapter

3.1 This chapter outlines the operation of the amendments to the Customs Tariff Act 1995 by the Clean Energy (Customs Tariff Amendment) Bill 2011 to provide a 'cent-for-cent' impact on the use of aviation and non-transport gaseous fuels, equivalent to the carbon emission price of the fuel, had the gaseous fuels been subject to carbon pricing.

Context of amendments

3.2 Aviation fuels, although subject to a small hypothecated levy to fund the Civil Aviation Safety Authority (CASA), do not receive fuel tax credits (FTC)s. Gaseous fuel for transport purposes are being brought into the fuel tax system under the alternative fuels legislation. However the gaseous fuels for non-transport purposes will be outside the FTC system. This is because non-transport liquified petroleum gas (LPG) and liquified natural gas (LNG) will receive a remission on the excise and excise equivalent customs duty, and non-transport compressed natural gas (CNG) will receive an exemption from the excise and excise equivalent customs duty imposed on gaseous fuels.

3.3 Therefore aviation fuels and non-transport gaseous fuels are not eligible for FTCs and are not covered by the Government's Clean Energy Plan mechanism to impose a carbon content price on their fuel costs, through FTC reductions.

Summary of new law

3.4 To bring these fuels into the Government's Clean Energy Plan, domestic aviation fuel excise equivalent customs duty will be increased by an amount equivalent to the carbon price to provide an effective carbon price for aviation. Similarly, the fuel tax exemption on non-transport CNG and the fuel tax remission for non-transport LPG and LNG will be adjusted on a 'cent-for-cent' basis equivalent to the carbon content price on the fuels, had the gaseous fuels been subject to carbon pricing.

Comparison of key features of new law and current law

Detailed explanation of new law

Adjustments of excise equivalent customs duty

3.5 The aviation fuels (Sub-headings 2710.11, 2710.19, 2710.91, 2710.99 (and 2710.12 after 1 January 2012) of Schedule 3 to the Customs Tariff Act 1995) are subject to a relatively small fuel tax (excise and customs duty) hypothecated to fund CASA. While keeping distinct the hypothecated CASA funding, the fuel tax rates will be adjusted by the amount of the notional carbon price that would be put on the fuel emissions, had aviation fuel been subject to a carbon charge. [ Schedule 1, Part 1, Divisions 1 and 2 ]

3.6 The formula for calculating the aviation fuel excise equivalent customs duty rate will be:

Aviation fuel excise equivalent customs duty rate rate = hypothecated CASA levy + aviation fuel carbon component rate

3.7 A new tariff item will be created for non-transport CNG (Sub-heading 2711.21.20 of Schedule 3 to the Customs Tariff Act 1995). [ Schedule 1, Part 1, Division 3, items 31 and 35 ]

3.8 The formula for calculating the non-transport CNG excise equivalent customs duty rate will be:

Non-transport CNG excise equivalent customs duty rate = CNG carbon component rate.

3.9 The formula for adjusting the remission on the non-transport LPG and LNG fuel will be established in excise and customs regulations.

Aviation fuel and non-transport CNG carbon component rate

3.10 The aviation gasoline and aviation kerosene carbon component rate on which the excise increases will be based are expressed in cents per litre and will be calculated by multiplying the relevant period carbon charge by the emission rate for the respective fuel. The relevant emission rate for aviation gasoline is 0.0022 tonnes of carbon emission per litre, and for aviation kerosene the relevant emission rate is 0.0026 tonnes of carbon per litre.

3.11 Table 3.1 lists the notional carbon emission charge by cents per litre of aviation fuel over the fixed carbon price period.

3.12 The excise equivalent customs duty exemption for non-transport CNG in section 77HA of the Taxation of Alternative Fuels Legislation Amendment Act 2011 will be amended so that non-transport CNG will become subject to excise equivalent customs duty at a rate equivalent to the CNG carbon component rate unless it is for private use. [ Schedule 1, Part 1, Division 3, item 31 ]

3.13 The CNG carbon component rate will be expressed in cents per kilogram and will be calculated by multiplying the relevant period carbon charge by the CNG emission rate of 0.0029 tonnes of carbon emission per kilogram.

3.14 Table 3.2 lists the LNG and CNG carbon component rate by cents per kilogram.

Timing of the excise equivalent customs tariff adjustment

3.15 The first adjustment of the fuel tax for aviation and non-transport gaseous fuels will take effect from 1 July 2012. There will be two further yearly adjustments on 1 July 2013 and 1 July 2014 followed by six-monthly adjustments beginning on 1 July 2015.

3.16 The amount of the fuel tax adjustment will be based in 2012-13, 2013-14 and 2014-15 on a carbon charge of $23.00 per tonne, $24.15 per tonne and $25.40 per tonne respectively.

3.17 From 1 July 2015, the fuel tax adjustment will be based on the preceding six-month average carbon auction price. The average auction price used on 1 July 2015 will be for the preceding six-month forward permit auctions. For subsequent periods the average priced used will be for the actual six-month period. As the average carbon price may decrease rather than increase over the six-month period, the corresponding aviation fuel tax adjustment could be a decrease rather than an increase. [ Schedule 1, Part 2 ]

3.18 Amendments will also be made to the Schedules in the Customs Tariff Act 1995 which provide for existing Free Trade Agreements (Schedule 5 to the Australia-US Free Trade Agreement, Schedule 6 to the Thailand-Australia Free Trade Agreement, Schedule 7 to the Australia-Chile Free Trade Agreement and Schedule 8 to the ASEAN-Australia-New Zealand Free Trade Agreement) to ensure that the carbon charge for aviation fuel and CNG also applies to the Free Trade Agreements.

Commencement and application provisions

3.19 The amendments to the Customs Tariff Act 1995 will commence on 1 July 2012 providing section 3 of the Clean Energy Bill 2011 commences on that date.

3.20 Amendments to the Customs Tariff Act 1995 shall apply to goods that were imported on or after 1 July 2012. It also applies to goods imported before 1 July 2012 but not entered into home consumption until on or after 1 July 2012.

Changes of rates of duty

3.21 The Clean Energy (Customs Tariff Amendment) Bill 2011 sets out excise equivalent rates of customs duty applicable to aviation fuels and CNG, from 1 July 2012. New section 19A in the Customs Tariff Act 1995 will give effect to subsequent adjustments to these duty rates. Section 19A will link duty rates for these goods to the equivalent items in the Excise Tariff Act 1921 and will automatically adjust those duty rates when duty rates change in the Excise Tariff Act 1921. This is similar to the mechanism in the present section 19 of the Customs Tariff Act 1995 that links changes to customs rates of duty for alcohol and tobacco products to rates of duty in the Excise Tariff Act 1921, for the purposes of twice yearly CPI duty rate adjustments.

3.22 This mechanism will ensure that rates of customs duty for aviation fuels and CNG are the same as set out in the Excise Tariff Act 1921. [ Schedule 1, Part 2, item 41 )]

Index

Clean Energy (Fuel Tax Legislation Amendment) Bill 2011

Schedule 1: Fuel tax credits

Clean Energy (Excise Tariff Legislation Amendment) Bill 2011

Schedule 1: Aircraft fuel

Schedule 2: Compressed natural gas

Clean Energy (Customs Tariff Amendment) Bill 2011

Schedule 1: Customs Tariff Act 1995