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)

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:

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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 ;

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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

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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 .

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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.

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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.

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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.

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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:

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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

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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.