Australia: The carbon pricing mechanism: a transport industry focus

The carbon pricing mechanism: an industry focus


The Federal government has confirmed that a carbon price will be imposed on the Australian transport sector, extending to domestic aviation, domestic shipping, rail and heavy road transport. It is critical to note that these sectors will not be covered by the proposed carbon pricing mechanism (the Mechanism), but rather an "effective carbon price" will be imposed by complementary adjustments to the taxation of transport fuels as outlined in the broader package.

This briefing provides the key details of the Government's proposed Securing a Clean Energy Future package (the Package), announced by the Australian Government on 10 July 2011, that are relevant to the transport sector. We also examine the key issues and implications for our aviation and shipping clients.

For a general overview of the Mechanism and complementary measures, please refer to our client update ' Carbon pricing mechanism snap shot: key features, certainty and flexibility '.

This paper focuses on the details and issues arising from the Package, including in particular:

  • The method and coverage of the imposition of an effective carbon price on transportation.
  • The legislative and administrative issues.
  • The management of carbon liabilities.
  • The international perspective.

Sectoral coverage and pricing method

The Government has confirmed that an effective carbon price will be imposed on emissions from transport fuel used in 'domestic aviation', 'domestic shipping' and rail transport. The terms 'domestic aviation' and 'domestic shipping' have not been defined. The Package does not seek to impose carbon liability on fuel used for international aviation or international shipping. Coverage uncertainties currently exist due to the lack of specific detail in the Package. A legal review of the parameters of these key definitions should be undertaken when the draft legislation is released by the Government.

The term "effective carbon price" is used because the transport activities which are covered will not fall within the Mechanism, but rather will be covered through changes to fuel tax credits and fuel excise arrangements in Australia's taxation regime. Adjustments to credits and excise will be made annually during the fixed price period and then every six months (based on the average carbon price over the previous six months) during the flexible price phase.

The Package provides as follows:

  • Domestic aviation fuel excise will be increased by an amount equivalent to the effect of placing the carbon price on aviation fuel (from 1 July 2012). International aviation fuel use will not be covered. Additional revenue will not be allocated to the Civil Aviation Safety Authority.
  • Business transport emissions from liquid fuels (rail and shipping) and non-transport emissions from businesses using liquid fuels, will be subject to an equivalent carbon price applied through a reduction in business fuel tax credits (applied after 1 July 2012).
  • Fuel use in relation to light commercial vehicles (4.5t or less), vehicles for household use, and fuels used in agriculture, forestry and fisheries will not have a carbon price imposed.
  • On-road transport use of Compressed Natural Gas (CNG), Liquefied Natural Gas (LNG) and Liquefied Petroleum Gas (LPG) (such as freight transport) will not face a fuel tax credit reduction due to the imposition of the Road User Charge.
  • Off-road transport use of CNG, LNG and LPG (such as on a mine site) will face a reduction in fuel tax credits equivalent to placing the carbon price on emissions from that fuel use.
  • Non-transport use of CNG, LNG and LPG, which currently benefit from an automatic remission of excise, will be replaced by a partial remission to reflect the effective carbon price.
  • Ethanol, biodiesel and renewable diesel (collectively "biofuels") will not incur fuel tax credit reductions or changes to excise as these fuels are zero rated under international carbon accounting rules.

Changes to fuel tax credits and excise to reflect the carbon price will be based on the specific emissions intensities of CNG, LNG, LPG, aviation gasoline, aviation kerosene, petrol and diesel, with all other liquid fossil fuels based on the diesel emission rate.

The Productivity Commission will undertake a review of fuel excise arrangements, including an examination of the merits of a regime based explicitly and precisely on the carbon and the 'energy content' of transport fuel. However no date has been given for this review and the Government has not specified what the consequences will be from the findings of the review.

As per other sectors, businesses in the transport sector (or those other businesses with a transport component to their emissions) will be only liable under the Government's carbon scheme if they trigger the general compliance threshold of 25,000 tonnes of greenhouse gas emissions per year. These businesses are already likely to be reporting their greenhouse gas emissions to the Federal Government pursuant to the National Greenhouse and Energy Reporting Act 2007.

Whilst a number of other sectors will receive transitional assistance or compensation, the Package does not provide any transitional assistance or compensation for the transport sector. However some facilities that receive transitional compensation because they fall within other sectors (such as gassy coal mines) may also have significant transport and logistical emissions aspects of their overall liability.

Legislative and administrative issues

We expect that the Government, in implementing these measures, will seek to make amendments to the Excise Tariff Act 1921 and the Fuel Tax Act 2006.

In practice, entities in the domestic shipping and rail transport sectors will generally pay the same amount at the pump for their fuel. However, the size of the fuel tax credit that they currently claim in their Business Activity Statement will reduce. Entities currently pay income tax on their fuel tax credits. Accordingly, they should be in the same after tax position as entities that otherwise pay the corresponding carbon price through the purchase of carbon permits, which will be tax deductible.

Conversely, airlines will pay more for their fuel at the pump. Manufacturers responsible for remitting the excise will simply increase the relevant amount added to their excise exclusive prices.

In both cases, the administrative burden from a taxation perspective is unlikely to significantly change.

Managing carbon liabilities in the transport sector

Liable entities in the aviation, shipping and heavy transport sectors will not benefit from the following market advantages available to those sectors which have a liability under the emissions trading scheme:

  • the ability to purchase carbon permits on the open market, or carbon offsets from domestic or international markets (which may be cheaper than domestic permits)
  • the ability to purchase and 'bank' the carbon permits not used for future use or sale
  • the ability to use the free allocation of allowances to fund investments in lower emissions plant or technologies, and
  • the ability to claim the costs of carbon permits as a tax deduction.

It will be important to review carefully the legislation when it is released and consider the extent to which these advantages are built into the consideration of the "effective carbon price" that is to be paid by the transport sector.

The remaining opportunities for the forward management of carbon liabilities include investing in lower emissions plant and technologies, and the use of biofuels which under the Package are zero rated in terms of emissions.

In order to capitalise on these opportunities, the transport sector will need to consider its ability to access funds from the AUD$10 billion Clean Energy Finance Corporation, which is to be set up to invest in and reduce finance risk in relation to innovative clean energy proposals and technologies. The Government will also provide an additional AUD$200 million over five years for grants to support business investment in research and development. These technology investments may help in the development of biofuels, and other clean energy and transportation efficiency developments.

In order to maximise the use of biofuels, the fuel will need to be available in commercial quantities with competent fuel supply infrastructure, and fuel supply contractual arrangements will need to be in place for the effective distribution of the fuel.

International perspective for aviation and shipping

The Australian Government's decision to include domestic aviation and shipping fuel into its carbon liability scheme is significant as few other jurisdictions around the world have introduced a carbon price for transport fuel.

At the international level, both aviation and shipping emissions are excluded from the Kyoto Protocol, partly because there was no consensus on how to treat emissions from the cross-jurisdictional transport sector. Both the Copenhagen Accord and Cancun Agreements were silent on transport emissions, and there appears to be a continued lack of international political impetus and cohesion at the UNFCCC level in respect of aviation and shipping emissions.

The International Civil Aviation Organisation (ICAO), the UN regulatory body for international aviation, considers that a global framework for the regulation of carbon emissions from aviation should be developed. At its general assembly meeting in October 2010, ICAO resolved to develop a global framework for market-based measures for aviation emissions, to be considered at the ICAO Assembly in 2013. This resolution is an important step in ICAO's potential global leadership of aviation emissions.

Meanwhile, stakeholders in the aviation sector are well aware that the EU will include international aviation into its emissions trading scheme from 1 January 2012. Several American airlines have challenged the legality of the scheme in a class action, arguing that the extra territorial effect of the scheme is in breach of the Chicago Convention and is unlawful (The Chicago Convention is an international treaty dealing with the regulation of internal civil aviation. It addresses, amongst other things, sovereignty over domestic airspace and airport duties). The class action was heard by the European Court of Justice on 5 July 2011 and a decision is expected within the next 2 months.

It is likely that ICAO will consider the effectiveness of both the EU scheme and the Australian scheme in its review of market mechanisms appropriate for the aviation sector in 2013. The International Maritime Organisation (IMO), the United Nations specialised agency with responsibility for the safety and security of shipping and the prevention of marine pollution by ships, at its meeting in London on 15 July 2011, considered a range of potential mandatory measures to reduce greenhouse gas emissions by the international shipping industry. At the meeting, the IMO agreed to amend MARPOL, the international convention on preventing pollution from ships, by adding a new chapter for energy efficiency regulations. The regulations will mandate that new ships meet requirements detailed in an Energy Efficiency Design Index and that all ships follow a Ship Energy Efficiency Management Plan. The regulatory requirements will apply to all ships of 400 tonnes gross and above, and are expected to enter into force on January 1, 2013.

Whilst many aviation and shipping stakeholders welcome the introduction of a carbon liability scheme for transport fuel, there is widespread concern that the development of ad hoc regulatory approaches for these international industries will result in a burdensome patchwork of regulation. Regardless, it will be important for the aviation and shipping industry to keep abreast of international developments and their domestic consequences.

Important information for transport sector clients to look out for

Some of the important questions, which stakeholders in the aviation and shipping industries should be seeking answers to when the draft legislation is released on 31 July 2011, include:

  • How the definitions of 'domestic aviation' and 'domestic shipping' will be set out in the legislation and what will that mean for competition with international carriers.
  • How the fuel tax credit and fuel excise adjustments will work in practice and upon what criteria the "effective carbon price" will be calculated every six months.
  • Whether the net carbon price for the transport sector will end up being higher then the carbon price other sectors are able to achieve on the open market, and
  • Whether the net carbon price will differ within the transport sector and what impact that will have on competition. For example, will there be a price advantage between road transport and domestic shipping, or between international shipping carrying coastal cargoes and domestic shipping.

As draft legislation is expected within the next 2 weeks, any requests for changes to the Government's proposed mechanism to include a cost of carbon on transport fuel for the domestic aviation and shipping sectors should be communicated to the Government as soon as possible.

Related updates

Carbon pricing mechanism snap shot: key features, certainty and flexibility

A framework for pricing carbon in Australia

Carbon Farming Initiative legislation tabled

Mineral Resources Rent Tax update

Further information

If you would like further information or advice about any aspect of the policies underlying, or the proposed legislation implementing, the Government's Clean Energy Future package, please contact a member of our Transport team.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Dimity Maybury
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