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Monday, 23 June 2003
Page: 17227

Mr McMULLAN (6:07 PM) —The Customs Tariff Amendment Bill (No. 2) 2003 and the Excise Tariff Amendment Bill (No. 1) 2003, which we are considering together, are just the latest chapter in what has become a very sorry saga of the government's clumsy and ill-considered efforts to prop up the ethanol industry. This is a story of the government bending over backwards to support an industry in the face of every piece of impartial advice both from within the bureaucracy and from outside. It is a story that mainly revolves around the activities and lobbying of the one major player in the ethanol industry, the Manildra Group—headed by Mr Dick Honan, who has become very well known for his lobbying around this issue, his generous support of the Liberal Party and his relationships with the Prime Minister and the former head of the Prime Minister's department, Mr Max Moore-Wilton.

The other source of pressure on the government to support the ethanol industry has been from elements of the National Party and the sugar industry lobby who hope that, in the process, this will provide assistance to the sugar industry. My concern with that particular argument is that it is a fraud on the legitimate concerns of sugar growers. They are being offered an illusion of support from which they will gain no benefit. The simple fact is that virtually all the ethanol produced in Australia is not made from sugar; it is made from wheat. The prospects of any substantial continuing benefit to the sugar industry from the emergence of an ethanol industry in Australia, even with all the subsidies, would be remote at best.

There was previously a third element to the argument which related to the environment. There was a view that, because ethanol is not generated from carbon based fossil fuels, it would be environmentally beneficial. But the CSIRO, amongst others, has most authoritatively and effectively debunked that myth and said that, when you look at the life cycle utilisation of all the resources going to produce ethanol and at its relative fuel efficiency, there is no environmental benefit to be gained.

I would like to deal with those issues a little more in a moment, but first let us look at the recent history of this issue. Ethanol is an alcohol, and it has a variety of purposes. For the purpose of this debate, we are talking about fuel ethanol—that is, ethanol blended with petrol for use as a transport fuel. The latest controversy over the use of ethanol goes back to 1999 when, as part of its so-called Measures for a Better Environment package, the government promised to harmonise Australian vehicle emissions with European standards. To support this, the government promised to introduce fuel quality standards. Historically, there has been no limit domestically on the amount of ethanol which suppliers can include in petrol blends in individual sales at the bowser. However, during consultations for the development of the national fuel quality standards in late 2000, Environment Australia proposed that a maximum cap of 10 per cent ethanol be set. That was consistent with international standards. Vehicle manufacturers argued then and argue now that ethanol blends greater than 10 per cent will affect engine operability and components such as fuel lines. They have provided advice to the government that many manufacturer warranties only extend cover for up to 10 per cent blends and that beyond that some warranties are removed completely while others are removed for fuel line systems. Engines such as lawnmowers, chainsaws and outboard motors with plastic fuel systems cannot safely use fuel with high levels of ethanol.

In March 2001 the government referred this issue to the ACCC through the then Minister for Financial Services and Regulation, the member for North Sydney, who said:

Consumers have a right to know the extent their petrol is being mixed with ethanol, and they also have a right to know if their engines are at risk of being ruined.

This issue should have been dealt with under the comprehensive fuel standards announced in May 2001. However, the decision on setting a standard for the ethanol limit in petrol was deferred for 12 months until May 2002. The only beneficiaries of that decision were the petrol retailers who blend ethanol in excess of 10 per cent and, of course, the companies—principally the one company, Manildra—who supply that ethanol. The excuse given was to allow for completion of studies to provide a scientific basis for setting the appropriate level of a cap. Everybody knows that if you were really doing it for safety reasons you would set the international standard limit and then do tests to see whether you could increase it, rather than allowing blending above the international safe standards to continue while the tests were being done. It was clearly a facade behind which effective assistance to the ethanol industry—and, through it, to Manildra—continued to operate.

The studies were to include examination of issues such as vehicle operability, environmental performance, effects on engines and any health or safety implications. An ethanol task force was formed to coordinate this task. It considered submissions from all stakeholders, and other technical and relevant information available. The task force was unable to achieve consensus because of the insistence by producer interests—the Australian Biofuels Association and Manildra Park Petroleum—that no caps should be set pending scientifically based trials of a 20 per cent ethanol-petrol blend in vehicles representative of the Australian vehicle fleet. It should be noted that all other members of the task force took the view that there was sufficient documentation to set a 10 per cent limit without the need for vehicle trials. Therefore, all independent advice was for a 10 per cent limit, but the government said no on the basis of the representation of the one vested interest—the one non-neutral participant, Manildra.

The ACCC formally advised the government in December 2001 that they had several fair-trading concerns relating to potential misleading conduct by particular distributors and retailers. These concerns related to lack of disclosure to consumers, effect on vehicles and warranties, and reduction in fuel economy. Fuel economy is affected because the energy content of a litre of ethanol is about 30 per cent less than a litre of petrol.

In May 2002, rather than setting the proposed limit, the Minister for the Environment and Heritage and the Minister for Agriculture, Fisheries and Forestry announced a $5 million, two-year study on market barriers to biofuels, which included funding for vehicle testing and technical assessment of use of 20 per cent ethanol blend vehicles. Completion of the trials was expected to take two years and it is still not clear whether cabinet has given the final go-ahead. Fuel industry representatives confirm that it was simply a delaying tactic to allow higher than 10 per cent petrol blending to continue.

On 22 August 2002 the Australian Automobile Association, the Federal Chamber of Automotive Industries and the Australian Institute of Petroleum jointly called on the government to institute a 10 per cent limit. They also opposed mandating ethanol at any level. But it was not until April this year, eight months after that warning and years after the first concerns were raised, that the environment minister finally bowed to the inevitable and introduced a 10 per cent limit on ethanol levels in petrol—a measure that he had been urged to take by the Labor opposition more than six months earlier.

In the meantime, consumer confidence in the ethanol industry has been shot to pieces. The blame for this loss of confidence is clear: it is due to the failure of the government to respond to legitimate and widespread concerns about the dangers of ethanol. There have been some ridiculous claims made by the industry about this issue; absurd claims that these concerns did not have a legitimate foundation. It is disturbing but perhaps not surprising that these claims have been echoed by government members reaching as high as the Deputy Prime Minister.

But it is those legitimate concerns that have led the government to set the 10 per cent limit. If the concerns are not real, why have the government set the limit? It is because they now accept that there are real and serious concerns and that the failure to act is in fact undermining the capacity of the users. Users who wish to experiment with 10 per cent ethanol blends, the so-called E10 fuels—and there have been some interested in doing that and some trials—have been discouraged from doing so by the controversy.

I was amused to hear the Deputy Prime Minister say in the House on 15 May that I had apparently apologised to Mr Honan, the Chairman of the Manildra Group, for my stand on this issue. I say absolutely, without equivocation at all, that I have not apologised to him. I have no reason to apologise to Mr Honan and I have not, I will not and—I reiterate here—I do not. The Deputy Prime Minister was misinformed; I can imagine by whom but I do not have any evidence.

Equally nonsensical was the argument peddled by the Deputy Prime Minister that the claims about the dangers of ethanol were sensational and inaccurate. If that is the case, why has the government imposed the limit? It has imposed the limit because it accepts that the arguments are in fact neither sensational nor inaccurate. The Deputy Prime Minister should have a word to his colleague the environment minister, who said two months ago:

Latest results provide evidence that ethanol blends higher than 20 per cent would cause problems for a proportion of older vehicles in the fleet.

These include:

... hesitation and problems with starting in very cold conditions, and could cause deterioration of metal, plastic and rubber components in some older vehicles.

That was the view of the environment minister. It is similar to views expressed by every major motor vehicle manufacturer and by the nation's main motoring organisations.

In spite of widespread concerns about excessive levels of ethanol use, the government on 12 September last year announced a series of changes to excise and subsidy arrangements that aim to support the ethanol industry. The Customs Tariff Amendment Bill (No. 2) 2003 and the Excise Tariff Amendment Bill (No. 1) 2003 implement the legislative aspects of that announcement. Under this decision, the 38.143c per litre excise exemption for fuel ethanol was abolished. For locally produced ethanol, the benefit was replaced with an equivalent subsidy for producers. However, this subsidy is not available for imported fuel ethanol, which would thereby be placed at a significant price disadvantage. The government claimed the decision was intended to promote the local ethanol industry in the interests of promoting the use of sustainable energy resources. The agriculture minister encouraged the idea that the decision would help the sugar industry, notwithstanding that almost all fuel ethanol produced in Australia is sourced from wheat, not sugar.

The decision followed two weeks of industry representations to the government about a move by independent fuel wholesaler Trafigura Fuels Australia Pty Ltd to import a tanker load of ethanol from Brazil. As a result of the decision, the tanker was diverted to another country. I do not have time to deal with it now. It was an extraordinary set of circumstances, in which high-level representations were made to the Australian Embassy in Brazil, and while negotiations were under way a tax with retrospective effect on Trafigura and its partners was imposed to prevent them carrying out a contract into which they had entered. They entered into the contract without the tax. The tax was implemented in the dead of night while the ship was halfway here and suddenly a legitimate contract was made uneconomic by a decision of the government in a desperate attempt to protect and preserve the interests of an industry and a company which it favours.

The decision to impose these prohibitive charges clearly favoured the Manildra Group, which produce more than 90 per cent of domestically produced fuel ethanol and which had declined to supply Trafigura with ethanol. I will not go to the merits of their decision not to supply; both sides have put their case and I do not know who is right. They may or may not have had a case for doing it. Trafigura argue they did not; Manildra argue they did. I am not in a position to judge, nor is it relevant to the current circumstances.

This legislation also comes forward in the context of some important changes to long-term fuel excise arrangements. In the 2003 budget the government announced it would change excise arrangements for fuel including ethanol. Effective excise rates for currently untaxed fuels are to be increased in a series of five even annual steps starting on 1 July 2008. Existing subsidy arrangements for ethanol are to be continued until the new arrangements begin in 2008. This decision extended for another five years the ethanol subsidy that would otherwise have ended in September 2003. The principle behind the ethanol excise decision and the proposed new fuel excise arrangements are inconsistent. The purpose of the proposed fuel excise arrangements is to tax fuels on an equal basis according to their energy content, whereas the ethanol subsidy promotes a low energy efficiency fuel.

The first of these bills we are dealing with today amends the Excise Tariff Act 1921 to implement the government's decision to remove the excise exemption for fuel ethanol and impose an excise duty rate equivalent to that applying to petroleum. The second bill amends the Customs Tariff Act 1995 to impose a customs duty on imports of fuel ethanol. These two measures treat locally produced and imported ethanol equally. Locally produced ethanol becomes subject to fuel excise, and imported ethanol becomes subject to an equivalent customs tariff. Both measures became effective on 18 September 2002—the date of commencement of a tariff proposal introduced on 16 September 2002.

However, a third key aspect of the government's 12 September 2002 package is the introduction of a subsidy for domestically produced ethanol. The subsidy confers a substantial cost advantage to locally produced ethanol compared with imported ethanol. The subsidy is not the subject of this legislation, nor could it be. We are in a difficult position here. The Labor Party does not have any objection to these two bills in isolation. On their own, they subject ethanol to the same excise arrangements as other fuels. For that reason, we will not oppose the bills. But we do have very serious concerns with the third leg of the government's 12 September package—the ethanol subsidy.

Let me list some of the concerns. Firstly, it is very hard to argue that this subsidy is a priority use of taxpayers' money, whether you look at it for long-term industry, environmental policy or agricultural support reasons, let alone when you compare it with other priority uses of taxpayers' money, such as Medicare. It is a strange set of priorities that this government has.

Secondly, the excise subsidy creates a protection regime that is directly contrary to our advocacy of the benefits of free trade. I and many others have spent years of effort bringing countries like Brazil along with Australia as part of the Cairns Group to be a very effective voice for free trade and agriculture. The relationship with those countries is dependent upon Australia continuing to be a powerful and effective voice for free trade and particularly for free trade in agriculture and agriculture related products. Yet here we are acting entirely contrary to that decision, attacking the interests of our fellow Cairns Group member, Brazil, in a manner that they have speculated might breach our WTO commitments and might give them grounds for a WTO case. My understanding is that Brazil will not pursue that matter before the WTO. I have been advised by the government—I do not have any independent information—that the technicalities of this matter do not breach the letter of the General Agreement on Tariffs and Trade and the World Trade Organisation articles. For the moment, let me accept that that is true, because I do not have any evidence to challenge it. It is unquestionably in breach of the spirit of the WTO, and it is certainly a breach of the spirit of the Cairns Group, of which we have been such a powerful advocate and from which we have been such a major beneficiary.

Thirdly, I am concerned that the advantages of such a massive subsidy to the local fuel ethanol industry have not been demonstrated. Fourthly, I reiterate my earlier concern that there is likely to be little or no benefit to the sugar industry. The sugar industry have a very serious problem. I do not minimise that for one second. We are all paying a sugar tax to attempt to fund the package to assist the sugar industry, and I do not minimise the seriousness of their concerns, some of which are caused by unfair international trading conditions. But it is a fraud on the legitimate concerns of decent sugar growers to pretend that a subsidy to the ethanol industry is part of a solution to their problem. It is not.

This ethanol subsidy does not come cheaply. Over the next four years it is predicted to cost $195 million, and so far, and for the foreseeable future, the lion's share has gone and will go to one company—Manildra Energy Australia. In Senate estimates hearings earlier this month, Senator Minchin, representing the industry minister, confirmed that Manildra received ethanol subsidy payments of more than $17 million between 17 October and the end of May. Over 10 months, that is nearly $2 million a month.

Let us consider some of the supposed explanations for the subsidy. Is the subsidy for environmental reasons? Despite it being presented as a green fuel, the environmental qualities of ethanol are mixed and its use in Australia purely on environmental grounds cannot be substantiated. Recent Australian life cycle analysis work by CSIRO and RMIT has shown that ethanol blends are considered greenhouse neutral. This means that, compared to normal petrol, there is no greenhouse benefit from using ethanol. Although alcohol fuels in some instances can lead to urban air quality benefits, it is difficult to generalise as some emissions increase and others decrease. The government is misrepresenting the environmental qualities of the fuel to try to position ethanol as a clean, green fuel. A case for the environmental benefits and support for cane growers has not been established, so there is no clear case for promoting ethanol on environmental grounds.

Is ethanol support needed under a new-found zeal for interventionist industry policy? This would be a radical policy shift from a government that used to claim it supported market based economic policies. There is no question that the ethanol producers benefit from the subsidy and that this will assist in promoting ethanol production. If you give any industry a big subsidy, it will help that industry. Everybody knows that. The question is whether it helps the economy overall—whether it is an efficient way of using taxpayers' money to maximise our economic and social objectives. The question in this case is whether the benefits that flow match, let alone exceed, the costs of providing the subsidy.

The report of the government's own fuel taxation inquiry, the Trebeck report, makes it clear that there is no evidence of any such benefit. The report refers to the excise concessions, but the effect is the same for the subsidy which has replaced the excise exemption since the report came down. The report says:

... no analysis has been undertaken to establish the benefits to rural and regional areas of the tax concessions and whether they could be achieved at lower cost by other means.

So there is no clear case for promoting ethanol on industry policy or regional policy grounds.

What about the sugar industry? They have a very legitimate concern, but I repeat that most ethanol produced in Australia comes from wheat, although a small proportion is produced from the sugar by-product C molasses—a waste low-value end product also used as cattle feed. A `Current Issues Brief' prepared by the Parliamentary Library points out that sugar producers would gain nothing from ethanol industry subsidies. It argues that, although sugar prices are low, redirecting the primary sugarcane product to ethanol production would greatly increase the price of feedstock used to produce ethanol, and so would greatly increase the cost of producing it. Although low, current sugar prices are higher than sugar producers would receive if they produced sugar for ethanol.

As the Treasury has pointed out, ethanol producers would be unwilling—`at best', as the Treasury tactfully puts it—to pay more than the world price if they were to buy sugar as an ethanol stockfeed. The only effect on sugar producers would be that product diverted to ethanol would not be available for export. The price received for sugar would remain the same and, overall, sugar farmers would be no better off.

So the argument that the subsidy will help the sugar industry does not stand up either. This proposal has been a cruel hoax on Australian sugar producers. The claims that the sugar industry will benefit are simply not supported by any dispassionate, disinterested analysis, including that from the government's own economic advisers.

The principle behind the ethanol subsidy is also at odds with the principles of the government's proposals for energy tax reform spelt out in the budget last month. The Trebeck report, which formed the basis of the energy reform statement, argues that the best basis for promoting energy efficiency is to set excise rates for all fuels according to energy content. Under this proposal, ethanol would have a lower excise rate than petrol, because it is less energy efficient. Petrol has 89 per cent of the energy content of diesel, the most energy efficient liquid fuel, whereas ethanol has only 61 per cent of the energy content of diesel. But that is a far cry from the current arrangement, by which the subsidy completely offsets the excise paid by ethanol producers, and has the same effect as leaving locally produced ethanol completely excise free.

The redeeming feature of these bills is that they take the first step towards a rational taxation regime more broadly, and for ethanol in particular, by subjecting ethanol to a normal rate of excise. As I explained earlier, the offensive parts of the government's 12 September announcement, the massive subsidy and its extent, are not included in these bills. For that reason the opposition will support the bills. But the government still has a long way to go to develop a sensible, effective fuel tax regime.