The Australian Federal Government's Securing Australia's Energy Future - the Australian Government's Climate Change Plan (Clean Energy Plan) was released on 10 July 2011 and a draft package of legislation was released shortly after this on 28 July 2011.
The Clean Energy Plan introduces significant changes to the Australian economy, which will affect many Australian and overseas businesses. It has a proposed start date of 1 July 2012.
The Clean Energy Plan will impose legal obligations and responsibilities on certain large emitters, including requiring them to purchase emission units from the Government. As larger emitters pass on their costs, other businesses will be indirectly affected. Businesses in the transport and logistics sector will be affected directly and indirectly, and the impacts will vary according to the transport mode.
The Clean Energy Plan creates a new product, emission units and a new market, the emission trading scheme. When Australian and international units can be exported and imported, Australia's carbon unit market will become part of the existing global market. The new market and its inclusion in the global market will create opportunities and challenges for Australian and international businesses.
The Clean Energy Legislative Package
The Clean Energy Legislative Package was released in exposure draft form by the Australian Government on Thursday, 28 July 2011. It comprises 14 bills and totals more than 650 pages of legislation. The Government will receive submissions on the legislative package until 22 August 2011 and has indicated that it intends to introduce the bills into Parliament before the end of 2011.
One of the key aims of the legislative package is to introduce a price on the carbon from greenhouse gas emissions using either the carbon price mechanism or other methods, such as changes to Fuel Tax Credits (FTCs) or excise. The introduction of a price on carbon will have an impact on businesses that will directly bear its cost. The impact will filter throughout the economy as the costs borne by businesses are passed on and flowed through, such as through increases to electricity prices and other inputs.
Other key features of the legislative package include:
- The creation of the framework underpinning the introduction of a carbon price, including registries, audit and compliance requirements and changes to the taxation system.
- The creation of a number of new authorities and other statutory bodies to administer the measures under the legislative package.
- Transitional measures to assist businesses and industry sectors to adjust to a carbon price.
The carbon price mechanism will directly affect approximately 500 companies, accounting for 60% of Australia's greenhouse gas emissions. These are entities that both:
- meet the relevant threshold for greenhouse gas emissions; and
- are in a sector covered by the mechanism.
The sectors covered by the mechanism are:
- stationary energy
- industrial processes
- fugitive emissions (generally from coal mining and natural gas extraction)
- emissions from landfills.
A number of other sectors, including transport, will be subject to a price on carbon, but by methods outside of the mechanism.
Impact on transport and FTCs
Fuel is generally subject to tax via the imposition of excise and customs duties. Businesses are generally able to claim back all or part of these taxes through FTCs.
Transport fuels are to be excluded from the carbon price mechanism. Instead, an equivalent carbon price will be applied through certain changes in FTCs and customs/ excise.
An effective carbon price will not apply to household transport fuels and light vehicle business transport (since these are not eligible for FTCs). Similarly, an effective carbon price will not apply to off-road fuel use by the agriculture, forestry and fishing industries, ie there will no reduction in FTCs for these industries. For other industries, there will be a reduction in the FTC entitlement by an amount equal to the carbon price.
Fuel use by heavy on-road transport will not be subject to an effective carbon price until 1 July 2014 (the Australian Government intends to introduce further legislation to implement this).
An effective carbon price will also be applied to domestic aviation, domestic shipping, rail transport and nontransport use of fuels.
FTCs is an area that will be subject to significant change over the next 12 months in addition to the carbon price mechanism changes set out above. Certain alternative fuels, such as LPG, LNG and Compressed Natural Gas (CNG), will be subject to tax for the first time from 1 December 2011 (and also be eligible for FTCs). Further, the FTCs available for certain activities will double from 1 July 2012.
For many businesses, the calculation of their FTC entitlement from 1 July 2012 will be a complex exercise, requiring an analysis of the business's fuel usage activities. For businesses that incur significant fuel costs, the reduction in FTC entitlements will form a significant part of the costs that can potentially be passed on to customers. Given the Federal Government's announcement that the ACCC will be monitoring pricing claims resulting from the introduction of a price on carbon, such businesses will likely want to formally analyse and document these costs.
Current fuel tax and credit arrangements
Fuels, unlike other emission sources, are currently subject to their own tax regime, applied through the Excise Tariff Act 1921 for domestically produced fuels and the Customs Tariff Act 1995 for imported fuels. Liquid and gaseous fuels are classified under those Acts for the purposes of determining the amount of fuel tax payable.
Business users of liquid and gaseous transport fuels are generally eligible for FTCs under the Fuel Tax Act 1996. These fully or partially offset the effective fuel tax paid on the fuel used or consumed by the business. The amount of the effective tax on which the fuel tax credit is based is the amount of fuel tax that was or would be payable on the fuel less any grant or subsidy amount. Fuels such as ethanol and biodiesel are presently eligible for a tax offsetting grant, making their effective tax zero.
In addition to changes brought about by Clean Energy measures, FTCs will be subject to significant change over the next few years as gaseous fuels such as LPG, LNG and CNG are progressively brought into the fuel tax system over a transitional period from 1 December 2011 to 1 July 2015. During this period, fuel tax rates will be progressively increased until they reach a full excise rate set by reference to the petrol/diesel excise rate but adjusted to reflect the lower energy content of these fuels. The FTCs available for certain activities will double from 1 July 2012.
For heavy vehicles used in road transport (ie vehicles with a gross vehicle mass exceeding 4.5 tonnes), the FTC entitlement is reduced by the road user charge. The road user charge is determined in accordance with processes established under national road transport legislation and implemented by means of a legislative instrument issued by the Minister under the Fuel Tax Act 1996. The road user charge is presently adjusted annually.
FTCs are not provided for fuel used in aviation or business use of fuel on-road in vehicles that do not meet the gross vehicle mass requirements outlined above or environmental criteria outlined in the Fuel Tax Act 2006.
Adjustment of the FTC to reflect the carbon price
The Government's package will use the existing fuel tax regime to impose an effective carbon price on businesses' liquid and gaseous fuels emissions by reducing existing FTCs by an amount equal to the carbon price.
For fuels, such as aviation fuel, that do not attract FTCs, the amount of excise will be increased by an amount equivalent to the carbon price on the emissions.
The amount by which FTCs or excise increases are adjusted will reflect the different amounts of carbon emitted by the burning of different fuels. For CNG, LPG, LPG, aviation fuels, petrol and diesel, these will be based on the specific emissions of those fuels, while all other liquid fossil fuels will be based on the diesel emission rate.
This will have different consequences for different transport sectors:
- An effective carbon price will not apply to household transport fuels and light vehicle business transport as these are not presently eligible for FTCs.
- Domestic aviation fuels do not receive FTCs, so domestic aviation fuel excise will increase by an amount equivalent to the carbon price on aviation fuel emissions. International aviation fuel is not subject to Australian fuel tax and therefore will not be subject to an effective carbon price.
- Diesel fuels used for rail transport and domestic shipping will be subject to an equivalent carbon price applied through a reduction in FTCs.
- There will be no reduction in the FTC for road transport use of CNG, LNG and LPG as their eligibility for a FTC is reduced to zero due to the road user charge. Fuel tax exemption on non-transport CNG and the fuel tax remission for non-transport LPG and LNG will be reduced on a 'cent-for-cent' basis equivalent to the carbon content price on the fuels.
- Ethanol, biodiesel and other biofuels will not incur FTC reductions or changes to excise.
- There will be no reduction in FTCs for off-road fuel use by the agriculture, forestry and fishing industries.
Heavy road transport vehicles will not face a carbon price from the commencement of the scheme. The Government intends to apply a carbon price on heavy on-road vehicles from 1 July 2014. Separate legislation to this effect will be introduced.
It is possible that the implementation of a carbon price for the road transport sector will be affected by changes to the road charging regime that might flow from the current Council of Australian Governments (COAG) Road Reform Plan (CRRP).
The CRRP was established to investigate options for reforming existing road charging arrangements, following the Productivity Commission's inquiry into road and rail freight infrastructure pricing. In that inquiry, the Commission identified major shortcomings in the current arrangements for charging for road use and provision of roads.
The current phase of the CRRP involves examining the feasibility of introducing more direct heavy vehicle road use charges and associated funding arrangements, in order to promote a more efficient, productive and safe heavy vehicle industry. It is possible that the CRRP process will lead to recommendations for changes to heavy transport fuel excise arrangements, which will impact on the implementation of a carbon pricing mechanism.
The Government proposes to reduce the business FTC entitlement for liquid and gaseous transport fuels to provide a 'cent-for-cent' impact on businesses equivalent to the price on the carbon emission from their use of these fuels.
During the period for which the carbon price is fixed (2012-2015), FTC reductions for businesses and the fuel tax rate increases for aviation and non-transport fuels will be based on the fixed carbon price as set at the beginning of each of the fixed price years.
Once the full emissions trading scheme commences in 2015-16, the FTC changes and fuel tax adjustments will be determined on a six-monthly basis, based on the average carbon price over the previous six months.
Businesses in the transport and logistics sector will not have the same market opportunities that will be available to sectors able to participate in the emissions trading scheme. Moreover, the Clean Energy Plan does not provide for any transitional assistance or compensation for the transport sector, although some businesses that fall within other emissions-intensive sectors may be eligible.
However there are likely to be opportunities for cost savings through investment in lower emissions technologies and the use of biofuels, which are to be zero rated for emissions purposes.
For rail and domestic shipping businesses, the carbon price will be offset by reductions in the FTC reductions, so the amount paid for fuel will generally remain unchanged. However the calculation of fuel tax entitlement from 1 July 2012 may become a more complex exercise, requiring an analysis of the business's fuel usage activities.
The implications for road transport will not be fully known until the Australian Government's legislation is released. In any case, this may be affected by changes to road user charges that flow from road pricing mechanisms currently being considered in the context of the COAG Road Reform Plan.
For further information
The Clean Energy Plan's impact will be felt across different industries and in different economies. With over 4,200 lawyers operating from 76 offices in 30 countries worldwide, DLA Piper is well placed to assist. We bring together specialists from our Environment, Tax, Corporate, Financial Services, Energy, Transport and Logistics and Infrastructure teams to help our clients to navigate the opportunities and challenges that lie ahead.
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