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Submission to the
Fuel Taxation Inquiry

By

The Department of Agriculture, Fisheries and Forestry
- Australia

March 2002

AFFA SUBMISSION TO THE COMMONWEALTH FUEL TAX INQUIRY

1. Introduction

1.1 The role of the Department of Agriculture, Fisheries and Forestry - Australia (AFFA) is to increase the profitability, competitiveness and sustainability of Australia's agricultural, food, fisheries and forestry industries and enhance the natural resource base to achieve greater national wealth and stronger rural and regional communities.

1.2 AFFA welcomes the opportunity to present its views on various issues to the Fuel Taxation Inquiry. Fuel taxation is a vital issue for AFFA's portfolio industries as fuel costs represent a significant proportion of the input costs of most of these industries, and these industries sell their products in highly competitive export and domestic markets, with overseas markets often distorted by high support levels for domestic producers. These issues are discussed more fully in Section 2 of the Submission.

1.3 The remainder of the Submission discusses some of the most important issues associated with fuel taxation for AFFA portfolio industries, including features of, and commitments made in relation to, the proposed Energy Grants Scheme (EGS). AFFA's views on the importance of the Inquiry appropriately interpreting the Government's commitment on the maintenance of benefits in the EGS is discussed in Section 3. Section 4 discusses the need to balance environmental and industry objectives. This theme is expanded on in Section 5 which discusses the need to share equitably the burden of limiting greenhouse gas emissions. The importance of properly investigating the possibility of using renewable transport fuels to assist in limiting greenhouse gas emissions is discussed in Section 6. In the final section of the Submission AFFA provides its views on possible measures to simplify the administration of the EGS.

2. Background

2.1 The agricultural sector plays an important role in the economic wellbeing of Australia. For example, gross value of agricultural production was $30.1 billion in 1999-2000, making up 4.8% of Gross Domestic Product (GDP). In the same year exports of agricultural commodities amounted to $24.2 billion contributing about a quarter of total merchandise exports.

2.2 The growing globalisation of the world economy has increased the importance of sectors that are predominantly trade-oriented - such as agriculture - maintaining their competitiveness in both domestic and overseas markets. This is particularly the case given the high levels of support that are offered by many overseas countries to their traded goods sectors. For example, Chart 1 shows agricultural producer support levels for Australia and a number of other agricultural producers.

Chart 1: Producer Support Estimate¹ for Agricultural Sector in Australia's Major Trading Partners

2.3 Chart 1 shows that the level of support in the OECD as a whole was around 34% of gross farm receipts - more than five times Australia's support level. Those countries which compete with Australia in world agricultural markets - with the exception of New Zealand - have significantly higher support levels, ranging up to more than 60% in Japan and Korea.

2.4 In this global environment it is critical that the cost of Australian agricultural inputs remain at levels that enable the continued competitiveness of our products. Fuel constitutes one of the major costs of production for agriculture, fish and forest industries. For example:

• The Australian Bureau of Agriculture and Resource Economics (ABARE) report - Australian Farm Surveys 2001 indicated that liquid fuel costs, (excluding diesel fuel rebates) accounted for 7.5 per cent of total costs of broadacre and dairy farms in 1999-2000; and
• Liquid fuel costs (net of diesel rebates) accounted for 5 per cent of total cash costs of broadacre farms.
• The latest available statistics indicate that diesel contributed more than three quarters (84%) of energy used in the agriculture, fisheries and forestry industries in 1998-99.

2.5 Clearly any policy that has an impact on the use and cost of oil or oil-related products is likely to have a significant impact on the competitiveness of portfolio businesses. Fuel taxes increase fuel costs and, to the extent that they are not offset by rebates or grants, have an impact on the competitiveness of Australian primary industries. The DFRS and the DAFGS reduce the effective price faced by primary producers for off road and eligible on-road users of fuel, and therefore ameliorate the effect of fuel taxes on competitiveness. Therefore, the nature of the replacement arrangements to these diesel schemes will obviously be of vital importance for primary producers.

2.6 The importance of DFRS and DAFGS to AFFA portfolio sectors is clear from Table 1 below (derived from Tables 5.4 and 5.5 of the Fuel Taxation Inquiry Issues Paper), which shows that about 94% of total claimants of rebates are from the agriculture and forestry and fishing sectors, with 19% of grants from these sectors. Average total claims (based on 2000-01 funding) under both schemes were around $5,700 for agriculture and $30,000 for forestry and fishing.

2.7 ABARE statistics (Australian Farm Surveys Report, 2001) indicate that the value of the claims (from both DFRS and DAFGS) for agriculture represents around 46% of the average fuel costs, and 3.5% of input costs of broadacre farms.

Table 1: Commonwealth Rebates and Grant Claims in Agriculture and Fisheries and Forestry Sectors for 2000-01

	Agriculture		Forestry and Fishing
	DFRS	DAFGS	DFRS	DAFGS
Number of Claimants	115,053	9,600	7,845	533
% of Total Claimants	88%	18%	6%	1%
2001-02 Funding (est) ($m)	$526	$12	$150	$6
% of Total Funding	28%	2%	8%	1%
Average claim ($/Claimant)	$4,575	$1,208	$19,173	$10,875

2.8 If the fuel prices faced by Australian primary production businesses were to increase it would not be possible for them, in general, to pass these additional costs on to consumers:

• Primary producers are generally price takers in export markets, and they would also have difficulty in shifting very much of the burden of any price impost onto consumers in domestic markets.
• The price impact of any increase in fuel prices is likely to make Australian primary production businesses less competitive in both the domestic and world market and/or lower their returns.
• DFRS and DAFGS have played an important role in keeping fuel prices at reasonable levels for farmers and it is important that these concessions continue.

3. Commitment to Maintain Benefits of DFRS and DAFGS under EGS

3.1 The EGS is part of the Measures for a Better Environment package announced in May 1999. The EGS will replace the DAFGS and the DFRS from 1 July 2003. The objectives of the scheme are outlined in The Diesel and Alternative Fuels Grants Scheme Act 1999 as:

"The purpose of the EGS will be to provide active encouragement for the move to the use of cleaner fuels by measures additional to those under this Act, while at the same time maintaining entitlements that are equivalent to those under this Act and the Diesel Fuel Rebate Scheme, including for the use of alternative fuels."

3.2 The Government's commitment that the EGS will maintain benefits equivalent to those available under the DFRS and the DAFGS is reflected in the terms of reference to the Fuel Taxation Inquiry which indicates that "in making any recommendations, the Inquiry is bound by Government commitments to maintain the benefits of current fuel rebates, subsidies and grants".

3.3 Other Government commitments explicitly reflected in guidance given to the Inquiry through the terms of reference are that:

• long term real increases in the effective level of diesel or petrol taxes should not be considered;
• overall budget neutrality be achieved; and
• the Inquiry should have regard to the welfare of regional, rural and remote communities.

3.4 As was demonstrated above, the current DFRS and DAFGS arrangements assist in maintaining the competitiveness of AFFA's portfolio industries by lowering the effective price of one of their most significant inputs. The maintenance of the profitability and competitiveness of individual businesses after the introduction of the EGS will require the continuation under the EGS of the current level of assistance available under the DFRS and DAFGS.

3.5 In the light of the costs of implementing the environmental objectives of the EGS - including the Government's wish to promote fuels that deliver better air quality and contribute to greenhouse gas objectives - budget neutrality will be difficult to achieve. In seeking to make recommendations about the future design of the EGS, AFFA believes it is important that the Inquiry interpret appropriately the Government commitment to "maintain benefits under the EGS equivalent to those available under the DFRS and the DAFGS":

• AFFA believes that individual primary producers who previously benefited from DFRS and DAFGS should have their individual benefits maintained under the EGS.
• This will be necessary in order that another objective included in the terms of reference - the welfare of regional, rural and remote communities - not be adversely affected.

4. Balancing Environmental and Industry Objectives

4.1 Agricultural production activities affect water, air and soil quality, influence eco-systems and bio-diversity, and shape rural landscapes. Some of these environmental effects are negative or positive externalities of agricultural production. The initiatives proposed under the Measures for a Better Environment include some which attempt to internalise these externalities by using price signals or subsidies to provide incentives to encourage businesses to change their behaviour to achieve the Government's environmental objectives. For example, using cleaner (eg less sulphur content) fuels and encouraging the adoption of new innovative technologies which use cleaner fuel.

4.2 AFFA believes, however, that the adoption of strict environmental standards should not impose significant additional cost burdens on, or put restrictions on the production methods of, primary producers and leave them at a competitive disadvantage compared to their foreign competitors.

4.3 For example, an element of Measures for a Better Environment is an increase in the excise on high sulphur diesel fuels thereby providing a price incentive to encourage conversion from dirtier to cleaner fuels. While it is important to encourage greater use of cleaner fuels, caution needs to be exercised to strike a balance between environmental and industry objectives - since extra costs may work against the facilitation of the development of competitive industries. For example, an increase in the excise for diesel fuel with higher sulphur content would be a significant burden for those primary producers who are heavy users of such diesel.

4.4 It also needs to be recognised that high sulphur diesel pollution will be less of a concern in rural areas than in metropolitan areas as the concentration of vehicles emitting pollution - and therefore the human health risk - is likely to much less than in metropolitan areas. This suggests that if the rationale for introducing a higher excise rate for high sulphur diesel is to reduce the human health risk, then a lower differential, or no differential at all, might be necessary in rural areas.

4.5 The Government also needs to consider any technical difficulties that are likely to emerge due to the use of low sulphur content fuel. The National Farmers' Federation (NFF), in its Fuel Tax Inquiry Submission, observed that the introduction of low-sulphur diesel has led to a number of fuel pump seal failures - shrinking rubber seal and leakage. This is particularly the case with fuel pumps on equipment more than 5-7 years old, with such older plant and equipment and vehicles commonly used by farmers. While AFFA understands that this problem is relatively limited, AFFA supports the NFF's suggestion that where farmers face identifiable costs for complying with the new emissions standard, an appropriate level (after adjusting for the normal wear and tear on equipment which would need to be replaced) of assistance could be justified. Alternatively a sufficiently long phase-in period should be allowed to reduce the incidence of this problem.

5. Sharing of the Environmental Burden of Adjustment to Limit Greenhouse Gas Emissions

5.1 Another situation in which there is a need for balance is in measures aimed at limiting greenhouse gas emissions. The United Nations Framework Convention on Climate Change (UNFCCC) and the Kyoto Protocol present challenges for countries in developing and implementing policies to limit their emissions of greenhouse gases. At this stage governments in OECD countries are using a variety of approaches for greenhouse gas mitigation.

5.2 Unilateral adoption of measures to improve environmental standards by Australia is likely to impose short-term pressures on Australian businesses. The UNFCCC, a global convention which aims to stabilise greenhouse gas concentrations at a level that would prevent dangerous human-induced interference with the climate system, and to which Australia became a party to in 1992, recognised that no one country can solve the problem alone. The UNFCCC sets an overall framework that involves all parties agreeing, step by step, on specific actions. AFFA supports the Government's current stance of using the UNFCCC, and other bilateral and multilateral mechanisms to assist in ensuring the widespread adoption of environmental initiatives across a broad range of countries.

5.3 It is also important that Australia's "environmental burden" is shared appropriately across the domestic economy and is not focused on one sector. In order to achieve the behavioural change necessary from both producers and consumers to limit emissions of greenhouse gases, other options as well as fuel prices need to be considered. This view is reinforced, as the long-term price elasticity of demand for transport is very low, making fuel taxes less effective instruments in inducing the behavioural changes necessary to facilitate environmental objectives being achieved. Vehicle, road and parking charges, fees related to freight capacity, property rates linked to energy efficiency will all have a role to play in behavioural change. It is also essential to balance issues of administrative complexity and transparency in designing effective market based policies.

6. Encouraging the Use of Renewable Transport Fuels

6.1 Another option for limiting Australia's emissions of greenhouse gases is to use alternative fuels that produce less emissions than current fuels. Biofuel production in Australia is currently viable only with some form of Government assistance. For example, ethanol is currently exempt from the $0.38 per litre fuel excise whether in blended or pure form (neat) and biodiesel is exempt only when used neat. However the development of reliable markets for by-products of agricultural industries through establishment of biofuel (for example, ethanol and biodiesel) production facilities provide an opportunity for these industries to broaden market bases and become more economically self-reliant, therefore reducing the need for Government assistance.

6.2 While biofuels can provide a number of benefits in relation to reduction of greenhouse gas emissions and improvement of air quality, the cost effectiveness measured against other options, would also need to be considered.

6.3 A number of related benefits could accrue to domestic agricultural industries and to rural and regional Australia, including:

• significant scope to render a variety of agricultural enterprises, particularly cropping, more profitable through establishment of a market for agricultural residues. With such industries as the sugar industry in severe difficulty (due, in part, to an international market heavily distorted by subsidised production) an additional market for by-products could be of significant benefit.
• potential to offset losses when commodity prices are low and provide a steady stream of income;
• increased employment in regional and rural areas through the biomass supply chain and construction, maintenance and operation of bioenergy and/or biofuel plants. For example, it is reported in a study by the Centre for Agricultural and Regional Economics that the establishment of a new 58 ML ethanol distillery would create around 464 short-term jobs during the construction phase and 216 jobs once it is constructed.

6.4 Biofuels can deliver environmental benefits such as improved air quality and reductions in greenhouse gas emissions. The Life-Cycle Analysis of Alternative Fuels for Heavy Vehicles commissioned by the Australian Greenhouse Office (AGO) and conducted by a CSIRO-led consortium indicates that:

• pure ethanol from waste or by-product feedstocks delivers substantial greenhouse gas emission reductions and air quality improvements in comparison to petrol and diesel (however, most ethanol will be used as a 10% blend with petroleum, which reduces the emissions abated);
• although varying with the feedstock and distilling/blending processes used, low-ethanol blends deliver measurable benefits in relation to air quality and can deliver greenhouse benefits;
• greenhouse emissions from pure biodiesel are generally 50% lower than low sulphur diesel, and significantly less on a full fuel cycle comparison, depending on the feedstock used.
  • For example, emissions derived form canola, tallow and waste cooking oil are 47%, 55% and 92% less than low sulphur diesel emissions, respectively; and
• emissions affecting urban air quality from pure biodiesel are similar or less than those for low sulphur diesel except oxides of nitrogen which is about 10-15% higher in urban areas; and
• biofuels are also less toxic than conventional fuels and are biodegradable.

6.5 In recognition of these benefits, the Government has announced the `Biofuels for Cleaner Transport' policy. The Government has set an objective that fuel produced in Australia from renewable sources will contribute at least 350 million litres to the total fuel supply by 2010. Progress towards the objective will be reviewed in 2006. To implement the objective, the Government has committed to provide $50 million through a grant process from 2002-03 until total new domestic production capacity reaches 310 million litres, or by end-2006-07, whichever is sooner. The grants will be delivered as capital subsidies of $0.16 per litre of biofuel for new or expanded domestic production infrastructure.

7. Simplification of the Administration of the EGS

7.1 Given that a significant number of primary producers will be affected through the EGS, it is important that the EGS is appropriately designed so as to minimise the negative impacts on businesses generally and on AFFA portfolio industries' businesses in particular. To ensure this, it is essential that industry has input in the design and administration of the program.

7.2 With the EGS replacing two existing schemes, each of which appears to be administratively expensive to implement, there appears to be a potential for significant administrative savings. AFFA would be concerned, however, if moves to make the scheme administratively simple resulted in a reduction in benefits for some of its portfolio industries businesses.

Department of Agriculture, Fisheries and Forestry - Australia

Date: 21 March 2002

1 Producers support estimate is an OECD indicator of the annual monetary value of gross transfers from consumers and taxpayers to agricultural producers, measured at the farm gate level, expressed as a percentage of gross farm receipts.