Last Sunday, the Federal Minister for Climate Change and Energy (the Hon. Chris Bowen MP) and the Federal Minister for Infrastructure, Transport, Regional Development and Local Government (The Hon. Catherine King MP) jointly announced that the Australian Government would soon introduce legislation regulating the fuel efficiency of new light vehicles – that is, passenger cars, SUVs, and light commercial vehicles – sold in Australia.

The Ministers stated that the Australian Government’s intent was for the legislation to be approved by the Australian Parliament by mid-year, with a view to the laws taking effect from 1 January 2025.

The announcement signals the end of nearly two decades of public policy debate in Australia about whether our country should regulate the fuel efficiency of new vehicles. During this time many developed economies have moved to implement fuel efficiency standards, but Australia’s desire to preserve its fragile domestic car manufacturing industry made the development of these standards particularly challenging.

The departure of Australia’s last vehicle manufacturer – Holden in October 2017 – provided a somewhat unwanted simplification of the process. But it still took another 6 years to get to the point of finalizing a framework for national vehicle fuel efficiency standard. Much of this debate focused on whether the standard should focus solely on passenger cars and SUVs, or should also embrace targets for light commercial vehicles.

While much of the design of the legislation has now been completed, one of the remaining issues to resolve relates to the rate of fuel efficiency improvement that will be enacted under the final version of the legislation.

The Government has released a Discussion Paper that proposes three options for the progressive lowering of the fuel efficiency thresholds – one for passenger vehicles and one for light commercial vehicles. These options can be summarized as follows:

  • Option A (Slow Start): A 34% reduction in average fuel consumption for new passenger cars and 14% for new light commercial vehicles (e.g. Utes) by 2035. This aggregate 5-year reduction amounts to an average annual reduction in emissions intensity of 6.8% and 3.8% for passenger vehicles and light commercial vehicles respectively.
  • Option B (Fast start and flexible): A 61% reduction in average fuel consumption for new passenger cars and 62% for new light commercial vehicles (e.g. Utes) by 2035. This aggregate 5-year reduction amounts to an average annual reduction in emissions intensity of 12.2% and 12.4% for passenger vehicles and light commercial vehicles respectively.
  • Option C (Fast Start): A 77% reduction in average fuel consumption for new passenger cars and 74% for new light commercial vehicles (e.g. Utes) by 2035. This aggregate 5-year reduction amounts to an average annual reduction in emissions intensity of 15.5% and 14.7% for passenger vehicles and light commercial vehicles respectively.

The above options are assessed in the Discussion Paper with the government identifying Option B as its preferred option. The Paper has been released for stakeholder feedback over the next month.

The Discussion Paper estimates that its’ preferred option will cost the Australian economy $46.5B (in terms of technology costs to industry, electricity costs to consumers, Battery replacement costs for EVs based on 12-year life, and industry compliance costs) over the next 25 years. The Paper goes on to suggest that these costs will be more than offset by an estimated $143B in community savings (in terms of fuel savings to consumers, reduced vehicle maintenance costs for consumers, GHG emissions reductions, and the health benefits of cleaner emissions).

“The analysis of the economic savings cited in the Government’s Discussion Paper appear ‘a little odd’ when compared with other external data, particularly in relation to the derivation of average annual fuel costs and the value assigned per tonne of GHG emissions reduction”, said ACAPMA CEO Mark McKenzie.

“The Paper considers the average and petrol diesel price in a period up to the end of Calendar Year 2022 – where prices spiked significantly (See Figure 7) – but fails to take account of the easing in average petrol price through 2023, effectively distorting the average petrol and diesel price for the purpose of the analysis”, said Mark.

“The analysis also calculates total GHG emission savings (Section 5.2) based on an average unit price of $60 per tonne and indexed by 3% per year. This price is double the current Australian Carbon Credit Unit price of $30 per tonne, suggesting that the assumed GHG emissions savings are likely to have been overestimated by a factor of 2”, added Mark.

But if you were to set aside these issues and accept the central thrust of the Paper that the implementation of this standard will more than double the rate of EV sales from the current rate of 7% in 2023 to more than 10% in 2030, then a key question arises in respect to the Australian Government’s projections on future fuel excise.

The 2022 Federal Government budget papers forecast that fuel excise will likely grow from $13.9B in 2022-23 to more than $16.B in 2025-26.  Such a projection appears out of step with a fuel efficiency standard that will dramatically reduce fuel consumption in coming years.

This observation begs the question about what the Australian Government plans to do about fuel excise, as the current regime is likely to become economically insignificant and/or manifestly unfair if the Australian Government plans to protect its future projections of annual excise revenue by lifting excise rates on motorists who cannot afford to purchase higher priced EVs.

This issue was flagged by the productivity commission in an October 2017 Report , yet successive governments have failed to address this issue, effectively giving wealthy EV owners a free ride on Australia’s road network.

While the Federal Treasurer and the State/Territory Treasurers committed late last year to investigate a means of closing the tax loophole for EV users in light of a recent Federal Court decision ruling that a Victorian Government tax on EV users was illegal, this process is understood to be simply looking at an alternative way to tax EVs outside of the existing Fuel Excise system.

ACAPMA firmly believes that it the release of the draft National Vehicle Fuel Efficiency Standard signals the urgent need for change.

It is past time for the Federal Government to review Australia’s fuel excise and consider replacing this system with a road user charge in line with the recommendations of the 2017 Productivity Commission Report (or abolishing the federal tax altogether and allowing States/Territories to increase annual vehicle registration charges to compensate for their lost share of fuel tax revenue).

“This is not an issue that will go away – the longer successive Federal Government’s ignore this issue, the greater the problem will become”, concluded Mark.

ACAPMA

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