Excise on ethanol, too

ALTERNATIVE fuels including liquefied petroleum gas (LPG) and ethanol will be taxed for the first time in Australia from July next year, federal budget papers show.

The surprising new impost on environmentally friendlier fuels will take the form of an energy content-based fuel excise system, which the federal government estimates will increase revenue by $276.5 million over five years from July 1, 2011.

Effectively representing the implementation of a 2004 Howard government proposal with a staged phase-in period, the new taxes include a 2.5-cents-a-litre excise on LPG, increasing to 12.5 cents by July 1, 2015, as well as a 25 CPL excise on ethanol fuel – 10 times the initial LPG excise – reducing to the same 12.5 CPL in five years.

As part of the new tax, which will remain lower than the 38.1-cent excise currently applied to petrol and also applies to the excise-equivalent customs duty rate for imported ethanol, there will be a 22.5 CPL offsetting grant payment to domestic ethanol producers that will be phased out over five years.

The Rudd government says the offsetting grants, which will not apply to imported ethanol, will provide the Australian ethanol industry with adequate time to prepare for the forthcoming changes, by effectively applying the same net tax impost to domestic ethanol producers as LPG.

However, the LPG and ethanol fuel excise could not have come at a worse time for Ford Australia, which will launch a next-generation liquid-injection LPG system for its Falcon before the new tax next year, or Holden – which has committed to upgrading the Commodore’s current dual-fuel LPG system to meet the Euro 4 emissions standard due to come into effect this July.

Holden will also launch its first E85-capable (3.0-litre) Commodore this year, as part of a VE Series II upgrade due on sale around September, and in March announced the formation of a consortium with the Victorian government, US bio-fuels leader Coskata, Caltex, Veolia Environmental Services and other partners to develop Australia’s first ethanol-from-garbage plant, which it says will produce more than 200 million litres of ethanol a year.

Holden continues to forecast that ethanol-fuelled vehicles could eventually replace up to 30 per cent of petrol-powered Commodore sales, while Coskata maintains that its renewable cellulosic ethanol fuel has the potential to reduce lifecycle greenhouse gas emissions by up to 84 per cent compared with regular petrol without impacting the availability or price of global food crops.

From top: Saab filling up on E85. Below: LPG Australia CEO Michael Carmody.

Although E85 fuel is not yet widely available locally, Caltex Australia – the only partly Australian-owned oil company – has announced it will soon sell E85 at 30 metropolitan service stations, with a further 70 outlets to be added across the country within 12 months.

E85 has been used exclusively for V8 Supercar racing since 2009, while E15 ethanol fuel will be mandated for NASCAR racing in the US from 2011.

As well as applying to the maximum 85 per cent ethanol content of E85 fuel, the ethanol excise will also be levied on the 10 per cent ethanol content of E10 petrol, which is currently available through more than 600 outlets.

The government is also pushing ahead with reductions in the rebate for post-factory conversions for cars to run on LPG, which now costs about 62 CPL and should remain cheaper than petrol even with a 12.5 CPL excise, further reducing the cost savings previously available to LPG-fuelled vehicle operators.

While both Holden and the local motor industry’s representative body, the Federal Chamber of Automotive Industries (FCAI), have reacted cautiously to the LPG and ethanol excise, LPG Australia has slammed the new LPG excise, which some reports have estimated will reap the government $540 million over the first four years.

Governments have spent more than $400 million over the past five years to encourage private buyers and taxi fleets to convert their vehicles to run on cleaner-burning LPG, with more than 250,000 motorists taking up government conversion grants since August 2006.

With a further 70,000 LPG-fuelled business vehicles entering the market, LPG Australia says about 700,000 Australian motorists now rely on LPG, making it the leading alternative transport fuel in Australia.

“The lack of prior consultation on these critical issues is concerning,” said Michael Carmody, the CEO of LPG Australia, which has long argued that LPG should remain excise-free and believes that, in isolation, the tax – which is yet to be legislated – could lead to a decline in the use and development of LPG.

“The proposed fuel tax on LPG Autogas announced in the Budget has taken the private motorist and transport industry by surprise, and reflects poorly on the government’s consultation with the LPG industry,” said LPG Australia in a May 13 statement.

“The government had not informed the industry of its intention to impose excise from 2011, nor discussed with the industry the administrative challenges and costs of imposing excise tax on a fuel with a different supply chain from petrol.

“The issue is the fundamental disconnect between, on one hand, the government providing the financial incentive via the LPG vehicles rebate scheme for private motorists, and an excise-free fuel to the taxi, fleet and transport industries, and the stimulus to the vehicle manufacturers, to convert to LPG powered vehicles and now, on the other hand, taxing the fuel that underpins the incentive program.

“While motorists using LPG will continue to save substantially on their fuel bills, the LPG industry urgently seeks consultation with government to develop a long-term policy that will remove the damage to consumer and industry confidence with this announcement.”

LPG Australia president James Batchen told GoAuto in February that the LPG industry expected a six-fold increase in the number of LPG-fuelled vehicles on Australian roads within 10 years.

Australia was the world’s top user of LPG a decade ago but now lies third., with LPG accounting for just six per cent of Australia’s transport fuel. Mr Batchen said that could rise to 30 per cent within 10 years given the resource available.

So far this year, some 98,859 petrol vehicles were sold to private buyers (up 7.8 per cent), while just 158 were LPG-powered – up 138 per cent on 2009 figures – compared to 7492 diesels and 381 hybrids.

In terms of business vehicle sales so far in 2010, petrol vehicles numbered 74,286 (up 26.2 per cent), while LPG vehicles numbered 1812 (down 3.3 per cent), diesels accounted for 7265 (up 27.2 per cent) and hybrids numbered 2029 (up 129 per cent).

Holden, which is believed to have applied for about $140 million in federal government green-car funding – primarily for the development of its locally assembled 1.4-litre turbocharged Cruze sedan and hatch – says it remains committed to alternative fuels including E85, despite the proposed LPG and ethanol taxes.

“We understand the government is seeking to strike the appropriate balance between their budget bottom line and an efficient tax that supports the development of a home grown alternative fuels industry,” said company spokesman Jonathan Rose.

“The policy does provide certainty for future investment around bio-ethanol which we see as positive. We will continue to pursue E85 and numerous alternative fuels as part of our strategy to reduce Australia's dependence on foreign oil.”

Similarly, the FCAI welcomed the excise on alternative fuels, which it says was inevitable, on the basis that it provides certainty for ethanol vehicle makers and ethanol producers, who would effectively be guaranteed a 50 per cent excise discount compared to petrol.

“We’d have our heads in the sand if we thought that alternative fuels, which will still attract a significant discount, could sit apart from the government’s broader fuel excise system,” FCAI chief executive Andrew McKellar told GoAuto.

“There needs to be a consistent basis for the taxation of fuels. I don’t think there was ever any expectation that fuels like ethanol or LPG would remain excise free indefinitely – that actually is not good policy.

“But the fact there might be some additional encouragement for fuels that are seen as having an environmental benefit makes sense and that’s the approach we’re seeing here.

“Certainly when you look at the excise applied to other fuels, one would understand there needs to be a consistent and fair policy for taxation of fuels and one which provides certainty.

“There has been a long period between the announcement of this policy and the implementation of it, and there are further adjustment measures which have been included in the budget papers in terms of the transition for domestic producers of ethanol, so I think it really is a step that has to be taken at some point.

“What the impact will be in the short-term versus the long-tern remains to be seen at this stage.”

As we’ve reported, the FCAI remains critical of the government’s continuation of the luxury car tax, which the Henry tax review advised against, and has indicated it will also lobby the government to implement other Henry review recommendations that have not been explicitly ruled out, including reform of the fringe benefits tax (FBT) on company cars, abolition of stamp duty, registration charges and the introduction of a road-user charge.

“One of the (Henry review) recommendations was to reintroduce indexation for petrol excise, which hasn’t occurred in this budget and in fact the government has ruled it out,” he said.

“So I guess one has to look at the overall equation in terms of transport related taxes to ensure there is a consistent and logical framework for those measures going forward.

“The Henry review provided some very well considered advice on issues in relation to excise, FBT, congestion pricing and the abolition of the luxury car tax. While the government has acted to rule out some of those measures, the industry’s view is that it was a well considered report that as a whole is worthy of further discussion by government.

“(But) The reality is that LPG and E85 will still be taxed at an advantageous rate. There will still be an incentive there for consumers to use alternative fuels. The point is that there needs to be a consistent approach based on logical rationale and several reviews have recommended that fundamentally be based on energy content.

“That the approach that’s been adopted and the industry is broadly comfortable with it.”

The Biofuels Association of Australia (BAA) said that although the ethanol excise provided certainty for local biofuel producers it did not give them enough time to compete on a level playing field with biofuel importers. Currently, 52 per cent of Australia's petrol and diesel fuel is imported, generating a trade deficit of some $17 billion.

"The biofuel industry has been seeking certainty from government for many years, since the excise policy position first came up in 2003, so at least this gives us certainty, whether or not we like it," said BAA CEO Heather Brodie.

"But there appears to be more of a sovereign risk under this government at a time when we need investment certainty. The best way to reduce our dependence on imported biofuels is to increase the incentive for local biofuel producers, but in five years there will be parity between imported and domestic biofuel and that's not enough.

"The gaseous fuels industry has operated excise-free for many years and it took Brazil 40 years to get where it is now. I guess this excise policy provides some certainty, but we need another five years before there's parity between local biofuel producers and importers."For its part, the government has defended the budget’s new excise measures on the basis that it will simply implement the Howard government’s long-standing energy content-based fuel excise plan, which will effectively deliver a 50 per cent tax discount for fuels such as LPG and ethanol.

Further, it says the staged phase-in of the new excise rates would prevent the sudden loss in the relative tax advantage of domestic ethanol compared to imported ethanol that would have occurred under the policy announced by the previous government.

“These initiatives will provide the fuel industry and fuel users with certainty as to the future direction of fuel tax policy so that they have confidence to make future investment decisions and consumption choices,” said assistant treasurer Senator Nick Sherry in a press release issued on May 13.

“To allow the alternative fuels industries time to adjust, effective excise will be phased in over the period beginning 1 July 2011 and ending 1 July 2015.

“In addition, the Rudd government was concerned to ensure that, as part of these new arrangements, our domestic ethanol industry would benefit from an appropriate transition period to the arrangements announced in 2004-05, which was absent from the previous government’s approach.

“To achieve this, imported ethanol will face a more gradual decline in excise equivalent customs duty over the transition period compared to the previously announced measure.

“Overall this policy will provide a comprehensive tax policy for the fuel market, while supporting the alternative fuel industry and domestic ethanol producers,” said Senator Sherry.

For the record, alternative fuels including the biofuels, ethanol and biodiesel, and the gaseous fuels including LPG, liquefied natural gas (LNG) and compressed natural gas (CNG) will be brought fully into the tax system by being ranked into one of the following three energy content bands:- High (energy content greater than 30 megajoules per litre, or per cubic metre in the case of compressed natural gas)- Medium (between 20 and 30 megajoules per litre)- Low (less than 20 megajoules per litre)“At the end of the transition period, alternative fuels will benefit from a 50 per cent reduction of their full energy content tax rate,” said the federal energy and resources minister Martin Ferguson. “These fuels provide consumer choice and competition in the transport fuels market.

“This announcement completes the implementation of the 2004-05 reform package, which received bipartisan support at the time. In enacting the final parts of the reform package, we will ensure that alternative fuels receive appropriate treatment under the tax law.”

Senator Sherry said extensive consultation with key industry players would include the implementation of support for the domestic ethanol industry, whether offsetting grants are the best mechanism to phase in effective excise over the transitional period for biofuels and gaseous fuels, and how to determine the appropriate taxation point for the gaseous fuels.

“The government will consult extensively with key stakeholders on the implementation details of this important policy,” said the assistant federal treasurer, who will soon release a discussion paper to this effect.