ACF objects to blanket fuel tax reduction

The federal government plans to reduce fuel tax from next year, but the plan has drawn fire from Australia's peak conservation body.

Carbon emissions from petrol combustion are lower than emissions from diesel (distillate) combustion, but the government's draft legislation presumes that all fuel sold is as carbon-intensive as diesel.

So the proposed fuel tax reduction will lead to cheaper petrol -- cheaper in fact than it should be, relative to the optimum 'market price' for fossil fuels. That's because the subsidy is based on that carbon content figure for diesel.

"The tax adjustment is based on a diesel baseline," explains Simon O'Connor, Economics Adviser to the Australian Conservation Foundation.

O'Connor believes that will negate the cost-based incentive to use less fuel in the future.

Under the proposed legislation, drivers will incur a subsidy of 5.4 cents per litre. The subsidy for petrol, given that fuel's carbon content, should be just 4.6 cents per litre, says the ACF, but the government will offer the 5.4 cents/litre subsidy to drivers buying petrol as well as diesel.

Motorists were shocked by the sudden rise in fuel prices last year, but conservation groups such as the ACF saw an upside to the retail pricing shakeup. As fuel prices soared, people elected to drive fewer places if they could get somewhere by walking, cycling or taking public transport instead. The flip side of the argument is that as fuel prices come down, motorists can be expected to use the car more. Even a difference as small as 0.8 cents per litre may have an ill effect on driving habits, says the ACF.

The ACF sees a real possibility that the cost-based incentive to use the car less would be eroded by the government's proposed subsidy favouring petrol over diesel,  since most cars are petrol-fuelled, not diesel.

There's also the chance that cars will assert their dominance in the private-versus-public transport argument as the cost of operating motor vehicles comes down. The government's formula is explained at the bottom of this article.

"We'd hope to see some amendments in that for sure," says O'Connor of the fuel tax reductions, which are due for implementation in July next year. The ACF has informed Treasury of its qualms in a submission forwarded a week ago.

"Really, our aim here is just to highlight that there are some real perversities in some of the policy mechanisms being used -- driven by political will rather than attempting to achieve any environmental or even economic objectives," says O'Connor, who believes the legislation was proposed in response to opposition concerns that the CPRS would penalise motorists.

"[The middle of last year], there was a lot of heat around fuel prices -- they were very high at the time -- so the opposition would have raised the point that under the CPRS, fuel prices are going to go up at the bowser," says O'Connor.

"So Rudd at that point made the commitment that any increase under the CPRS would be offset by a reduction in fuel tax excise -- a cent-for-cent reduction -- so there's no impact at the bowser."

Motorists are likely to be unperturbed by the argument, since the difference between the subsidy as proposed and the subsidy the ACF would like to implement will be less than six cents for a car with a 60-litre tank and fuel priced at $1.20 retail.

But across the nation, the 'overpayment' of subsidy is worth $150 million a year, according to the ACF.

On balance though, the conservation group has welcomed the CPRS and the Global Financial Crisis, far from being the very ruination of the world economy for decades to come, presents some major opportunities for businesses and individuals willing to go green. In a depressed labour market, we may see heavy industry moving to areas with an abundance of renewable energy -- places like Tasmania, for example, with its hydro-electric system.

O'Connor believes that putting a price on pollution is major step forward for the country -- and the globe.

"The attempt to put a price on pollution for the first time will potentially drive some really great, innovative stuff -- and hopefully it will be really exciting to watch."

Buckle yourself in for the ride. The next decade will be very interesting...

How the formula would work: Although a litre of petrol weighs approximately 750gms, it releases 2.36kg of CO2 when combined with air and burnt in an engine. The CO2 released by burning diesel is 2.7kg per litre of the fuel. Based on the government's cost/penalty of $20 per tonne of carbon and using the carbon content of diesel as the constant for the formula, the formula is: (2.7kg x $20)/1000kg.

The subsidy for motorists would thus be 5.4 cents per litre, not the 4.6 cents per litre they should be incurring for petrol, based on 2.3kg of carbon per litre. As far as the ACF is concerned, this is a 0.8 cent/litre gift to those motorists (the vast majority) driving petrol-engined cars rather than diesel-engined cars.

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