Part 3 of this paper outlined the principal role of taxes as raising revenue to fund public services. It also noted that imposing taxes on goods and services can have other policy objectives besides raising revenue. In particular, by changing the prices of goods and services, taxes can influence decisions by consumers as to what they buy.
While governments do impose specific taxes on some goods and services with the purpose of influencing consumer behaviour, governments generally seek to raise revenue in a way which is neutral on individuals' consumption and investment (or production) decisions.
This is because the resources available in an economy to produce goods and services will be used most efficiently when they are allocated to those uses most valued by consumers.
The imposition of taxes on goods and services which alters their relative prices can change consumer decisions and therefore the allocation of resources in the economy. If prices no longer reflect the true value of goods or services to the economy and consumers, resources may be allocated inefficiently.
For example, two producers of similar products using inputs of similar value may have different prices, because one is using new, more efficient production methods, while the other may have older technology requiring more inputs for the same level of output. If the more efficient producer's product were taxed more highly, so that the price of its product were above that of its competitor, a tax-induced shift in consumption and resources to the inefficient producer may occur.
To minimise these types of results, governments often rely on broad based consumption taxes (such as a GST), with most goods and services taxed at a uniform rate.
However, there are also instances when governments may seek deliberately to change relative prices, if the market does not accurately reflect the full costs to the economy and the community from consumption of a product. Government intervention in these circumstances may be justified.
As noted in Part 3, the spillover costs, or externalities, from fuel use are often raised in this context.
The Inquiry's requirement to report on the effects of existing tax and rebate, subsidy and grant arrangements on efficient allocation of resources is linked to other elements of the terms of reference, particularly in relation to environmental outcomes (paragraph 4(a)) and externalities associated with transport (paragraph 5 (d)).
In addressing these issues, the Inquiry will examine:
the effects of the existing structure of taxes, rebates, subsidies and grants on resource allocation in the economy generally
- for example, whether the existing arrangements change relative prices and therefore the consumption of fuel and fuel related applications; and
the role of fuel taxes in addressing issues of resource allocation:
- whether taxes, or other mechanisms are appropriate to address costs such as road construction or maintenance, congestion, pollution and road accident costs.
The Inquiry is required to report on environmental outcomes of fuel use and to take into account use of fuel types that would deliver better air quality and contribute to greenhouse objectives. While the use of fuel also results in other environmental impacts (eg noise), the following section is confined to greenhouse and air quality emissions.
Fuel combustion is the single largest contributor to urban air pollution and greenhouse emissions. Vehicles are estimated to contribute up to 70 per cent of total urban air pollution while electricity generation is the major source of greenhouse emissions.16 Chart 6.1 shows the relative contribution of relevant sectors to air pollutants in the Port Phillip region in Victoria in 1995-96. Where air pollution is a problem in rural and regional areas, it is due largely to use of solid fuel heating, fires and wind-blown dust from agricultural or mining activities. Chart 6.2 shows greenhouse gas emissions from fuel use.
Chart 6.1: Sources of air pollution for Port Phillip region, 1995-96(a)
(a) CO - carbon monoxide, NOx - nitrogen oxides, VOCs - volatile organic compounds, SO2 - sulphur dioxide, PM10 and PM2.5 are particulate matter of size less than or equal to 10 and 2.5 microns in diameter respectively. In summer, vehicle emissions are the main contributor to particulate emissions while in winter, the main contributor in most cities is domestic solid fuel heaters.
Source: Environment Protection Authority Victoria, Air emission inventory , 1998.
Chart 6.2: Greenhouse gas emissions from fuel use, 1998
(a) Fugitive emissions are gases released during the extraction and transport of fuel.
Source: Australian Greenhouse Office, National Greenhouse Gas Inventory 1998, 2000.
The major impact of air pollutant emissions is upon human health, while greenhouse gas emissions impact on climate change. The health risks associated with exposure to air pollutants include increased susceptibility to cardiovascular disease, respiratory infection, exacerbation of asthma symptoms and eye irritation. Incidences of high air pollution have been shown to be associated with increased hospital admissions and premature death.17 The impact of climate change associated with greenhouse gases include the effects of rising sea levels and the impact on agriculture, ecosystems and society of changing rainfall patterns and climatic zones.
There are three key considerations that need to be taken into account in considering policy measures aimed at addressing emissions.
Level of fuel use - reductions in emissions from use of fuel could be offset by increases in the total quantity of fuel used.
The fuel life cycle - the environmental effects of fuel use need to be assessed on the fuel's whole production history, from raw material to energy output as transport, lighting or heating. For example, fuel with low pollutant emissions in end use may generate high levels of emissions during production phases. For some fuel, different methods of production may result in different emissions outcomes. For example, the life cycle emissions from biodiesel differ depending on whether it is produced from canola, tallow or waste vegetable oil.
Technology - the environmental impact of a fuel may depend on the technology used with the fuel. Optimum emissions performance is achieved when the appropriate quality fuel is matched with vehicle technology. For example, many vehicles with catalytic converters only achieve optimal emissions performance with low sulphur fuels.
Table 6.1 shows the potential for developments in technology to affect greenhouse gas emissions, energy efficiency and life cycle cost for various fuel/technology combinations in a standard passenger motor vehicle.
Table 6.1: Energy, greenhouse and cost comparisons for 2020 cars
(a) ICE=internal combustion engine, FC=fuel cell, hybrid=liquid fuel+electric power.
Source: Energy Laboratory, Massachussetts Institute of Technology, On the
Road in 2020, MIT EL 00-003,
As its benchmark, the table uses the effects estimated for a petrol passenger motor vehicle in 2020 incorporating current trends in technology development. The table shows that, compared with a similar sized vehicle in 1996, the 2020 vehicle will (plus or minus 8 per cent for uncertainty) use 55 per cent less energy, emit 52 per cent less greenhouse gases and cost 2 per cent less over its full life cycle. The table shows that emission improvement is influenced by the type of fuel/technology combination used.
Emerging technologies such as hybrid and fuel cell vehicles may offer greater potential energy savings but, being less familiar technologies, are associated with a greater range of uncertainty about the accuracy of the forecasts.
Table 6.1 does not address the impact of fuel/technology combinations on air quality. However, the trend is expected to be similar in that improvements in technology will reduce air pollutant emissions. For example, improved diesel vehicle technology designed to meet the more stringent vehicle emissions standards mandated for Australia from 2006 will reduce particulate tailpipe emissions by 94 per cent and nitrous oxide tailpipe emissions by 56 per cent compared with the emissions requirements for 1996 model vehicles.18 Likewise, petrol hybrid vehicles have the capacity to reduce emissions of nitrous oxides by up to 98 per cent and hydrocarbons by 95 per cent.19 Hydrogen fuel cell vehicles have zero vehicle tailpipe pollutant emissions.
The Inquiry is asked to report on the interplay between fuel taxes and related issues such as petroleum pricing, cost structures and marketing arrangements.
Two pricing issues which receive frequent public comment are fluctuations in fuel prices in metropolitan markets and the difference between metropolitan and country prices. The Australian Competition and Consumer Commission has been asked by the Government to examine the issue of petrol price fluctuations and published a discussion paper on this issue in June 2001. The Fuel Taxation Inquiry is not examining this issue.
Metropolitan and country fuel retailers pay the same excise rate and the same amount for the world market based cost of refined fuel. These components make up the largest part of the final price. Fuel taxation plays little role in the differences in price between city and country areas. The reasons for the differences include factors such as less vigorous competition, lower sales volume and more complex distribution arrangements in country areas. The GST is based on the final price and will reflect these differences, but its impact is intended to be offset by the Fuel Sales Grants Scheme (a grant of one or two cpl for regional and remote fuel retailers - see section 5.2.1).
These factors are highlighted in Chart 6.3 which shows the average unleaded petrol prices in June 2001 in two country towns and in Sydney. Bega has limited passing traffic in winter, but Yass, with a similar population, is close to a busier highway. Many Yass motorists also commute to Canberra and have access to that market if local prices are high.
Chart 6.3: Average unleaded petrol prices for June 2001(a)
(a) Yass and Bega both qualify for a one cpl grant under the Fuel Sales Grants Scheme, which is intended to offset the impact of the GST on petrol prices in areas outside metropolitan areas. The chart shows the retail price of petrol after the grant has been paid to the retailer.
Source: Estimates based on information from Shell, Caltex and the Australian Automobile Association.
An important factor in country fuel prices is the level of competition in the local market. Rural service stations are less likely than their urban counterparts to compete vigorously with their rivals. Country outlets have smaller markets and, given the greater distances between outlets, less passing trade which could be influenced by discounting. Price discounting therefore is less likely to lead to increased market share than it does in a city where customers follow more flexible purchasing patterns. The lower level of competition also means that oil companies are not required to cut the cost of wholesale fuel to help their retailers match local competition as happens regularly in metropolitan areas.
The low volume of petrol sold by many country service stations is also important. Country stations usually sell between a third to a half of the volume of city service stations. As the costs of selling fuel are relatively constant, low volume stations require higher margins per litre of fuel sold to achieve a similar commercial return.
Because of the low volume of sales, country service stations also have less opportunity to sell non-fuel items, which typically have a higher profit margin than fuel. Country service stations may therefore have less options to offset low profit margins from fuel through sales of other products or services.
Apart from major highway sites, many rural service stations receive their supplies from distributors, rather than direct from oil terminals. The cost of distributors' operations also contribute to a higher bowser price in rural areas. Retailing in rural and remote areas also involves higher transport costs relative to retailing operations in cities.
The most commonly known fuel marketing arrangement is a retail service station. However, some fuels are sold predominantly by bulk delivery. For example, less than 19 per cent of diesel is sold at retail outlets.
Of the 8370 service stations across Australia in December 2000, only 315 (or 4 per cent) were operated directly by oil companies. Other service stations have a variety of commercial relationships with the oil companies. They include: oil company franchisees, dealer owned sites with oil company direct supply contracts, dealer or distributor owned with distributor supply contracts, independent chains (eg Gull, Liberty) and supermarkets (Woolworths). There were also a small number of non-branded distributors, mostly in country areas.20
In practice, the Australian retail petroleum market is highly competitive, particularly in larger capital cities. Chart 6.4 shows International Energy Agency information on fuel prices, including the tax component for OECD countries. It shows that Australia has the lowest pre-tax price for petrol and is among the five lowest total prices including tax. Australia's ranking in this comparison has been consistently around this level over many years.
Chart 6.4: International comparisons of petrol prices,
(a) Prices are in Australian dollars.
Source: Department of Industry, Science and Resources, Australian Petroleum Statistics, Issue No. 59, June 2001.
In examining the current fuel taxation structure in Australia, the Inquiry will be undertaking a review of overseas fuel taxation structures including objectives, mechanisms and levels.
The Inquiry is also asked to report on administration issues. These are covered in Part 5.
19 Figures for hybrid vehicles are based on the emissions performance of the Toyota Prius compared with the requirements of Australian Design Rule 37/01 which specifies the current emissions performance required of new petrol vehicles in Australia. Prius data supplied by Toyota Australia.
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