DEPARTMENT OF TRANSPORT AND REGIONAL SERVICES SUBMISSION TO THE FUEL TAXATION INQUIRY
The analysis and views expressed in this submission are those of the Department and do not necessarily reflect the views of the Minister or the Government
This submission deals with a number of issues which the Department of Transport and Regional Services considers that the Fuel Taxation Inquiry should take into account in examining the total structure of Commonwealth and State taxation of fuels.
Section 1 of the submission sets the scene for considering the interactions between fuel taxation and transport activity. Section 2 establishes some transport and regional policy objectives for fuel taxation and examines the effectiveness of current arrangements against the various objectives which the fuel tax regime is explicitly or implicitly designed to achieve. Section 3 discusses fuel taxation and charging for the costs of transport activity, including the current heavy vehicle charging regime, proposals to use fuel excise to charge for externalities, and the proposed Energy Grants (Credits) Scheme . Section 4 explores some longer term directions for reform which the Department thinks it is important for the Inquiry to consider now.
1. SETTING THE SCENE - TRANSPORT ACTIVITY AND FUEL TAXATION
1.1 Transport is a major input to all economic activity and a major sector in its own right ...
The transport sector accounts for just over 5 per cent of total economic activity in Australia1. Road transport accounts for almost half of the value of core transport activities, with air and rail each accounting for around a quarter. Transport volumes are quite different to values. In relation to freight volumes, road, rail and sea transport have roughly equal shares of the domestic freight task, measured in tonne kilometres; air transport accounts for only 0.1 per cent of domestic freight. However, road and air dominate in terms of high value freight and passenger movements, with rail and sea transport focused on lower unit value bulk freight tasks.
Transport is a key input to other sectors of the economy. The transport sector provides services valued at more then $30 billion to other industries. The sector also contributes more than $11 billion to national final consumption2. To put this in a wider frame, the Bureau of Transport Economics (BTE) has estimated that the gross added value of logistics activities in Australia was around $57 billion in 1999-2000, or 9 per cent of GDP3.
Transport is also an important source of income and employment. Total employment in the sector is around 452,000, including 52 per cent in road transport, 23 per cent in storage and other transport services, 13 per cent in air, 8 per cent in rail and 3 per cent in water. In 2000-01, the sector provided over an estimated $17 billion in wages, salaries and other payments to labour.
1.2 Transport is also a key facilitator of social activity ...
Available economic data does not adequately illustrate the social significance of the transport sector, as it does not include passenger travel involving the personal use of vehicles. Much of this activity is classified as consumption (of fuel, vehicles, mechanical services, etc), and falls outside of the commercial transport sector as defined for statistical purposes.
Nevertheless, this transport activity is still valuable. Transport provides access to essential services and employment, enhances choices, and underpins participation in a wide range of activities. Access to transport - including the cost and availability of private and public transport options - is thus an important equity issue and a critical contributor to social cohesion in Australian life. This is true of all types of locations, from inner urban areas to rural communities, although the specific access and equity issues faced vary across locations.
Cars are the most significant form of passenger transport, providing over 80 per cent of total passenger kilometres travelled.
1.3 Like almost all other energy intensive activity, transport activity is often associated with inefficiencies, inequities, environmental costs and adverse quality of life impacts ...
The central nature of transport activity to the economy and society, and the dominance of certain modes of transport - especially road transport - inevitably leads to issues associated with its use. These include urban traffic congestion, inadequate access to transport compounding inadequate access to services, serious public health issues associated with vehicle emissions, transport's contribution to greenhouse emissions, and a range of built environment issues associated with transport planning which many blame for a lower sense of urban amenity.
Some of these efficiency, access and environmental issues are directly related to the performance characteristics of transport vehicles, and the fuel used in those vehicles.
1.4 Most transport activity in Australia is heavily reliant on petroleum and petroleum substitute fuels ...
Australian domestic transport currently consumes in the order of 30 billion litres (or gigalitres, GL) of petroleum fuels per annum (including natural gas and allowing for the different energy contents and densities of the various petroleum fuels).
The dominant transport fuel is automotive gasoline - with the consumption of 17 GL in 1998, (about 70 per cent of which was unleaded petrol and 30 per cent leaded petrol). The other major transport fuels are:
Even though most of Australia's urban railways are now electrified, electricity and other fuels (including fuel oil, natural gas, coal, aviation gasoline and ethanol) currently account for less than 5 per cent of total primary energy consumption by Australian transport.
Of this annual consumption of approximately 30 GL of fuel, passenger cars account for over half (54 per cent of the total), followed by trucks and light commercial vehicles (LCVs) (see Figure 1).
FIGURE 1 SHARES OF AUSTRALIAN DOMESTIC TRANSPORT
Notes Values refer purely to fuel end-use; therefore `Rail' here does not include energy consumption due to electricity generation and transmission for electric traction use.
`Maritime' includes small craft use as well as coastal shipping.
Total (oil and gas use by domestic transport) = 1077 petajoules (PJ) for 1997-98
Source BTE estimates (based on ABARE and ABS data).
Recent projections undertaken by the BTE4 also indicate that petroleum fuels will continue to be the dominant fuel type for transport out to 2020. These projections also indicate that:
Other sectors with relatively high use of petroleum products relative to their contribution to the economy are the mining and agriculture, forestry and fishing sectors.
1.5 Fuel costs and fuel taxation are significant factors influencing transport choices and investment decisions ...
Like all forms of taxation, fuel taxation5 has direct price impacts that influence consumer demand and, in turn, investment decisions.
Unlike the GST, the fuel tax arrangement is not a general fuel tax system, rather a tax on selected crude oil derivatives and like fuels (this reflects its origins as a tax on road vehicles imposed to raise revenue for road building). Evolution of the fuel tax arrangements has occurred over time to produce the existing arrangements that apply variable rates, determined by the fuel type and the end use to which the fuel is put.
Differential taxes on fuel products, and on different sectors, directly impact on the relative prices of goods, sending powerful signals to consumers, both personal and business, that can influence:
As already noted, transport is also a key input to the provision of goods and services and, to the extent that taxes and their administration costs apply to business, there are cascading price impacts on that provision.
Fuel tax arrangements can also contribute to a higher or lower cost of transport for individuals depending on where they live and how far they have to travel to access services, and depending on the vehicle technology which they own.
It is against this background that the impact of current fuel tax arrangements on transport in Australia can be assessed.
2. THE EFFECTIVENESS OF THE EXISTING FUEL TAX SYSTEM
This section discusses the effectiveness of fuel tax arrangements for the major fuel types against the objectives which they are either explicitly or notionally meant to achieve.
2.1 The current fuel taxation regime is part of a crowded landscape of fuel policies which affect transport demand and investment decisions ...
While a major objective of fuel taxation is revenue raising, elements of the arrangement also seek to pursue other economic, environmental and social objectives through the price impacts of differential effective tax rates and the scope of application of those rates.
Fuel taxation is part of a crowded landscape of fuel policies. Ad hoc policy and rate changes over decades have progressively complicated this landscape. Petrol and diesel excises can more than double the cost of these fuels. Excise exemptions for alternative fuels (eg LPG, CNG, ethanol) and grant programs significantly reduce the tax burden for certain fuel users (eg Diesel and Alternative Fuels Grants Scheme (DAFGS), Diesel Fuel Rebate Scheme (DFRS) and Fuel Sales Grants Scheme). Excise differentials (unleaded petrol and proposed ultra low sulfur diesel excise differential) are designed to provide an incentive for the uptake of more environmentally friendly fuels.
For heavy vehicles, the excise rate is dependent on the type of fuel used, what it is used for, vehicle type and the location of use. Effective fuel excise for vehicles between 4.5 and 20 tonnes could be around 40, 38, 20 or 0 cents per litre depending on the fuel type, location, and what the truck is carrying. In addition, 20 cents per litre of fuel tax on heavy road transport is treated as a road user charge in the calculation of national registration charges for heavy vehicles.
There are also non-tax measures pursuing overlapping objectives. Regulatory measures such as tighter emission standards for new vehicles and for fuel quality also pursue environmental objectives. State vehicle registration arrangements and public education programs to encourage more fuel efficient vehicles also have environmental objectives.
Other direct Government support arrangements also exist. The alternative fuels grants programs (CNG Infrastructure Program and Alternative Fuel Conversion Program) are intended to promote the uptake of cleaner fuels by heavy vehicles. Subsidies encourage the uptake of renewable technologies in place of diesel for stationary energy (Household Photovoltaic Systems Grants, Remote Renewable Power Generation Program). Other one-off or medium term industry support is often provided to develop alternative fuels or new vehicles (such as capital subsidies for ethanol processing and hybrid petrol-electric vehicles).
In addition, other tax-based regimes are regularly discussed, particularly to pursue environmental objectives. An example is carbon taxes to pursue greenhouse objectives.
This presents a wide range of potentially conflicting policies and programs. As a result, the signals which these arrangements send to consumers and investors are neither transparent nor consistent. The Department considers it important that the Inquiry try to clarify the objectives of the fuel taxation regime as a starting point for recommendations about how to improve the system.
2.2 Transport and regional policy objectives for fuel taxation
Before examining the fuel taxation regime against the objectives which it is notionally meant to achieve at present, the Department notes the transport and regional objectives which it considers should guide the Inquiry. In general terms, the fuel tax arrangements should encourage transport systems which are safer, more efficient, internationally competitive, sustainable and accessible, and encourage better access to opportunities and services for regional communities.
In more specific terms, these objectives would include:
2.3 Petrol tax arrangements are relatively simple, and generally achieve their main objective of revenue raising ...
The Commonwealth Budget Paper No 1, 2001-02 estimates 58 per cent of fuel tax revenue collections will be obtained from automotive gasoline. 98 per cent of petrol consumption is attributable to the road fleet. 85% of this is consumed by passenger vehicles, and almost all of the remainder by light commercial vehicles7.
Fuel tax arrangements on petrol are relatively simple, with a single rate of excise (following the phase out of leaded petrol on 1 January 2002) independent of other factors such as the purpose to which the fuel is put.
While A New Tax System (ANTS) reduced fuel tax on diesel used for business in a number of sectors, there is no equivalent rebate for petrol use in transport, or in the agricultural, mining or health areas. This disadvantages industries with high petrol use, or potentially may encourage business to shift away from petrol due to tax treatment rather than because of fuel performance.
Because of quite distinct differences in the operational characteristics of diesel and petrol engines for many applications, and the fact that off-road vehicles less than 3.5 tonnes are not eligible for the DFRS, this distortionary impact is unlikely to be significant. Nevertheless, it raises the general issue that the Inquiry could consider the costs and benefits of extending business fuel tax rebates to petrol.
2.4 Fuel tax arrangements for diesel are much more complicated and therefore more prone to creating distortions and increasing transaction and administrative costs ...
2.4.1 Rebating off-road use of diesel
Primary production, construction, rail and marine transport and electricity generation are the major off-road users of diesel.
The arrangements under which fuel tax paid on off-road business use of diesel is rebated reflects the origins of the diesel excise as a revenue raising tax for the purposes of funding roads. It is consistent with the fact that the charging methodology for heavy vehicles uses the current diesel excise to apportion a notional road user charge for heavy vehicles. The Department notes that the social and economic impacts on many regional communities of removing these arrangements would be detrimental and significant.
The existing arrangements maintain diesel tax for business users in some sectors. Under the DFRS where some industries, such as construction, are required to pay significantly more for diesel used off-road than most other industries, there are also incentives to misreport fuel usage to avoid fuel tax. Misreporting, fuel mixing with solvents (eg toluene) and fuel substitution (eg use of heating oil as transport fuel) are some examples. The development of new fuels may create additional opportunities for fuel mixing/substitution - both legal and illegal - to take advantage of differences in excise rates between sectors and fuels.
The application of off-road rebates to some sectors and not others also results in anomalies. For example, diesel for domestic electricity generation is rebated (under DFRS), but if members of small communities combine to more efficiently generate electricity they are no longer eligible for the rebate. The rebate which they pay goes towards funding the Remote Renewable Power Generation Program (administered by the Australian Greenhouse Office) which is designed to subsidise the purchase of renewable power generating facilities in off-grid communities. Under the way in which Program money is allocated, however, not all communities who pay excise will benefit from the Program in the form of subsidies for renewable energy infrastructure.
The DFRS also raises equity issues. For example, the costs of running power generation for small mixed retail businesses in isolated regions not connected to the power grid are significant, and excise imposts can further disadvantage already isolated and poorly serviced communities.
In recognition of this, the Government has made a commitment to extend the DFRS to small retail/hospitality businesses producing their own electricity from diesel, provided there is no access to grid power. It is intended that businesses such as caravan parks, tourist resorts and road houses will benefit from the extension.
Rail uses diesel or electricity almost exclusively. It currently receives the full rebate of fuel tax under the DFRS for fuel used off-road. However, diesel usage in rail terminals is not rebated despite terminals not being part of publicly maintained road networks. Most rail operators also operate and maintain terminals to transfer goods from rail to road for collection by the customer. This requires them to maintain separate records of diesel usage on rail and in terminal (eg for operation of fork-lifts and other equipment to transfer containers from trains to trucks), adding to administration costs.
The Department would encourage the Inquiry to consider the merits of extending off-road business fuel tax rebates on diesel to those sectors and off-road activities that do not currently benefit from rebates.
2.4.2 On-road use of diesel
Diesel is the dominant fuel for road vehicles over 4.5 tonnes gross vehicle mass. Road transport accounts for just over half diesel use. The Commonwealth Budget Paper No 1, 2001-02 estimates that diesel will account for 41 per cent of fuel tax revenue collections will be obtained from diesel.
Heavy road transport for inter-city, city-regional and inter-regional trips benefit from partial rebates of diesel fuel tax under the DAFGS. Due to intense competition in the road freight industry, most of these benefits will be passed on to domestic and international consumers.
Eligible journey restrictions were included in the DAFGS to address concerns about the air quality impacts of trucks in metropolitan areas. The decision to subsidise alternative fuels under DAFGS in order to maintain price differentials between diesel and alternative fuels such as LPG and CNG may provide some incentive for truck operators to stay with alternative fuels. However, alternative fuels account for less than 1% of DAFGS payments and it is likely that diesel will remain the dominant fuel for heavy vehicles for the foreseeable future.
Against these potential environmental benefits are the perverse incentives to purchase larger vehicles to get over the 20 tonne barrier and qualify for the maximum rebate (at a fuel efficiency penalty), and to set up freight operations just outside the metropolitan zone to qualify for the maximum rebate (at an average journey length penalty). It also adds to the cost of urban buses despite the potential for lower cost public transport services to better serve environmental outcomes in urban areas.
The metro/non-metro split in the DAFGS should be viewed against recent changes to diesel fuel standards and diesel vehicle standards which the Department considers more effectively pursue environmental objectives in urban areas:
These measures are expected to deliver significant gains in urban air quality. The BTE8 has estimated that if Euro 3 standard diesel vehicles and Euro 4 standard diesel fuel were introduced in 20039, and Euro 4 standard vehicles are introduced in 2006, then particulate emissions would be approximately 48 per cent below the projected base case level in 2015. Put another way, this scenario is estimated to achieve in the order of a 30% reduction of particulate emissions in capital cities in 2015 over 1997 levels - despite the major increase in transport activity in that period.
Using this same scenario, the BTE has also estimated that extending eligibility for DAFGS to all vehicles above 4.5 tonnes regardless of their use will create fuel use in 2015 only two per cent higher than what would be expected with the current DAFGS arrangements. This still translates into an absolute fall in urban particulate emissions from transport in 2015 by 26 per cent over 1997 levels.
For the Department, this raises questions about the environmental and cost effectiveness of the metro/non-metro split in the DAFGS. Removing the metro/non-metro split in DAFGS could remove many of the distortions and administrative costs inherent in existing arrangements.
In place of the metro/non-metro split, the Department considers that other measures could be explored to address air quality concerns while awaiting the benefits from improved fuel and vehicle standards. Alternative measures could work more closely with the Government's existing policy on fuel and vehicle standards; for example, by creating a direct incentive for businesses to update their vehicles (through purchase or retrofitting existing vehicles) in order to receive the grant.
The Department therefore considers that the Inquiry should consider the merits of extending the DAFGS to vehicles between 4.5 and 20 tonnes in urban areas.
2.5 The tax treatment of other transport fuels serves a range of objectives including revenue raising ...
2.5.1 Aviation fuels
Aviation fuels are aviation turbine fuel (avtur) and aviation gasoline (avgas). A relatively small excise and customs duty is levied on avtur and avgas, to:
a. fund part of the budget for the Civil Aviation Safety Authority (CASA) (2.548 cents per litre (c/l) raising an estimated $58.4 million in 2001-02);
b. offset the transitional Location Specific Pricing (LSP) Subsidy to Airservices Australia for maintaining capped charges for control towers at certain regional and general aviation airports (0.26 c/l - estimated at $7 million per annum); and
c. recover the cost of airport regulation oversight by the ACCC (0.037 c/l for avtur only - approximately $900,000 per annum).
Safety regulation and CASA are funded by a mix of direct appropriation (estimated at $43.584 million for 2001-02), duty on aviation fuels (estimated at $58.4 million), and fees and charges for services (estimated at $3.2 million). The aviation fuels excise and customs duty is appropriated to CASA under the Aviation Fuels Duty (Special Appropriation) Act 1988. While there is no specific formula underpinning this combination, it reflects the private and public good aspects of aviation safety.
The LSP subsidy was introduced to subsidise Airservices Australia for the provision of control tower services at certain general aviation and regional airports. The subsidy guarantees the provision of air traffic services at these airports at a price the general aviation industry can bear. Significant increases in charges could result in widespread closure of aviation towers in regional areas, with potential safety implications. The subsidy is a transitional measure, introduced on the basis that an immediate move to full location specific pricing for tower-based air traffic control services would have a potentially significant financial impact on regional aviation operators and services, on the pilot training industry, and the communities involved. The LSP subsidy is currently $7 million per annum, and was extended for two years in the May 2001 Budget.
The revenue raised from aviation fuels duty is used for the benefit of the aviation industry. The excise on avtur and avgas is an administratively simple, low cost and flexible mechanism for obtaining a contribution towards the cost of aviation safety regulation from the aviation industry and travelling public. The excise duty component which offsets the LSP subsidy is also an administratively simple and low cost way of raising revenue from the aviation industry for this purpose. While most of the revenue comes from the use of large aircraft by the regular public transport sector, rather than the smaller regional airlines and general aviation sector that primarily use the subsidised airports, the cross-subsidisation is restricted to the aviation industry.
2.5.2 Fuels used by the marine sector
Commercial shipping uses mainly bunker fuels and diesel. Excise is payable on both.
As part of the ANTS package, the rebate scheme was extended to cover the use of bunkers and diesel by commercial marine operators. The shipping industry had long argued that it was inequitable for ship operators not to be eligible for off-road rebates. The inclusion of the marine sector in the rebate scheme also removed the anomaly of Australian vessels operating in the coastal trades being liable for excise while some foreign flag ships operating in the same trades were not.
The shipping industry is concerned about the impact of the Product Stewardship Oil Levy. Commercial shipping uses a significant quantity of lubricants for operating machinery including large ship engines. Much of the lubricant is lost during use which precludes the operators from recovering some of the levy. The local shipping industry is also concerned about the inequitable treatment of Australian and foreign flagged ships under the levy scheme. While Australian ships are liable for the levy, foreign flagged vessels engaged in Australian domestic trades are able to source their lubricants overseas and not pay the levy.
2.5.3 Alternative fuels
There are few economic alternatives to the internal combustion engine in road transport vehicles at this time and the historic efficiency and extensive distribution networks of petrol and diesel fuels make these the dominant fuels in such engines. Nevertheless, due mainly to subsidies implicit in excise exemption, alternative fuels represent an increasing proportion of transport fuel use. Between 1990 and 1998, the share of energy consumption for transport from the use of petrol and diesel reduced from 93% to 86% with a corresponding growth in the share of LPG (2% to 7%)10.
Despite this growth in alternative fuels, they continue to represent a small share of energy usage. The absolute increase in energy use for transport from rising transport demand, and the relatively stable average fuel efficiency of vehicles, has allowed fuel tax revenues to increase and maintain a relatively consistent share of Commonwealth revenue.
While transport demand is projected to continue, factors which may combine to prevent the fuel tax base from continuing to grow at past rates include:
The main argument for retaining a zero excise rate for alternative fuels has been their environmental benefits. A discussion of the effectiveness of using fuel tax to address environmental externalities of transport activity is included in the following section.
3. FUEL TAXATION AND CHARGING FOR THE COSTS OF TRANSPORT ACTIVITY
3.1 Fuel taxes already interact with charging for transport use ...
As noted above, fuel tax currently forms an accepted component of the charging regime for aviation services. It is also a notional component of the heavy road vehicle charging regime.
The aviation and maritime sectors have a wide range of charges contributing to airport and port infrastructure and services provided to those industries. Such charges are easily varied to reflect demand (for example higher charges during peak periods or off-peak rates for low demand periods).
While there are some differences between jurisdictions, for the most part the rail sector has a direct infrastructure access charging regime based on a fixed access and variable mass distance charge for each train (however few, if any, parts of the network recover a contribution to fixed costs). These arrangements also incorporate, or have the capacity to incorporate, additional charges for priority services (train management priority or variable charges for paths relating to demand). It also pays rolling stock and business accreditation charges covering public safety regimes and services.
The road sector also faces a range of charges, but infrastructure access charges are less directly linked to usage. With the exception of a limited number of toll roads, there is no direct charging for road use. Existing tolls have largely been introduced to enable new road construction to be brought forward, and typically cover road construction and maintenance costs14.
Fuel excise and GST are the major existing taxes on vehicle use (as opposed to vehicle ownership).
While there is no hypothecation of fuel tax to road costs, 20 cents per litre of fuel tax on heavy road transport is treated as a road user charge in the calculation of national registration charges for heavy vehicles.
Clause 9 of the Heads of Government Heavy Vehicles Agreement, which is a schedule to the National Road Transport Commission Act 1991, states:
Under the Second Heavy Vehicle Charges Determination, which was implemented on 1 July 2000, 20 cents per litre of the fuel excise paid by heavy vehicles was notionally treated as the Road Use Charge heavy vehicles incur, with the remainder of charges (access, etc) being paid through registration costs. The DAFGS was introduced on the same day. As the DAFGS reduced the effective (gross) cost of fuel excise for eligible heavy vehicles to 20 cents per litre, it became seemingly possible to argue that heavy vehicles were paying their way. However, there are a number of complexities to this:
Based on the National Road Transport Commission (NRTC) methodology, and putting to one side the complexities just mentioned, registration charges and the 20 cents per litre excise see heavy vehicles pay a substantial proportion of the cost of the road wear that they cause. The Department supports the current arrangements to the extent that they represent a much better approach to charging than previous State based regimes which bore little relationship to the mass or distance travelled by individual heavy vehicles.
The Department would encourage the Fuel Tax Inquiry to recognise the charging methodology applied by the NRTC via the diesel fuel excise as a legitimate and explicit attempt to establish a more direct charging relationship through current tax arrangements.
Having said this, the charging approach has a number of drawbacks. Because charges are worked out within vehicle classes on the basis of averages, vehicles imposing less than average cost on the road system are subsidising those which travel more. The methodology also does not take account of contributing towards the costs of providing the roads on a whole of life basis, nor a return on the investment in the roads. It also avoids the externality costs imposed by the heavy vehicle on the community and on other road users. The Department notes that a detailed explanation of the current charging methodology is contained in the NRTC submission to the Inquiry.
In respect of externalities, current heavy vehicle charging arrangements are consistent with those of other transport modes (and indeed other sectors of the economy, eg electricity generation) which also tend not to include any mechanism for charging externality costs (with the exception of some noise charges in the aviation sector). Regulation is typically used to address excessive externalities, eg design rules for road vehicles, airport curfews, and EPA noise regulation.
By contrast, the contribution of passenger motor vehicles to road damage is minor compared with heavy vehicles. However, cars are the major source of road capacity requirements. This leads to the conclusion that, if cars were charged for road use, urban car use would likely require higher charges, particularly at peak hours in congested urban areas, than rural car use.
For passenger motor vehicles, there is no explicit or implicit road user charge, except for toll roads. Existing pricing for cars is weighted towards owning a vehicle relative to use of that vehicle. There is a large up-front car purchase cost, depreciation is related to a combination of the age of the vehicle and the kilometres travelled, and registration is unrelated to the distance travelled by consumers. Fuel and parking costs are likely to be the major determinant of the marginal cost of car use and can be perceived to be small by car owners. Some business tax arrangements further reduce the marginal cost of car use to the driver.
Fuel excise is a blunt instrument for charging vehicles for the costs of using roads and for influencing demand for transport services. An integral part of longer term reform of road pricing is likely to involve moving from a charging system that concentrates on vehicle ownership taxes to one with a higher proportion of vehicle use charges that better target location, time of day, technology of vehicle and distance travelled. This issue is further discussed in Section 4 of the Department's submission.
3.2 There are a range of externalities associated with fuel use - but in almost every case, the fuel tax regime is not an effective means to recover the costs of these externalities, or to affect the transport behaviour associated with them ...
Increasing transport demand is making the external impacts of transport decisions, such as emissions, congestion and noise an increasingly important transport issue and one governments have a role in addressing. The instruments which governments use to address these issues should be those most likely to be cost effective.
Transport analysts generally accept that congestion is the most significant transport cost in urban areas. The BTE estimated the costs to the economy of congestion in Australian cities in 1995 at almost $13 billion, increasing to $30 billion by 201515. Reliance on personal motor vehicles for meeting travel requirements, and the relatively low marginal cost of using a vehicle during congested periods are key contributors to congestion. At the same time, it is clear that motorists already bear a significant share of the cost of congestion in the form of longer travel times. Congestion also exacerbates a range of other externalities, in particular increased pollutant and greenhouse emissions from idling and stop-start driving.
Effectively reducing congestion would involve contributions from both supply- and demand-side measures. An essential component of demand management measures is likely to be effective economic instruments to send cost signals to transport users. While fuel consumption can almost double in congested areas, congestion costs are very location and time dependent. Fuel excise is therefore an inappropriate instrument for reducing congestion because it is not sufficiently sensitive to the spatial and temporal aspects of transport decisions.
Direct pricing for road use which takes account of location, time of day and traffic levels would be much better able to address congestion than an excise-based charge.
3.2.2 Air quality emissions
Pollutant emissions from vehicles are very dependent on the technology of the vehicle and, from an air quality perspective, the type and quality of the fuel.
Air quality externalities are also very location dependent, being of primary concern in urban areas, certain corridors within urban areas, and sensitive to weather conditions. The ineffectiveness of a selective fuel tax regime to address location specific issues has already been discussed in relation to congestion.
The Commonwealth regulates minimum emission performance for new vehicles and has introduced new fuel quality standards. As already noted, these measures have the capacity to be far more effective than using the fuel taxation regime (eg the zero excise rate on alternative fuels), and will have a progressive air quality benefit as new vehicles and fuels penetrate the vehicle fleet.
On the demand side, however, existing transport taxing and charging mechanisms provide few incentives for updating vehicles or for ensuring that in-service emission performance continues to meet design requirements.
This is not to say that there is no place for excise measures to influence fuel use. Australian experience with an excise differential for leaded and unleaded fuels was that the measure was effective in inducing people to move to unleaded fuel. However the success was driven by influencing the choice of people who could run their vehicle on either fuel rather than through inducing them to invest in a vehicle that was able to use unleaded fuel. It was also supported by new vehicle regulations.
The Government's Measures For A Better Environment statement has proposed an excise differential to provide an incentive for earlier introduction of low sulphur fuels. The air quality benefits of early introduction could be significant, particularly in relation to reduced particle emissions, which are the greatest health concern.
The proposed differential is likely to be effective to the extent that it offsets the additional costs involved in producing ultra low sulfur diesel (ULSD) - that is, additional production costs that cannot be offset by charging a price premium to those that consider ULSD to be a superior fuel to low sulfur diesel. While some diesel users (such as urban bus operators and operators of underground vehicles) may be willing to pay extra for ULSD, most diesel users are unlikely to, as they may not be able to pass additional costs onto their customers.
Evidence from the UK, Germany and Sweden indicate that reducing the taxation levels on cleaner diesel fuels can lead to a very rapid shift in production from high to low sulfur fuels. For example, in the UK the excise incentive for ULSD (introduced via an increase in excise on diesel with >50ppm sulfur) led to the market share of ULSD rising from under 20% in November 1998 to effectively 100% by August 1999.
Lowering sulfur levels in petrol would not directly deliver comparable air quality benefits, as petrol vehicles are not significant sources of particle emissions. However, sulfur levels in petrol are the key technology constraint in terms of on board diagnostics, direct injection technologies, etc which can offer significant benefits in reduced vehicle emissions and better fuel consumption.
3.2.3 Greenhouse emissions
Fuel use may be a reasonable proxy for greenhouse emissions, as there is a close relationship between the amount of fuel used and the amount of carbon emitted16. Unlike air quality emissions, greenhouse emissions have global atmospheric rather than local impacts. Therefore it may be effective to use the fuel tax regime to recover the costs of externalities associated with climate change, regardless of the location of fuel combustion.
Against this, transport activity is relatively price inelastic at existing fuel prices17. The magnitude of the transport fuel price rise required to achieve a given reduction in greenhouse emissions will be much greater than the fuel price rise necessary to achieve the same reduction in greenhouse emissions in other sectors. There is a wide body of economic theory and modelling work which demonstrates that imposing a price for carbon on a sector that is relatively unresponsive to fuel price rises is a high cost strategy for achieving reductions in greenhouse gas emissions.
The Department considers that, if excise were to be used to internalise environmental externalities, it is only appropriate for greenhouse gases, and then only as an economy-wide measure, rather than one specific to transport.
Noise emissions from vehicles are very dependent on the technology of the vehicle and the type of fuel, and the extent of the problem is also highly location and time of day dependent. As noted in relation to other location specific externalities, the Department's view is that fuel excise is not an effective mechanism for addressing this issue.
3.3 Fuel tax levels and rebates may be used as an incentive to reduce externalities, but this needs to be much more flexible than the current approach of granting some fuels a zero excise rate ...
The zero excise rate for LPG has had a major impact on the pattern of Australia's fuel use. The significant market share accounted for by LPG in passenger and light commercial vehicles can almost entirely be explained by its excise free status and subsidies for conversions rather than by its efficiency as a transport fuel.
The zero excise rate also undoubtedly provides a major incentive for CNG and LNG take up in heavy vehicles, and for increased sales of a petrol/ethanol mix for petrol vehicles should production cost efficiencies allow it to be competitive with petrol. The Government has recently announced a capital grant to foster the new production of fuel ethanol and biodiesel in Australia, with the objective of achieving production of 350 million litres by 2010.
However, there can be no presumption that alternative fuels benefit the environment. The emission performance of alternative fuels (as with all fuels) is very reliant on the vehicle in which the fuel is being used. For example, the emission performance of a converted gas or dual fuel heavy vehicle is generally considered to be very much inferior to that of a vehicle that was designed and built to run solely on gas. Conversion may deliver air quality benefits, and it is possible that the greenhouse performance of converted vehicles is inferior to modern diesel fuelled vehicles.
Likewise, there have been some significant concerns with the emissions performance of cars converted to LPG. The Motor Vehicle Environment Committee18 is currently considering a standard which would provide an assurance that conversions are of a quality which would not undermine the original vehicle emissions certification.
In addition, while there may be tail pipe emission benefits from the more widespread use of ethanol, the overall environmental benefits are dependent on the feedstock and technologies used to produce the ethanol. Policies to promote the use of ethanol, however, also have the objective of delivering benefits for regional Australia.
This raises two issues (at least):
Existing zero fuel tax rates to encourage adoption of alternative cleaner fuels is an inflexible and distortionary mechanism to address environmental objectives. It does not provide a price differential for fuels in accordance with the level of environmental benefit.
The result is likely to be fuel selection of alternative fuels over conventional fuels, irrespective of which has the most environmental benefit. The current regime also makes it more difficult to provide appropriate incentives to commercialise potentially better performing alternative fuels, and better performing conventional fuels.
The Department considers that it is the emissions from the fuel in the vehicle rather than any inherent qualities of the fuel itself which should be the primary consideration in emissions policies for transport.
The Department also considers that an important factor often forgotten in the pursuit of alternative fuels policies is that the Government's fuel and vehicle standards policies are already in place to deliver major environmental gains in air quality (in the case of ultra low sulfur diesel) and greenhouse (in the case of low sulfur, high octane petrol) over the medium term. While the current excise rates provide some recognition for the potential environmental benefits of alternative fuels, they are not in a position to recognise similar benefits from improvements to conventional fuels (especially low sulphur and ultra low sulphur diesel).
In summary, the existing excise arrangements to encourage alternative fuels are not performance based, and were developed at a time when vehicle standards and the quality of conventional fuels was lower than that which will be provided under the Government's current policy settings. The efficacy of these measures should be critically evaluated so that the costs and environmental benefits can be compared to alternative and more direct mechanisms to achieve environmental objectives.
3.4 The Energy Grants (Credits) Scheme
The Measures for a Better Environment statement by the Government in May 1999 proposed an Energy Grants (Credits) Scheme (EGCS) to actively encourage adoption of cleaner fuels. An impact of reducing the effective fuel price through rebate schemes is that people who receive rebates have lower economic incentives to move to alternative fuels and technologies.
The Department considers that there are a number of threshold issues which need to be taken into account in considering the best means to pursue this strategy.
Firstly, it is the Department's view that alternative fuels would be suitable for only a small share of the diesel market. It is probably not cost effective to move much of the activity that primarily benefits from the DAFGS and DFRS to alternative fuels. The asset turnover period for farm equipment and the difficulties and costs associated with establishing on-farm storage of alternative fuels mean that the agricultural sector will not quickly adopt any existing alternative fuels. Similar difficulties apply to the mining industry. Existing alternative fuels also have a lower energy output than diesel making it less suitable for heavy applications. The power disadvantages and distributional issues of existing alternative fuels also makes it unlikely that there will be significant adoption of alternative fuels in major portions of the trucking industry (especially long distance trucking).
Secondly, there are sound arguments for an Energy Grants (Credits) Scheme to cover fuel use as a whole, rather than just petroleum fuels. Many non-petroleum fuels also contribute to greenhouse and air quality emissions (especially the former). The costs of an equal emission reduction may be lower in, for example, the electricity sector rather than the transport sector. Similarly, any fuel charging arrangements that pursue emission reduction, or other externalities, is likely to be more effective if applied to all fuels, rather than just petroleum products. Allied to this, consideration should be given to an Energy Grants (Credits) Scheme which includes measures to directly address transport activities beyond heavy vehicles. Passenger and light commercial vehicle use in urban areas account for the dominant share of transport emissions of greenhouse gas and urban air pollution.
A third issue is that, as noted already, it is the performance of the fuel in the vehicle which determines the emissions outcome of any fuel. Excise rate, rebate or grant arrangements need to have an eye to maximising the environmental benefit from higher uptake of cleaner fuels through the performance of vehicles.
A fourth issue is that interventions need to separately identify air quality and greenhouse outcomes. For example, reduced pollutant emissions from transport should not be a policy goal where the fuel is being used in small communities. Likewise, higher uptake of alternative fuels may deliver improved air quality outcomes, but at a cost in terms of poorer greenhouse outcomes due to their lower energy output19. Interventions therefore need to be clear about the environmental outcome which they are seeking.
The discussion earlier in the submission on alternative fuels highlighted the unsuitability of excise as a tax on ambient emissions. An effective incentive arrangement for alternative fuels is likely to require an excise rate component. This should be variable to reward performance, and time limited and reviewable to ensure changes in relative performance are reflected in arrangements. Zero rates and full rebates allow little scope for incentives for new technologies with better performance. The Government's proposal to have a short term excise differential from 2003 for lower sulphur diesel could be provided through this component of an Energy Grants (Credits) Scheme.
The issue of whether the Scheme could be used to provide positive incentives to encourage the uptake of new technology diesel vehicles requires further consideration. There are administrative considerations, as well as competition impacts between larger operators who are better placed to purchase new vehicles, and smaller operators who may find the cost of vehicle purchase prohibitive. The analysis should also take account of vehicles sold into the second hand market, and whether these are likely to be running in urban or rural areas, which is pertinent to air quality outcomes in the cities.
4. DIRECTIONS FOR REFORM
The Department considers that the benefits of a flexible Energy Grants (Credits) Scheme is likely to be magnified if it forms part of a more comprehensive reform agenda that directly addresses transport demand and technological efficiency. The Energy Grants (Credits) Scheme could form part of a package that balances revenue raising objectives, economic objectives (preserving existing benefits and reducing business costs), environmental objectives (reducing emissions across all sectors), and improving the certainty and administrative simplicity of the grant arrangements (fixing anomalies and reducing administration).
Most of the elements of such a package have been discussed previously in this submission:
The Department considers, however, that the most cost effective transport emission reductions, and more efficient outcomes for the transport sector, could be achieved by moving to a system of direct road user charging for all vehicles.
The BTE estimates that, on the basis of existing trends, road freight tonnages in Australia will increase by 80 per cent to 201522. Importantly, total urban road traffic is estimated to grow by between 20 and 25 per cent by 201523. This has significant implications for congestion, the need for improved traffic management, pressure for expansion of infrastructure capacity and environmental externalities.
To the extent that the excise inhibits direct road use charging (in the case of cars), or at the least forms part of the methodology for calculating road use charges (for heavy vehicles), it is an inadequate mechanism to recover the costs of road use. In this context also, heavy vehicles using alternative fuels get a free ride, irrespective of their contribution to road damage, road capacity and externality costs.
A way forward on this reform path may be to separately identify the road charge portion of excise and seek to replace this portion over time with other pricing instruments that have the capacity to more directly pursue charging objectives. While it could be argued that lower fuel costs will lead to increased emissions, more direct charging for transport services would enable clearer signals to be sent to consumers on the costs of their transport decisions. This is likely to be more effective in ensuring that motorists face the costs of their activity. It would also better inform road infrastructure decisions.
To the extent that the Government seeks to use fuel tax as a revenue raising measure, it could apply a uniform rate for each fuel to reduce opportunities for manipulation of the system by shifting fuel between sectors or uses. While the rate applying to each fuel could vary, maintaining a transparent basis for determining the rate, such as energy content or ad valorem, would remove uncertainty in the development of alternative fuels and facilitate administration of the arrangements.
The theoretical case for road pricing is well established from an economic efficiency perspective. Electronic tolling technologies that enable efficient revenue collection taking account of location, time of day and even traffic levels are now available and are improving rapidly. The equity considerations surrounding such pricing for road use raises a number of critical issues, especially in the implementation of road use charging in such a way as to achieve the same level of access to destinations and services. These issues would need to be examined in far greater detail - and settled - before moving down any path towards more direct forms of road use charging. The Department does not underestimate the scope of this kind of reform, nor its attendant difficulties.
While it is beyond the scope of the inquiry to develop more comprehensive arrangements for road charging reform, the Department would encourage the Inquiry to closely examine this concept in the context of the fuel tax regime. This would be directly addressing the terms of reference which require the Inquiry to report on the impact of the tax structure on the efficient allocation of resources and environmental outcomes.
4.1 Impacts on regional and remote communities
Many regional and all remote communities rely heavily on transport (and therefore heavily on fuel use) for access to services - this is a function of the longer distances to travel to access services, and less recourse to public transport. The heavy reliance on fuel in regional areas means that fuel tax arrangements will have an additional impact for industry and residents in such areas compared with metropolitan centres.
Non-metropolitan fuel costs are typically higher than that in urban areas because of a range of factors, including transport costs, lower sales volumes requiring higher margins, and the level of retail competition in some regional centres. These higher costs are reflected in a higher proportion of the fuel price attributed to the GST. The Fuel Sales Grants Scheme recognises this, and is designed to reduce the cost disadvantage.
While rural consumers pay the same excise on fuel as urban consumers, many externalities (notably noise, congestion and pollutant emissions) accrue almost exclusively in urban areas. Moving costs from fuel tax to other vehicle use charges that more accurately reflect costs imposed by motorists is likely to be more equitable for regional drivers. It could also reduce the need for a Fuel Sales Grants Scheme, which is a more indirect (and therefore less certain) means of delivering lower vehicle use costs to fuel consumers in regional and remote Australia.
As already noted, the social and economic impacts on many regional communities of removing the DFRS would be detrimental and significant.
4.2 Revenue implications
The Submission does not deal in detail with the revenue implications of the issues which it raises. The Department considers that revenue implications can only be properly addressed in the context of the overall set of recommendations which the Inquiry will make to the Government.
The Department notes, however, that revenue implications of extending the DAFGS, for example, could be addressed in part by extending the scheme at the same time as the move to tighter heavy vehicle emission standards.
The Department also notes that if the inquiry were to consider changes to the excise treatment of alternative fuels, this could be a source of revenue to fund other changes in fuel tax arrangements.
The Department notes further that a shift to more direct forms of vehicle charging over the longer term would require a more fundamental examination of revenue gains and losses, including State/Territory arrangements.
Existing differential excise rates, exemptions and rebates expose fuel tax arrangements to administrative complexity, manipulation and anomalies. The arrangements pursue a range of unidentified but conflicting objectives that lack transparency and send a confusion of cost messages to consumers, thereby distorting consumption and investment decisions. The arrangements may be less effective over time in raising revenue. The Department believes that the Inquiry provides an important opportunity to review the effectiveness of existing arrangements and make recommendations on the long term policy objectives and principles for taxing fuel.
Existing arrangements should be moved to a more integrated combination of measures that better balance Government revenue raising, economic, environmental and administrative objectives. In order to do this, decisions on fuel tax need to be made having regard to wider energy policy directions.
Stable public policy in relation to fuel taxes is required to inform transport investment decisions. In addition, time horizons or transition arrangements for implementing major tax decisions should take into account the capital life or reasonable amortisation periods for vehicles and equipment purchased in good faith on the basis of existing tax arrangements.
To the extent that objectives are not transport sector specific, there should be a move over time towards broadening measures to cover all sectors of the economy. For example, emission reduction mechanisms should target all emitters (where relevant) through the most cost effective measures, not just emitters in some sectors.
Reforms to arrangements to correct anomalies and to introduce well targeted short-term measures need not wait until governments are in a position to put in place an integrated fuel tax system, provided initiatives coming out of the Inquiry are consistent with long term reform directions. Alterations to the arrangements have the capacity to impact on the relative competitiveness of different transport modes and sectors of the economy. Accordingly, changes to aspects of the arrangements should occur over time with appropriate lead times. This will optimise certainty for business and consumer investment decisions.
The existing fuel excise arrangement is ineffective in sending messages to transport users about the cost impact of their transport choices. In this respect, there are opportunities to achieve greater efficiency and environmental gains in the road transport sector. One approach which the Inquiry may consider is that of explicitly identifying a road charge component of fuel tax as a first step, and seek to progressively replace this with more direct pricing mechanisms to ensure more efficient transport choices. There is no sound basis, however, for using the excise to recover externality costs - apart from greenhouse gas emissions, and only where this were to apply to all sectors.
Nevertheless, the findings of the Fuel Tax Inquiry and the Government response to the findings provide an opportunity to advance these issues. Reform could involve immediate measures to correct existing anomalies, to introduce effective short term measures and to review poorly performing programs pending development of more integrated arrangements. In the longer term reform could involve revenue neutral rebalancing of excise rates across fuels, replacing a portion of existing fuel tax with other charge mechanisms, review of other existing taxes and charges (such as tolls and vehicle registration) and consolidation of government incentive programs.
1 This and the following
section draw on a soon to be published report by the Allen Consulting Group
for the National Transport Secretariat.
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