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OZONE PROTECTION (LICENCE FEES - IMPORTS) AMENDMENT BILL 2003

2002-2003



THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA



HOUSE OF REPRESENTATIVES



OZONE PROTECTION (LICENCE FEES – IMPORTS)
AMENDMENT BILL 2003



EXPLANATORY MEMORANDUM



(Circulated by authority of the
Minister for the Environment and Heritage,
the Honourable Dr David Kemp, MP)

OZONE PROTECTION (LICENCE FEES – IMPORTS) AMENDMENT BILL 2003

OUTLINE

This bill allows regulations to be made that set the amount of levy that is payable by importers of substances that require a Controlled Substances Licence under the Ozone Protection and Synthetic Greenhouse Gas Management Act 1989 (OPSGGM Act). The levy is collected to recover the Commonwealth’s costs associated with assisting industry phase-out their consumption of the ozone depleting substances (ODS) hydrochlorofluorocarbons (HCFCs) and methyl bromide as well as minimise their emissions of these ODS and specific synthetic greenhouse gases (SGG) used as replacements to ODS.


The bill will amend the Ozone Protection (Licence Fees – Imports) Act 1995 to:–

• enable regulation under the amended Act to introduce a levy payable upon the import of certain SGGs, namely hydrofluorocarbons and perfluorocarbons, into Australia. The levy must not exceed a rate of $165 per tonne;

• set a maximum limit for the existing levy payable upon the import of ozone-depleting HCFCs in Australia at $3000 per ozone-depleting tonne;

• set a maximum limit for the existing levy payable upon the import of methyl bromide into Australia at $135 per tonne.

Financial impact statement
The net effect of these amendments on the fiscal bottom line is zero as the additional revenue generated through these amendments is intended to recover the additional expenditure incurred by the Commonwealth in implementing the amended Ozone Protection Act 1989 (ref: Ozone Protection and Synthetic Greenhouse Gas Legislation Amendment Bill 2003 ). The additional revenue raised through these amendments is estimated at $1.0m in 2003-04 and $1.0m in 2004-05.

Regulation Impact Statement and Cost Recovery Impact Statement
(see overpage)


Regulation Impact Statement

Reference Guide to Ozone Protection Regulation Impact Statements

This Regulatory Impact Statement (RIS), examines options for resourcing the delivery of Environments Australia’s ozone protection programme in line with the Commonwealth’s national and international obligations.

In considering this component of the RIS package, the reader should also consider the RIS on the management of import, export and manufacture of synthetic greenhouse gases (SGG) on page 47 of the Explanatory Memorandum to the Ozone Protection and Synthetic Greenhouse Gas Legislation Amendment Bill 2003 (OPSGG Bill) and the RIS considering options for the uniform management of end-use applications for both ODS and SGG (page 69 of the OPSSG Bill Explanatory Memorandum).

Introduction

Environment Australia is responsible for carrying out the Commonwealth’s obligations under the Ozone Protection Act 1989 (OPA). As a result Environment Australia has on-going responsibility for the implementation and administration of the Act including the administration of a licence and quota scheme for ozone depleting substances (ODS) included under Schedule 1 of the Act and the facilitation of a shift by industry to ozone benign alternatives through sponsoring research and development, informing industry of regulatory requirements, monitoring usage of ODS and other measures.

All new ODS currently available to the Australian market are manufactured overseas. Importers require a licence under the Act that is issued by and administered by Environment Australia. Licence conditions vary according to which species of ODS is procured. However, all licence holders must pay a licence application fee that is intended to cover relevant EA administrative costs. In addition, companies licenced to import the most widely used varieties of ODS pay an activity fee on each tonne they import. Revenue from this source is directed to developing alternatives for industries that rely to a high degree on access to ozone depleting inputs.

The original aim of the OPA was that meeting Environment Australia’s administrative and industry support activities be financed through fees paid by industry. However, commencing in 2010, Environment Australia’s costs are expected to exceed the combined revenue available from accumulated financial reserves and future revenue from payments under existing fee structures. In order to meet obligations extending through to 2020 when ODS will no longer be needed for most applications, Environment Australia is seeking increases of 50 percent in selected licence application fees, increases of 50 percent in activity fees and the introduction of fees for certain administrative functions now performed free of charge.

Licence application fees have not risen since 1995. In the ensuing period, normal parameter adjustments in the average cost to Environment Australia of employing staff to process licence applications have been experienced. Second, in the next 10-15 years the revenue which Environment Australia obtains from activity fees will decline sharply as legislative limits covering industry access to imports of two prominent ODS - hydrochlorofluorocarbons (HCFCs) and methyl bromide used for horticultural purposes - progressively restrict imports. A decline in revenue from activity fees will occur at the same time EA faces the greatest demand on its resources to assist industry in adjusting to ozone benign alternatives.

Background

ODS are used primarily as a refrigerant in domestic and commercial refrigeration and air conditioning equipment. They also act as streaming agents in fixed and portable fire extinguishers and metered dose medical inhalers, as blowing agents in the manufacture of rigid polyurethane foam, as sterilising agents, as solvents for cleaning electronic and other equipment and as fumigants for disease and pest control.^[1] When vented into the atmosphere these substances damage the ozone layer protecting humans, animals, plants and building materials from the harmful effects of UV-B radiation.

Licences issued under the OPA are a means of reducing Australian consumption of ODS in line with, and in some cases ahead of, Montreal Protocol on Substances that Deplete the Ozone Layer 1987 (Montreal Protocol) phase out requirements for controlled ODS. Licences also provide a vehicle for Government to monitor and enforce the requirement that a licence holder only imports ODS from, and exports ODS to, countries which are signatories to the Montreal Protocol at volumes agreed under industry limits and quotas established under the OPA. Licensing also provides a vehicle for mandatory reporting of import and export activity by licensees.

At present, there are 17 licences issued under the OPA:

• eight controlled substances licences for the import of HCFCs;

• five controlled substance licences for the import of methyl bromide;

• two essential use licences for the import of chlorofluorocarbons (CFCs); and

• two used substance licences for the import of halon and CFCs for destruction.

With the exception of essential uses licences which extend over a variety of time frames, each licence extends for two years and a fee is payable upon application or renewal. Fees stand currently at $10,000 for a controlled substance licence, $10,000 for a used substance licence and $2,000 for an essential uses licence. In addition to these measures, activity fees are payable by controlled substance licence holders at a rate of $2,000 for each ozone depleting tonne^[2] of imported HCFC and $90 for each metric tonne of imported methyl bromide.

Revenue from licence application and activity fees is paid into an Ozone Protection Reserve (OPR) which was established in 1995 under Section 65B(1) of the OPA. The Explanatory Memorandum to the Ozone Protection Amendment Bill 1995 which established the Reserve states that licence application fees will cover the costs of administering the licence scheme including assessing licence applications, issuing licences, monitoring licence activity, keeping records of quota allocations, transfers and variations and reporting to the Montreal Protocol Secretariat on annual activity. The Memorandum states that activity fees will be used to fund the furthering of an industry phase-out program for HCFCs and methyl bromide and related public awareness campaigns.

The Memorandum notes that the net effect of licence application and activity fees on Environment Australia revenue should be neutral. This means that all reasonable costs incurred by Environment Australia in administering its obligations under the OPA should be covered through contributions from industry. More specifically, it requires that sufficient fees be generated from licence applications to cover the reasonable costs of licence scheme administration and that sufficient funds be generated from activity fees to cover the reasonable costs of a program for assisting industry to move to alternatives to HCFCs and methyl bromide.

Three factors oblige EA to support an industry transition program:

• the Montreal Protocol, which Australia has ratified, calls for Parties to adopt appropriate legislative or administrative measures to control, limit, reduce or prevent human activities likely to have adverse effects on the ozone layer, in accordance with the means at its disposal and its capabilities. Facilitating industry transition from controlled ODS helps to reduce these activities by accelerating a shift to alternatives;

• the OPA has the stated objective of using best endeavors to encourage Australian industry to replace ozone depleting substances and achieve a faster and greater reduction in the levels of production and use of these substances than are provided for in the Protocol, to the extent that such replacements and achievements are reasonably possible within limits imposed by the availability of suitable alternative substances and appropriate technology and devices^[3]; and

• transitional arrangements for industry form an important part of Australia’s broader ozone protection program as set down in the 1994 ANZECC Revised Strategy on Ozone Protection.^[4] The Revised Strategy acknowledges that while users of ODS should bear the costs of eliminating use and emissions of these substances, adjustment costs may fall unreasonably on some sectors. It establishes the general policy principle that, in these circumstances, unreasonable economic impacts should be alleviated^[5].

Industry support for the principle of a transition program is well documented and was described in the Second Reading Speech for the Ozone Protection Amendment Bill 1995:

“...industry supports the creation of a trust fund to ensure that revenue collected from licensees at the time of peak activity ... can be spread and utilised at the time of lower activity...when the need for information programs will be most critical if Australia is to minimise the economic impact of the final stages of the phase-out program.”

To this point, the majority of revenue generated by EA to fund an industry transition program has been directed to supporting research and industry awareness connected with alternatives to methyl bromide in horticultural applications. Relatively small amounts of funding have been directed to alternatives to the use of HCFCs in foam and other areas of secondary industry.

The problems faced by horticultural users of methyl bromide centre on the fumigation of soil and the absence of a single alternative substance which achieves not only effective product outcomes but minimises adverse effects on the environment and human health. This problem will be short-lived given that methyl bromide for horticultural application is scheduled for complete phase-out by 2005, through industry limits set under the OPA. However, as methyl bromide used in horticulture declines its use as a fumigant for quarantine and pre-shipment (QPS) purposes is set to escalate and to add substantially to Australia’s ODS emissions.^[6] QPS applications include the fumigation of rice, cottonseed, hay, fruit and vegetables and timber exports to control pests and diseases and treating imported wood and wooden products to achieve similar outcomes.

The Ozone Protection Reserve does not cover all ancillary costs connected with administering the legislation. These costs are associated with:

• compliance and enforcement actions associated with the licensing and quota systems;

• storing and destroying seized or forfeited goods;

• reforming the legislation;

• developing broader policy initiatives in the area of ozone protection; and

• administering applications for Section 40 exemptions.

Revenue for these purposes is drawn direct from the general appropriations of Environment Australia.

Section 40 of the OPA allows exemptions from compliance with the Act to be granted by the Minister for the import, export, distribution, use and manufacture of products which contain or rely upon CFCs, halons, carbon tetrachloride and methyl chloroform where these products are essential for medical, veterinary, defence, industrial safety and public safety purposes and no practical alternatives are available, a law prescribes that the product be used and no practical alternatives exist or the product is for use in conjunction with the calibration of scientific, measuring or safety equipment.

The Problem

Since the mid-1990s, the overall revenue generated through licence application fees and activity fees has exceeded expenditure by Environment Australia in administering both areas of the legislation and facilitating a program of industry transition. However, neither accumulated funds nor the on-going revenue collected by Environment Australia under the current fee structure are adequate to meet forecast revenue requirements. Two problems are apparent in relation to the adequacy of Environment Australia’s long-term revenue stream.

First, the average total cost of each Environment Australia staff member assigned to administer licences has increased over the past seven years as a result of normal parameter adjustments. In addition, contrary to the Reserve’s original intent, to date Environment Australia has not recovered all costs associated with these staff, including superannuation, leave and accommodation. Consequently, when all costs associated with licence administration are taken into account, total costs have risen to the point where they will shortly exceed the revenue available to Environment Australia from licence application fees and relevant accumulated reserves. Under the current fee structure, operating costs exceeded operating revenue in 2001/2002. When financial reserves are taken into account, operating costs associated with these activities are expected to exceed available revenue by 2010.

The consequences of a revenue shortfall are a diversion of resources from other areas of Environment Australia to support ozone protection activities or a reduction in administrative effectiveness by EAs Ozone Protection Section. In the former case, resources could be taken from other important environmental policy initiatives. In the later case, Environment Australia would be less well placed to process licence applications and renewals in a timely manner or to prevent illegal imports of ODS by monitoring licence activity. Delays could restrict the availability of ODS to industry and place an additional compliance burden on licence holders.^[7] Illegal imports of HCFCs and other ODS may lead to higher levels of avoidable emissions and under-cut legitimate industry operators who are in compliance with legislative requirements.

Second, revenue from activity fees will decline markedly in the period ahead. Within a decade, these fees together with relevant accumulated reserves will be insufficient to cover the expected costs of an EA funded program for industry transition from HCFCs and methyl bromide.

The OPA calls for a total phase-out of imports of methyl bromide for horticultural applications by 2005 and for an all but complete phase-out of imports of HCFCs by 2015. In the case of methyl bromide for horticultural use, imports will decline from 340 metric tonnes in 2002 to zero tonnes in 2005. In the case of HCFCs, imports will decline from 190 ozone depleting (ODP) tonnes in 2002 to 2.5 ODP tonnes in 2015. Table 1 below sets out activity fees projections for the period ahead, under the current fee structure and the legislation’s prescribed phase-out schedule.

Table 1: Expected Revenue from Current Activity Fees 2001-2 to 2020-21 ($’000 constant 2000-2001 prices) Source: Environment Australia.

At the same time its revenue from activity fees is declining sharply, Environment Australia may face greater demand for resources to facilitate a program for industry transition for two reasons.

1. methyl bromide for QPS applications will be increasingly sharply and creating a pool of chemicals with important adverse effects on Australian efforts to contain emissions of ODS; and

2. a decline in the availability of HCFCs and methyl bromide for horticultural use reduces the availability of both substances to industry and strengthens the need for Government assistance to facilitate a smooth shift by users to alternative substances or processes.

As substance availability declines, those areas of industry which have not already transitioned using readily available methods may be forced to adapt using more costly and complex alternatives. Areas in which alternatives are less easily accessed include soil fumigation applications that will still rely on methyl bromide and the manufacture of certain kinds of rigid polyurethane foam that is expected to rely on the availability of HCFCs until at least 2006.^[8]

Environment Australia estimates that an additional $2 million revenue will be required to administer the OPA and fund the industry transition program for Scheduled ODS to 2020. This revenue will be directed to sponsoring research and development and public awareness but may go beyond these established policy approaches to include activities such as advanced forms of atmospheric monitoring for ozone depletion. These activities accord with existing policy principles that include requirements for Government to address any unreasonable economic impacts associated with a move away from ODS and to raise awareness of all key factors relevant to managing the transition to ozone benign technologies.^[9]

A significant portion of additional revenue from a new fee structure will be strategically targeted towards research and development to assist all industry participants with the transition to non-ozone depleting and environmentally acceptable alternatives. Australia has a history of limited investment by industry in research and development due, in part, to problems experienced by companies in raising capital and securing ownership rights over their inventions. Under the Ozone Protection Reserve, money can be targeted so that research and development outcomes are accessed by business of all sizes.

Summary of Problems

• by 2010 the costs to Environment Australia of administering the licence scheme will exceed revenue available from licence application fees and relevant accumulated reserves. Inadequate administration may contribute to increased illegal imports and higher levels of avoidable emissions of ODS as well as to higher regulatory compliance costs for industry and market disruption caused by undue restrictions on access;

• EA estimates that over the next 20 years it will be required to outlay substantially more than the funds available from activity fees and relevant accumulated reserves, in order to facilitate the transition by industry away from two major ozone depleting substances - HCFCs and methyl bromide. Failure to provide support for transition may place undue cost pressures on certain areas of industry including horticulture and the manufacture of foam. It may also prolong the use of ODS and the subsequent risk of avoidable emissions. These pressures conflict with nationally agreed policy principles for ozone protection; and

• any shortfall in revenue from licence application fees and activity fees contravenes a 1995 legislative objective for the administrative industry transition costs of Environment Australia be covered fully from industry contributions as part of a general objective for achieving revenue neutrality. Revenue deficiencies therefore contravene agreed principles of corporate governance for Environment Australia.

Options

Four approaches or options arise in connection with the problems noted above:

Option 1 offers the advantages of minimal additional costs associated with Environment Australia administering the licensing scheme and associated industry compliance. The disadvantages fall into three categories:

1. the prospect of higher emissions of ODS through illegal imports and the prospect of prolonged use of these substances in industries with few current alternatives;

2. disruption in supply of ODS to end-users and higher regulatory compliance costs for licence holders, from delays and other inefficiencies in licence scheme administration; and

3. unreasonably high costs of transition for some areas of industry.

This Option is not considered viable because it contravenes key tenets of Australia’s ozone protection program covering limits on ODS emissions and equity in industry transition arrangements.

Option 2 offers the advantages of retaining existing administrative arrangements and limiting the risk of Environment Australia extending beyond reasonable limits in its support for industry transition. The disadvantages of the Option include failing to address the problem of a future revenue shortfall to meet the costs of administering the licence application scheme and contravening minimum accepted legislative and policy objectives for equity in industry transition arrangements. For these reasons, this Option is not considered viable.

Option 3 offers the advantage of simplicity, in the sense that it retains existing administrative arrangements including current fee structures. The disadvantages include drawing resources away from other policy areas within the Department of Environment and Heritage or other areas of Government and contravening the original policy objective of revenue neutrality in fee structures. Contravention of revenue neutrality requirements means that this Option is not viable.

Option 4 offers the advantages of providing funds commensurate with Environment Australia’s forecast cost structure, ensuring that the original policy objective of revenue neutrality continues to be achieved and facilitating industry transition to ODS alternatives in a manner consistent with an identified need and established policy principal. The disadvantages of this Option include the need for minor revisions to arrangements for administering licence application and activity fees and the impact which higher fees may have on the price of ODS faced by industry and consumers. These factors suggest that Option 4 is viable but requires a detailed evaluation of its impact.

Proposed Amendments

Environment Australia is proposing a 50 percent across-the-board increase in licence application fees and activity fees as well as the introduction for the first time of an application fee for exemptions under Section 40 of the OPA. In keeping with existing arrangements for other licenses, no refund of Section 40 exemption fees will apply in the event the application is unsuccessful. Table 2 below compares the existing and proposed fee structures.

Table 2 - Summary of Existing and Proposed Fee Schedules. *Activity fees for methyl bromide are calculated on a metric tonne basis rather than ODP tonne.

The objectives of the proposed increase in licence application fees is to generate revenue sufficient to satisfy the original legislative requirement for revenue neutrality in relation to Environment Australia assessing licence applications, issuing licences, monitoring licence activity, keeping records of quota allocations, transfers and variations and reporting to the Montreal Protocol Secretariat on annual activity.

The increase seeks to avoid unnecessary emissions of ODS and undue delays in access and higher compliance costs for the distributors and end-users of these substances, caused by a lack of administrative resources. An increase of 50 percent equates broadly to the rise in relevant Environment Australia staff costs since 1995. The introduction of a licence application fee for Section 40 exemptions reflects the fact that these exemptions absorb substantial administrative resources within Environment Australia whose costs should be covered through industry contributions in accordance with the principle of revenue neutrality.

The objectives of the proposed increase in activity fees are threefold:

• to meet an expected shortfall in revenue needed to promote awareness and help facilitate the shift by industry away from HCFCs and methyl bromide;

• to extend transition arrangements to new types of environmental protection activity such as atmospheric monitoring; and

• to satisfy an original legislative requirement for revenue neutrality.

The increase seeks to avoid market disruption which may arise from some industries facing undue or unreasonable pressure to move from ODS to ozone benign alternatives. An increase in activity fees of 50 percent for HCFCs and methyl bromide will generate revenue sufficient to meet the difference between the revenue that Environment Australia requires for its proposed industry transition program and funding available from a combination of accumulated reserves and existing activity fees.

It is not proposed that the new licence and activity fees be indexed to the Consumer Price Index or other measures of general prices increases. However, the new fee structure will be reviewed from time to time in close consultation with industry to determine its adequacy. Environment Australia’s proposed new fee structure does not

seek to cover the costs associated with plans by Environment Australia to introduce a nationally uniform set of legislative controls over the end-use of ODS. These controls and their method of financing are discussed in a separate Regulatory Impact Statement (RIS).

Impact Analysis

A review of the impact of a shift to address revenue shortfalls for Environment Australia involves identifying and comparing the costs and benefits of the existing situation (or ‘base case’) against the costs and benefits that can be expected if the amendments proposed by Environment Australia are introduced under Option 4 (or ‘scenario for change’).

In line with Commonwealth Government requirements for the preparation of a Regulatory Impact Statement (RIS), the analysis of costs and benefits must be considered for each key stakeholder group - business, Government, consumers and the community.^[10]

Business

The immediate costs to business of the proposed amendments take the form of higher fees paid by licence holders.

Licence holders for HCFCs will face the highest increase by being required to pay an additional $2,500 each per year in application fees and an extra $1,000 per ODP tonne of imports, when fees are proposed to increase at the beginning of 2003. These fees will extend for the duration of their licenses, estimated to average between 8 and 10 years.^[11] The estimated total additional cost to industry over the period 2003 to 2020 is $1.36 million.^[12] Licence holders are all larger companies, many with international links. Accordingly, an increase in fees will not have an immediate impact on smaller enterprises.

Licence holders for methyl bromide will each be required to pay an additional $2,500 per year in licence application fees and an extra $45 per metric tonne on all imports of methyl bromide, beginning in 2003. In the case of methyl bromide for horticultural use, additional fees will extend only to 2005 when the level of permitted imports declines to zero in accordance with industry limits set under the OPA. Licence application fees and activity fees for the import of methyl bromide for QPS purposes will continue in perpetuity. Total fee increases for methyl bromide are estimated at an additional $324,400 over the period 2003 to 2020. License holders include a number of small-medium size enterprises.

Holders of used substances licenses will each face an extra $2,500 per year in application fees, at an additional total cost of $45,000 over the period 2003 to 2020. Holders of essential uses licenses will each face an extra $1,000 per year in application fees, at an additional total cost of $24,000 from 2003 to 2020. Finally, holders of Section 40 exemptions will each be charged an extra $1,500 per year commencing in 2004, at an estimated additional cost of $120,000 over the period 2004-2020. The holders of used substances licenses, essential use licenses and Section 40 exemptions are all larger enterprises, many with international ownership links.

Table 3 below summarises the impact of proposed fee increases across licence categories.

Table 3 - Anticipated Revenue from Existing and Proposed Licence Application and Activity Fees^[13] 2001 to 2020 ($’000 constant 2001 prices) (Existing fee revenues in brackets) Source: Environment Australia.

Based on the current number of licence holders, Option 4 involves industry paying an additional $1.876 million to Environment Australia over the period 2003 to 2020. However, it is expected that the vast majority of this amount will be passed on to consumers. Thus, the only significant cost incurred direct by licence holders and applicants for Section 40 exemptions will be associated with the inconvenience of having to adjust their prices to accommodate a higher cost structure.

There are no clear or immediate benefits to licence holders or Section 40 exemption holders from Option 4, although by helping to ensure the effective administration of the licence scheme including aspects of enforcement the this Option may assist legitimate legal importers by preventing illegal imports and limiting numbers of domestic competitors.

Most licence holders distribute ODS rather than use these substances as part of their own production process. Thus, these licensees are unlikely to be significant beneficiaries of expenditure by Environment Australia on a fee-based industry transition program that includes research and development into alternatives to HCFCs and methyl bromide. Indeed, licence holders may be disadvantaged by Environment Australia’s program to the degree that alternatives are developed which lie outside their established business interests. Section 40 exemption holders import ODS - such as halons and CFCs - which lie outside Environment Australia’s proposed industry transition program..

Government

The costs to Government are those of estimating the new fee structure and introducing and enforcing necessary legislative changes. It not expected that higher activity fees will encourage industry to understate their activity levels as part of periodic reporting to Environment Australia and require proportionately higher levels of Government monitoring and enforcement.

The costs of estimating a new fee structure and altering legislation are once off. They involve drafting relevant sections of the Ozone Protection Act Amendment Bill, informing industry of the changes being proposed and ushering the Bill through the Commonwealth Parliament. These costs are minimal given that the proposed new fee structure is already well developed and all licence holders are aware of changes.

The benefits to Government include:

• sustaining a position of revenue neutrality in line with the original legislative objective for ozone protection;

• avoiding any future need to divert resources to ozone protection from other areas of the Department of Environment and Heritage or Government;

• promoting and facilitating industry transition away from HCFCs and methyl bromide, in line with original legislative and policy objectives; and

• reinforcing Australia’s international reputation as an advocate of strong ozone protection measures, which may assist Australia in future global ozone protection negotiations.

Consumers

The costs to consumers from Environment Australia’s proposed amendments are those passed on by licence holders paying higher application and activity fees. In this case, consumers are defined as businesses which source their ODS from wholesalers and distributors who hold licences under the OPA as well as customers for the products or services which these businesses offer for sale.

An estimated $1.36 million or around 73 percent of total costs will flow to consumers of HCFCs who are expected to face a rise of $1 per kilo in the market price for bulk supply of the most widely consumed variant, HCFC-22 - from $12 per kilo to $13 per kilo.^[14] These consumers include auto product manufacturers, food and chemical manufacturers, supermarkets, motor dealerships, building owners and refrigeration engineers. Their customers include final purchasers of vehicles, food, clothing, other convenience goods, office space and a range of other products.

There is no readily available data on how a rise may impact on each consumer group or the people dependent on the goods and services they provide. This is due in part to the absence of industry associations that garner the views of end-user interests. However, HCFC licence holders have indicated that any adverse impact is likely to be small given that ODS make-up a small proportion of consumer final cost structures and the price effect of Government licence fees tends to be far outweighed by exchange rate variations and other factors.^[15]

An estimated $324,400 or around 17 percent of the amount will flow over two years to consumers of methyl bromide - around one fifth to users in horticulture and the remainder to users for QPS. Fee rises will see the average market price for methyl bromide increase by up to 15 cents per kilo from $7.50 per kilo to $7.65 per kilo.^[16]

Methyl bromide for horticulture and QPS applications is imported by five companies who on-sell to a range of consumers. Approximately 28 percent of total imports are directed to horticultural use and the remaining 72 percent to QPS. No precise data is available on its current end-use although available estimates suggest that for horticulture more than 30 percent of the substance is used in the production of fruit and vegetables produced around Bundaberg, 20 percent in the production of strawberries, 13 percent in the production of flowers and 9 percent in the production of glasshouse products within South Australia.^[17] The majority of these end-users are small businesses. For QPS, the major users of methyl bromide are grain exporters (29 percent), cottonseed exporters (22 percent), hay exporters (12 percent) and timber, wooden products and wooden palleting associated with transport of a range of commodities (18 percent).^[18] Again, a number of end-users are small businesses.

There is no readily available data on how a rise in licence and activity fees may impact on down-stream consumers of methyl bromide including those at the point of end-use. However, licence holders have indicated that, for the horticultural industry at least, a fee-induced rise in the price for methyl bromide may place substantial pressure on producers of flowers and strawberry runners who have no ready alternatives and have recently experienced steep increases in the cost of methyl bromide as a result of exchange rate changes and industry limits on imports. Representatives of horticultural growers re-affirmed this position and expressed opposition to any fee increase.^[19]

Importers of methyl bromide used for QPS and QPS industry contacts have indicated that any fee increases would be passed on in their entirety to the end user. The extent of effect this would have on the industry was not agreed upon. The majority of importers reported that any further increase would be detrimental. However other industry QPS contacts suggested that the increase would be negligible. It was reported that any increase would be a disadvantage in the international market making the increase undesirable but not disastrous.

Approximately $45,000 or 2.4 percent of the amount will flow to holders of a used substance licence. Currently, there are two licence holders in this category - a company which stores and destroys halons from overseas and a company which uses chlorofluorocarbons (CFCs) for scientific research. Neither is a small business. One licence holder indicated that it would not be renewing its licence and that the proposed fee increase was therefore irrelevant to its operations. The other indicated that higher fees would not have a substantially adverse impact on its operations or the activities of its customers.

An estimated $24,000 or 1.3 percent of total costs will flow to holders of an essential uses licence. In turn, most of this amount is expected to be passed on to customers. There are currently two firms in this licence category, both of which are major pharmaceutical companies manufacturing metered dose medical inhalers for the treatment of asthma. However, at least one of these businesses is expected to transition from ODS to other substances before Environment Australia’s proposed fee increases take effect. The other has not indicated that higher fees will have a significant adverse impact on its profitability or the price of its products.

Finally, $120,000 of the amount or 6.4 percent will be paid by organisations with Section 40 exemptions. Current exemption holders include airlines, the military and major pharmaceutical companies. Their customers are airline passengers, the Defence Force and purchasers of a range of pharmaceutical products. These organizations indicated that higher fees will be passed along the supply chain. However, there was no evidence put forward to suggest that consequent rises in the price of goods or services would substantially disadvantage customer groups.

Benefits to consumers arise from Environment Australia using part of the additional revenue that it collects from higher fees to support research and other activities aimed at facilitating a shift to ozone benign alternatives. That facilitation will enable producers to adopt alternatives at a lower cost than might otherwise apply and provide scope for subsequent cost savings to be passed on to customers. Insufficient data is available to determine whether these benefits exceed the higher costs which consumers will face as higher fees are passed on by ODS importers and wholesalers. An important factor preventing a full assessment is the absence of data on what kinds of additional research and public awareness projects will be funded and in which areas of industry.

Community

There are no costs to the community from Environment Australia’s proposed amendments.

The benefits to the community from an increase in licence application fees emerge from an enhanced ability of the Department of Environment and Heritage or Government to address environmental and other issues that go beyond ozone protection. By avoiding a diversion of resources from other areas of the Department to fund administration of the ozone protection licence scheme, a higher fee structure will enable other Government functions to proceed unhindered. Insufficient data is available to identify the nature of these gains.

The benefits to the community from higher activity fees are also difficult to determine. The fees will be used to ease the adjustment pressures faced by industry in complying with phase-out targets prescribed under the OPA. However, it is not clear whether or to what degree this will result in lower levels of ODS emissions by allowing phase-out targets under the OPA to be achieved at an earlier date or improving the recovery of used substances. Much depends on the individual research and other projects receiving funding - a factor which has still to be determined.

In the event that an earlier phase-out and improved recovery is achieved, environmental gains in the form of lower levels of depletion of the ozone layer can be expected. Less depletion will result in a lower incidence of skin cancers and cataracts in humans, less damage to human immune systems, reduced pressures on the health care system and improved quality of life, higher industrial productivity and an extended duration for working lives, improved agricultural and forestry productivity, enhanced productivity and sustainability of Australia’s marine and other natural resources, a lower incidence of diseases among animals and a longer product life for UV-B sensitive building materials including plastics and paints. ^[20]

It is not possible to quantify these benefits due to the difficulty in gauging the future course of the proposed transition program. Nevertheless, such gains are tangible and could be significant. The global benefits of international action by signatories to the Montreal Protocol are well documented in a recent Canadian study which point to global gains from the Protocol in the period 1987-2060 of more than US$459 billion in 1996 prices, consisting of US$238 billion from reduced damage to fisheries, US$191 billion from reduced damaged to agriculture and US$30 billion from reduced damage to building materials. These estimates exclude dollar values for human health related benefits which the report acknowledged as highly significant.^[21]

In a recent study of Australia’s share of the global benefits of the Montreal Protocol for the period 1989-2060, a Commonwealth Task Force estimated gains to Australia of AUS$7.4 billion in 1996 prices.^[22] This consisted of $4.6 billion in reduced damage to fisheries and agriculture, $2.3 billion in reduced damage to human health and $0.5 billion in reduced damage to building materials. Taken together, the Canadian and Task Force studies point to substantial advantages to Australia from maintaining high levels of international commitment to ozone protection measures.

Table 4: Summary of Impact by Stakeholder Group - Proposed New Fee Schedule

Sustainable Development

Ecologically sustainable development (ESD) has been defined for Australia as "using, conserving and enhancing the communities resources so that ecological processes so that ecological processes, on which life depends are maintained and the total quality of life, now and in the future, can be increased".

The proposed amendments to the Commonwealth’s ozone protection legislation support the Commonwealth Government's commitment to ESD. The Commonwealth's National Strategy for Ecologically Sustainable Development describes three core objectives of ESD. These are:

1. to enhance individual and community well being and welfare by following a path of economic development that safeguards the welfare of future generations;

2. to provide for equity within and between generations; and

3. to protect biological diversity and maintain essential ecological processes and life support systems.

Legislative changes to the commonwealth’s ozone protection legislation, will provide the greatest scope for meeting these objectives. Protection of the stratospheric ozone layer is essential guarding the welfare of future generations and for providing equity between both current and future generations as ozone depletion will initially have the greatest impact on the southern hemisphere.

Ozone protection is also critical in protecting biodiversity and maintaining essential ecological processes. Increased UV radiation due to ozone depletion has the potential to seriously disrupt natural ecosystems. Creating a strong national regulatory system in association of ratification of all amendments is the most effective way of Australia being able to ensure an effective response to this global problem.

Stakeholder Comments

The Australian Fluorocarbon Council (AFC) that represents the interests of all holders of HCFC licences and a major holder of a methyl bromide licence for horticultural use does not oppose the proposed increase in licence application fees from $10,000 to $15,000 paid every two years. In the event that an increase in fees is introduced part way through an existing licence period, the AFC believes that appropriate pro-rata adjustments should be made.

However, AFC opposes any increase in HCFC and methyl bromide activity fees. The Council considers that existing fees are adequate to meet the costs of Environment Australia’s industry transition program for ODS, under reasonable assistance arrangements.

Remaining licence holders for methyl bromide used for horticultural purposes are generally opposed to any fee increases on two grounds: the rise in administrative costs incurred by Environment Australia since 1995 has exceeded movements in the Consumer Price Index over the same period, and fee increases may place undue pressure on horticultural users of methyl bromide who in recent years have already absorbed sharp increases in substance prices as a result of shrinking import quotas, the declining value of the Australian dollar and high levels of import competition which restrict their ability to pass fee increases along the supply chain.

The end-users most effected by a rise in fees for methyl bromide are growers of flowers and strawberry runners who are least able to access alternatives in the event of price rises.^[23] These organizations were contacted through the Queensland Department of Primary Industry and the Queensland Fruit and Vegetable Growers Association (QFVG) who have taken an active interest in methyl bromide phase-out issues and represented the interests of growers in the 2001 Commonwealth Task Force review of ozone protection legislation.

QFVG has indicated that horticultural producers do not support a rise in licence fees to cover a higher Environment Australia administrative cost structure. The Association also opposes any increase in activity fees, at least until Environment Australia has discussed and agreed with industry the specific applications to which higher fee revenues will be directed. Although QFVG acknowledged the need to seek alternatives to methyl bromide, it noted that horticultural producers were highly sensitive to rising production costs.

Licensed importers of methyl bromide used for QPS and a number of QPS industry contacts have indicated that any fee increases would be passed on in their entirety to the end user. The extent of effect this would have on the industry was not agreed upon however the majority of importers felt that any further increase would be detrimental. However other QPS industry participants suggested that the increase would be negligible. It was, however, a widely held view that any increase would be a disadvantage in the international market making the increase undesirable but not disastrous.

Neither essential uses licence holders nor holders of used substances licences indicated opposition to higher licence fees. In a number of cases, holders expected to transition away from ODS before the new fee structure came into place. Where higher fees were to be sustained, the relatively small value of the increase was expected to have a minimal effect on licensees or end-users of their products and services.

Holders of Section 40 exemptions held mixed views on the proposed introduction of a fee. These organizations were evenly split in terms of their acceptance or rejection of EA's proposed new fee structure. Several organizations that supported the structure indicated that they would no longer need Section 40 arrangements by the time a fee was introduced. The majority acknowledged that higher fees would have a minimal impact on end-users of ODS subject a Section 40 exemption, as the fee was relatively small and part of it may be absorbed by exemption applicants. Several organizations noted that due to Government regulation in the aircraft and other industries, applicants had no choice but to use to ODS and were therefore unable to avoid a Section 40 fee. The overall tenet of comments was that although the principle of fee increase was not universally accepted, any rise would cause minimal disruption to the market.

Conclusion

Environment Australia is proposing an increase in the fees it charges industry to import certain ODS. One objective of higher charges is to limit avoidable emissions of these substances by enhancing the ability of Environment Australia to monitor illegal imports and assist certain areas of industry in transitioning towards ozone benign alternatives at an early date. Another is to satisfy corporate governance requirement for Environment Australia to operate under conditions of cost neutrality. Environment Australia’s proposed changes represent the only viable option for achieving these objectives, given that alternative approaches contravene one or more essential elements of Australia’s overall ozone protection program.

Beginning in most cases in 2003, Environment Australia is seeking increases of 50 percent in selected licence application fees, increases of 50 percent in activity fees and the introduction of fees for the administrative of industry applications for Section 40 exemptions now processed free of charge. If implemented, Environment Australia’s proposed fee structure will require that industry pay an additional $2 million over the period 2003-2020. The vast majority of higher costs will be passed on to consumers of ODS including auto product manufacturers, food and chemical manufacturers, supermarkets, motor dealerships, building owners, refrigeration engineers, horticultural producers and general fumigation businesses specializing in quarantine and pre-shipment work and their customers.

The direct environmental benefits of a fee increase are unable to be quantified. Difficulties emerge in estimating prevented emissions of ODS for three reasons:

1. No precedents are available to gauge higher emission rates from a reduction in effective enforcement of import licences by Environment Australia. Such enforcement has been fully resourced since licences were first introduced;

2. The rate of an accelerated shift by industry from ODS to ozone benign alternatives will depend on the specific measures contained in an enhanced industry transition program. Due to the extended time scale for this program, such measures have yet to be fully defined; and

3. A high cost is attached to adjusting existing models for measuring the environmental impact of ODS emissions to incorporate the effect of fee increases.

In the event that reduced emissions do emerge, there is a strong body of evidence to suggest that Australia will benefit in terms of reduced damage to fisheries and agriculture, human health, building materials and other factors. Overseas and Australian studies indicate that reduced emissions produce tangible community benefits that substantially outweigh the industry adjustment and other costs of containing ODS consumption. This provides prima facie evidence of tangible environmental gains in the event fee increases prevent ozone depletion.

The task of assessing the final impact of higher fees on industry and consumers is complicated by the wide number of organizations involved and the practical difficulties in achieving a consensus view in the absence of industry associations representing the interests of end-users of ODS.

Through their association - AFC - importers of HCFCs have indicated that their customers are likely to face an average $1 per kilo rise in substance prices as a result of higher fees, which equates to a price rise of around 8 percent. This is expected to lead to minimal market disruption for two reasons:

1. ODS make up a small proportion of the overall cost structures of most user businesses; and

2. the absolute size of the increase is substantially smaller than the effects of other ODS price determinants such as exchange rate variations and legislative-induced reductions in import volumes.

Irrespective of the degree of expected market disruption caused by the proposed fee increases, AFC does not support all elements of the new fee structure. While accepting the need to increase licence application fees to meet a rise in Environment Australia staffing costs since 1995, the AFC opposes a rise in activity fees that are directed to assisting transition by some parts of industry to ozone benign alternatives. The rationale in this case is that Environment Australia have not described the nature of the program in sufficient detail or demonstrated the merits of additional transitional assistance. There are also commercial considerations that centre on the likelihood that funding for transitional arrangements are likely to encourage some traditional users of ODS to move to other alternatives, in effect resulting in a reduction in the customers base for importers and wholesalers of ODS.

Suppliers and users of methyl bromide hold a less sanguine view than suppliers of HCFCs on the market effects of higher license and activity fees. They argue that the expected rise of $0.15 per kilo (a retail price increase from and average of around $9.00 to $9.15) will unreasonably reduce the profitability of users in the horticultural sector. This position hinges on two claims:

1. Any increase in Environment Australia’s staff costs above the Consumer Price Index is unjustified; and

2. Prices of methyl bromide for horticultural use have risen sharply in recent years as a result of exchange rate changes and legislative-induced import restrictions.

It is argued that these prices are already at, or close to the limits imposed by market competition. A fee increase would therefore place undue adjustment pressures on horticultural users producers.

In similar vein to suppliers of HCFCs, suppliers and users of methyl bromide for horticultural use oppose an increase in activity fees. They argue that even though assistance for industry to transition away from methyl bromide remains a desirable objective, further details of the program’s proposed new elements are needed before higher activity fee levels can be accepted.

The majority of importers of methyl bromide used for QPS reported that the impact on wholesale prices, from any fee increase, would be detrimental for exports. This position was dependant on foreign currency exchange rates with a lower Australian dollar placing considerable pressure on these industry participants. All contacted importers indicated that any fee increases would be passed on in their entirety to the end user. The areas of the industry which would be most effected were said to farmers and consumers. The extent to which this would affect the industry was not agreed upon, however the majority of importers reported that any further increase would be detrimental.

Other QPS industry contacts were not in favour of the fee increases but did not report severe consequences. They suggested that the increase would be negligible. It was reported that any increase would be a disadvantage in the international market making the increase undesirable not disastrous. The large majority of Australia’s hay and grain exports would be affected as they both require fumigation and there is no alternative fumigant. The proposed fee structure was generally supported by the exporters on the proviso that Environment Australia provides strong support and access to adequate funding to develop and prove alternatives to methyl bromide fumigation.

Data provided by holders of essential uses licences and used substances licences suggest that higher licence fees will have a minimal impact on the market. Licence holders do not oppose a higher fee structure. Although holders of Section 40 exemptions were muted in their support for the proposed introduction of an application fee, the majority considered such a fee would cause minimal market disruption. The fact that payment of a fee may arise from satisfying a Government regulation that ODS be used in specified applications does not overturn the legislative requirement for Environment Australia to secure payment direct from exemption applicants for its application processing costs. Should applicants seek reimbursement from Government, claims should be directed to the agencies responsible for such regulation.

With these points in mind, the following conclusions can be drawn:

• Environment Australia’s proposed increase in licence fees for all licence classes and applicants for Section 40 exemptions can be justified on the basis of actual increases in staffing costs since 1995, a legislative requirement for cost neutrality and support from most stakeholder groups. Cost neutrality principles override any sectoral opposition to fee increases which rely on the arguments that proposed fee rises exceed relevant increases in the CPI or the commitment to pay fees arises only from another form of Government regulation;

• Environment Australia’s proposed increase in activity fees for methyl bromide used for quarantine and pre-shipment can be justified on the basis of the substance will be required in increasing volumes in the period 2003-2020 for these purposes and revenues obtained through higher fees may therefore contribute to researching and promoting alternatives to an increasing important source of ODS emissions. Licence holders importing methyl bromide for QPS purposes have indicated whilst they do not necessarily support a higher licence and activity fee structure they are aware of the need for such measures and will be able to pass cost increases on to consumers.

Implementation

Option 4 could be implemented through changes to the Ozone Protection Act 1989 and related legislation and regulations.

Environment Australia will continue to work directly with AFC, QFVG and other industry participants to ensure comprehensive awareness of the new fee structure.

Review

Section 68 of the Ozone Protection Act 1989 provides the Minister shall, at the end of each financial year, prepare a report on the operation of the Act during that year and cause a copy of the report to be laid before each House of Parliament within 15 sitting days of that House after the preparation of the report is completed. Consequently, the operation of Option 1, as a provision of the Ozone Protection Act 1989, would form part of the annual report to the Commonwealth Parliament.

The Ozone Protection Act 1989 has been the subject of a comprehensive review (completed in January 2000) in accordance with the National Competition Principles Agreement.

Cost Recovery Impact Statement

Organisational Objectives

Environment Australia’s organisational objectives in relation to the protection of stratospheric ozone are identified in the 2002-2003 Environment and Heritage Portfolio Budget Statement (PBS). Relevant PBS outcomes include:

• Outcome 1 – The environment, especially those aspects that are matters of national significance, is protected and conserved.

Performance information relevant to Outcome 1 includes:

• The Commonwealth’s obligation to promote HCFC and Methyl Bromide phase out programmes and administration of the licensing and quota system under the Ozone Protection Act 1989 is met; and

• the phase out schedule in the Ozone Protection Act (the Act) is met for all ozone depleting substances (ODS).

The organisational objectives of the Australian Greenhouse Office in relation to the management of synthetic greenhouse gases are identified in the 2002-2003 Environment and Heritage PBS. Relevant outcomes include:

• Outcome 1 - The environment especially those aspects that are matters of national environmental significance, is protected and conserved

Performance information relevant to Outcome 1 includes:

• 1.5.1 Evaluating progress towards commitments under the convention and the Kyoto target, and improving the knowledge base on climate change

Current cost recovery arrangements fall into the Commonwealth’s two broad categories of cost recovery charges: fees for goods and services (ie. licence application fees for the import, export and manufacture of substances controlled under the Act); and, ‘cost recovery’ levies (ie. activity fees for the import, export and manufacture of controlled substances).

Existing Cost Recovery Arrangements

ODS are used in the following industries: air conditioning and refrigeration, fire protection and explosion suppression, agriculture and quarantine, foam and aerosol manufacture and solvent applications. Consequently, existing cost recovery arrangements are targeted are this discrete group in order to recover the cost of ODS regulated activity.

Costs are recovered through the fees described below on those persons at the top of the ODS supply chain (ie importers, exporters and manufacturers of ODS and ODS-containing products). Stakeholder consultation indicates that these charges are passed on to the public, through the supply chain of the gases to their ultimate end use and are supported by industry on the basis it represents the simplest, most cost-effective and reasonable way of recovering the costs of regulated activity related to ODS.

Licence Application Fees

At present, there are 17 controlled substances licences issued under the Act. With the exception of essential uses licences which extend over a variety of time frames, each licence is valid for two years and a fee is payable upon application or renewal.

Fees currently stand at $10,000 for a controlled substance licence, $10,000 for a used substance licence and $2,000 for an essential uses licence.

Activity Fees

Activity fees are payable by controlled substance licence holders at a rate of $2,000 for each ozone depleting tonne^[24] of imported HCFC and $90 for each metric tonne of imported methyl bromide. No controlled substances are currently manufactured domestically in commercial quantities.

Ozone Protection Reserve

All revenue from licence application and activity fees is paid into the Ozone Protection Reserve (OPR), a special account established in 1995 under Section 65B(1) of the Act. Funds in the Reserve are used to reimburse the Commonwealth for costs associated with:

• furthering the HCFC and methyl bromide phase-out programmes;

• providing information about those programmes; and

• the administration of the licensing and quota systems established under the Act.

Licence application fees cover the costs of administering the licence scheme including:

• assessing licence applications;

• issuing licences;

• monitoring licence activity;

• keeping records of quota allocations;

• transfers and variations; and

• reporting to the Montreal Protocol Secretariat on annual activity.

Activity fees paid into the reserve are used to fund the furthering of an industry phase-out programs for HCFCs and methyl bromide and related public awareness campaigns.

The intention of the existing arrangements, as described in the Explanatory Memorandum that accompanied the Bill to establish the OPR, was that the net effect of licence application and activity fees on Environment Australia revenue should be neutral. This means that all reasonable costs incurred by Environment Australia in administering its obligations under the Act should be covered through contributions from industry. More specifically, it requires that sufficient fees be generated from licence applications to cover the reasonable costs of licence scheme administration and that sufficient funds be generated from activity fees to cover the reasonable costs of a program for assisting industry to move from HCFCs and methyl bromide to non-ozone depleting alternatives.

The level of the licence application fees was based on consideration of the anticipated number of regulated firms and the costs associated with administering the licensing and quota system with that number of regulated firms. Controlled substances licences relate to the ODS HCFC and methyl bromide. The $10,000 licence application fee for such licences balanced the complexities of calculating associated quotas and monitoring quarterly reporting and activity fee payment with the economies of scale achieved through the relatively large number of anticipated applicants. The $10,000 used substances licence reflected a balance between the less complex administrative obligations and the absence of any economies of scale owing to the very small number of anticipated regulated firms. The $2000 (effectively $4000 if considered over the same period as the controlled or used substances licences) essential uses licence reflected a similar level of complexity in the administrative obligations as the used substances licence but the anticipated economies of scale from a reliable number of identified regulated firms.

The level of the per ODP and metric tonne activity fees were based on consideration of the environmental impact for which the regulated firms were responsible, the duration for which the regulated activities must occur in order to redress this impact, and the costs associated with such regulation. The regulatory activities are required to implement Australia’s obligations under the Montreal Protocol on Substances that Deplete the Ozone Layer (the Protocol). These obligations require that Australia undertake these regulatory activities until at least 2020, when both HCFC and methyl bromide should be virtually phased out.

It was however expected that the costs associated with regulated activities will not fall in line with the declining availability of HCFCs and methyl bromide, as remaining HCFC and methyl bromide consumption will be in those areas where alternatives are either not yet available or costly and complex. Therefore, in order to achieve revenue neutrality over the life of the regulated activities associated with industry phase out of HCFC and methyl bromide, the activity fees level were intended to generate a surplus during the early period of greatest HCFC and methyl bromide activity (on an ODP and metric tonne basis) that would cover the increased costs per ODP and Metric Tonne associated with the later period of lower HCFC and methyl bromide activity.

The establishment of the OPR as a Special Account within the Consolidated Revenue Fund ensured that the over-cost recovery generated from activity fees on industry in the OPR’s initial years would be returned to industry to address the under-cost-recovery arising in later years.

Rationale for revision to Cost Recovery Arrangements

1. Under-cost recovery on existing regulated activity

Analysis of existing cost recovery arrangements indicates two problems with the maintenance of full cost recovery for whole of regulated activity period (ie until 2020).

First, when cost recovery was introduced, Environment Australia did not recover all costs associated with staff assigned to the regulated activities, resulting in under-cost recovery. Consistent with the original intention of the cost-recovery arrangements, full cost recovery of all staff-related costs including superannuation, leave, accommodation and other support is now proposed. Even in the absence of this proposal, however, normal parameter adjustments have increased the cost of regulated activities to the point where it will shortly exceed the revenue available to Environment Australia from fees and relevant accumulated over-cost recovery. Under the current fee structure, operating costs associated with regulated activities exceeded operating revenue in 2001/2002. When financial reserves are taken into account, operating costs associated with all regulated activities are expected to exceed available revenue by 2010.

Second, The OPR does not presently cover all costs associated with administering the legislation. There has been inconsistent application of the cost recovery policy in regard to regulated activities under the ozone protection program. This has resulted in tax payers subsidising regulated firms in regard to the costs connected with administering the legislation. These costs are associated with:

• compliance and enforcement actions associated with the licensing and quota systems;

• storing and destroying seized or forfeited goods;

• reforming the legislation;

• policy development directly related to the licensing and quota systems and associated industry transition to ozone-benign alternatives; and

• administering applications for Section 40 exemptions.

Revenue for these purposes is currently drawn direct from the general appropriations of Environment Australia and the AGO.

To illustrate the under-cost recovery resulting from the existing cost recovery arrangements, income and expenditure for 2001/2 is shown overpage.

Table 1: Cost Recovery Income 2001-2002

Table 2: Ozone Protection Act Related Expenditure 2001-2002

Staff costs are estimated in terms of Average Staffing Levels (ASL).

Table 3

^♦any short-fall between income and expenditure is currently met through annual appropriations to Environment Australia from the Consolidated Revenue Fund.

2. Additional regulated activity arising from the 2001 Review of the Commonwealth Ozone Protection Legislation

The recommendations of the 2001 Review of the Commonwealth’s Ozone Protection Legislation, undertaken in accordance with the Commonwealth’s obligations under the National Competition Policy, and subsequent stakeholder consultation propose Environment Australia undertake the following additional regulated activity. The proposed changes will include amendments to the purpose of the OPR. Funds in the OPR will therefore by required to meet the additional costs associated with:

• Reducing avoidable emissions of ODS and SGG;

• phase-out programs for all ODS;

• emission reduction programs for all ODS and SGG;

• administration of the licensing system for SGG;

• administration of a licensing system for the import of air conditioning and refrigeration equipment containing ODS and SGG;

• administration of ODS and SGG end-use regulations to the extent they are not delivered through a co-regulatory approach with industry;

• policy development directly related to the above regulated activities;

• awareness raising directly related to above regulated activity; and

• the administration of the licensing system for SGG established under the Act;

• monitoring, compliance and enforcement actions associated with the end-use regulations, including monitoring and enforcement of co-regulatory end-use approaches; and

• assessing applications for Section 40 exemptions.

Licence application fees will cover the costs of administering the new licence arrangements including:

• inviting applications;

• assessing licence and exemption applications;

• issuing licences;

• administering applications for Section 40 exemptions.

• monitoring licence activity;

• keeping records of quota allocations and import, export and manufacture activity; and

• licence transfers and variations.

Activity fees will now cover the costs associated with:

• phase-out programs for all ODS;

• emission reduction programs for all ODS and SGG;

• oversight of the industry co-regulatory arrangements (including Industry Boards and the development of industry sector specific Environmental Improvement Plans)

• storing and destroying seized or forfeited goods;

• keeping records of quota allocations and import, export and manufacture activity;

• reporting to the Montreal Protocol and UNFCCC Secretariat on annual ODS and SGG activity; and

• awareness raising directly related to above regulated activity.

Cost Recovery Implications

The Act will be amended to extend and alter existing cost recovery practices contained in the current provisions. The amendments will:

• increase existing application fees for HCFC and methyl bromide controlled substances licences by 50%;

• Increase existing application fees for used substances and essential use licences by 50%;

• Increase existing activity fees on imports, exports and manufacture of HCFCs and methyl bromide by 50%;

• Introduce an application fee for Section 40 exemptions and import licences for pre-charged air-condition and refrigeration equipment;

• Introduce licence application fees for HFC and PFC controlled substances licences; and

• Introduce an activity fee for the import, export and manufacture of HFCs and PFCs used as alternatives to ODS by traditional Montreal Protocol industries.

Table 4: Summary of Existing & Proposed Cost Recovery Charges

# Activity fees for HCFC are calculated on ODP tonne. In regard to the most commonly used HCFC, HCFC-22, this converts into an activity of $165 per metric tonne.

* Activity fees for methyl bromide are calculated on a metric tonne basis rather than ODP tonne.

♣Activity fees for HFCs/PFCs are calculated at a rate equivalent to that levied for the HCFCs they replace (most commonly HCFC-22). As HFCs/PFCs are not ozone depleters the levy cannot be calculated according to their ODP.

The fees on pre-charged air-conditioning & refrigeration equipment contained in the above table are estimates only. The amendments to the Ozone Protection Act do not set the applicable fee but provide for the fee to be set under delegated legislation. The estimates provided here are modeled on the known costs associated with processing essential use exemption applications that are considered to be comparable to the proposed Pre-charged Air-Conditioning and Refrigeration Equipment Import Licence in terms of resource commitment.

The proposed increase in licence application fees will satisfy the legislative requirement for revenue neutrality in relation to Environment Australia’s responsibilities in administering the Act. The approach contained in the amendments takes into account the possibility that fluctuations in revenue and administration costs may result in either a surplus or a deficit for any given financial year while remaining revenue neutral in the longer term.

The introduction of a licence application fee for HFCs and PFCs acknowledges that there are costs incurred by Government that are broadly equivalent to those associated with the administration of controlled substances licenses for ODS.

The introduction of a licence application fee for Section 40 exemptions will ensure the application of a consistent cost recovery policy across all firms regulated by the Act and remove the existing subsidization of exemption holders. That is, to date while the administrative costs of the licensing system have been charged to the firms seeking a licence through an application fee, the administrative costs of the exemption system under the Act have been borne by the general tax payer, through general appropriations.

Increased activity fees for HCFCs and methyl bromide will generate revenue sufficient to meet the difference between the revenue that Environment Australia requires for its proposed industry transition program and funding available from a combination of accumulated reserves and existing activity fees.

Table 5: Estimated Income 2003/4 – 2004/5 ($M)

Table 6: Estimated Expenditure 2003/2004 – 2004/5 ($M)

Note: figures rounded to 3 decimal places and so will not sum exactly to totals.

Table 7

^Ω surplus income is retained for future expenditure in accordance with the purpose of the OPR. Annual surpluses will decline and then become annual deficits as the number of licensees decline and HCFC and methyl bromide is phased out, reducing recoverable licence and activity fees while the total costs associated with regulated activities does not experience a similar decline.

Consultation Mechanisms for monitoring the efficiency and effectiveness of cost recovery arrangements

As stated previously, as the OPR is a Special Account within the Consolidated Revenue Fund, fees recovered from regulated firms can only be directed to the regulated activities prescribed under the provisions of the OPR.

The proposed amendments provide the Minister with the power to create industry boards to assist in the administration of many aspects of the Act, providing a conduit for the technical and policy advice to the Minister on licensing arrangements and regulated activities. The amendments also require Environment Australia to report annually to the Minister on the performance of the Act, including the estimation of emissions and information on revenue collected and funds dispersed. The efficacy of these new arrangements can also be considered through comparisons with the prior experience of State and Territory governments in regulating the use of ODS within their jurisdictions prior to the introduction of these arrangements.

Future Review of Cost Recovery Arrangements

Cost recovery arrangements will be reviewed every five years in line with Commonwealth Cost Recovery Guidelines for Regulatory Agencies (DoFA December 2002).

Legal requirements for the imposition of the charges
The proposed amendments to the legislation, including associated cost recovery arrangements, draw on the following heads of power under the Commonwealth Constitution: the external affairs, trade and commerce and corporations powers. As levies, the activity fees are enacted under a separate tax Act.

Issues to be addressed by Legislation

The following issues will be addressed by the proposed legislative amendments:

• the need for importers, exporters and manufacturers of ODS and SGG to hold a controlled substances licence – a non-refundable licence application fee will be payable upon application;

• the need for importers, exporters and manufacturers of ODS and SGG to report on the volumes of ODS and SGG imported, exported and manufactured and to pay an activity fee based on that activity;

• the Commonwealth Parliament will be provided with an annual report detailing cost recovery revenue arising from the arrangements; and

• a capacity for changing the respective fees for licences to reflect prevailing circumstances.

Outcomes of Consultation with Stakeholders

In developing the cost recovery components of the proposed legislative changes, Environment Australia and the Australian Greenhouse Office undertook extensive consultation with affected industry participants and other interested stakeholders.

The concerns raised by industry have been considered in the context of preparing the cost-recovery policy and have been taken into consideration in the design of the licence application and activity fee system. The ongoing opportunities for reviewing the cost recovery structure will provide a further opportunity to revisit these issues and re-evaluate the concerns raised by industry.

Australian Fluorocarbon Council

The Australian Fluorocarbon Council (AFC) that represents the interests of all holders of HCFC licences, a major holder of a methyl bromide licence for horticultural use and the majority of existing importers of SGG, does not oppose the proposed increase in licence application fees from $10,000 to $15,000 paid every two years. In the event that an increase in fees is introduced part way through an existing licence period, the AFC believes that appropriate pro-rata adjustments should be made.

However, AFC opposes any increase in HCFC and methyl bromide activity fees. The Council considers that existing fees are adequate to meet the costs of Environment Australia’s industry transition program for ODS, under reasonable assistance arrangements.

The AFC supports the principle of the extension of the licensing, levy and reporting system from ODS to SGG. AFC has long emphasised the importance of having uniform regulation across all jurisdictions.

The AFC has considered the specific elements of the Commonwealth’s proposals and the views of the Council on the three key aspects are:

• the Council accepts the need for licences for the import (and manufacture) of SGG to be issued to suitable applicants;

• the Council accepts the proposal that an activity fee be introduced for SGG; and

• the Council accepts the proposal that appropriate reporting of SGG that are imported or manufactured be made by industry.

The AFC acknowledges that the proposal for the licences and reporting of imports of SGG parallel the requirements for ODS and that this should be an efficient addition to an existing policy. The Council agrees that the proposed fee for an SGG licence should be the same as the fee charged for an ODS licence: that is, $15,000 for two years. Equally, a licence to deal only with SGG would require a fee of $15,000 for two years. These fees should assist in ensuring that only genuine, long term traders are involved in the import of SGG.

The AFC supports, in principle, the Commonwealth's proposals for an activity fee for bulk gas and for charged equipment. AFC notes, however, the following provisos:

• the quantum of the fees needs to be agreed – AFC accepts that the program should be self-funding, but the fee basis should not enable surplus revenue to be accumulated;

• all revenue collected should use the existing Trust Fund arrangements; and

• in the case of charged equipment, AFC proposes that a small licence or administration fee be implemented, with an activity fee being levied after a yet to be agreed point.

AFC emphasises that, while it is essential to include charged equipment in any regulatory regime, the system for assessing and collecting the fees needs to be as simple as possible. Consequently, it may be appropriate to group equipment into categories and apply a fee to each group, rather than to apply the fees on a piece-by-piece basis.

The proposals for reporting of imports of SGG are supported, although the Council notes that the reporting format should be as straightforward as possible and consistent with other similar types of reports prepared by companies.

Air-conditioning and Refrigeration Equipment Manufacturers Association

The Air-conditioning and Refrigeration Equipment Manufacturers of Australia (AREMA), represents the majority of air conditioning and refrigeration equipment importing and manufacturing activity in Australia and include the major importing companies Emailair, Fujitsu, Daikin, Trane, Carrier, York and Mitsubishi. AREMA also has a substantial membership of smaller importers who have joined the Association in supporting the proposed changes. The views of the smaller members of AREMA may be taken as representative of those of smaller firms within the industry which are not Association members.

In a recent letter to Environment Australia, AREMA expressed the following views:

“AREMA members understand and accept the need for equity across the industry in terms of fees to support the program.

To this effect we agree, in principle, to fees on such refrigerants imported in charged equipment equating to activity fees charged on bulk imports, while any licence fees should reflect the costs of administering the licence.”

Vehicle Air Conditioning Specialists of Australia

The Vehicle Air Conditioning Specialists of Australia (VASA), which represents wholesalers, manufacturers, retailers and other businesses that have an involvement in the after-market vehicle industry in Australia and New Zealand, supports a licensing system covering all importers, manufacturers and exporters of synthetic greenhouse gases, where this system also includes an activity fee and appropriate reporting requirements. VASA notes that there will need to be consultation with importers of pre-charged equipment, including vehicles, to ensure that a practical and efficient system of reporting is established.

Federal Chamber of Automotive Industries (FCAI)

The Federal Chamber of Automotive Industries (FCAI), representing manufacturers and importers of new vehicles marketed in Australia, provides the following comments on the proposals relating to the proposed controls on the bulk import, export and manufacture of synthetic greenhouse gases (SGG):

• The proposals appear to be mainly administrative; there are no technical changes to the use of current refrigerant - 134a;

• Our interpretation is that the automotive industry will need to treat our modern "ozone benign" 134a refrigerant as though it was CFC, R12, because of the former's contribution to greenhouse gas emissions. Refrigerant 134a will, in future, be treated as a "scheduled substance" under the Ozone Protection Act and the automotive industry will be classified as one of the Montreal Protocol industries, because we have replaced ODS refrigerants with SGG – 134a almost universally;

• The consequences of the Commonwealth proposals are understood to be that our industry will need to consider the associated controls related to use, record keeping of quantities purchased and training of users. For both automotive manufacture and service, registration and certification will be required - with relevant fees. The levy on imported refrigerant (none is manufactured in Australia) will increase refrigerant cost all round. The refrigerant in imported vehicles is also included in the levy; and

There is a similarity to the situation that existed when R12 was in its phase out period and, in that sense, the proposals seems to fit a logical pattern. With the Commonwealth co-ordinating the new regulatory regime, there will be more consistency than existed previously when different States had their own individual requirements.

In regard to the proposed controls on the licensing of imports of pre-charged RAC equipment, FCAI provided the following additional comments:

• “Whilst licence costs are a relatively minor issue^[26], of more significance is likely to be the management of licences for technicians and managing possible changes to handling practices for refrigerant gas. FCAI would request that a reasonable implementation period be provided; i.e. 2 years”;

• “As for [the previously mooted] threshold^[27] before [import] licences and charges would apply, this would be of no benefit to vehicle importers”.

Methyl Bromide Licensees

Remaining licence holders for methyl bromide used for horticultural purposes are generally opposed to any fee increases on two grounds: the rise in administrative costs incurred by Environment Australia since 1995 has exceeded movements in the Consumer Price Index over the same period, and fee increases may place undue pressure on horticultural users of methyl bromide who in recent years have already absorbed sharp increases in substance prices as a result of shrinking import quotas, the declining value of the Australian dollar and high levels of import competition which restrict their ability to pass fee increases along the supply chain.

The end-users most effected by a rise in fees for methyl bromide are growers of flowers and strawberry runners who are least able to access alternatives in the event of price rises.[28] These organizations were contacted through the Queensland Department of Primary Industry and the Queensland Fruit and Vegetable Growers Association (QFVG) who have taken an active interest in methyl bromide phase-out issues and represented the interests of growers in the 2001 Commonwealth Task Force review of ozone protection legislation.

QFVG has indicated that horticultural producers do not support a rise in licence fees to cover a higher Environment Australia administrative cost structure. The Association also opposes any increase in activity fees, at least until Environment Australia has discussed and agreed with industry the specific applications to which higher fee revenues will be directed. Although QFVG acknowledged the need to seek alternatives to methyl bromide, it noted that horticultural producers were highly sensitive to rising production costs.

Licensed importers of methyl bromide used for QPS and a number of QPS industry contacts have indicated that any fee increases would be passed on in their entirety to the end user. The extent of effect this would have on the industry was not agreed upon however the majority of importers felt that any further increase would be detrimental. However other QPS industry participants suggested that the increase would be negligible. It was, however, a widely held view that any increase would be a disadvantage in the international market making the increase undesirable but not disastrous.

Essential Use & Used Substances Licensees

Neither essential uses licence holders nor holders of used substances licences indicated opposition to higher licence fees. In a number of cases, holders expected to transition away from ODS before the new fee structure came into place. Where higher fees were to be sustained, the relatively small value of the increase was expected to have a minimal effect on licensees or end-users of their products and services.

Holders of Section 40 exemptions held mixed views on the proposed introduction of a fee. These organizations were evenly split in terms of their acceptance or rejection of EAs proposed new fee structure. Several organizations who supported the structure indicated that they would no longer be needing a Section 40 arrangements by the time a fee was introduced. The majority acknowledged that higher fees would have a minimal impact on end-users of ODS subject a Section 40 exemption, as the fee was relatively small and part of it may be absorbed by exemption applicants. Several organizations noted that due to Government regulation in the aircraft and other industries, applicants had no choice but to use to ODS and were therefore unable to avoid a Section 40 fee. The overall tenet of comments was that although the principle of fee increase was not universally accepted, any rise would cause minimal disruption to the market.

State and Territory Jurisdictions

State and Territory Governments have indicated their support for the Commonwealth extending the Ozone Protection Act to include the licensing and levy provisions on the importers and manufacturers of SGG through both the Ozone Protection Advisory Committee and the High Level Group on Greenhouse.

OZONE PROTECTION (LICENCE FEES– IMPORTS) AMENDMENT BILL 2003

NOTES ON CLAUSES

Clause 1: Short Title
1. Clause 1 is a formal provision specifying the short title of the amending legislation as the Ozone Protection (Licence Fees – Imports) Amendment Act 2003.

Clause 2: Commencement
2. Clause 2 specifies that the Bill will commence on the day it receives Royal Assent.

Clause 3: Schedule
3. Clause 3 is a formal provision specifying that each Act specified in a Schedule to this Bill is amended as specified by the Schedule.

SCHEDULE 1 – AMENDMENTS

Ozone Protection (Licence Fees – Imports) Act 1995

Item 1 – Title

4. This Item repeals the existing long title of the Act and substitutes one that reflects the extension of the Act to include levies on the import of SGGs.

Item 2 – Section 1

5. Item 2 amends the short title in section 1 of the Ozone Protection (Licence Fees – Imports) Act 1995 to reflect the change in the focus of the Act to include a levy to be paid by licensees who import SGGs.

Item 3 – Section 3

6. This Item amends the reference in section 3 to Ozone Protection Act 1989 to reflect the amendment to the short title of that Act made by the Ozone Protection and Synthetic Greenhouse Gas Legislation Amendment Act 2003.

Item 4 – Section 4

7. This Item replaces the existing section relating to the imposition of a levy on the import of HCFCs and methyl bromide specified in regulations (section 4) with a section 4 that provides that each person who holds a controlled substances licence for the import of HCFCs, methyl bromide or SGGs will be subject to the levy specified in the Regulations.

8. This item also specifies the maximum amounts of any levy. The maximum amounts may not exceed:

• $135 for each metric tonne of methyl bromide imported;

• $165 for each metric tonne of SGG imported; and

• $3000 for each ODP tonne of HCFC imported.

10. “ODP tonne” is defined in section 10 of the Ozone Protection Act 1989 as the quantity of HCFC that results from multiplying its mass in tonnes by its ozone depleting potential. On this basis, the maximum levy placed upon HCFCs is not significantly greater than that placed upon SGG. For the most prevalent HCFC, HCFC 22, the maximum levy for each metric tonne imported will be $165.

11. Tying the amount of levy payable to the ODP of the HCFC encourages the import of lower ODP alternatives, resulting in better environmental outcomes.

11. The substituted subsection 4(2) provides that where the regulations made under subsection 13(1A) provide that a certain import of scheduled substance does not require a controlled substances licence, then that import will also not be subject to the levy payable under this amended Act.

12. Subsection 4(4) under this item provides that where a licensee is granted a licence for only a part of a quarter (Section 7 of the Ozone Protection Act 1989 defines quarter as any three month period commencing on the first day of January, April, July or October), then the levy will only be payable for any controlled substance imported during the period that the licensee held a licence. Any import without a licence would be subject to penalties under the amended Ozone Protection Act 1989.

Item 5

13. This is a technical Item that updates the reference in section 5 to the new section 4 to account for the structure of the new section 4.

^[1] Taken together, these areas of economic activity are described as Montreal Protocol industries.
^[2] An ozone depleting tonne is calculated as the mass in tonnes of a specific ODS multiplied by its agreed ozone depleting potential. ODS vary in their potential to damage the ozone layer. ODP measures are set out Schedule 1 of the Ozone Protection Act 1989.
^[3] Ozone Protection Act 1989, Section 3.

^[4] Australian and New Zealand Environment and Conservation Council, Revised Strategy for Ozone Protection in Australia 1994 - Report No.30, Canberra, April 1994.

^[5] Australian and New Zealand Environment and Conservation Council, Revised Strategy for Ozone Protection in Australia 1994, op.cit., pp. 4-5. The Strategy also notes that a high priority should be given by governments, industry and public interest groups to raising awareness of the public, unions and affected industries of the phase-out schedule [for ODS], the availability of alternative technologies and products and ways of managing the transition to ozone benign technologies with minimum cost and disturbance. Finally, the Strategy commits Governments to monitor the development in Australia and overseas of alternatives to ozone depleting substances and encourage industry to adopt those with the best possible outcome for health and the environment.

^[6] It should be noted that methyl bromide in QPS applications is not expressly limited under the Montreal Protocol. However, international discussions on such limits have recently been undertaken and the possibility exists of formal restrictions over consumption being introduced through the Protocol in the medium-long term.

^[7] Taken together, these areas of economic activity are described as Montreal Protocol industries.

^[8] For discussion of the adjustment pressures facing these industries see Task Force to Review the Commonwealth’s Ozone Protection Legislation - A Review of the Legislative Framework and Regulatory Options, Environment Australia, Canberra, January 2001, pp. 19-20.

^[9] Australian and New Zealand Environment and Conservation Council, Revised Strategy for Ozone Protection in Australia 1994, op.cit., p.4.

^[10] Office of Regulation Review, A Guide to Regulation, Productivity Commission, Canberra, 1998.

^[11] For budgeting purposes, EA has assumed that the number of HCFC licence holders will decline from 2003 in proportion to the decline in the availability of these substances under the Ozone Protection Act 1989.

^[12] All figures used in this RIS are expressed on constant 2001 prices unless otherwise stated.
^[13] It should be emphasized that these figures are projections and may be subject to change at a later date.

^[14] The number of ODP tonnes of HCFC provided for under the OPA for 2003-2020 inclusive is 1,215. Data on expected fee increases is provided by the Australian Fluorocarbon Council (AFC).

^[15] Data provided by AFC.
^[16] The number of metric tonnes provided for under the OPA for 2003-2005 inclusive is 408. Data on the price impact of licence and activity fee increases provided by the Australian Fluorocarbon Council (AFC).
^[17] Methyl Bromide Consultative Group, National Methyl Bromide Response Strategy, Part 1 Horticultural Uses, Environment Australia, June 1998, p. 15. Figures are used to illustrate main uses only and do not add to 100 percent.
^[18] See Environment Australia, National Methyl Bromide Response Strategy Part 2 - Quarantine and Pre-shipment Uses, Canberra, 2001.

^[19] Correspondence from the Queensland Fruit and Vegetable Growers Association dated 8 February, 2002.

^[20] The lines of causality and nature of benefits associated with emissions of ODR, depletion of the ozone layer and damage to human health and the environment are detailed in ARC Applied Research Consultants, Global Benefits and Costs of the Montreal Protocol on Substances that Deplete the Ozone Layer, Environment Canada, Ottawa, 1997.

^[21] Ibid.

^[22] The quantitative application of this and other data to Australia is considered in Task Force to Review the Commonwealth’s Ozone Protection Legislation, Report - A Review of the Legislative Framework and Regulatory Options, Environment Australia, Canberra, January 2001.

^[23] The particularly structural adjustment issues faced by these growers is discussed in Task Force to Review the Commonwealth’s Ozone Protection Legislation, Report - A Review of the Legislative Framework and Regulatory Options, Environment Australia, Canberra, January, 2001, pp. 18-20.
^[24] An ozone depleting tonne is calculated as the mass in tonnes of a specific ODS multiplied by its agreed ozone depleting potential. ODS vary in their potential to damage the ozone layer. ODP measures are set out Schedule 1 of the Ozone Protection Act 1989.