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)

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.