Caltex Australia comments on Carbon Pollution Reduction Scheme White Paper February 2009

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1 Caltex Australia comments on Carbon Pollution Reduction Scheme White Paper February 2009 Upstream Point of Liability - Fuel Tax Package Outline of scheme The Carbon Pollution Reduction Scheme (CPRS) White Paper (Chapter 17 pages 17-1 to 17-18) proposes an emissions trading scheme which includes the following elements: Further details a cut to fuel tax cent for cent when the scheme commences on 1 July 2010 tax cut review every six months for first three years to ensure cuts reflect the changes in carbon price. The Government will only adjust fuel tax to benefit fuel users. If the emission price falls, the fuel tax rate will not increase reduction in fuel tax will become permanent after three years The tax cuts will be calculated as follows: Issues first tax cut 1 July 2010, applied to all liquid fuels subject to the general cents/litre rate, including petrol and diesel tax cut amount will be determined by the impact of emissions pricing on diesel. Diesel emits more carbon dioxide than petrol (2.7kg CO 2 per litre diesel v 2.3kg CO 2 per litre petrol), so the tax cut will provide more than cent for cent assistance to petrol users agriculture (excluding forestry), fishing and heavy on-road transport (vehicles with gross vehicle mass exceeding 4.5 tonnes) do not pay effective fuel tax because all of the cpl excise is rebated, so the Government will introduce a CPRS fuel credit payment. The CPRS fuel credit will be available to agriculture and the fishing industry for 3 years and heavy on-road businesses for 1 year the CPRS fuel credit will be equal to the six monthly fuel tax cut fuel marketers/suppliers will be required to purchase permits for customers emissions. By 2017 emissions from petrol will be the same as without the CPRS yet fuel suppliers will have purchased $8 billion in permits and charged them back to customers. There is price risk for fuel suppliers associated with permit cost recovery, cash flow impacts from purchase of permits at auction, working capital costs and implications for price monitoring and potential price regulation. Caltex believes that to ensure delivery on the cent for cent commitment the price of carbon permits for petroleum products must be exactly matched to the excise reduction. This is not the case under the CPRS as proposed in the White Paper. At A$23/t CO 2, total petroleum emissions of 115Mt requires fuel suppliers to purchase A$2.6 billion permits on behalf of their customers per annum. At A$40/t CO 2, total petroleum emissions of 115Mt requires fuel suppliers to purchase $4.6 billion permits on behalf of their customers per annum.

2 Patrol price (2005 Acpl) Industry wide emissions from petrol (MtCO2) Effectiveness of CPRS on greenhouse gas (GHG) reduction Australia s total emissions from petrol are unlikely to be significantly reduced by the CPRS. The 46MtCO 2 emitted annually by petrol accounts for 8% of Australia s total GHG emissions. Analysis of the mechanisms of the White Paper suggests that emissions from petrol will increase for the first 3 years of the scheme and will remain above the level of emissions without a CPRS until In the first 10 years there will be zero net reduction in emissions once the initial increase in emissions and subsequent decline is taken into account. The following chart displays the impact of the CPRS on emissions from (Emissions in the no CPRS case remain constant at 46MtCO 2.) Impact of CPRS on emissions from petrol ( ) % 0.2% 0.1% 0.0% -0.1% -0.2% -0.3% Annual % change in emissions from petrol Year ending 30 June Emissions MtCO2 (LHS) Change as % of emissions (RHS) The cause of the initial increase in emissions is the decision to offset the price impact of the CPRS by imposing a fuel tax reduction which is greater than cent-for-cent. By using the volume of GHG emitted by diesel to calculate the offset (which is greater than petrol emissions), the CPRS will result in a reduction in petrol prices compared to prices without a CPRS. This will lead to an increase in demand for petrol and the consequent increase in emissions. Impact on petrol prices (first 10 years) Year ending 30 June Petrol price Acpl (2005$) with CPRS Petrol price Acpl (2005$) w/o CPRS

3 Industry-wide petrol sales (ML) Effect of CPRS on demand for petrol The White Paper recognises that people have limited flexibility to respond quickly to changes in fuel prices. This can be expressed as price elasticity of demand, which measures the percentage increase in demand for a given percentage decrease in price. Petrol is a highly inelastic good, with historical evidence suggesting that for every 1% increase in price there is only 0.15% reduction in demand in the short run (say 1 year) and 0.4% reduction in demand in the long run (say 10 years). The Bureau of Infrastructure, Transport and Regional Economics (BITRE) estimates the price elasticity of fuel demand to be between and -0.4 for passenger vehicles (Green Paper p.101). Caltex modelling uses these estimates as the basis of its modelling. These elasticities are consistent with the recent Treasury Working Paper: An Exploration of Australian Petrol Demand: Unobservable Habits, Irreversibility, and Some Updated Estimates. The following chart reflects how the elasticity projected by the CPRS and Treasury will lead to an increase in petrol sales through to 2017, due primarily to the excise offset being greater than cent-for-cent, before prices will increase and reduce consumer demand for petrol. (Petrol demand in the no-cprs case is constant at 20,000ML) Impact of carbon pricing on consumer demand for petrol Year ending 30 June Industry-wide petrol sales ML (LHS) Change as % of petrol sales volume (RHS) 0.3% 0.2% 0.1% 0.0% -0.1% -0.2% -0.3% Annual % impact on volume of petrol sales The short term decrease in price due to the more than cent-for-cent excise offset will also impact the long term purchasing behaviour of consumers. The Department of Climate Change s 2007 paper Transport Sector Greenhouse Gas Emissions Projections details the impact that recent high petrol prices have had on influencing the pattern of new vehicle purchases by Australian motorists. With the rise in petrol prices, sales of new large passenger cars (sedans) fell almost 20 per cent in 2006, while sales of small passenger cars increased by about 20 per cent. The impact of lower petrol prices under the CPRS is likely to reduce this purchasing trend towards more environmentally friendly vehicles, with purchasing decisions made in one year having impacts for many years until vehicles purchased in that year are replaced. Impacts for diesel Diesel is the dominant fuel for all kinds of commercial and industrial on-road and off-road vehicles. With economic growth, demand for diesel has increased markedly in recent years and Caltex projects that this growth will continue by around 4% per annum on trend. Under the White Paper proposals, a CPRS fuel credit payment will be made to agriculture and fishing businesses for three years and heavy on-road transport businesses for one year. Once this fuel credit payment ceases (it is subject to revision in 2013), these businesses will

4 be liable for a carbon cost even though there is limited capacity for a reduction in diesel use as heavy vehicles have little ability to downsize or improve their efficiency. This is because commercial users of diesel already focus on fuel efficiency to reduce operating costs and commercial vehicles must carry loads that can t be downsized. In contrast, motorists using petrol can downsize without affecting passenger capacity or switch to more fuel efficient models. Costs The lack of positive impact on emissions, as evidenced in the above analysis, must be compared to the costs which will be imposed on fuel suppliers who are required to purchase permits for customers emissions. The CPRS mechanism is disproportionately costly and inefficient in reducing emissions because of the transactional costs and risks associated with purchasing permits. By modelling the cost of carbon as projected in the White Paper, it is estimated that the fuel suppliers will spend approximately $8 billion between 2010 and 2017 on the purchase of permits for petrol alone, which contributes 8% of Australia s GHG emissions. This means that the industry will be liable for the purchase and churn of $8 billion worth of permits for petrol to achieve an outcome in 2017 where petrol emissions are the same as in Projections show that fuel suppliers will outlay over $30 billion by 2017 on permits for emissions from all liquid fuels (including petrol, diesel and jet fuel), which will have a negligible impact on emissions. When comparing this to the modelled outcome of the CPRS on consumer demand and its impact on emissions, the costs of the scheme greatly outweigh the benefits.

5 ATTACHMENT - summary charts Impact of CPRS on petrol price (first 3 years) Carbon price $23/t CO2 $40/t CO2 Petrol price w/o CPRS (Acpl) Carbon cost (Acpl) Excise reduction (Acpl) Petrol price with CPRS (Acpl) Impact of CPRS on diesel price (first 3 years) Carbon price $23/t CO2 $40/t CO2 Diesel price w/o CPRS (Acpl) Carbon cost (Acpl) Excise reduction (Acpl) Diesel price with CPRS (Acpl) Short run impact on emissions (first 3 years) Petrol w/o CPRS Petrol with CPRS % reduction in price 1.0% Increase in demand 0.15% Increase in emissions 0.15% Note: short run price elasticity is 0.15 Long run impact on emissions Petrol price (Acpl) 120 Carbon $40/ tco2 (Acpl) 10.0 % increase in price 8.4% % reduction in emissions (long run elasticity of 0.4) 3.2% Emissions from petrol (2008) Reduction in emissions by Mt CO2 1.3Mt CO2 Note: impact on diesel would be less because of the reliance on diesel by heavy vehicle transport Annual emissions (Mt CO 2) Cost of permits to fuel suppliers $23/tCO 2 (A$billion) Cost of permits $40/tCO 2 (A$billion) Petrol sales Diesel sales

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