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 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.