Review of the Fuel Quality Standards Act 2000 - Final Report

Marsden Jacob Associates Financial & Economic Consultants

ABN 66 663 324 657 ACN 072 233 204

Internet: http://www.marsdenjacob.com.au E-mail: [email protected]

Melbourne office: Postal address: Level 3, 683 Burke Road, Camberwell Victoria 3124 AUSTRALIA Telephone: 03 9882 1600 Facsimile: 03 9882 1300

Perth office: Level 1, 220 St Georges Terrace, Perth Western Australia, 6000 AUSTRALIA Telephone: 08 9324 1785 Facsimile: 08 9322 7936

Sydney office: Rod Carr 0418 765 393

Authors: Peter Kinrade, Nadja Arold, Rod Carr (Marsden Jacob Associates); Lyn Denison, Sean Lam, Deanna Tuxford, Bethany Warren (Pacific Environment Limited)

This report has been prepared in accordance with the scope of services described in the contract or agreement between Marsden Jacob Associates Pty Ltd ACN 072 233 204 (MJA) and the Client. Any findings, conclusions or recommendations only apply to the aforementioned circumstances and no greater reliance should be assumed or drawn by the Client. Furthermore, the report has been prepared solely for use by the Client and Marsden Jacob Associates accepts no responsibility for its use by other parties.

Abbreviations

AAA Australian Automobile Association

ABS Australian Bureau of Statistics

ACCC Australian Competition and Consumer Commission ADRs Australian Design Rules

AIP Australian Institute of Petroleum

CBA Cost-benefit analysis

CEA Cost-effectiveness assessment

CEN Comité Européen de Normalisation (European Committee for Standardisation)

CO Carbon monoxide

CO2 Carbon dioxide

DIPE Di-isopropyl Ether

DRIS Decision Regulation Impact Statement

EN European Standard

FCAI Federal Chamber of Automotive Industries

FQA Fuel quality assurance

GHGs Greenhouse gases

LGA Local government area

MTBE Methyl Tertiary Butyl Ether

O3 Tropospheric ozone

OBPR Office of Best Practice Regulation

N20 Nitrous oxide

NOx Nitrogen oxides

NPV Net Present Value

PAHs Polycyclic aromatic hydrocarbons

PM2.5 Particulate matter (particles), 2.5 micrometres or less in diameter

PM10 Particulate matter (particles), 10 micrometres or less in diameter ppm Parts per million PULP Premium unleaded petrol

PV Present value

RIS Regulation Impact Statement s13 Section 13 (of the Fuel Quality Standards Act 2000)

SOx Sulfur oxides

TBA Tertiary Butyl Alcohol

ULP Unleaded petrol

VKT Vehicle kilometres travelled

VOCs Volatile Organic Compounds MARSDEN JACOB ASSOCIATES

TABLE OF CONTENTS Page Executive summary

Marsden Jacob Associates with Pacific Environment Limited have been contracted by the Australian Government Department of the Environment to undertake an independent review of the Fuel Quality Standards Act 2000 (the Act). The Act provides the legislative basis for national fuel quality and fuel quality information standards in Australia. Section 72, Part 1of the Act provides for an independent review of the operation of the Act to be undertaken as soon as possible after the second anniversary of the commencement of Part 2 of this Act and afterwards at intervals of not longer than 5 years. A previous review of the Act was completed in April 2005 (Fuel Quality Standards Act Review Panel et al. 2005).

Review terms of reference

The terms of reference require that the independent review examine, advise and report on: 1. The appropriateness and relevance of the objects of the Fuel Quality Standards Act 2000 including consideration of: i.1.a.i.1.a. the interrelationships between fuel quality, vehicle emission standards and other standards, government policies and initiatives, e.g. automotive design and technology, fuel and transport industries, deregulation, productivity, or economic matters; i.1.a.i.1.b. the extent to which the Act has been able to meet its objectives; and i.1.a.i.1.c. the role, if any, of fuel quality standards in meeting the aims of the Plan for a Cleaner Environment and in the development of the National Clean Air Agreement. 2. Options, including a preferred option, to meet the objectives recommended in response to point 1, that: a.i.1.a.i.1.a. are efficient and effective; a.i.1.a.i.1.b. allocate roles and responsibilities to those best placed to deliver outcomes, e.g. government, industry, community; and a.i.1.a.i.1.c. identify appropriate sustainable funding models. 3. Any implementation issues that will need to be addressed to ensure a smooth transition to any future model. 4. Any other relevant matters including environmental, health, technical and regulatory issues. The full terms of reference of the review are provided in Appendix 1.

Scope of the review

This independent review is focused on the Fuel Quality Standards Act 2000. The Act provides the overarching legislative framework for national fuel quality standards and

The Department of the Environment Review of the Fuel Quality Standards Act 2000 6. fuel quality information standards in Australia (Figure ES.1). The Fuel Quality Standards Regulations 2001 (the Regulations) establish the administrative details of the Act, with determinations made under the Act used to set standards for particular fuels and fuel parameters.

Objects Regulation of fuel & additives Reporting Enforcement Other

Administrative detail Standards

Figure ES.1 Fuel quality legislative framework The Motor Vehicle Standards Act 1989 is out of scope for this review. However, reflecting the relationship between the two statutory regimes, issues relevant to that Act have been noted over the course of the review.

Why regulate fuel quality?

Regulation of fuel quality in Australia is primarily being driven by the objective of reducing externalities associated with the combustion of transport fuels. As noted in the Australian Government Guide to Regulation, “…an externality is generated when the economic activity of one organisation or individual generates a positive or negative impact for another without there being a market price associated with the impact. For example, a factory might be polluting a river, making the water unusable for businesses downstream” (DPMC 2014, p.21). Where the use of fuel is concerned there are a number of negative externality impacts or potential impacts, including: . human health impacts of air pollution; . property and amenity impacts of air pollution, such as erosion of stone buildings and reduced visibility; . ecological impacts of air pollution; . climate change linked to emissions of greenhouse gases; and . the impacts of MTBE and other ether oxygenates on groundwater quality. Of these, the main focus of fuel quality in Australia is its links to short-term and long- term effects on human health, with greenhouse gas emissions also being an important consideration.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 7. Key Findings

Finding 1: The Act was an appropriate regulatory response and remains relevant There are significant market failures associated with use of road transport fuels, notably negative externalities in the form of pollutants and greenhouse gas emissions. Given those failures, the introduction of the Act, the Regulations and associated determinations, following an extensive Regulation Impact Statement (RIS) process in 2000, was an appropriate response. Notwithstanding significant improvements to air quality since introduction of the Act, the health risks associated with air pollution suggest that prima facie a strong case remains for the continued regulation of fuel quality in Australia. A move towards international harmonisation of fuel standards creates further impetus for the regulation of fuel quality. That does not necessarily mean that the Act in its current form represents an ideal framework or even the most appropriate framework for regulating fuel quality. Moreover, the existence of environmental externalities does not on its own justify government intervention in the form of the Act. This finding was confirmed through feedback from the full spectrum of stakeholders who confirmed that the Act was an appropriate response and remains relevant. However, a number of stakeholders commented that there is potential for improvements to the Act.

Finding 2: The Act has met its stated objectives The objects of Fuel Quality Standards Act 2000 are to: (a) regulate the quality of fuel supplied in Australia in order to: (i) reduce the level of pollutants and emissions arising from the use of fuel that may cause environmental and health problems; and (ii) facilitate the adoption of better engine and emission control technology; and (iii) allow the more effective operation of engines; and (b) ensure that, where appropriate, information about fuel is provided to consumers when the fuel is supplied. The analysis undertaken and stakeholder feedback received as part of the review confirm that regulation of fuel supplied in Australia via the Act has led to: . a quantifiable reduction in the mass of (assessed) pollutants arising from the use of regulated fuel, in both Melbourne and Sydney, with the exception of ozone formation; . generally an improvement in health outcomes, also with some exceptions associated with exposure to ozone; and . indirectly has contributed to a reduction in the level of (assessed) greenhouse gas emissions arising from the use of regulated fuel.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 8. The one area of concern expressed by some stakeholders is that greater emphasis should be given to consumer protection in the Act.

Finding 3: The historical health benefits appear to substantially exceed the costs that resulted from the introduction of the Act The 2005 regulatory impact statement (RIS) estimated that the costs to the refining industry of full harmonisation with Euro 4 fuel standards would be: . $1,320m in capital investment over the period to 2008; and . $17m per annum in operating costs per refinery from 2005. Similarly, the 2005 review reported estimates from the petroleum industry to achieve standards then mooted from 2006 and 2008. In total the investment costs for major refinery upgrades for the (then) five refineries were estimated at $945 million. Combining this estimate with the operating cost estimate from the RIS and converting to $2015 provides a present value estimate of total capital and operating costs of achieving fuel quality standards up to 2015 of approximately $2.8 billion. It is important to emphasise that this estimate is an approximation only and should be treated with caution, nevertheless it is substantially less than the present value $5 billion of health benefits REF _Ref419124728 \h \* MERGEFORMAT achieved through implementing the Act.

Finding 4: Fuel quality regulation appears to be best served through government regulation The review considered a number of regulatory, co-regulatory and self-regulation options (see Figure ES.2). An initial qualitative assessment of options concluded that: . Australian Government regulation is the preferred alternative, subject to the regulation delivering a net welfare benefit to the Australian population. . State and Territory Government regulation is also preferred to co-regulation or self- regulation alternatives. However, there are a number of challenging issues with a jurisdiction based approach that could undermine the achievement of key objectives and outcomes. . Co-regulatory and self-regulation options appear to be ill-suited to the regulation of fuel quality outcomes, because there is: (1.1.1.a.i) no collective interest; (1.1.1.a.ii) no industry incentive to develop standards that support social and environmental outcomes; and (1.1.1.a.iii) regulatory consistency will not be achieved. Figure ES.2: Long-list of options Source: Marsden Jacob, 2015

REF _Ref419124728 \h \* MERGEFORMAT This estimate does not include the benefits associated with reduced greenhouse gas emissions and improved vehicle operability.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 9. Finding 5: Retaining and amending the Act is likely to be the preferred regulatory option Four regulatory options were subject to economic analysis (cost-effectiveness and cost- benefit analysis): . Option 1 (Base Case) is retention of the Act in its current form. . Option 2 (Amended legislation) is retention of the Act but with amendments to the Act. Amendments to the Act are assumed to take effect from 2019. . Option 3 (Self-regulation) involves industry self-regulation, with fuel quality guidelines replacing regulated standards. . Option 4 (Co-regulation) involves new co-regulatory arrangements between the government and the petroleum industry.

Cost-effectiveness From a cost-effectiveness perspective the significant cost savings can be achieved through the implementation of Options 3 and 4. The most significant savings are expected to be achieved through reductions in Government costs, especially compliance and monitoring costs and costs associated with administering the Act. Cost savings to industry are projected to be relatively modest. However, the cost effective assessment (CEA) results only consider regulatory framework costs and don’t consider the broader welfare impacts and risks associated with the different options. Cost benefit analysis The key finding of the cost benefit analysis is that government regulation is preferred over self-regulation and co-regulation options: Option 1 (Base case) and Option 2 (Amended Act) are preferred to either self-regulation (Option 3) or co-regulation (Option 4), since (subject to the threshold test described below) they are expected to have lower welfare costs. Option 2 (Revised Act) is preferred over Option 1 (Base case), since it is estimated to deliver a small net benefit of $8 million compared to the base case due to lower regulatory framework costs. A key cost variable not included in the cost-benefit analysis (CBA) is the cost of supplying fuel. Fuel cost impacts will arise as a consequence of the additional capital and operating costs to domestic refineries of meeting any proposed strengthened fuel standards in the future (under modelled scenarios A and D) or, alternatively, from the cost of importing higher quality fuel. However, it has not been possible to reliably estimate this cost as part of the analysis so a threshold analysis has instead been used. The threshold analysis identifies that: . Option 1 (Base case) will remain the preferred option relative to Option 3 (self- regulation) provided additional fuel supply costs of Option 1 above Option 3 can be kept to less than $578 million in present value terms, equivalent to 0.6 cents/litre.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 10. See Figure ES.3. . Similarly, Option 1 (Base case) will remain the preferred option relative to Option 4 (co-regulation) provided additional fuel supply costs of Option 1 above Option 4 can be kept to less $400 million in present value terms, equivalent to 0.4 cents/litre. Figure ES.3: Threshold analysis - fuel supply costs (NPV $ million 2015)

Finding 6: Regulatory burden does not differ substantially between the options Regulatory burden measurement undertaken for each of the options reveals that industry regulatory burden does not differ substantially between the options, with Option 3 having the lowest regulatory burden at $10.7 million per annum and Option 4 having the highest regulatory burden at $11.3 million per annum.

Finding 7: Implementation of the preferred option should proceed

The preferred option (Option 2) is essentially a revised form of the Act, with revisions mainly aimed at improving effectiveness and reducing the regulatory burden to industry associated with supplying compliant fuels. It is not anticipated therefore, that there will be significant barriers to effective and timely implementation of the new arrangements. Nevertheless, staged implementation of Option 2 will need to be undertaken in a planned manner.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 11. Recommendations

Further to the key findings the following recommendations have emerged from this review.

Recommendation 1 Noting the externality risks, and most particularly the health risks, posed by air pollution and the emission of greenhouse gases associated with fuel use in motor vehicles, a regulatory framework that ensures consistency in the quality of fuel supplied in Australia should continue to be maintained for the foreseeable future.

Recommendation 2 Should Government decide to retain the Fuel Quality Standards Act 2000, consideration should be given to making a range of amendments to the Act and any consequential amendments to the Fuel Quality Standards Regulations 2001 to enhance their efficiency and effectiveness. Amendments to the following provisions are proposed: . Extending the objects of the Act to include consumer protection provisions; . Act review provisions (section 72); . Section 13 approval provisions; and . Penalties, compliance and reporting provisions. See Box 6, proposed amendments i) to v) for details.

Recommendation 3 Feedback from a number of stakeholder submissions is that the Fuel Standards Consultative Committee (FSCC) has played an important advisory role to government and an avenue for industry input on decisions made under the Fuel Quality Standards Act 2000, including determinations and s13 approvals. Given stakeholders clearly believe this body has an important role, if a decision is made to retain the Act, the Australian Government should consider either maintaining the FSCC or establishing a new advisory body. The advisory body should continue to be representative, comprising key industry and other stakeholders.

Recommendation 4 Given the effectiveness of the Fuel Quality Standards Act 2000 in meeting health, environmental and engine operability objectives there is a strong case, prima facie, for retaining the Act either in its current or amended form. A decision to repeal or replace the Act should not be made unless it can be confidently determined that alternative regulatory arrangements are equally effective in achieving objectives and at lower net

The Department of the Environment Review of the Fuel Quality Standards Act 2000 12. cost to society.

Recommendation 5 Amendments should be made to the Fuel Quality Standards Act 2000 to ensure that the process of regulating fuel quality standards and vehicle emissions standards (established through ADRs) is better coordinated in the future. Amendments to the Motor Vehicle Standards Act 1989 may also be required to link this Act to the Fuel Quality Standards Act 2000. See Box 6, proposed amendment vi.

Recommendation 7 Given uncertainties regarding the costs and benefits of harmonising fuel quality standards in Australia with international best practice, no decision should be made to harmonise standards including in particular the sulfur content of unleaded petrol and premium unleaded petrol, until further investigation has been undertaken into the costs and benefits of improving the quality of these fuels and the fuel security implications of doing so.

Recommendation 8 A plan for implementing Option 2, as outlined in section Option 2 implementation, should be initiated.

Recommendation 9 Improvements in fuel quality that have been achieved since the introduction of the Fuel Quality Standards Act 2000 have resulted in material reductions in the quantum of pollutants in the airsheds. However, the modelling undertaken for this review has demonstrated that the relationship between ozone and NO2 is complex, such that the reduction in NO2 through improved fuel quality standards is contributing to increased ozone production, particularly in the Sydney airshed. Noting the aims of the Plan for a Cleaner Environment and the current process for developing a National Clean Air Agreement, it is recommended that additional time and resources be dedicated by governments to investigating options to reduce ozone concentration, particularly in the Sydney airshed.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 13. 1. Introduction

1.1 Review terms of reference

The terms of reference require that the independent review examine, advise and report on: 1.1.1.a.iii.1. The appropriateness and relevance of the objects of the Fuel Quality Standards Act 2000 including consideration of: 1.1.1.a.iii.1.a. the interrelationships between fuel quality, vehicle emission standards and other standards, government policies and initiatives, e.g. automotive design and technology, fuel and transport industries, deregulation, productivity, or economic matters; 1.1.1.a.iii.1.b. the extent to which the Act has been able to meet its objectives; and 1.1.1.a.iii.1.c. the role, if any, of fuel quality standards in meeting the aims of the Plan for a Cleaner Environment and in the development of the National Clean Air Agreement. 1.1.1.a.iii.2. Options, including a preferred option, to meet the objectives recommended in response to point 1, that: 1.1.1.a.iii.2.a. are efficient and effective; 1.1.1.a.iii.2.b. allocate roles and responsibilities to those best placed to deliver outcomes, e.g. government, industry, community; and 1.1.1.a.iii.2.c. identify appropriate sustainable funding models. 3. Any implementation issues that will need to be addressed to ensure a smooth transition to any future model. 4. Any other relevant matters including environmental, health, technical and regulatory issues. The full terms of reference of the review are provided in Appendix 1.

1.2 Scope of the review

This independent review is focused on the Fuel Quality Standards Act 2000. The Act provides the overarching legislative framework for national fuel quality standards and

The Department of the Environment Review of the Fuel Quality Standards Act 2000 14. fuel quality information standards in Australia. The Fuel Quality Standards Regulations 2001 (the Regulations) establish the administrative details of the Act, with determinations made under the Act used to set standards for particular fuels and fuel parameters. The Act, the Regulations and determinations place an obligation on the fuel industry, including fuel suppliers, to supply fuel that meets strict environmental requirements. This review adopts the definition of regulation in the Australian Government Guide to Regulation (Department of Prime Minister and Cabinet 2014): “Any rule endorsed by government where there is an expectation of compliance” (page 6).

Coverage of the Fuel Quality Standards Act 2000 The Act, the Regulations and determinations are primarily concerned with the quality of fuels for use in road transport. The Fuel Standard (Petrol) Determination 2001 specifically excludes avgas supplied for use in aircraft. Similarly, the Fuel Standard (Automotive Diesel) Determination 2001 specifies that diesel means automotive diesel, therefore excluding marine diesel applications.

Motor Vehicle Standards Act 1989 Vehicles and fuel work together to reduce vehicle emissions that impact on air quality, because without fuel of appropriate quality, vehicle emissions reduction systems will not be as effective as intended. Likewise, without appropriate vehicle technologies, improving fuel quality will not be as effective in reducing vehicle emissions as it would otherwise be (Figure 1).

Figure 1. Motor vehicle emissions standards and fuel work together to reduce vehicle emissions Vehicle emissions standards are set through Australian Design Rules (ADRs) under the Motor Vehicle Standards Act 1989 REF _Ref419124728 \h \* MERGEFORMAT . On 16 January 2014, the Assistant Minister for Infrastructure and Regional Development, the Hon Jamie Briggs MP, approved the terms of reference for a comprehensive review of the Motor Vehicle Standards Act 1989 with a view to reducing regulatory costs to business and individuals, and improving the safety and environmental performance of road motor vehicles. That review is being led by the Australian Government Department of Infrastructure and Regional Development REF _Ref419124728 \h \* MERGEFORMAT . The Motor Vehicle Standards Act 1989 is out of scope for this review. However, reflecting the relationship between the two statutory regimes, issues relevant to that Act have been noted over the course of the review.

REF _Ref419124728 \h \* MERGEFORMAT Compliance with these standards is regulated by state and territory governments.

REF _Ref419124728 \h \* MERGEFORMAT An issues paper on vehicle emissions is due for release in February 2016.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 15. 1.3 Drivers of the review

There are several drivers of the review. a number of legislative and policy requirements and drivers; the international regulatory context for the regulation of fuel standards has evolved considerably since the legislation was enacted; and the business environment for fuels and vehicles has changed considerably since the legislation was enacted.

Legislative and policy drivers for the review As previously noted, Section 72 of the Act requires an independent review to be undertaken at intervals of no longer than five years. The review is necessary to ensure certainty around the regulatory framework prior to undertaking significant changes or updates to fuel standards or to regulatory functions.

Legislative instruments sunset from October 2019

In addition, there are a number of legislative instruments (including determinations known as fuel standards) made under the Act that will sunset from October 2019. The legislative instruments provide the regulatory framework for fuel quality in Australia to reduce pollutants and emissions from fuel that can contribute to environmental and health problems. Table 1: Status of legislative instruments under the Act

Sunsets on Legislative Instrument 1 October 2019 Fuel Quality Standards Regulations 2001  Fuel Quality Standards (Register of Prohibited Fuel Additives) Guidelines 2003  Fuel Quality Information Standard (Ethanol) Determination 2003  Fuel Quality Information Standard (Ethanol E85) Determination 2012  Fuel Standard (Ethanol E85) Determination 2012  Fuel Standard (Autogas) Determination 2003  Fuel Standard (Automotive Diesel) Determination 2001  Fuel Standard (Biodiesel) Determination 2003  Fuel Standard (Petrol) Determination 2001 

Source: Legislative Instruments (Fuel Standard Instruments) Sunset-altering Declaration 2016 http://www.comlaw.gov.au

Australian Government’s regulatory reform agenda

The Australian Government is committed to reducing the cost of unnecessary or

The Department of the Environment Review of the Fuel Quality Standards Act 2000 16. inefficient regulation imposed on business, individuals and community organisations by a net $1 billion a year. The Government uses a deliberately broad definition of regulation: “any rule endorsed by Government where there is an expectation of compliance”. This includes legislation, regulation and quasi-regulation. From 1 July 2016, the Australian Government’s approach will be broadened to include a focus on regulatory reforms that encourage innovation and competitiveness, enhancing productivity and economic growth.

Standards

Sound environmental standards are necessary as these create certainty for business, confidence within the community and provide for the effective stewardship of natural resources for current and future generations. However, poorly designed regulation can place unnecessary burden on the community through duplicative and cumbersome requirements while failing to meet the desired environmental outcomes (Department of the Environment 2015). As part of the Industry Innovation and Competitiveness Agenda the Australian Government has adopted the principle that if a system, service or product has been approved under a trusted international standard or risk assessment, then Australian Government regulators should not impose any additional requirements for approval in Australia, unless it can be demonstrated that there is a good reason to do so. The Environment Portfolio has developed criteria to assess potential opportunities for adoption of international standards and risk assessments. These criteria have been developed in consultation with business, industry and environmental groups.

Issues with the Act

Internal reviews within the Department of the Environment have identified a number of issues that impact the effectiveness of the Act at present. The review has considered the desirability and costs and benefits of making changes to the Act to address these issues.

International fuel standards and harmonisation

The international regulatory context for the regulation of fuel quality standards has evolved considerably since the legislation was introduced. The overarching feature is that vehicle emission standards around the world are becoming more stringent. Because emissions standards and fuel quality work are closely linked, this often means that higher quality fuel is needed for emission standards to be met. While fuel quality in Australia is not a direct function of the regulatory framework in place here, as discussed later in this report, substantial improvements to fuel quality and reductions in emissions in line with international trends have been achieved since introduction of the Fuel Quality Standards Act 2000 (see section 3). Thus the regulatory framework for fuel quality can be expected to have a bearing on fuel quality in Australia in the future and further efforts towards international harmonisation.

Changing fuel sector environment There is a complex array of influences that will affect the business environment of the Australian fuels sector in coming years. A clear trend is emerging though of increasing

The Department of the Environment Review of the Fuel Quality Standards Act 2000 17. demand for petrol and particularly diesel being met through imported fuels (Table 2). Due to recent closures of refineries, only four refineries now remain in Australia: BP's Kwinana refinery in Western Australia, Viva Energy’s Geelong refinery in Victoria, Caltex's Lytton refinery in Queensland and Exxon-Mobil's Altona refinery in Victoria (Figure 2). REF _Ref419124728 \h \* MERGEFORMAT Further, by global standards remaining refineries have relatively small production capacity. Table 2: Production and imports of petroleum products Australia, 2000 and 2013

Chang Petrol & diesel production and imports 2000 2013 e Australian refinery produced petrol 17 000 ML 15 600 ML -8% Imported petrol 1 200 ML 3 700 ML 207% Australian refinery produced diesel 11 800 ML 12 900 ML 9% Imported diesel 1 100 ML 12 500 ML 1010% Percentage imported (total petrol and diesel) 7% 36%

Source: DIIS 2015

Figure 2: Refineries and major fuel import terminals Note the Kurnell refinery ceased refining operations in 2014, with the site being converted to a fuel import terminal. The Bulwer Island refinery closure in mid-2015 and is in the process of being converted to a jet fuel import terminal.

REF _Ref419124728 \h \* MERGEFORMAT There has been a recent media report that plans are being considered for a new refinery at Gladstone in Queensland however.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 18. Source: AIP 2013

1.4 Review process

The review has been both backwards and forwards looking - that is to say we have evaluated both the effectiveness of the Act as it has operated until now and potential costs and benefits of regulating fuel quality in the future. The review has been undertaken in a manner that addresses requirements of The Australian Government Guide to Regulation, including the ten Principles for Australian Government Policy Makers and seven regulatory impact statement (RIS) questions – see Box 1 (DPMC 2014). To address these principles and questions the review has followed the process as set out in the sub-sections following.

Box 1: Australian Government Guide to Regulation, Ten Principles and Seven RIS Questions

Ten Principles: 1. Regulation should not be the default option for policy makers: the policy option offering the greatest net benefit should always be the recommended option. 2. Regulation should be imposed only when it can be shown to offer an overall net benefit. 3. The cost burden of new regulation must be fully offset by reductions in existing regulatory burden. 4. Every substantive regulatory policy change must be the subject of a Regulation Impact Statement. 5. Policy makers should consult in a genuine and timely way with affected businesses, community organisations and individuals. 6. Policy makers must consult with each other to avoid creating cumulative or overlapping regulatory burdens. 7. The information upon which policy makers base their decisions must be published at the earliest opportunity. 8. Regulators must implement regulation with common sense, empathy and respect. 9. All regulation must be periodically reviewed to test its continuing relevance. 10. Policy makers must work closely with their portfolio Deregulation Units throughout the policy making process.

Seven RIS Questions: 1. What is the problem you are trying to solve? 2. Why is government action needed? 3. What policy options are you considering? 4. What is the likely net benefit of each option? 5. Who will you consult about these options and how will you consult them? 6. What is the best option from those you have considered? 7. How will you implement and evaluate your chosen option?

Establish whether there is a case for regulation of fuel quality When seeking to establish whether there is prima facie a case for action on fuel quality in the future we have considered the following: Why regulate fuel quality? In particular, are there market failures associated with the unregulated supply of fuel? What are the objectives and main instruments of the current Act?

The Department of the Environment Review of the Fuel Quality Standards Act 2000 19. Are they appropriately framed given problems identified?

Assess effectiveness of the Act Looking backwards, how effective has the current Act been in achieving objectives? Answers to this question have in turn entailed: Assessing the administrative effectiveness of the Act. Backcasting analysis of emission reductions and improvements to health outcomes that have been achieved through implementation of the Act.

Identify and assess feasible regulatory options Looking forward, is continuation of the Act in its current form the most appropriate way to proceed? In answering this question, the review has considered the full spectrum of regulatory options that are available over the short and longer terms including: business as usual (continuation of the Act in its current form); amended Act; co-regulatory approaches; and de-regulatory and self-regulatory approaches. Assessment of options was undertaken at four levels:

1.1.1.a.i.i. Qualitative assessment

Assessment of a longer list of options against a qualitative framework comprising a series of assessment criteria. From this assessment a shorter list of options was prioritised for more detailed assessment.

1.1.1.a.i.ii. Cost-effectiveness

Cost-effectiveness assessment of the short listed options - defined as the least cost approach to achieving a minimum level of regulation considering only the direct costs of the different regulatory approaches.

1.1.1.a.i.iii. Broader welfare impacts

An economic assessment of the short listed options within a cost-benefit analysis (CBA) framework. To complete this analysis it was necessary to consider the broader welfare impacts of the options including the costs and benefits of alternative trajectories for fuel quality standards. Because it is not feasible to be definitive about the fuel quality

The Department of the Environment Review of the Fuel Quality Standards Act 2000 20. standards that will apply under different regulatory options in the future, a range of fuel quality scenarios were developed and assessed: Scenario A (international harmonisation). Fuel quality standards are tightened in 2020 in Australia to align with international best practice. Scenario B (frozen in time). Fuel quality standards remain unchanged from their current levels. Scenario C (backsliding). The quality of fuel declines for a limited range of fuel quality parameters, for a limited share of the market. Scenario D (delayed international harmonisation). Fuel quality standards are tightened in 2025 in Australia to align with international best practice. These scenarios were used to establish upper and lower bounds for indirect and non- market costs and benefits associated with each of the regulatory options, with different scenarios applied to the different options based on an assessment of their ‘best fit’. REF _Ref419124728 \h \* MERGEFORMAT Integrated emissions, air quality and health impacts modelling A key consideration when assessing non-market costs and benefits is the implications of the different scenarios (linked to the different regulatory options) for emissions arising from the use of fuel that may cause environmental and health problems. To that end, integrated emissions, air quality and health impacts modelling was undertaken for each of the scenarios outlined above. The emissions and air quality modelling was undertaken using CCAM-TAPM-CTM models applied to the Melbourne and Sydney airsheds, with results for other metropolitan airsheds extrapolated from the Melbourne and Sydney model outputs. REF _Ref419124728 \h \* MERGEFORMAT As with the back-casting analysis, when undertaking the emissions and air quality modelling it has been necessary to consider the interplay between fuel quality, vehicle emissions standards, vehicle design and other drivers of emissions (see Box 2).

1.1.1.a.i.iv. Industry impacts and regulatory burden

The industry impacts and regulatory burden of the different options also needed to be carefully considered and assessed. Impacts include the direct costs of the different regulatory options, as well as indirect costs associated with alternative fuel quality scenarios including petroleum industry investment and operating costs. Regulatory burden measurement was undertaken in accordance with the Australian Government’s Regulatory Burden Measurement Framework (OBPR 2015).

Box 2: Interplay between fuel quality and other factors driving emissions

The interplay between fuel quality and technologies and the role of international trade factors on vehicle and fuel standards within Australia are among the many factors that need to be considered in determining the impacts of changes in fuel quality on emissions. Other factors that also influence emissions and their impacts include the rate of uptake of fuels from renewable

REF _Ref419124728 \h \* MERGEFORMAT The scenarios and their application to the regulatory options are discussed in more detail in Chapter 5.

REF _Ref419124728 \h \* MERGEFORMAT An overview of the approach to the integrated emissions, air quality and health impacts modelling is provided in section 7. A full discussion of the approach and models used is provided in an accompanying technical report -

The Department of the Environment Review of the Fuel Quality Standards Act 2000 21. sources, changes in fleet composition, the retro-fitting of control technologies to older vehicles (particularly heavy vehicles) and changes in traffic characteristics in major cities. Where necessary, we will consider these aspects as a direct consequence of addressing the identified fuel quality scenario.

Undertake stakeholder consultation and seek stakeholder feedback Comprehensive and effective consultation is critical to ensuring that available information and the full range of views on technical and policy issues is captured in the analysis. Stakeholder feedback on the options and analysis has been sought at two key stages in the project: public release of an Issues Paper in June 2015 (Marsden Jacob 2015) REF _Ref419124728 \h \* MERGEFORMAT ; and public release of the Draft Review Report (this report). A list of stakeholders that provided responses to the Issues Paper is provided in Appendix 2.

1.5 Structure of the report

The remainder of this review report is structured as follows: Section 2 – Current legislative framework: discusses the case for regulation of fuel quality and the key features of the Act. Section 3 – Has the Act been administratively effective? Section 4 – Has the Act achieved its objectives? Section 5 – Fuel quality regulatory option: discusses the regulatory options that were considered in this review and the qualitative assessment of the long listed options. Section 6 – Options analysis: presents the results of the cost-effectiveness and cost- benefit analysis of the shortlisted options and the assumptions that underpin the analysis. Section 7 – Emissions, air quality and health impacts: summarises the assumptions, analytical techniques and results of the emissions, air quality and health impact assessments.

REF _Ref419124728 \h \* MERGEFORMAT Appendix 3 contains a list of stakeholders who provided submissions on the Issues Paper.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 22. 2. Legislative framework and policy basis

In this section we discuss the current regulatory framework for addressing fuel quality in Australia and the policy issues underpinning the need for regulating fuel quality. REF _Ref419124728 \h \* MERGEFORMAT

2.1 Key points

Fuel quality is currently regulated in Australia through the Fuel Quality Standards Act 2000, the Fuel Quality Standards Regulations 2001 and associated determinations. The Act would appear to be an appropriate and comprehensive approach to the regulation of fuel quality given environmental and health risks associated with the combustion of fuels. Moreover, the objects, as currently specified in the Act, remain appropriate, although possibly too narrow. This doesn’t necessarily mean that the Act in its current form should continue in the future. That question is explored in subsequent chapters.

2.2 Current regulatory framework

The National Fuel Quality Standards Regulation Impact Statement (DEH 2000) assessed seven options for regulating fuel quality in Australia, with the Fuel Quality Standards Act 2000 introduced as the preferred regulatory option. The Fuel Quality Standards Act 2000 provides the overarching legislative framework for national fuel quality standards in Australia (Figure 3). The Fuel Quality Standards Regulations 2001 (the Regulations) establish the administrative details of the Act, with determinations used to set standards for particular fuels and fuel parameters.

Objects Regulation of fuel & additives Reporting Enforcement Other

Administrative detail Standards

REF _Ref419124728 \h \* MERGEFORMAT This section merely provides an overview of the regulatory regime. Discussion of the operation of that regime, including its effectiveness, is provided in section Has the Act been administratively effective?.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 23. Figure 3: Fuel quality legislative framework

Major provisions in the Act and Regulations The Act is set out in five parts: Part 1 of the Act comprises preliminary information; Part 2 sets out the regulatory regime for fuel and fuel additives; Part 3 details monitoring and enforcement provisions; Part 4 details record keeping and reporting requirements; and Part 5 discusses other matters. These parts are detailed below, with further discussion provided, including aspects of the Regulations, where pertinent to the review.

Part 1 – Preliminary

Part 1 of the Act sets out the objects of the Act, definitions and its relationship to other Commonwealth and State and Territory laws. In the context of this review, Section 3, Objects of the Act, is the most important section. Objects The objects of Fuel Quality Standards Act 2000 are to: (a) regulate the quality of fuel supplied in Australia in order to: (i) reduce the level of pollutants and emissions arising from the use of fuel that may cause environmental and health problems; and (ii) facilitate the adoption of better engine and emission control technology; and (iii) allow the more effective operation of engines; and (b) ensure that, where appropriate, information about fuel is provided to consumers when the fuel is supplied. Object (b) was introduced through an amendment to the Act in 2003. It is worth noting that the National Fuel Quality Standards Regulation Impact Statement (DEH 2000) also refers to secondary outcomes that were expected to be delivered through the legislation: harmonisation of Australian vehicle emission standards with international standards; national availability of petrol and diesel of appropriate quality to allow the effective adoption of new vehicle engine and emission control technologies; a nationally consistent approach to fuel quality standards; ensuring that appropriate fuel is available to meet the timetable for introduction of the new Australian Design Rules; and avoiding restriction of competition and trade.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 24. These outcomes are not specified in the Act but can be regarded as secondary objectives implied from the stated objects of the Act and subsequent parts. It is also important to note that stakeholder feedback over the course of this review indicated generally strong to very strong support for maintaining the current objects of the Act with no stakeholders objecting to the current objects. The one area of concern relevant to the objects expressed by some stakeholders is that greater emphasis should be given to consumer protection in the Act (see section Consumer protection).

Part 2 – Regulation of fuel and fuel additives

Part 2 of the Act regulates fuel and fuel additives. This is done through: creating offences and civil penalty provisions for supplying fuel that does not comply with fuel standards and for supplying fuel that does not comply with fuel quality information standards. granting of approvals to vary a fuel standard or a fuel quality information standard and with varying and revoking those approvals. requiring documentation for the supply of fuels that are subject to fuel quality standards. creating an offence and a civil penalty provision for altering fuels that are subject to fuel quality standards. establishing a Fuel Standards Consultative Committee. detailing the process for making fuel quality standards and fuel quality information standards. Essentially that process entails: - The Minister (for the Environment) determining that a fuel standard or information standard should apply in respect of a specified kind of fuel, considering the objectives of the Act. - The determination is made via a legislative instrument (see section Determinations for an overview of determinations that have been made). - The determination is only made after a consultation process has been undertaken, including advice from the Fuel Standards Consultative Committee. - The fuel standard may provide for more stringent parameters to apply in specified areas in Australia. However, preference must not be given to one State over another in applying the standard. creating offences and civil penalty provisions relating to the supply or importation of fuel additives that are covered by an entry in the Register of Prohibited Fuel Additives. Additives which have been demonstrated to have an adverse impact on the environment or engine operability are considered for inclusion on the Register. At present however, there are no additives listed on the register. Penalties Penalties currently detailed in the Act include a maximum of $450,000 on Corporations for altering or supplying fuel that does not comply with a fuel standard. Approvals Subsection 13(1) of the Act enables the Minister to grant an approval to vary a particular fuel standard or fuel quality information standard. Most approvals that have

The Department of the Environment Review of the Fuel Quality Standards Act 2000 25. been granted have been for fuels for specialist uses such as leaded petrol in motor sports. Subsection 13 (2) of the Act enables the Minister to grant an emergency approval in the event of a shortfall in the supply of a fuel. Approvals granted are discussed further in section 3.3.2. Part 2 of the Regulations stipulate that an application for an approval to vary a fuel standard must be covered by a written application and an application fee. Application fees are detailed in Table 3. Application fees are currently charged on the basis of the quantity of fuel for which an approval is being sought. However, in keeping with the revised Australian Government Charging Framework and Cost Recovery Guidelines, there is currently a Government proposal to amend the fee schedule to ensure fees are charged in line with the cost of administering the approvals process. This is discussed further in section Section 13 approvals. Table 3: Application fee for approvals

Quantity of fuel Fee Item (megalitres) ($) 1 ≤1 2,575 2 >1, ≤ 25 25,000 3 >25, ≤100 70,000 4 >100 130,000

Source: Fuel Quality Standards Regulations 2001, Part 2, Section 5

Fuel Standards Consultative Committee The Fuel Standards Consultative Committee includes representatives of each of the states and territories, the Commonwealth, fuel producers, nongovernment environmental organisations and consumer interests. Committee members are appointed by the Minister for the Environment, who may appoint additional members. The Committee is chaired by a senior officer of the Department of the Environment. The Minister is required to consult the Committee before: determining a fuel standard or fuel quality information standard; granting, varying or revoking an approval to vary a fuel standard; entering or removing contents from the register of prohibited fuel additives; and preparing guidelines for more stringent fuel standards which may apply in specified areas in Australia. It is important to note that, at the time of this review, the Australian Government has indicated its intention to disband the Fuel Standards Consultative Committee, with the necessary amendments set out in the Omnibus Repeal Day (Spring 2014) Bill 2014.

Part 3 – Monitoring and enforcement provisions

Part 3 sets out the Act’s enforcement regime. Specific provisions in the Act aimed at ensuring compliance include: Appointment of inspectors, the powers and obligations of those inspectors and the rights and responsibilities of occupiers of fuel supply premises when inspectors seek to

The Department of the Environment Review of the Fuel Quality Standards Act 2000 26. exercise their powers. Taking of fuel samples by inspectors with the consent of a fuel supply premise. If consent is not granted, the issue of a warrant by a magistrate to enable inspectors to enter a fuel supply premise for the purpose of taking a sample. Analysis of fuel samples. Offence proceedings including the issue of evidentiary certificates containing information about the analysis of fuels samples. Injunctions restraining a person from engaging in conduct that would otherwise be in contravention of the Act. The issue and enforcement of pecuniary penalties for the contravention of a civil penalty provision and criminal proceedings. Inspectors Trained personnel appointed as inspectors may visit a fuel supplier at any time, on any day to undertake fuel testing and sampling, view fuel delivery documentation, inspect ethanol labels and check any other requirements of the Act. Fuel testing The testing of fuels under the Act is undertaken across all areas of the national fuel supply chain. Samples may be taken from importers, refineries, distributors and service station forecourts. The testing program is structured to ensure a broad range of sites and locations are sampled including from fuel suppliers who have been the subject of a consumer complaint.

Part 4 – Record keeping and reporting

Under Section 66 of the Act, fuel suppliers must keep and maintain records at each individual site where the fuel is supplied, for a period of two calendar years. These records include delivery documentation, stock reconciliation and fuel testing records in relation to the supply of fuel. If the relevant records are paper documents, these records must be kept at the premises where the fuel is supplied. Alternatively, documents may be retained in an electronic format which are either retained at the premises or are readily accessible. Under Section 67 of the Act, Annual Statements must also be submitted each calendar year by producers of fuels that are subject to standards. Details that must be provided in the statements include: the kind and grade of fuel produced or blended, or its product code; details of any testing done on the fuel, including the date of each test and records by which the fuel tested can be traced to delivery docket numbers for the fuel; test methods used and the results of the tests; how the fuel was supplied; the quantity supplied; the kind and grade of fuel, or its product code; and to whom it was supplied.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 27. Annual Statements must also be provided by importers of fuel, with the statements containing similar information to that provided by producers.

Part 5 – Other matters

Other matters covered in the Act include: authority for the (Department) Secretary to disclose information obtained through operation of the Act, especially if disclosure is likely to assist in the administration or enforcement of taxation law or consumer protection law; delegation of the Minister’s powers or functions under the Act; provision for an appeal to the Administrative Appeals Tribunal against a decision made under the Act including: - a decision to refuse to grant an approval or to revoke an approval; and - a decision to enter, or not to enter, a fuel additive, or a class of fuel additives, in the Register. annual reporting on operations of the Act; and review of the Act, which must be undertaken at intervals of not longer than 5 years.

Determinations Fuel standards and fuel quality information standards are set via a legislative instrument known as a ‘determination’. To date the following determinations have been made under the Act: Fuel Standard (Petrol) Determination 2001 Fuel Standard (Automotive Diesel) Determination 2001 Fuel Standard (Autogas) Determination 2003 Fuel Quality Information Standard (Ethanol) Determination 2003 Fuel Standard (Biodiesel) Determination 2003 Fuel Standard (Ethanol E85) Determination 2012 Fuel Quality Information Standard (Ethanol E85) Determination 2012 These determinations and the standards are described in more detail in section Determinations.

2.3 Why regulate fuel quality?

Regulation of fuel quality in Australia is primarily being driven by externality objectives, notably the reduction of negative externalities associated with the combustion of transport fuels. As noted in the Australian Government Guide to Regulation, “…an externality is generated when the economic activity of one organisation or individual generates a positive or negative impact for another without there being a market price associated with the impact. For example, a factory might be polluting a river, making the water unusable for businesses downstream” (DPMC 2014, p.21).

The Department of the Environment Review of the Fuel Quality Standards Act 2000 28. Where the use of fuel is concerned there are a number of negative externality impacts or potential impacts, including: human health impacts of air pollution; property and amenity impacts of air pollution, such as erosion of stone buildings and reduced visibility; ecological impacts of air pollution; climate change linked to emissions of greenhouse gases; and the impacts of MTBE and other ether oxygenates on groundwater quality (see Box 3). Of these, the main focus of fuel quality in Australia is its links to short-term and long- term effects on human health, with greenhouse gas emissions also being an important consideration. This is clear from the objects of the Act and the National Fuel Quality Standards Regulation Impact Statement, which specifically stated that the Australian Government's primary objective in mandating fuel quality standards “…is to reduce the adverse effects of motor vehicle emissions on urban air quality, human health, and the enhanced greenhouse effect” (Environment Australia 2000, p.4). As previously noted (section Major provisions in the Act and Regulations), another consideration underpinning the regulation of fuel quality in Australia is harmonisation of fuel quality with fuel standards internationally.

Box 3: MTBE

Methyl tertiary butyl ether (MTBE) is a volatile organic chemical that is used as an octane enhancer in some countries, including the EU and in Asia. The benefits of MTBE are that it is cheap to produce and by enhancing octane ratings it improves fuel combustion and reduces emissions. Since January 2004 the volume of MTBE has been limited in all grades of petrol to less than 1%, essentially allowing MTBE to be present as trace quantities only. Although MTBE is not added by Australian refineries incoming fuel from international refineries may contain MTBE. The decision to restrict the level of MTBE in petrol follows concerns about the risk that MTBE poses to groundwater contamination from underground storage tank leakage and spills. MTBE possesses several properties that enable it to rapidly spread to groundwater supplies. It does not bind well to soil particles, is highly water soluble and poorly biodegradable. Although available evidence indicates that MTBE poses a low threat to human health, it does foul the taste of water and is odorous, which made water supplies unusable for drinking and other potable uses even at very small concentrations. In Western Australia the volume of MTBE in petrol is limited is limited to 0.1% because of the extensive use of groundwater for water supplies there. The issue of MTBE and the standard that currently applies in Australia has attracted significant comment from stakeholders. On the one hand a number of stakeholders, including the Asian Clean Fuels Association (ACFA), argue strongly that restrictions on the use of MTBE in petrol should be removed. They cite the air quality benefits of using MTBE; the extensive use of MTBE and other ether oxygenates in European countries and water sampling data from Europe showing the absence of MTBE in groundwater; and a range of studies indicating the low health risk of MTBE (e.g. European Centre for Ecotoxicology and Toxicology of

The Department of the Environment Review of the Fuel Quality Standards Act 2000 29. Chemicals, 1997). On the other hand, a number of stakeholders have urged that restrictions on the use of MTBE be maintained. Some cite recommendations of the report International Fuel Quality Standards and Their Implications for Australian Standards (Hart Energy 2014) which recommends no changes to the existing specification for MTBE and other gasoline ether oxygenates listed in the petrol determination. One stakeholder (W Godson) goes further, arguing that even residual levels of MTBE should not be permitted in petrol in Australia. As with other fuel quality specifications, recommendations on directions with regards to the MTBE content of petrol is outside the scope of this review. We note however, that no decision should be made to change MTBE specifications in petrol before there has been a thorough assessment of the costs and benefits of doing so supported by a comprehensive technical analysis.

Fuel quality, air pollution and health According to the State of the Environment 2010 report: “Most pollutants (carbon monoxide, nitrogen dioxide, sulfur dioxide and PM2.5 particles) result from combustion (primary pollutants) while …secondary pollutants (such as ozone) result from the action of complex photochemical processes on primary pollutants (oxides of nitrogen and volatile organic compounds), predominantly in the warmer months, forming photochemical smog.” (State of the Environment Committee, 2011, p. 127). Motor vehicles are the single largest contributor to a number of primary air pollutants, contributing approximately 80% of NOx emissions and are the predominant source of

PM10 and carbon monoxide emissions in urban areas. Since introduction of the Act, Australia’s population, motor vehicle numbers and fuel usage have increased significantly (Table 4). Nevertheless, concentrations of many primary and secondary pollutants have decreased over the same period, the exceptions being ozone and particle levels, which have remained more or less steady (Figure 4 and Figure 5) REF _Ref419124728 \h \* MERGEFORMAT . Table 4: Australia: population, vehicle and fuel statistics in 2000 and 2013

Chang 2000 2013 e People Population 19 million 23 million 22% Population in capital cities 12 million 15 million 24% Vehicles Number of light vehicles 11.4 million 15.3 million 34% Number of heavy vehicles 0.48 million 0.63 million 31%

Source: Australian Bureau of Statistics, 2015a and 2015b

REF _Ref419124728 \h \* MERGEFORMAT The significant role of improved fuel quality, together with vehicle emission standards, in contributing to reductions of these pollutants is discussed in section 3.3.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 30. Figure 4. Average maximum four-hour average ozone concentrations (a) and average 95th percentile four-hour average ozone concentrations (b) for four Australian cities, 1999–2008

Source: Department of Sustainability, Environment, Water, Population and Communities, 2011

Figure 5. Capital cities highest daily average PM2.5 concentrations

Source: Department of Sustainability, Environment, Water, Population and Communities, 2011 Given improvements to air quality, it could be tempting to conclude that regulation of fuel quality is no longer a priority. As noted in the Medical Journal of Australia though, “…in Australia, the increasing interest in the (outdoor air pollution) issue has been spurred not so much by a worsening of air quality as by accumulating evidence of its effect on health and the perceived need to ‘do something about it’” (Kjellstrom, Neller & Simpson 2002, p.604). Over the past 15-20 years, scientific studies have greatly expanded our understanding of the nature and extent of the effects of major air pollutants in cities (e.g. Denison et al. 2000, 2001; Environment Protection and Heritage Council, 2004, 2010; Simpson et al.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 31. 2005a, 2005b). On the basis of these and related studies, it is apparent that urban air pollution is a significant cause of death and illness in the community. By one estimate (Begg et al. 2007) there were close to 3000 deaths due to urban air pollution in 2003. This was 2.3 % of all deaths and nearly twice the national road toll. Two-thirds of these deaths were attributable to long-term exposure to air pollutants, with the elderly most affected. The health burden associated with urban air pollution was shared about equally between males and females (53% to 47%). Such deaths occur from a range of medical causes (Figure 6). More recent analysis undertaken for the National Plan for Clean Air (Golder Associates 2013) estimates that from 2006 to 2010 annual mortality attributable to current long-term PM2.5 exposures above background in four Australian cities (Sydney, Melbourne, Brisbane, Perth) was equivalent to around 1590 deaths at typical ages. Moreover, in October 2013, the International Agency for Research on Cancer (IARC) announced that it has for the first time classified outdoor air pollution as carcinogenic to humans (IARC 2013). Particulate matter was evaluated separately and was also classified as carcinogenic. The IARC listed the predominant sources of air pollution as transportation, stationary generation, industrial and agricultural emissions and residential heating and cooking. In 2012, the IARC also classified diesel exhaust as carcinogenic (IARC 2012).

Figure 6. Deaths attributed to long-term exposure to urban air pollution, 2003 REF _Ref419124728 \h \* MERGEFORMAT Source: Begg et al. 2007 The economic cost of these health impacts is likely to be substantial. The combined economic cost of motor vehicle-related mortality (deaths) and morbidity (illness) was estimated in 2000 at between $1.6 billion and $3.8 billion (central estimate $2.7 billion)

REF _Ref419124728 \h \* MERGEFORMAT More recent data on deaths attributed to long-term exposure to urban air pollution is expected with release of the report The burden of disease and injury in Australia 2011. This is expected in mid-2016.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 32. (BTRE 2005). A more recent OECD study (OECD 2014) estimates that the cost of premature deaths due to air pollution in Australia increased between 2005 and 2010 from approximately USD 2.9 billion per annum (~A$ 3.4 billion) to USD 5.8 billion per annum (~A$ 6.8 billion). The corollary of this is that reducing air pollutants has the potential to achieve significant economic benefits if achieved cost effectively. The marginal benefit of reducing PM2.5 in urban areas (Sydney and Melbourne), for example, is valued at between $190,000 and $290,000 per tonne (Pacific Environment Limited and Marsden Jacob Associates 2013). The extent to which the air quality objectives of the Act have been achieved are explored in detail in section Impact of changes on air quality.

Greenhouse gas emissions Motor vehicles emit a range of greenhouse gases. The principal greenhouse gas emitted is carbon dioxide, but the combustion of fuels in motor vehicles can also produce nitrous oxide and methane. The transport sector (including motor vehicles) is a significant source of greenhouse gas emissions. In the year ending September 2014, the combustion of transport fuels accounted for 17% of Australia’s national inventory (Department of the Environment, 2015b). Importantly, the growing transport task means that the proportional contribution of the sector has been increasing. Transport was the sector of fastest growth in emissions in the period 1989-90 to 2013-14, with growth of more than 50% in that period (Figure 7).

Figure 7: Growth in greenhouse gas emissions by sector, 1989-90 to 2013-14 Source: Department of the Environment, 2015b

Consumption of the major liquid fuels is a broad indicator of emissions from the transport sector. Australia’s National Greenhouse Gas Inventory reveals that over 70% of liquid fuels consumed in Australia in 2013-14 was in the domestic transport sector, with the vast majority of this being for road transport. Changes to vehicle fleet composition mean that consumption of automotive gasoline (including ethanol-blended) has been decreasing slightly (- 2.8 % from 2008-09 to 2012-14), but this decline has been more than offset by strong growth in the consumption of diesel fuel (+ 20.6%)

The Department of the Environment Review of the Fuel Quality Standards Act 2000 33. (Department of the Environment, 2015b). The relationship between fuel standards and fuel consumption is not straightforward, with more stringent fuel standards for some parameters not necessarily leading to lower fuel consumption. Nevertheless, many of the technologies used to achieve improved fuel efficiency of vehicles rely on high fuel quality. For example, the decision to adopt a 10 ppm sulfur limit in the European petrol standard was made primarily to support carbon dioxide emissions reductions by assisting improvements in fuel efficiency - an important consideration in the context of European fuel efficiency standards for motor vehicles (Hart Energy 2014, European Union 2009). While Australia does not currently have mandatory vehicle fuel efficiency standards, improved vehicle fuel efficiency was an important goal in the context of government climate change policy and was a significant driver for implementation of the Fuel Quality Standards Act 2000 (see Safeguarding the Future: Australia’s Response to Climate Change, Prime Minister 1997). That goal continues to stand (see A Plan for a Cleaner Environment, Department of the Environment, 2013). The extent to which the greenhouse gas emission objectives of the Act have been achieved are also explored in section Impact of changes on greenhouse gas emissions. On 31 October 2015, the Australian Government announced the establishment of a Ministerial Forum to examine vehicle emissions standards in Australia and vehicle testing arrangements. The Forum will also consider this Report on the Review of the Fuel Quality Standards Act 2000.

2.3.3 Harmonisation of emission and fuel standards with international standards Harmonisation of emission and fuel standards internationally is another factor driving regulation of fuel quality in Australia. The National Fuel Quality Standards Regulation Impact Statement, states that key secondary objectives of the Act are: the harmonisation of Australian vehicle emission standards with international standards; and the national availability of petrol and diesel of appropriate quality to allow the effective adoption of new vehicle engine and emission control technologies. The international context for the regulation of fuel quality has continued to evolve since introduction of the Act in 2000. The overarching feature is that emissions standards around the world are becoming more stringent. This often means higher quality fuel is needed for emission standards to be met. Also, Australia is operating in an increasingly global automotive industry, “…where vehicle manufacturers design and develop vehicle platforms for sale throughout the world. Small changes are then made to engine, emission and fuel systems to cater for local market differences” (FCAI 2015, p.9). Australia’s increasing reliance on imported motor vehicles therefore, adds to pressure for emission and fuel standards in Australia to achieve closer harmonisation with standards internationally, particularly from a vehicle operability perspective (see Table

The Department of the Environment Review of the Fuel Quality Standards Act 2000 34. 8). REF _Ref419124728 \h \* MERGEFORMAT The question as to whether or not complete harmonisation between fuel standards and elsewhere is required is discussed further in section Facilitating adoption of better engine and emission control technology and allowing effective operation of engines of the report.

REF _Ref419124728 \h \* MERGEFORMAT The transition in Australia away from domestic manufacturing of light vehicles will be completed by the end of 2017 when the light vehicle industry becomes a fully imported industry.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 35. Table 5: Summary of fuel quality standards in Australia and other countries South Fuel/substance Australiaa Japanc EUd USAe Koreab Petrol 42% pool average Aromatics over 6 months 24 vol% 35 vol% 25% with a cap of 45% Benzene 1 vol% 0.7 vol% 1 vol% 1 vol% 0.95 vol% Ethanol 10 vol% 3 vol% 5 vol% Non- Non- Lead 0.005 g/L 0.013 g/L 5 mg/L detectable detectable Phosphorus 0.0013 g/L All grades:150 ppm (since 1 Jan 10 ppm 2008) Sulfur 10 ppm 10 ppm 10 ppm (average, PULP grade 50 from 2017) ppm (since 1 Jan 2008) MTBE (Methyl 1 vol% 7 vol% Tertiary Butyl Ether) DIPE (Di-isopropyl 1 vol% ether) TBA (Tertiary Butyl 0.5 vol% Alcohol) Diesel 30 wt% Aromatics 35 vol% 25 vol% (automotive) Benzene 1 vol% Lead 0.005 g/L 11 wt% (since 1 5 wt% PAHs 8 wt% Jan 2006) (automotive) 10 ppm (since 1 10 ppm 10 ppm 10 ppm Sulfur 10 ppm Jan 2009) (automotive) (highway) (highway) Sources: a. The Department of the Environment, Fuel quality standards, b. TransportPolicy.net, South Korea: Fuels: Diesel and Gasoline, . c. TransportPolicy.net, Japan: Fuels: Diesel and Gasoline, http://transportpolicy.net/index.php? title=Japan:_Fuels:_Diesel_and_Gasoline d. European Union, 2009 e. TransportPolicy.net, US: Fuels: Diesel and Gasoline,

The Department of the Environment Review of the Fuel Quality Standards Act 2000 36. 2.4 Conclusions and recommendations

There are significant market failures associated with use of road transport fuels, notably negative externalities in the form of pollutants and greenhouse gas emissions. Given those failures, introduction of the Fuel Quality Standards Act 2000 and associated regulations and determinations, following an extensive RIS process in 2000, appears to have been an appropriate response. Moreover, the objects of the Act, focussed as they are on reducing the health and environmental risks of fuel use, are suitably framed. This is reflected in a decision by the Australian Government, in October 2015, to establish a whole of government approach to vehicle emissions through a Vehicle Emissions Ministerial Forum. The Ministerial Forum will be supported by a working group who will examine a range of issues including, among others, the implementation of Euro 6 or equivalent standards for new vehicles and fuel quality standards. Notwithstanding significant improvements to air quality since introduction of the Act, the health risks associated with air pollution suggest that prima facie a strong case remains for the regulation of fuel quality in Australia. A move towards international harmonisation of fuel standards creates further impetus for the continued regulation of fuel quality. That does not necessarily mean that the Fuel Quality Standards Act 2000 in its current form represents an ideal framework or even the most appropriate framework for regulating fuel quality. Moreover, the existence of environmental externalities does not on its own justify government intervention in the form of the Fuel Quality Standards Act 2000.

Recommendations

The Department of the Environment Review of the Fuel Quality Standards Act 2000 37. 3. Has the Act been administratively effective?

In this section we review the administrative effectiveness of the Fuel Quality Standards Act 2000, since its introduction. Stakeholder perceptions of the Act, its strengths and weaknesses, are important factors informing the review (see Box 4). Based on the review of these areas we consider whether there are limitations with the existing Act and whether changes to the Act are desirable if the Act continues in the future.

3.1 Key points

The Fuel Quality Standards Act 2000 would appear to have been effectively administered since it was introduced. Determinations have been made setting fuel quality standards for the vast majority of fuel that is supplied for use in the road transport sector in Australia. A large majority of fuel supplied in Australia appears to meet those fuel quality standards. Nevertheless, there is scope for Act amendments that could further improve the effectiveness of the Act, strengthen the consumer protection aspects of the Act, and streamline decision-making as well as, in some cases, reducing the regulatory burden to industry of supplying compliant fuels.

Box 4: Stakeholder consultation for the review

On 12 June 2015 the Minister for the Environment announced the second independent review of the Fuel Quality Standards Act 2000. An Issues paper was published as a basis for consultation and interested persons and organisations were encouraged to provide comments by Friday 24 July 2015. The Issues Paper and a letter introducing the review was sent directly to 130 stakeholders and was also made available for download from the review website at: http://www.marsdenjacob.com.au/fuel-

The Department of the Environment Review of the Fuel Quality Standards Act 2000 38. quality-review-reports/. Twenty five submissions on the Issues Paper were received from organisations and individuals including representatives of the petroleum industry, biofuels industry, motor vehicle and trucking industries, automobile associations, the motor sports industry, state government environmental regulators, environment NGOs and academics. The review team held follow-up consultations with many of these stakeholders as well as with the Australian Competition and Consumer Commission (ACCC) and Standards Australia. Drawing from the submissions and direct consultations, the following key points emerged regarding stakeholder views on the Fuel Quality Standards Act 2000. Regulatory framework Most organisations have indicated a strong preference for a regulatory framework that ensures nationally consistent or uniform fuel quality standards. Some stakeholders are strongly of the view that this is best achieved through continuation of the existing Fuel Quality Standards Act 2000. Other stakeholders are neutral and whether the Act should continue or whether an alternative regulatory framework such as co-regulation should be adopted. Most state government agencies oppose the idea of a state based regulatory framework either because it will be unwieldy and potentially move away from uniform standards (standards setting) or because it will be duplicative (compliance). Compliance and consumer protection Some stakeholders, including motoring organisations, have indicated that regardless of the regulatory framework and standards adopted, compliance and consumer protection needs to be strengthened. This includes: . a stronger focus in the Act on consumer protection with regards to engine operability; . strengthening and better resourcing of the sampling/auditing regime; . improved labelling and other information at point of sale about what fuels can be used in what vehicles; . maintaining sampling at retail outlets, with additional audits of bulk suppliers. Fuel standards Stakeholders were advised that the focus of the review is on the regulatory framework rather than fuel quality standards per se. Nevertheless, most stakeholders were keen to comment on various aspects of fuel standards. Key points relevant to the review include: . The Federal Chamber of Automobile Industries (FCAI) and a range of other stakeholders argue that Australia should continue to align with international vehicle emission and fuel standards which are largely set in Europe and, to some extent, USA. Meeting Euro 6 emission standards will require sulfur limits to be set at 10ppm. . The Australian Institute of Petroleum argues that it is not necessary for Australia to move from current standards for sulfur in unleaded petrol (ULP) and premium unleaded petrol (PULP) in order to achieve Euro 6 emission standards. . The costs of motoring and the operability of vehicles for consumers are major concerns of the Australian Automobile Association with respect to fuel standards. . For some stakeholders fuel security is a key issue to be considered with any move to lower sulfur in fuels. . There is significant support for stronger regulation of biofuels and biofuel blends. Additional stakeholder perspectives on these and other issues are discussed later in this chapter.

3.2 Overview

The Fuel Quality Standards Act 2000 commenced operation in 2001 following the introduction of the Fuel Quality Standards Regulations 2001. The Department of the

The Department of the Environment Review of the Fuel Quality Standards Act 2000 39. Environment (the Department) administers the legislation. REF _Ref419124728 \h \* MERGEFORMAT The key administrative functions of the Department relevant to the legislation are: Monitoring and compliance of fuel standards and fuel quality information (see section Monitoring, compliance and consumer protection). Fuel policy covering: - Section 13 approvals (see section Section 13 approvals); and - overseeing determinations and legislative amendments (see section Determinations and legislative amendments). Costs associated with these administrative functions are summarised in Table 6 for the 10 year period 2005-06 to 2014-15. Although varying year on year, costs have remained roughly constant in real terms, averaging $2.9 million per annum in the five years to 2009-10 and $3.1 million in the five years to 2014-15. Decreases in costs in 2014-15 reflect general cuts to Departmental budget allocations and are projected to remain at this level or lower for the foreseeable future. The proportion of costs borne by the fuel policy and compliance sections of the Department have also remained roughly constant at 20-25% and 75-80% respectively over the period 2005-06 to 2014-15, reflecting resources needed to undertake the functions of the two sections. Some of those functions are discussed in more detail in the following sections considering the roles and views of industry and other stakeholders. Table 6: Government costs of administering the Fuel Quality Standards Act, 2005-06 to 2014-15 ($ 000s)

2005-06 2006-07 2007-08 2008-09 2009-10 Fuel Policy 180 325 705 675 1,046 Compliance 1,591 2,332 2,555 2,545 2,608 Total 1,771 2,657 3,260 3,220 3,653

2010-11 2011-12 2012-13 2013-14 2014-15 Fuel Policy 983 777 810 540 594 Compliance 2,073 2,166 2,948 2,595 1,858 Total 3,056 2,943 3,758 3,134 2,453

Source: Department of the Environment

3.3 Monitoring, compliance and consumer protection

Government monitoring and compliance The testing of fuels under the Act is undertaken across all areas of the national fuel REF _Ref419124728 \h \* MERGEFORMAT Known as the Department of Environment and Heritage until 2007 and Department of Sustainability, Environment, Water, Population and Communities from 2007 until 2013.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 40. supply chain. Testing can include testing of fuels approved under section 13 of the Act. Samples may be taken from importers, refineries, distributors and service station forecourts. The testing program is structured to ensure a broad range of sites and locations are sampled including from fuel suppliers who have been the subject of a consumer complaint. The sampling process involves the following steps. The inspectors will take a 10 litre flush of the fuel to ensure that the sample is representative of the tank. The flush will then be returned to the tanks and the occupier will be provided with a receipt for this action. The inspectors will then pour three 2 litre samples of the fuel. Of the samples: - the occupier will be asked to choose one to keep at the service station for their own testing if they wish to do so; - one of the samples may be sent to a National Association of Testing Authorities laboratory for testing; and - the other will be kept by the Department in secure storage in case further testing is needed. An inspector who takes a sample must record enough details to identify it and the address of the premises where it was taken and ask the occupier to sign the record. A container of a sample must be marked so that the sample is clearly identifiable, but in a way that prevents a person testing the sample from identifying the source of the sample. The container must also be securely packed, stored and transported so as to preserve the integrity of the sample. Fuel samples are then tested according to ASTM standards. For example the established international standard for testing of sulfur in petrol and diesel is ASTM D5453. Table 7 provides a summary of fuel sampling undertaken by the compliance section of the Department since standards for petrol and diesel were first introduced in 2002. A few key points can be drawn from this data: First, there has been a noticeable shift in the testing of fuel samples over time away from laboratory testing to on-site testing. The Department advises that this trend reflects both cost and preferred approaches to testing, with on-site tests (which can be undertaken at relatively low costs for a limited range of parameters) now often being undertaken as a first stage of testing, followed by more comprehensive laboratory tests if on-site tests detect a potential problem. Second, the number of tests overall has declined in recent years. In part this reflects budgetary constraints, although the Department advises that testing tends now to be more targeted than in the past, focussing more on known problem areas and fuel suppliers. Finally, the percentage of non-compliance with fuel standards, after being quite high in the early years of monitoring, has remained steady at about 1-2% over the past nine years. Although there has been a small increase in the rate of non-compliance in the past two years, it is too early to say whether this represents a reversal in trend.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 41. Table 7: Numbers and outcomes of fuel samples undertaken by compliance section of the Department

Financial On site Laboratory Total Non-compliance Non-compliance % year testing testing no.

2002/03 0 861 861 16 1.86%

2003/04 0 867 867 34 3.92%

2004/05 0 870 870 40 4.60%

2005/06 0 1077 1077 75 6.96%

2006/07 861 1471 2332 60 2.57%

2007/08 2592 552 3144 62 1.97%

2008/09 3306 549 3855 40 1.04%

2009/10 3751 697 4448 42 0.94%

2010/11 2523 460 2983 31 1.04%

2011/12 2427 365 2792 35 1.25%

2012/13 2962 397 3359 32 0.95%

2013/14 1305 413 1718 35 2.04%

2014/15 1369 284 1653 33 2.00%

Source: Department of the Environment Overall, it is concluded that the fuel sampling and testing regime undertaken by the Department, supported by other aspects of the regulatory regime, has been reasonably effective in helping to ensure that fuel supplied to the Australian market complies with Australian fuel standards and in detecting non-compliances when they do occur.

Consumer protection Information provided to the review team by the Australian Competition and Consumer Commission (ACCC) indicates that although in recent years there have been a significant number of enquiries or complaints by consumers regarding the supply of fuel from retail outlets, few of these complaints have related to the quality of fuel supplied. For example: in 2012-13 approximately 3% (30) of all fuel related enquires or complaints to the ACCC were related to fuel quality; and in 2013-14 approximately 2% (25) of all fuel related enquires or complaints to the ACCC were related to fuel quality. Most complaints were price-related. REF _Ref419124728 \h \* MERGEFORMAT Nevertheless, a number of stakeholders, responding to the Issues Paper, expressed concern at the lack of consumer protection provisions in the Act more broadly and an uncertainty as to whether responsibility for ensuring that fuel supplied is ‘fit for

REF _Ref419124728 \h \* MERGEFORMAT ACCC personal communication, August 2015.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 42. purpose’ rests with the Commonwealth, through the Act, with the ACCC or with state consumer affairs agencies. Two small business stakeholders, for example, have expressed concerns about shortcomings with the automotive diesel standard as it relates to operability, noting in particular the issue of diesel fuel waxing in equipment after cold nights. Similarly, the Australian Automobile Association (AAA) has expressed concern about fuel contamination and the impact of this on engine operability, citing an incident of fuel contamination in Melbourne in 2009 that caused catastrophic engine damage to more than 50 vehicles. In this case the fuel in question complied with established fuel standards and so a more stringent or comprehensive monitoring regime of the standards would not have prevented the contamination problem from occurring. The issues noted above raise the question as to whether the objects of the Act need to be broadened to place greater emphasis on consumer protection (see section Box 6). In broadening the objects of the Act, it will be important to ensure that amendments to do not unnecessarily add to the monitoring and compliance burden of fuel suppliers (see Box 5).

Petroleum industry quality assurance Fuel quality control is not confined to monitoring and compliance undertaken through the Act. The petroleum industry itself undertakes monitoring of the fuel that it supplies to the Australian market. For example, Australian Institute of Petroleum (AIP) members, which supply around 85% of the fuel to the Australian market, have in place quality assurance procedures to ensure that quality fuels are supplied to the Australian market (see Box 5). The costs of these procedures are likely to be substantially more than the costs of the government monitoring and compliance regime. The AIP emphasises though that most of the quality assurance undertaken by its members (>80%) is necessary to meet contractual requirements and market expectations and would be undertaken regardless of the existence of the Fuel Quality Standards Act 2000.

Box 5: Quality assurance procedures of AIP members

AIP member oil companies manage the quality and compliance of the fuel supplied throughout the supply chain out to the end consumer. This management typically follows a process of certification at origin point of manufacture (typically a refinery either locally or overseas) followed by protection against unacceptable contamination within the supply chain by means of operational procedure supported by targeted contamination check testing. At the refinery/origin point of manufacture, manufactured petroleum product are subjected to batch-wise testing and certification ranging from full test schedule through to testing a defined set critical parameters with non-critical parameters tested on a frequency basis. The frequency of testing is based on statistically validated high confidence levels of consistent “on specification” results for each test property nominated to be placed on frequency testing. This primary certification test report is traditionally defined as a Certificate of Quality (CoQ) and is produced by a quality assured testing laboratory. After a product batch has been certified, including confirmation that is compliant with the Fuel Quality Standards Act 2000 specified test property limits, the batch will be made available for supply to downstream customers through various transportation modes such as via pipeline, marine vessel, and/or tank truck. Post certification, assurance of the continued compliant status of the fuel is managed by adherence to company controlled procedures incorporating testing on a small number of test

The Department of the Environment Review of the Fuel Quality Standards Act 2000 43. properties. These test properties are specifically chosen for use in the field to both confirm the identity of the product batch being transported and to identify any unacceptable contamination that could result in the product batch no longer being compliant with regulated specifications. For Pipeline delivery to major bulk terminal testing of the above properties may be conducted to confirm the batch and/or identify gross contamination (Visual Appearance, Density, Flash Point) on a periodic basis during the product movement. Contamination check test results are compared against the supplied CoQ for the nominated batch For marine transportation additional contamination testing may be performed immediately post loading and again immediately prior to discharge into receiving terminal to verify the cargo is as indicated by the origin CoQ(s) and has not been contaminated in loading and/or transit to receiving terminal. Receiving terminals typically perform contamination check testing during the process of receipt to monitor the quality of the product received throughout the entire receipt period. Subsequently the tank into which the product batch has been received is usually sampled and tested to assure the tank contents have not been unacceptably contaminated. The same contamination check testing will be used, however now the results will be compared against calculated expected results based upon volume weighted calculation using known results for the existing tank heel and the receipt CoQ(s) data. Provided the actual tank results match the calculated expected results within defined tolerances then the receiving tank would be released for supply to downstream customers, whether via a Truck Load Rack or for backload onto a marine vessel. Delivery from terminal tanks to truck loading racks is typically through product grade dedicated pipework, eliminating any need to test against contamination. Biofuel blending does occur at specific terminals in some states combining biofuel blend stocks with petroleum grades though the use of specialised blend control systems which proportionally control and deliver targeted blends into the truck at the load rack. The use of computer control and real time monitoring afforded by the terminal automation system and the blending system is used to assure the finished blend in truck is compliant with the legislated limits set by both the Commonwealth and the specific state. The industry claims that the combination of the original certification (CoQ), procedural integrity in handling, and contamination check testing downstream of origin certification ensure that the quality of the fuel is maintained throughout the supply chain. Source: Australian Institute of Petroleum

3.4 Section 13 approvals

As discussed in section Major provisions in the Act and Regulations, section 13 (s13) of the Fuel Quality Standards Act 2000 allows the Minister, in consultation with the Fuel Standards Consultative Committee, to grant a person an approval to vary a fuel standard for a specified use. Approvals provide a mechanism to allow for ad-hoc and general variations to fuel standards in response to technological and operational needs. As revealed in Table 8, historically s13 approvals have fallen into three broad categories: specialist racing fuels; emerging fuels such as biodiesel (e.g. B20); and unusual supply circumstances, especially relating to the supply of diesel in remote areas.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 44. Table 8: Current section 13 approvals REF _Ref419124728 \h \* MERGEFORMAT

Approval holder Approval type ERC Racing Fuels Pty Ltd Specialist racing fuel (leaded) Specialist racing fuel (leaded & International Motorsport Solutions Pty Ltd unleaded) Specialist racing fuel (leaded & VP Racing Fuels Pty Ltd unleaded) Specialist racing fuel (leaded & Netaway Pty Ltd unleaded) Race Fuels Pty Ltd Specialist racing fuel (unleaded) Specialist racing fuel (leaded & Just Fuel Petroleum Service Pty Ltd unleaded) ACB Group Pty Ltd Specialist racing fuel (unleaded) BP Australia Pty Ltd Specialist racing fuel (leaded) Petro National Pty Ltd Biodiesel B20 National Biofuels Group Pty Ltd Biodiesel B20 Biodiesel Producers Limited Biodiesel B20 Neumann Petroleum Pty Ltd Biodiesel B20 Smorgon Fuels Pty Ltd Biodiesel B20 Macquarie Oil Company Pty Ltd Biodiesel B20 Freedom Fuels Terminalling Pty Ltd Biodiesel B20 The Biodiesel Station Pty Ltd Biodiesel B20 Hahn Environmental Services Pty Ltd Biodiesel B20 Australian Renewable Fuels Adelaide Pty Ltd Biodiesel B20 Australian Renewable Fuels Picton Pty Ltd Biodiesel B20 Eagle Fuels Pty Ltd Biodiesel B20 Mogas Regional Pty Ltd Biodiesel B20 Pro Green Biofuels Pty Ltd Biodiesel B20 Eastern Great Southern Petroleum Biodiesel B20 Central State Fuels Pty Ltd Biodiesel B20 LogicOil Pty Ltd Biodiesel B20 Kifuel Pty Ltd Biodiesel B20 Consolidated Biodiesel Pty Ltd Biodiesel B20 Bioworks Australia Pty Ltd Biodiesel B20 Glencore Singapore Pte Ltd Biodiesel B20 Ashoil Pty Ltd Biodiesel B20 Mobil Oil Australia Pty Ltd Biodiesel B20 Caltex Australia Petroleum Pty Ltd Biodiesel B20 The Shell Company of Australia Pty Ltd Biodiesel B20 BP Australia Pty Ltd Biodiesel B20 Mobil Oil Australia Pty Ltd Diesel Caltex Australia Petroleum Pty Ltd Diesel The Shell Company of Australia Pty Ltd Diesel BP Australia Pty Ltd Diesel

REF _Ref419124728 \h \* MERGEFORMAT As at December 2015

The Department of the Environment Review of the Fuel Quality Standards Act 2000 45. IOR Energy Pty Ltd Diesel Source: Department of the Environment

Specialist racing fuels Sections of the motor racing and water sports communities seek approval for the supply of specialist racing fuels that, in many cases, do not comply with fuel standards (generally the petrol standard). Racing fuels often contain elevated quantities of a range of substances including lead, MTBE and aromatics. The fuels are mainly supplied by small to medium businesses and in small volumes, with the total volume of racing fuel supplied under approvals being only about 0.002% of the total annual commercial supply of petrol in Australia. A number of submissions to the review from approval holders stressed the high administrative burden to their businesses associated with the s13 approvals process. Other submissions, including from other sections of the motor racing industry, argue however that granting approvals to racing fuels under section 13 should be phased out as it is no longer necessary for racing fuels to contain elevated levels of lead and other substances. They cite the use of fuels by the motor racing industry in Europe and elsewhere that already comply with stringent petrol standards. In December 2015 the Minister for the Environment wrote to leaded racing fuel approval holders, advising that it is the Australian Government’s intention to consider phasing out leaded racing fuel over one to two years, beginning in 2017, and seeking views on the phase-out timeframe. Overall though, the issues raised above suggest that changes to the management of racing fuel approvals in the future may be warranted (see Box 6).

Emerging fuels The approvals process is used to manage the regulation of emerging fuels, such as biofuels and paraffinic diesel, prior to the implementation of a relevant fuel quality standard. For example, in February 2009 the automotive diesel fuel standard was amended to allow up to five per cent biodiesel in diesel supplied in Australia. At the same time, it was decided that the continued supply of diesel/biodiesel blends with greater than five per cent biodiesel would be managed through the section 13 approvals process until the implementation of relevant standards for diesel/biodiesel blends. Twenty two small and medium companies currently hold approvals to supply diesel with a biodiesel content of more than five per cent but not more than 20 per cent (known as B20), whilst varying no other parameter of the diesel standard. Historically, the application fees for these applications have been waived as it was considered unreasonable to impose a financial burden on suppliers as a result of the Australian Government’s decision on management of these blends. Four major fuel suppliers also have approvals to vary the biodiesel content up to 20 per cent and to vary the cetane and density parameters of the diesel standard. As these suppliers are varying parameters in addition to the proportion of biodiesel they have not received a fee waiver.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 46. The majority of B20 fuel is used in the heavy transport and mining sectors. A fuel quality standard for B20 is currently under development. With the implementation of a B20 standard, it is anticipated the workload associated with approvals relating to the supply of diesel/biodiesel blends will be significantly reduced. Notwithstanding this, the biofuels industry believes that the process for establishing new fuel blends should be streamlined. In particular, the industry argues that where a blend is made up of products that in their own right already comply with a standard, then the blended product should be deemed compliant once blended. The blend specification should then simply be the reported average of each of the constituents. Similarly, another stakeholder has suggested that the Comité Européen de Normalisation REF _Ref419124728 \h \* MERGEFORMAT (CEN) standard specific for Paraffinic Diesel, which is expected to be issued as an EU fuel quality (EN) standard, should be adopted in Australia as a matter of course. In response, the Department notes that amendments to regulation 3(2) of the Fuel Quality Standards Regulations 2001 have recently been implemented that will improve its ability to develop fuel quality standards and fuel quality information for blended fuels. However, it rejects the notion that the standard for a blended product can simply be the reported average of each of the constituents, since the blended fuel will not necessarily react in the combustion process in the same manner as its individual components. An alternative solution to the streamlining of section 13 approvals for emerging fuels, flagged by the Department, could be an amendment to section 13 to provide the Minister or delegate with the ability to make a bulk section 13 approval where a standard is in development (see Box 6).

Unusual supply circumstances In a small number of cases companies have requested approvals linked to the supply of non-compliant fuel, primarily diesel, to remote locations, including mining operations. One set of approvals has permitted a medium sized company to carry out local production of diesel fuel for exclusive use in regional mining operations. The company in question, IOR Energy Pty Ltd, has requested that permanent exemption be given to the sulfur and density requirements of the automotive diesel standard fuels supplied by its refineries due to claims that these fuels offer energy security, low emissions and other environmental benefits relative to other commercial diesel fuels. Any decision on this question is outside the scope of this review and would need to be made as part of a future approvals process.

S 13 cost recovery In 2015 a cost recovery implementation statement relating to s13 applications was completed in accordance with the revised Australian Government Charging Framework and Cost recovery Guidelines (Department of the Environment 2015c, Department of Finance 2015). As noted in the implementation statement, the policy authority for full cost recovery of processing applications to vary fuel standards was re-confirmed by Government in 2006-07, with the cost of providing the approval service to be recovered

REF _Ref419124728 \h \* MERGEFORMAT European Committee for Standardisation

The Department of the Environment Review of the Fuel Quality Standards Act 2000 47. by charging a fee from users when the application is lodged. The key costs to government of providing this approval service are linked to the following processes: Receive application and liaise with applicant to ensure application is complete. Assess the application and seek external technical or legal advice as required. Prepare a draft recommendation for appropriate consultation Conduct consultation process and conduct Departmental evaluation of comment. Brief the Minister and/or delegate to seek a decision on the application. Prepare any legal instruments and notices. Notify the applicant of the decision and any conditions of approval. Publish the decision in the Commonwealth Gazette and record the approval. Through the implementation statement it was determined that the total cost to the Department of processing applications is approximately $6,663 per application, significantly different from the current fee structure as set out in Table 3.

3.5 Determinations and legislative amendments

Another administrative function of the Department is to oversee the process of establishing fuel quality standards through determinations and the legislative amendment process.

Determinations Fuel standards and fuel quality information standards are set via ‘determinations’. To date the following determinations have been made under the Act.

Current determinations

Fuel Standard (Petrol) Determination 2001 The Fuel Standard (Petrol) Determination covers standards for Unleaded Petrol (ULP) and Premium Unleaded Petrol (PULP) for a wide range of substances and properties. The determination commenced on 1 January 2002, with a number of amendments to standards having been made since then. Current standards are set out in Table 9. The determination also sets out the parameters for ethanol contained in petrol, the testing methods that should be applied to testing for the various parameters and details operability standards including Motor Octane Number (MON), copper corrosion, existent gum and induction period.

Table 9: Current fuel standards for Petrol

Date Substance/ property Grade Specification introduced

The Department of the Environment Review of the Fuel Quality Standards Act 2000 48. Sulfur ULP, LRP 150 mg/kg (150 ppm) 1 January 2005 PULP 50 mg/kg (50 ppm) 1 January 2008 Benzene All grades 1% by volume 1 January 2006 Lead All grades 0.005 g/L 1 January 2002 Oxygen Containing ethanol 2.7% by mass 1 Nov. 2007 Not containing 3.9% by mass 1 Nov. 2007 ethanol Ethanol All grades 10% by volume 1 July 2003 Phosphorus ULP, PULP 0.0013 g/L 1 January 2002 DIPE (Di-isopropyl ether) All grades 1% by volume 1 January 2002 MTBE (Methyl tertiary All grades 1% by volume 1 January 2004 butyl ether) TBA (tertiary butyl All grades 0.5% by volume 1 January 2002 alcohol) Maximum final boiling All grades 210oC 1 January 2005 point Minimum octane number ULP 91.0 1 January 2002 PULP 95.0 1 January 2002 LRP 96.0 1 January 2002 Olefin content All grades 18% by volume 1 January 2002 42% by volume pool Aromatic content All grades average with a cap of 1 January 2005 45%

Fuel Standard (Automotive Diesel) Determination 2001 The Fuel Standard (Diesel) Determination covers standards for Automotive Diesel for a wide range of substances and properties. The determination commenced on 1 January 2002, with a number of amendments to standards having been made since then. Current standards are set out in Table 10. The determination also sets out the testing methods that should be applied to testing for the various parameters and details operability standards including carbon residue, water and sediment, conductivity, colour, flash point and lubricity. Table 10: Current fuel standards for Automotive Diesel

Substance/ property Specification Date introduced Sulfur 10 mg/kg (10 ppm) 1 January 2006 Ash 0.01% (m/m) 1 January 2009 PAH (Polycyclic aromatic 0.005 g/L 1 January 2002 hydrocarbons) Oxygen 11.0% by mass 1 January 2006 Biodiesel 5.0% by volume 1 March 2009 Maximum distillation temperature 360oC 1 January 2006

The Department of the Environment Review of the Fuel Quality Standards Act 2000 49. (95% recovery) cetane index 46 1 January 2002 cetane number 51 1 January 2002 Density ≥820 kg/m3, ≤850 kg/m3 1 January 2006 Viscosity @ 40oC ≥82.0 cSt, ≤4.5cSt 1 January 2002

Fuel Standard (Autogas) Determination 2003 The Fuel Standard (Autogas) Determination covers standards for Autogas for a range of substances and properties. The determination commenced on 1 January 2003. Current standards are set out in Table 11. The determination also sets out the testing methods that should be applied to testing for the various substances or properties. Table 11: Current fuel standards for Autogas

Substance Specification Dienes 0.3% (molar) Residue on evaporation 60 mg/kg Sulfur (after stenching) 50 mg/kg Volatile residues (C5s and higher) 2.0% (molar) Property Specification Copper strip corrosion Class 1 Water No free water at 0oC Motor octane number 90.5 minimum Odour 800 kPa minimum Vapour pressure (gauge) @ 40oC 1530 kPa maximum

Fuel Quality Information Standard (Ethanol E85) Determination 2012 The Fuel Quality Information Standard (Ethanol E85) Determination 2012 sets out the information that must be provided with a fuel blend consisting of 70-85% ethanol (designated E85) and petrol. The standard states that the following information must be clearly displayed on any fuel pump at a service station dispensing E85: (1.1.2) the words ‘Contains 70-85% ethanol’, and ‘Not Petrol or Diesel’; or (1.1.3) the words ‘Contains x% ethanol’, where x is a number between 70 and 85, and ‘Not Petrol or Diesel’. REF _Ref419124728 \h \* MERGEFORMAT Fuel Quality Information Standard (Ethanol) Determination 2003 The Fuel Quality Information Standard (Ethanol) Determination 2003 sets out the information that must be provided for the supply of ethanol blend from a service station. The standard states that the information must be clearly state one of the following: (1) the words “Contains up to x% ethanol”, where x is no less than the percentage of ethanol in the ethanol blend;

REF _Ref419124728 \h \* MERGEFORMAT Underlines added

The Department of the Environment Review of the Fuel Quality Standards Act 2000 50. (2) the words “Contains up to y% ethanol”, where y is the percentage of ethanol in the ethanol blend

Fuel Standard (Biodiesel) Determination 2003 The Fuel Standard (Biodiesel) Determination covers standards for biodiesel for a wide range of substances and properties. The determination commenced on 18 September 2003, with a number of amendments to standards made since then. The determination also sets out the testing methods that should be applied to testing for the various parameters. Fuel Standard (Ethanol E85) Determination 2012 The Fuel Standard (Ethanol E85) Determination covers standards for Ethanol E85 for a wide range of parameters. The determination commenced on 1 November 2012. The determination also sets out the testing methods that should be applied to testing for the various parameters.

Future determinations

As previously noted fuel standards for B20 are currently in train. As discussed in section Specialist racing fuels, it may also be appropriate to develop fuel standards for specialist racing fuels. Stakeholders responding to the review issues paper or draft report have pointed to revised or new fuel standards they believe should be established through future determinations: As discussed in Box 6, a range of stakeholders have argued that Australia should continue to align with international vehicle emission and fuel standards and that this will require revising some standards for petrol (see also section Facilitating adoption of better engine and emission control technology and allowing effective operation of engines). Gas Energy Australia believes that a determination should be made to establish standards for the use of Compressed Natural Gas (CNG) and Liquefied Natural Gas (LNG) in motor vehicles, buses and trucks. It argues that uniform national standards for these fuels are required to underpin their market development in Australia. Two stakeholders have raised ongoing concerns with the production and use of alpine/ winter diesel blends. They suggest that consideration should be given to a fuel standard to cover these lower density products. In response to these points, the review team emphasises that decisions on revising or developing new fuel standards through determinations are outside of the scope of this review. However, a number of changes to the Act and Regulations are proposed which should facilitate improved processes for standards setting.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 51. Legislative amendments

Past amendments

Numerous amendments have been made to the Act and Regulations since they were first introduced in 2000 and 2001 respectively. The most significant changes were made in response to recommendations of the 2005 review of the Fuel Quality Standards Act 2000. Although many of the recommendations of that review required only administrative responses, eight changes to the Act and Regulations were implemented through the Fuel Quality Standards Amendment Regulations 2008 (No. 1) and the Fuel Quality Standards Amendment Bill 2009. The most significant changes included: amendments in the case of supply emergencies to allow Minister to grant section 13 approvals in short timeframes without having to consult a full quorum of the fuel standards consultative committee to avoid fuel supply shortfalls; an amendment to section 68 to streamline the approvals process by allowing approvals of a minor nature be delegable; creation of Section 41A to remove the requirement for an inspector to first obtain the occupier’s permission before exercising monitoring powers; and an amendment to allow for provision of ‘on-the-spot’ fines for minor offences. More recent changes include amendments in December 2015 to regulation 3(2) of the Fuel Quality Standards Regulations 2001 that will improve the Department’s ability to develop fuel quality standards and fuel quality information for blended fuels.

Possible future amendments

Review of the legislation, stakeholder feedback and internal review by the Department indicates that there is scope to improve operation of the legislation through amendments to the Act and/or Regulations. These are detailed in Box 6.

Box 6: Proposed amendments to the legislation

Following are proposed amendments to the Act and Regulations building on discussions earlier in this report. As discussed further in section 6, the review team has assessed the regulatory burden impact of the proposed amendments and believes that most amendments will have no impact on regulatory burden or in some cases will reduce the burden on industry. i. Enhancing consumer protection - objects of the Act The objects of the Act do not specifically include vehicle operability issues and consumer protection. Although the Competition and Consumer Act 2010 provides a level of protection in relation to the quality of fuel supplied, the Department currently expends significant resources dealing with complaints from members of the public relating to isolated incidents of fuel contamination that cannot be fully addressed by the Australian Competition and Consumer Commission due to resource constraints and other priorities REF _Ref419124728 \h \* MERGEFORMAT . The most serious of these was an incident of contamination in 2009 in Melbourne from a fuel that contained a small amount of a substance that caused catastrophic engine damage to more than 50 vehicles even though the fuel complied with

REF _Ref419124728 \h \* MERGEFORMAT See footnote 31, page 68.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 52. existing standards. It is not feasible or desirable to incorporate a listing of all possible contaminants into the fuel standards. However, consideration should be given to extending the scope of the Act by including ‘engine operability’ and ‘fit for purpose’ provisions in the objects of the Act (section 3). Additional compliance and monitoring provisions may also be needed to ensure that these objects can be achieved, but these should not unnecessarily add to the monitoring and compliance burden of fuel suppliers. Amendments to the Act could be supported by amendments in future determinations that specify, in addition to fuel standards, that the fuel supplied does not contain any contaminants that affect engine operability.

ii. Review of the Act Under section 72 of the Act the Minister must cause an independent review of the operation of the Act to happen every five years. It is arguable that the five year period is too short to assess whether the Act is achieving its objects (as set out in section 3 of the Act). It is recommended that the review period be increased from five years to ten years REF _Ref419124728 \h \* MERGEFORMAT . iii. S 13 approvals – emerging fuels The biofuels industry believes that the process for establishing a new fuel blend is unwieldy and needs to be streamlined. The approach proposed by the industry of allowing a blend to be compliant if it is made up of products that in their own right already comply with a standard is rejected on grounds that it is likely to result in anomalies. An alternative approach to streamlining the process would be to amend section 13 to provide the Minister or delegate to make a bulk section 13 approval for suppliers of an emerging fuel and a mass application fee waiver where a standard is in development for the emerging fuel in question. iv. S 13 approvals - racing fuels In many cases, fuels used in motor racing and water sports do not comply with existing fuel standards. Racing fuels may contain elevated quantities of a range of substances including lead, MTBE and aromatics. In order to allow motor racing events to continue, the department regulates racing fuels through the section 13 approvals process under the Act. However, much of the motor racing industry believes that this process applies a high administrative burden on suppliers of racing fuels. Alternatively, some sections of the motor racing industry and other stakeholders believe that there is no need for racing fuels to contain elevated levels of lead and other substances, citing the use of established compliant fuels by the motor racing industry in Europe. They believe that the granting of approvals under section 13, which permit the supply of certain racing fuels that contain substances such as lead and MTBE in excess of the current petrol standard, should be phased out. An approach that allows for the long term regulation of racing fuels through developing a fuel standard for racing fuels may be a workable compromise. Such a standard is likely to require changes to the Act and Regulations including section 4 of the Act and section 3(2) of the Regulations. The racing fuel standards would need to specify certain allowable ‘end-uses’ for specific racing fuels. Subsequent to development of racing fuel standard, the streamlining process discussed in amendment 3 above could also be applied to racing fuels.

REF _Ref419124728 \h \* MERGEFORMAT We note that, although vehicle technology is advancing rapidly, recently revised vehicle fleet data projections used in the modelling for this review indicates that motor vehicles powered by non-traditional fuel sources will still comprise only a small share of the total vehicle fleet in 2025. Thus a timeframe for the next review of 2026 is unlikely to be compromised by a major shift away from vehicles powered by petroleum.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 53. v. Strengthening penalties, compliance and reporting provisions The Department of the Environment has undertaken an internal review of the Act and Regulations, focussing primarily on strengthening compliance provisions and penalties. As a consequence of that review the Department has identified 12 potential amendments to the Act and the Regulations relating aimed at strengthening compliance provisions and penalties. The potential amendments are detailed in Appendix 3 (Amendments 1 to 12). All 12 amendments are supported. The Department has also identified two amendments to the Act to improve data collection and reporting processes. Combined, these amendments should have the effect of reducing industry reporting costs and government data collection costs. The two amendments are also detailed in Appendix 3 (Amendments 13 and 14). vi. Coordinating fuel quality determinations and ADRs Vehicles and fuel work together to reduce vehicle emissions. Whereas fuel quality is regulated as determinations under the Fuel Quality Standards Act 2000, emissions standards are regulated as Australian Design Rules (ADRs) under the Motor Vehicle Standards Act 1989. Both the Australian Automobile Association and the Federal Chamber of Automobile Industries point to apparent anomalies with this situation, with development of fuel quality standards, vehicle emissions standards and (potentially) greenhouse gas emission standards not currently being undertaken in a way that ensures effective coordination. This situation has the potential to impede the adoption of better engine technology or impact on engine operability. It also leads to duplication of effort by government and industry. Noting that the Motor Vehicle Standards Act 1989 is out of scope for this review and that a comprehensive review of that Act is currently underway, the most appropriate way of dealing with this situation would be to consider amendments to both the Fuel Quality Standards Act 2000 and the Motor Vehicle Standards Act 1989 to ensure that in the future, where relevant (i.e. fuel standards have the potential to materially affect emissions) and practical, ADRs and fuel quality determinations are fully coordinated. Section 21 is the most relevant section of the Fuel Quality Standards Act 2000.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 54. 3.6 Conclusions and recommendations

The Fuel Quality Standards Act 2000 appears to have been effectively administered since introduced. Determinations have been made setting fuel quality standards for the vast majority of fuel that is supplied for use in the road transport sector in Australia. As well, a large majority of fuel supplied in Australia appears to meet those fuel quality standards. Where non-compliant fuels are being supplied they are generally being detected. Nevertheless, there is scope for Act amendments that could further improve the effectiveness of the Act as well as, in some cases, reducing the regulatory burden to industry of supplying compliant fuels or applying for section 13 approvals. Furthermore, there is scope to improve consumer protection provisions of the Act and determinations to increase protections against fuel contamination.

Recommendations

Recommendation 2 Should government decide to retain the Fuel Quality Standards Act 2000, consideration should be given to making a range of amendments to the Act and to the Fuel Quality Standards Regulations 2001 to enhance their efficiency and effectiveness. Amendments to the following provisions are proposed: . Extending the objects of the Act to include consumer protection provisions; . Act review provisions (section 72); . Section 13 approval provisions; and . Penalties, compliance and reporting provisions. See Box 6, proposed amendments i) to v) for details. Recommendation 3 Feedback from a number of stakeholder submissions is that the Fuel Standards Consultative Committee (FSCC) has played an important advisory role to government and an avenue for industry input on decisions made under the Fuel Quality Standards Act 2000, including determinations and s13 approvals. Given stakeholders clearly believe this body has an important role, if a decision is made to retain the Act, the Australian Government should consider either maintaining the FSCC or establishing a new advisory body. The advisory body should continue to be representative, comprising key industry and other stakeholders.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 55. 4. Has the Act’s objectives been achieved?

In this section we review the effectiveness of the Act in achieving its key objectives including: reducing emissions and improving health outcomes; and facilitating the adoption of better engine and emission control technology in Australia and enabling the more effective operation of engines.

4.1 Key findings

The Fuel Quality Standards Act 2000 has been effective in achieving its objectives to date. In summary, the analysis undertaken for this review shows that regulation of fuel supplied in Australia via the Act has led to: - a quantifiable reduction in the mass of (assessed) pollutants arising from the use of regulated fuel, in both Melbourne and Sydney, with the exception of ozone formation; - generally an improvement in health outcomes, also with some exceptions associated with exposure to ozone; and - indirectly has contributed to a reduction in the level of (assessed) greenhouse gas emissions arising from the use of regulated fuel. Although full harmonisation of fuel quality standards in Australia with international best practice has not yet been achieved, the adverse impact of this situation on the adoption of better engine and emission control technology and the effective operation of engines are likely to have been relatively minor.

4.2 Reducing emissions and improving health and environmental outcomes

Role of fuel quality and emissions standards in driving emissions As discussed earlier in this report vehicles and fuel work together to reduce vehicle emissions that impact on air quality. Historically the driving force for changes to fuel quality standards in Australia has been the need to produce or have access to fuels that are compatible with vehicle engine and emission control technologies. To a certain extent this remains a relevant consideration in the context of the secondary objectives of the Act (i.e. to achieve international harmonisation). It is now also recognised that fuel quality can also have a direct impact on emissions. Of particular concern is the sulfur content of fuel which is directly related to the efficiency of vehicle emission control technologies (Orbital 2013). Petrol and diesel fuels standards, the standards most relevant to assessing impacts of the Fuel Quality Standards Act 2000 on emissions and health outcomes, are summarised in

The Department of the Environment Review of the Fuel Quality Standards Act 2000 56. and Table 10 respectively REF _Ref419124728 \h \* MERGEFORMAT . The tables highlight the timing of the introduction of fuel specifications (such as sulfur) post-2000 which have often followed the introduction of emissions standards via Australian Design Rules (ADRs).

The role of fuel quality, emission standards and other factors important in bringing about changes to vehicle emissions, was raised in a number of the submissions received during the public consultation period for the issues paper. Collectively the submissions highlight the fact that there are multiple factors that directly and indirectly influence emission changes including fuel quality, the make-up of the Australian motor vehicle fleet (including the availability and rate of uptake of alternative fuels and changes in fleet composition), changes in traffic characteristics and other (non-motor vehicle) sources of emissions.

Backcasting method and key assumptions Pacific Environment has undertaken an air quality assessment and health risk assessment as a component of the broader independent review of the Fuel Quality Standards Act 2000 (the Act). The first part of that assessment quantified the impact of changes to fuel quality standards that were initiated through the Act since 2002 on air quality and health outcomes. This part is referred to here as ‘backcasting’ and is discussed in detail in two technical reports (PEL 2016a and 2016b) REF _Ref419124728 \h \* MERGEFORMAT . The second part of the assessment, which quantified the potential impacts of future fuel quality scenarios, is summarised in section 7 and discussed in detail in the same technical reports. An impact assessment approach, involving the integrated modelling of emission estimates, air quality and health impacts has been used in both parts of the assessment. It allows a quantitative link to be established between changes in emissions and the changes in air quality. With this approach it is possible to then quantify the public health benefit across a population. This is a detailed study approach, and draws upon a combination of both actual and assumed information. At the core of the study is the underlying necessity to be able to reliably attribute changes in air quality and their associated health impacts to past changes to fuel quality standards. In the air quality assessment air dispersion modelling has been undertaken for the Port Phillip (Melbourne and Geelong) and the Sydney Greater Metropolitan Region (GMR) (Sydney, Newcastle and Wollongong) airsheds. The results presented in this report are reported for Melbourne and Sydney and refer to the results for the Port Phillip and Sydney GMR airsheds respectively. The key assumptions applied in the backcasting include: 2000 (Back 2000) represents the vehicle fleet size and vehicle fleet mix that was in place at the time of the legislative changes of 2000 (Coffey Geosciences, 2000). This scenario is therefore a hypothetical scenario, but provides a relevant baseline of what

REF _Ref419124728 \h \* MERGEFORMAT Further details of the Australian fuel quality specifications are provided in Table 1 of the air quality assessment. The international fuel specifications referenced in determining the future scenario design are also provided in the air quality assessment (PEL 2016a).

REF _Ref419124728 \h \* MERGEFORMAT Readers who wish to understand in detail the methods, assumptions and sensitivity analysis applied to the air quality and health risk assessment modelling should view the two technical reports. Those reports have been published separately.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 57. was anticipated to occur, and assists in retrospectively assessing the impact of the 2000 legislation. 2015 (Back 2015) is also hypothetical, and is defined in such a way that the relative change to air quality as a result of the introduction of the 2000 legislation can be determined. It is based on a description of the emissions estimated for a 2015 vehicle fleet, with the vehicle kilometres travelled (VKT) scaled to the 2000 VKT, as defined in the previous review (Coffey Geosciences, 2000) to facilitate consistency in the comparison.

1.1.2 Impact of changes on air quality

Air quality outcomes were considered for nitrogen dioxide (NO2), sulfur dioxide (SO2), carbon monoxide (CO), particles (as PM2.5), and volatile organic compounds (VOCs), all of which are regarded by public health authorities as having the potential to cause various adverse health effects. The impact of the change in emissions was considered from two perspectives: 1. The estimated total emission reduction attributable to motor vehicle fuel quality. 2. The estimated ground level concentrations of the relevant pollutants across the modelled regions considered (Melbourne and Sydney metropolitan regions). The emission estimates for both Melbourne and Sydney, are shown in Table 12. Table 12: Motor vehicle emissions for the two backcasting scenarios (tonnes/year)   Melbourne  Sydney Backcasting Backcasting 2015/2000 % Backcasting Backcasting 2015/2000 % 2000 2015 2000 2015 CO 544,000 84,358 16 506,000 82,326 15

NOx 56,900 19,992 35 57,100 19,876 35

PM2.5 2,450 742 30 2,440 779 32

SO2 1,940 271 14 2,250 264 14 VOCs 69,500 8,756 13 71,600 9,758 14

As revealed in Table 12, by comparing the emission estimates for backcasting modelling scenarios in Melbourne and Sydney, (Back 2015 compared to Back 2000), the estimated 2015 emissions of all pollutants are substantially lower in 2015 compared to the 2000 values in both Melbourne and Sydney. On this basis the regulation of the fuel supplied in Australia (via the Act) has led to a quantifiable reduction in the mass of relevant pollutants emitted in Sydney and Melbourne. It is important to note however, that the changes in NOx and VOC emissions from motor vehicle can impact the O3 concentration when comparing the hourly concentrations on the same meteorological day. For example, data for the locations near and to the south-west of the CBD (Geelong and Richmond) shows that backcasting

2015 has reduced NO2 and VOCs (i.e. air toxics) concentrations by nearly half, but the O3 concentrations practically remains constant..

The Department of the Environment Review of the Fuel Quality Standards Act 2000 58. Modelling air quality in a region takes into account all emissions in the airshed, and so the relationship between vehicle emissions and emissions from all other sources becomes an important factor in determining whether the improvements have had a significant influence on regional air quality. For example, where motor vehicle emissions are a dominant source of pollutants in an airshed, the difference in dispersion modelling results will generally be more apparent than if the airshed is dominated by another source type, such as industry or domestic sources. It should be noted that the relationship between motor vehicles and other emission sources varies by pollutant. Generally, the regulation of the fuel supplied in Australia (via the Act) has led to a quantifiable reduction in the level of (assessed) pollutants and emissions arising from the use of fuel.

1.1.3 Impact of changes on greenhouse gas emissions

Greenhouse gas emissions (as carbon dioxide equivalent or CO2-e) related to vehicle use and related fuel production were estimated for New South Wales and Victoria. Calculations were also made on an Australia-wide basis, taking into account the parameters of carbon dioxide (CO2), methane (CH4) and nitrous oxide (N2O). These emission estimates are shown in Table 13. Following the introduction of the 2000 fuel quality legislation, the national estimate, via comparison of the backcasting scenarios, shows a reduction in CO2-e of around 55%. This impact has been indirect in that the introduction of the Act and associated fuel standards allowed for the use of more fuel efficient vehicle technology, which in turn required less fuel leading to the reduction of greenhouse emissions.

Table 13: Annual greenhouse gas emissions (t CO2-e) for motor vehicles and fuel production

New South Wales Victoria Australia Scenarios Motor Fuel Motor Fuel Motor Fuel Vehicles Production Vehicles Production Vehicles Production Backcasting Year 2000 - - - - 58,301,447 9,098,553 Backcasting Year 2015 9,433,823 1,574,008 8,905,450 1,281,034 32,224,786 5,029,016

1.1.4 Health outcomes Applying the changes to air quality described in Impact of changes on air quality, health outcomes are considered for nitrogen dioxide (NO2), sulfur dioxide (SO2), carbon monoxide (CO), particles (as PM2.5), ozone (O3), as well as diesel particles and benzene, by applying a health risk assessment. All of these pollutants are regarded by public health authorities as having the potential to cause various adverse health effects. The calculated health outcomes for Melbourne and Sydney, for each pollutant, are shown in Table 14 to Table 20. The results for the Back 2015 scenario show a decrease in health effects in Melbourne for all pollutants assessed except ozone. For Sydney the results are more mixed. The reductions for NO2 and PM2.5 are greater than those observed for the other pollutants. For SO2 there are small decreases in all outcomes for Melbourne which reflects the changes in the predicted ambient levels of SO2. For Sydney there is no change in the mortality outcomes between 2000 and 2015 scenarios, but hospital admission outcomes and emergency department attendances for asthma increased. This is thought to be due to the fact that the main source of SO2 in Sydney is industrial emissions not motor

The Department of the Environment Review of the Fuel Quality Standards Act 2000 59. vehicles which account for less than 2% of the total SO2 emissions.

The results for SO2 in Melbourne and Sydney are shown in Table 14. For SO2 for Melbourne, the difference between the Back 2000 and Back 2015 scenarios with respect to hospital admission for respiratory disease among people 65 years and older is a decrease of 40 admissions. For Sydney for the same scenarios and outcome there was an increase of 23 admissions. The differences in the health responses between

Melbourne and Sydney are due to the overall contribution of motor vehicles to the SO2 emissions. Sydney’s SO2 emissions are dominated by industrial emissions. Thus reducing motor vehicle emissions does not have as significant impact on health results as it does in Melbourne.

Table 14: Health outcomes for SO2 for the Back 2000 and Back 2015 scenarios

Melbourne Sydney HEALTH 2000 2015 2000 2015 Differenc OUTCOME Backcasti Backcasti Difference Backcasti Backcasti e ng ng ng ng Daily mortality all causes 15 8 -7 14 15 +1 All ages Daily mortality cardiovascular 6 3 -3 6 6 0 disease All ages Daily mortality respiratory disease 3 1.5 -1.5 3 3 0 All ages Hospital admissions respiratory disease 113 73 -40 149 172 +23 65+ years Emergency Department visits 71 35 -36 74 70 -4 asthma 1-14 years

The results for NO2 in Melbourne and Sydney are shown in Table 15. For NO2 there were significant reductions in all health outcomes for both Melbourne and Sydney comparing Back 2000 and Back 2015 with the reductions being greater in Melbourne. As an example, for daily all-cause mortality in Melbourne there was a decrease of 125 deaths between the Back 2000 and Back 2015 scenarios. For Sydney the decrease was 41 deaths.

Table 15: Health outcomes for NO2 for the Back 2000 and Back 2015 scenarios

Melbourne Sydney 2000 2015 2000 2015 HEALTH OUTCOME Differenc Differenc Back Back Back Back e e casting casting casting casting All-cause mortality 30+years (long-term) 556 219 -337 436 330 -106 Cardiovascular mortality 30+years 104 41 -63 82 62 -20 (long-term) Respiratory Mortality 30+ years (long-term) 28 11 -17 22 16 -6 Lung cancer mortality 30+ years (long-term) 22 9 -13 18 13 -5 Daily mortality all 199 74 -125 157 116 -41 causes

The Department of the Environment Review of the Fuel Quality Standards Act 2000 60. Melbourne Sydney 2000 2015 2000 2015 HEALTH OUTCOME Differenc Differenc Back Back Back Back e e casting casting casting casting All ages

Daily mortality cardiovascular disease 63 23 -38 49 36 -13 All ages Daily mortality respiratory disease 37 30 -7 29 22 -7 All ages Hospital admissions respiratory disease 572 296 -276 431 336 -95 65+ years Hospital admissions cardiovascular disease 633 263 -370 173 129 -44 65+ years Hospital admissions pneumonia and 214 87 -127 161 126 -35 bronchitis 65+ years Hospital admissions respiratory disease 221 82 -139 476 371 -105 15-64 years Emergency Department visits asthma 1-14 44 15 -29 37 25 -12 years

The results for ozone show the opposite trend to that observed for NO2 with adverse changes in all health outcomes assessed in both Melbourne and Sydney. The results for ozone are shown in Table 16. For Melbourne as an example for daily all-cause mortality there was an increase of 171 deaths between the Back 2000 and Back 2015 scenarios. For Sydney the increase was 127 deaths. These increases are thought to be due to the significant decreases in NO2. NO2 is involved in both the formation and removal of ozone from the atmosphere so any significant changes in NO2 levels will have an impact in ozone levels.

Table 16: Health outcomes for O3 for the Back 2000 and Back 2015 scenarios

Melbourne Sydney 2000 2015 2000 2015 HEALTH OUTCOME Differenc Differenc Backcasti Backcasti Backcasti Backcasti e e ng ng ng ng Daily mortality all 465 636 +171 617 744 +127 causes, All ages Daily mortality cardiovascular disease 218 298 +80 289 349 +60 All ages Daily mortality respiratory disease, All 62 85 +23 82 99 +17 ages Emergency Department visits asthma 1-14 135 171 +36 179 201 +22 years

Improvements in health outcomes were observed for PM2.5 in Melbourne between the Back 2000 and Back 2015 scenarios. The results for PM2.5 are shown in Table 17.

Table 17: Health outcomes for PM2.5 for Back 2000 and Back 2015 scenarios

HEALTH OUTCOME Melbourne Sydney 2000 2015 Differenc 2000 2015 Differenc Backcasti Backcasti e Backcasti Backcasti e

The Department of the Environment Review of the Fuel Quality Standards Act 2000 61. ng ng ng ng All-cause mortality 854 775 -79 971 970 -1 30+years (long-term) Cardiovascular mortality 454 411 -43 516 515 -1 30+years (long-term) Ischemic Heart Disease Mortality 299 271 -28 339 339 0 30+ years (long-term) Lung cancer mortality 61 55 -6 69 69 0 30+ years (long-term) Daily mortality all causes 355 295 -56 376 366 -10 All ages Daily mortality cardiovascular disease 63 52 -11 66 65 -1 All ages Hospital Admissions 1054 1014 -40 624 651 +26 cardiac Disease 65+ Hospital admissions respiratory disease 65+ 535 520 -15 539 527 -12 years Hospital admissions cardiovascular disease 917 882 -35 281 292 +11 65+ years Hospital admissions pneumonia and 243 233 -10 1061 1106 +45 bronchitis 65+ years Hospital admissions respiratory disease 484 423 -61 1220 1271 +51 15-64 years Emergency Department visits asthma 88 87 -1 98 89 -9 1-14 years

The largest decrease was for long-term all-cause mortality with a calculated reduction in 79 deaths. For Sydney there was no change in the health outcomes between these scenarios. The differences in the health responses between Melbourne and Sydney are largely due to the population growth assumptions used in the HRA. These assumptions are described in the separate HRA technical report (PEL, 2016b).

For PM2.5 from diesel emissions alone in both Sydney and Melbourne there was approximately a 4-fold decrease in the risk of lung cancer between the Back 2000 and Back 2015 scenarios. The results for diesel emissions are shown in Table 18. Table 18: Changes in cancer risk (as a proportion of the exposed population) due to diesel PM for the Back 2000 and Back 2015 scenarios

Melbourne Sydney Scenario Modelled Increase in cancer risk Diesel PM 2000 Back casting 4x10-4 8x10-5

2015 Back casting 1.6x10-4 2.1x10-5

The results for CO in Melbourne and Sydney are shown in Table 19. For CO the results for Melbourne are similar to those observed for SO2 and NO2 with decreases (improvements) in all outcomes observed between the Back 2000 and Back 2015 scenarios. The outcomes for Sydney also decreased between these scenarios but the decreases were smaller than those observed for Melbourne.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 62. Table 19: Health outcomes for CO for the Back 2000 and Back 2015 scenarios

Melbourne Sydney 2000 2015 2000 2015 HEALTH OUTCOME Differenc Differenc Backcasti Backcasti Backcasti Backcasti e e ng ng ng ng Daily Mortality all causes. all ages 22 4 -18 8 5 -3 Hospital Admissions Cardiovascular Disease 69 13 -56 25 16 -9 65+ years Hospital Admissions Cardiac Disease 101 19 -82 37 24 -13 65+ years The air toxics benzene, formaldehyde, toluene and xylenes were also modelled as part of the air quality assessment. A quantitative risk assessment was undertaken for benzene only, and the results are shown in Table 20. For the back 2000 and back 2015 scenarios there was a decrease in cancer risk for both Melbourne and Sydney. For Melbourne there was an estimated 5-fold decrease in the risk of cancer and in Sydney a 3-fold decrease. For the other air toxics all predicted values were well below the monitoring investigation levels in the Air Toxics NEPM (National Environment Protection Measure). Table 20: Predicted increases in cancer risk (as a proportion of the exposed population) due to benzene for the Back 2000 and Back 2015 Scenarios

Melbourne Sydney Scenario Modelled Increase in cancer risk Benzene 2000 Back casting 1.5x10-5 1.6x10-5

2015 Back casting 3.2x10-6 5.2x10-6

Benefits and costs of achieving health outcomes Given the hypothetical nature of the scenarios (section Backcasting method and key assumptions), it is not feasible or appropriate to undertake a full cost-benefit analysis (CBA) of the impacts of establishing fuel standards since the Act was introduced in 2000. Nevertheless health outcomes of the two scenarios, outlined in the previous section, have been monetised to provide an understanding of the health benefits/avoided costs of introducing fuel standards since 2002 relative to costs (principally to the petroleum industry) of achieving those standards.

Benefits/avoided costs of achieving health outcomes

Table 21 provides a summary of estimates of the annual value of avoided health costs achieved through the Act. Table 21: Estimated annual value of health benefits/avoided costs achieved through the Fuel Quality Standards Act 2000, disaggregated by pollutant and region ($ 000s 2015)

Avoided cost Pollutant Region Back 2000 Back 2015 linked to Act

NO2

The Department of the Environment Review of the Fuel Quality Standards Act 2000 63. NO2 Melbourne 213,304 86,672 - 126,632 NO2 Sydney 167,222 125,755 - 41,467 NO2 Other 389,059 183,541 - 205,518 Total 769,585 395,968 - 373,617

SO2 SO2 Melbourne 5,781 3,154 - 2,627 SO2 Sydney 5,997 6,322 325 SO2 Other 9,887 5,679 - 4,208 Total 21,665 15,156 - 6,509 CO CO Melbourne 5,050 925 - 4,125 CO Sydney 2,188 1,375 - 813 CO Other 11,605 2,019 - 9,586 Total 18,842 4,319 - 14,523

O3 O3 Melbourne 137,912 188,602 50,690 O3 Sydney 183,139 220,781 37,643 O3 Other 223,028 327,435 104,407 Total 544,079 736,819 192,740

PM2.5 PM2.5 Melbourne 467,947 419,699 - 48,248 PM2.5 Sydney 530,438 529,020 - 1,418 PM2.5 Other 883,580 790,566 - 93,014 Total 1,881,964 1,739,284 - 142,680 All All Melbourne 829,993 699,051 - 130,942 All Sydney 888,983 883,254 - 5,729 All Other 1,517,160 1,309,241 - 207,919 Total 3,236,136 2,891,546 - 344,590

As shown in the table, it is estimated that the annual value of avoided health impacts achieved through implementing the Act and associated fuel standards is approximately $345 million REF _Ref419124728 \h \* MERGEFORMAT . Most of these benefits will have been realised through revised standards for sulfur in ULP, PULP and diesel in 2005, 2008 and 2006 respectively, with further benefits achieved through a revised standard for PAH in diesel in 2002. Reductions in NO2 and PM2.5 emissions are the major sources of the health benefits realised, offset to some extent by increases in health impacts of raised ozone concentrations (see section Health outcomes for explanation). Most of the benefits are estimated to have been realised in Melbourne and other capital cities (Brisbane, Perth, Adelaide, Hobart, Canberra), with benefits limited in Sydney due to the nature of its airshed (also see section Health outcomes for explanation). Measured over a 10 year period from 2006 (after which most of the major fuel standards were introduced), the present value of health benefits realised is estimated to be approximately $5.1 billion. It is important to emphasise however, that this estimate is an approximation only and should be treated with some caution due to the difficulties of compiling backcasting scenarios that fully reflect nature of the vehicle fleet in 2000 and

REF _Ref419124728 \h \* MERGEFORMAT The method applied to monetising the health outcomes is the same as has been applied to assessing alternative future regulatory options. This is detailed in section Health impacts. It is important to note that the method used, applying Value of a Life Year (VOLY) to avoided mortalities, means that the estimates derived are likely to be quite conservative. Furthermore, the estimate here does not include the benefits of reductions in benzene and diesel particle emissions that stemmed from implementing the Act. As discussed further in section Health impacts, it has not been possible to value the change to cancer risk that resulted from these emissions reductions.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 64. the change in the vehicle fleet since then. Nevertheless, drawing on outcomes of the backcasting analysis, we can confidentially state that the health benefits/avoided costs of introducing the Act, and associated improvements to fuel quality since then, have been substantial.

Costs of achieving health outcomes

The RIS completed in support of the Fuel Standard (Petrol) Determination 2001 and the Fuel Standard (Automotive Diesel) Determination 2001 (Environment Australia 2001) and the independent review of the Act undertaken in 2005 both provide estimates of petroleum industry investment and operating costs required to achieve the major fuel quality standards. The RIS estimated that that costs to the refining industry of full harmonisation with fuel standards required to meet Euro 4 would be: $1,320m in capital investment over the period to 2008; and $17m per annum in operating costs per refinery from 2005. Similarly, the 2005 review reported estimates from the petroleum industry to achieve standards then mooted from 2006 and 2008. In total the investment costs for major refinery upgrades for the (then) five refineries were estimated at $945 million. Combining this estimate with the operating cost estimate from the DRIS and converting to $2015 provides a present value estimate of total capital and operating costs of achieving fuel quality standards up to 2015 of approximately $2.8 billion. This equates to a price impact of about 1.0-1.5 cents per litre. It is important to emphasise that this estimate is an approximation only and should be treated with caution, nevertheless it is substantially less than the present value $5 billion of health benefits achieved through implementation of the Act.

4.3 Facilitating adoption of better engine and emission control technology and allowing effective operation of engines

Two key objectives of the Act, detailed in Part 1, are to: (1.1.1.a.i) facilitate the adoption of better engine and emission control technology; and (1.1.1.a.ii) allow the more effective operation of engines. These objectives are closely linked and also linked to a secondary objective of the Act of harmonisation of Australian vehicle emission standards with international standards. As noted already in this report, vehicles and fuel work together to reduce vehicle emissions that impact on air quality. Without fuel of appropriate quality, vehicle emissions reduction systems will not be as effective as intended. Likewise, without appropriate vehicle technologies, improving fuel quality will not be as effective in reducing vehicle emissions as it would otherwise be. Whereas fuel quality is regulated as determinations under the Fuel Quality Standards Act 2000, emissions standards are regulated as Australian Design Rules (ADRs) under the Motor Vehicle Standards Act 1989. As detailed in the Final Regulation Impact Statement for Review of Euro 5/6 Light Vehicle Emissions Standards (DITRD 2010), from the mid 1990s ADRs have closely matched European Union emissions standards

The Department of the Environment Review of the Fuel Quality Standards Act 2000 65. (Euros), their introduction generally lagging corresponding Euro standards by four to eight years (see Table 22). Fuel standards in the EU (including EN 228 – Gasoline and EN 590 – Diesel) have generally been introduced to time with requirements set by the Euro standards REF _Ref419124728 \h \* MERGEFORMAT . Fuel standards in Australia, on the other hand, have generally lagged behind the introduction of the ADRs by two to three years. Thus the introduction of fuel standards in Australia has often lagged behind corresponding EU standards by up to ten years. Table 22: Timetable for introduction of motor vehicle emission standards, Euro and ADR EU (Euro) Australia (ADR) Standard Petrol Diesel Petrol Diesel Euro 1 (ADR 37/70) 1989 1989 1998 1995 Euro 2 (ADR 79/00) 1993 1993 2003 2002 Euro 3 (ADR 79/01) 1997 1998 2005 - Euro 4 (ADR 79/02) 2003 2003 2008 2006 Euro 5 (ADR 79/03, core Euro 5) 2009 2009 11/2013 11/2013 Euro 5 (ADR 79/04, full Euro 5) - - 11/2016 11/2016 Euro 6 (ADR 79/05) 2014 2014 7/2017 to 7/2018 Sources: DITRD 2008, 2010; EEA 2004

With respect to vehicle technologies, Australia is a technology taker – now more than ever given that light vehicle manufacturing is soon to cease in Australia. Noting this situation two important questions to consider in the context of objectives (ii) and (iii) of the Act are: 1. Is it necessary for fuel standards in Australia to harmonise with EU fuel standards in order for Euro 5 and 6 emission standards to be effectively adopted here? 2. Will failure to harmonise Australian fuel standards with EU fuel standards adversely affect the operability of engines here?

Changes to standards needed to achieve harmonisation Before examining these questions, it is useful to consider the changes to fuel standards that would need to be undertaken in Australia to achieve harmonisation with international standards (focussing primarily on EU standards). A recent report by Hart Energy Research & Consulting (2014) for the Australian Government Department of the Environment collated available information to compare the current Australian fuel quality standards for gasoline, diesel, autogas (LPG), biodiesel and E85 with standards for the same fuels in the European Union, United States, Japan and the Republic of Korea (South Korea), and examines points of difference. Recognising that there are no international standards applying in Australia per se, but that historically Australia has followed EU standards in most aspects of fuel quality1, the Hart Energy analysis found that “there are a number of specifications in Australian gasoline, diesel, biodiesel and E85 that may require changes” (Hart Energy 2014, p.2). These changes are summarised

REF _Ref419124728 \h \* MERGEFORMAT For example, the EU sulfur standard for petrol of 10 ppm, established under EN 228, was set in 2009.

1 The notable exception is MTBE. Any changes to sulfur and aromatics content in line with possible changes listed in Table 23 would need to take account of Australian circumstances regarding MTBE and whether and how this can align with the harmonisation objective (see Box 3).

The Department of the Environment Review of the Fuel Quality Standards Act 2000 66. in Table 23. It is important to emphasise that the changes presented in Table 23 are not recommendations of this review. They merely provide an indication of changes that might be needed if Australian fuels standards are to harmonise with international best practice, notably with EU standards.

Table 23: Possible changes to fuel specifications to achieve international harmonisation

Gasoline (Petrol) Sulfur Align with the EU, Japan and South Korea by reducing the limit from the current 150 ppm for all grades and 50 ppm for premium-grade gasoline (PULP) to 10 ppm max for all grades to enable advanced emission controls on the vehicles that are being produced and driven in markets such as Australia today. Aromatics Align with the EU by reducing the limit from the current cap of 45 vol% (42% pool average over 6 months) to 35 vol% max to help further reduce NOx, benzene and PM emissions in Australia. Silver corrosion Consider adopting ASTM D4814’s limit of Class 1 max if a lower sulfur limit is adopted. This is aimed to protect against reactive sulfur compounds that can corrode or tarnish silver alloy fuel gauge in-tank sender units. Diesel Polyaromatics Align with the EU by reducing the limit from the current 11 wt% to 8 wt% max, which could further help reduce NOx and PM emissions in Australia Carbon residue Align with the U.S. and South Korea by reducing the limit from the current 10% 0.2 wt% to 0.15 wt% max to help further reduce engine deposits Biodiesel Acid value Align with the EU, U.S., Japan and South Korea by reducing the limit from the current 0.80 mg KOH/g to 0.50 mg KOH/g max to ensure the storage of biodiesel, as well as protect against fuelling system deposits and corrosion. Phosphorus Align with the EU by reducing the limit from the current 10 mg/kg to 4 mg/kg max to help improve the performance of catalytic converters and newer vehicle technologies Oxidation Align with the EU by tightening the limit from the current 6 hours min to 8 stability @ hours min 110°C Cold soak If precipitates have been an issue in Australia’s biodiesel, consider adding a filterability / cold cold soak filterability specification in line with ASTM D6751 at 200-360 flow seconds max, depending on temperature. Similarly, if there are any instances of gelling or fuel injector fouling, the government may want to consider adding a cold flow specification E85 Sulfur Align with the EU and proposed reduction of Australia’s gasoline sulfur limit to 10 ppm max Acidity (as Align with the EU and the U.S. by reducing the limit from the current 0.006 acetic acid) wt% to 0.005 wt% max to further protect against corrosion. Existent gum If gums are an issue in Australia’s E85, it may be worth considering adding a (solvent solvent unwashed existent gum specification of 20 mg/100ml max as unwashed) required in ASTM D5798

The Department of the Environment Review of the Fuel Quality Standards Act 2000 67. Silver corrosion Consider adopting ASTM D5798’s limit of Class 1 max to protect against reactive sulfur compounds that can corrode or tarnish silver alloy fuel gauge in-tank sender units.

Source: Hart Energy (2014)

4.3.2 Is harmonisation necessary to achieve emission controls and effective operation of engines? Sulfur in petrol is a key fuel parameter if not the key parameter when examining a response to this question. The issue has been the subject of a number of studies in Australia and internationally and is certainly the fuel parameter of most interest and concern to many of the stakeholders responding to the Issues Paper, including the Australian Automobile Association (AAA), Australian Institute of Petroleum (AIP) and Federal Chamber of Automotive Industries (FCAI). When framing a response to the question we have relied on the views of stakeholders and an extensive review of available literature. In particular we have drawn on a number of reports that have examined this issue including a report that was recently completed for the Department by Orbital Australia Pty Ltd (Orbital Australia 2013) REF _Ref419124728 \h \* MERGEFORMAT . The Orbital report, as well as being the most comprehensive literature review of sulfur limits for petrol that has been completed in Australia to date, also canvassed a wide range of industry and stakeholder views. On this point, we note that although many submissions provided to the current review commented on the issue of sulfur in petrol, the views expressed by stakeholders were substantially unchanged from those canvassed in the Orbital report. Considering the objectives of the Act, the Orbital report essentially addressed three questions: 1. Will reducing the sulfur level of petrol reduce the level of pollutants and emissions arising from the use of the fuel? 2. Will reducing the sulfur level of petrol facilitate the adoption of better engine and emission control technology? 3. Will reducing the sulfur level of petrol allow the more effective operation of engines?

Will reducing the sulfur level of petrol reduce the level of pollutants and emissions arising from the use of the fuel?

On the first question, the Orbital report states that: “Without Australian-specific test data to the contrary, there is an expectation that exhaust emissions would be higher with the use of 150 ppm or 50 ppm sulfur fuel than they would be if a lower sulfur fuel level was implemented. Much of the literature used to assess this aspect is dated and relates to a period when Europe and the US were evaluating the impacts of fuel sulphur. The robustness of engine and vehicle emission technology has improved since this time, and some of the more recent data suggests a lower sensitivity of tailpipe emissions to different levels of fuel sulfur” (p.21). Overall

REF _Ref419124728 \h \* MERGEFORMAT Other reports and reviews examined include ACEA 2013, DIT 2010, MMA 2005 and USEPA 2014.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 68. however“…the literature clearly indicates that the use of higher sulfur levels has a detrimental effect on all regulated pollutants, though most strongly on NOx emissions.” (p.117). In summary, reducing sulfur in petrol will reduce emissions but perhaps not by as much as past reductions have achieved. This conclusion is largely supported by emissions analysis undertaken for this review, which reveals that reducing sulfur in petrol from 150 ppm for ULP and 50 ppm for PULP to 10 ppm will have a quantifiable impact on exhaust emissions, in particular NOx emissions (see section Emissions of air pollutants). Failure to reduce sulfur in petrol in Australia however, does not necessarily preclude the adaptation of Euro 5 and 6 emission standards.

Will reducing the sulfur level of petrol facilitate the adoption of better engine and emission control technology?

On this question the Orbital report states: “A reduction in fuel sulphur levels (from the current 150 ppm and 50 ppm levels to 10 ppm) is likely to enable the use of some specific technologies, namely lean burn GDI, as well as enhance their fuel consumption capability by reducing the frequency of their (catalyst) regeneration/ desulfurisation cycles.” (p.117). However, the literature reviewed indicates that the predicted uptake of this technology in Europe and the US has not been realised” (p.21). Thus a reduction in sulfur will facilitate the adoption of lean burn technologies, as well as enhancing their fuel consumption performance. However, the take up of lean burn technologies in Europe, the US and Australia has been relatively limited to date.

Will reducing the sulfur level of petrol allow the more effective operation of engines?

On the final question both the Orbital report and earlier assessments (e.g. DITRD 2010) note that in real world operation of the vehicle, where higher fuel sulfur level exists compared to certification levels, the following issues may arise: Tailpipe emissions may be higher for these fuels compared to emissions from fuels that meet certification levels, especially at higher mileage. This is because, although three- way catalysts REF _Ref419124728 \h \* MERGEFORMAT operate effectively at current sulfur levels (150 ppm or less), in-service catalyst durability is likely to be affected by fuel sulfur levels higher than certification levels. The durability question becomes important in the context of Euro 5/6 as these standards require manufacturers to demonstrate compliance with the emissions standards at 160,000km (compared to 100,000km in Euro 4). On Board Diagnostic (OBD) systems may become less reliable and the Malfunction Indicator Lamp (MIL) may be illuminated too early or too late. After a review of these issues the Orbital report concludes that the use of low sulfur fuels should reduce the likelihood of false triggering of the OBD systems and it could have an effect on service life of three-way catalysts, but that studies undertaken to date make it difficult to quantify these impacts. Overall though “… reducing fuel sulphur is unlikely to yield significant improvements in the operability of engines or vehicles”

REF _Ref419124728 \h \* MERGEFORMAT The three-way catalyst is the most common form of automotive catalyst. It is ‘three way’ because it oxidises carbon monoxide (CO), oxidises hydrocarbons and reduces oxides of nitrogen (NOx).

The Department of the Environment Review of the Fuel Quality Standards Act 2000 69. (p.21).

4.4 Conclusions and recommendations

Overall, based on the analysis undertaken for this review, a thorough literature review and the views of stakeholders, we can quite confidently assert that regulation of fuel supplied in Australia via the Fuel Quality Standards Act 2000 and supporting regulations and determinations has been effective in achieving the objectives of the Act. With respect to the objectives of reducing emissions and improving health outcomes there has been: a quantifiable reduction in the mass of (assessed) pollutants arising from the use of regulated fuel, with the exception of O3 formation, in both Melbourne and Sydney; generally an improvement in health outcomes, with some exceptions associated with exposure to O3. indirectly, a reduction in the level of greenhouse gas emissions arising from the use of regulated fuel. With respect to the objectives of facilitating adoption of better engine and emission control technology and allowing effective operation of engines, we note that full harmonisation of fuel quality standards in Australia with international best practice has not yet been achieved. The adverse impact of this situation on the adoption of better engine and emission control technology and the effective operation of engines is likely to have been relatively minor though. Nevertheless, we note that The Australian Government Guide to Regulation stipulates that “…where international standards already apply ... whether (and why) standards being proposed differ from the international standard” should be explained” (DPMC 2014, p.29). Further, to ensure that lack of harmonisation does not impact on adoption of emission control technology or effective operation of engines in the future there is a strong case for arguing that the process of establishing emissions standards through Australian Design Rules (through the Motor Vehicle Standards Act 1989) and the process of setting fuel quality standards should be more closely aligned. Both the Australian Automobile Association and the Federal Chamber of Automobile Industries point to apparent anomalies with this situation.

Recommendations

Recommendation 4 Given effectiveness of the Fuel Quality Standards Act 2000 in meeting health, environmental and engine operability objectives there is a strong case, prima facie, for retaining the Act either in its current or amended form. A decision to repeal or replace the Act should not be made unless it can be confidently determined that alternative regulatory arrangements are equally effective in achieving objectives and at lower net cost to society. Recommendation 5

The Department of the Environment Review of the Fuel Quality Standards Act 2000 70. Amendments should be made to the Fuel Quality Standards Act 2000 to ensure that the process of regulating fuel quality standards and vehicle emissions standards (established through ADRs) is better coordinated in the future. Amendments to the Motor Vehicle Standards Act 1989 may also be required to link this Act to the Fuel Quality Standards Act 2000. See Box 6, proposed amendment vi.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 71. 5. Fuel quality regulatory options

For this review, Marsden Jacob considered a broad spectrum of options for the regulation of fuel quality in Australia. In this section, we discuss the long-list of regulatory options, the short-listing process and specify key features of the short-listed options. Marsden Jacob’s analysis of the regulatory options has been undertaken in a stepped manner, see Figure 8. Figure 8: Options assessment process

5.1 Key findings and recommendations

Fuel quality regulation appears to be better suited by government regulation

Based on our assessment of regulatory, co-regulatory and self-regulation options: Co-regulatory and self-regulation options appear to be ill-suited to the regulation of fuel quality outcomes, because there is: (1.4.1.a.i) no collective interest; (1.4.1.a.ii)no industry incentive to develop standards that support social and environmental outcomes; and (1.4.1.a.iii) regulatory consistency will not be achieved. Australian Government regulation is the preferred alternative against the framework criteria, subject to the regulation delivering a net welfare benefit to the Australian population. State and Territory Government regulation is also preferred to co-regulation or self- regulation alternatives. However, there are a number of challenging issues with a jurisdiction based approach that could undermine the achievement of key objectives and outcomes.

Four options were short-listed

Marsden Jacob short-listed four regulatory options for more detailed economic analysis: Option 1 (Base Case): The Base Case is the business as usual option against which the incremental costs and benefits of alternative options are considered. Under the Base Case the Fuel Quality Standards Act 2000 is retained in its current form. Option 2 (Amended legislation): Under Option 2 the Fuel Quality Standards Act 2000 is retained but is amended to address identified shortcomings with the current Act. Option 3 (Self-regulation): Australian Government regulations and determinations are repealed or sunset and self-regulatory arrangements are developed and implemented. Option 4 (Co-regulation): Australian Government regulations and determinations are repealed or sunset. New co-regulatory arrangements are established.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 72. These scenarios were short-listed based on discussions with a range of stakeholders, across fuel and motor vehicle industries and government agencies, along with stakeholder submissions.

5.2 Defining the regulatory options

For the purpose of this review, we have adopted the Australian Law Reform Commission REF _Ref419124728 \h \* MERGEFORMAT definitions of the key regulatory options: Government regulation: comprises primary and subordinate legislation. It is the most commonly used form of regulation (ALRC, 2012). Self-regulation: is generally characterised by industry-formulated rules and codes of conduct, with industry solely responsible for enforcement (ALRC, 2012). Self- regulation typically involves a group of economic agents, such as firms in a particular industry or a professional group, voluntarily developing rules or codes of conduct that regulate or guide the behaviour, actions and standards of its members. (OECD – unofficial paper). Co-regulation: refers to situations where industry develops and administers its own arrangements, but government provides legislative backing (ALRC, 2012). The specific types of instruments or mechanisms that may be created under a self-regulatory regime are similar under a co-regulatory framework, but co-regulation entails explicit government involvement. It is the degree of government involvement and legislative backing that determines the difference between the two. (OECD REF _Ref419124728 \h \* MERGEFORMAT ).

5.3 Options considered

Long list of options The long-list of regulatory options is summarised in Figure 9 and they are further discussed below. Figure 9: Long-list of options

Source: Marsden Jacob, 2015

Government Regulation

Three alternative forms of government regulation have been considered:

REF _Ref419124728 \h \* MERGEFORMAT Australian Government, Australian Law Review Commission (2012) Classification—Content Regulation and Convergent Media (ALRC Report 118), http://www.alrc.gov.au/publications/classification-content-regulation-and-convergent-media-alrc-report-118, accessed 20 August 2015

REF _Ref419124728 \h \* MERGEFORMAT OECD (n.d.) Alternatives to Traditional Regulation, declassified document

The Department of the Environment Review of the Fuel Quality Standards Act 2000 73. Alternative 1: Australian Government retains regulatory responsibility under the existing regulatory framework, with minor efficiency improvements. Alternative 2: Australian Government retains regulatory responsibility under the existing regulatory framework, with significant changes. Significant changes could involve: (1) shifting the onus of proof of compliance from the Australian Government to fuel suppliers; or (2) shifting compliance assessment to the bulk supply point (i.e. import terminals and refinery terminals). (3) shifting enforcement activities to states and territories. Alternative 3: State and territory governments take on the regulation of fuel quality by enacting their own legislation.

Self-regulation

One self-regulatory option has been considered: Fuel quality legislation and determinations are repealed or sunset (whichever happens first). A governing body is established and endorsed by the petroleum industry to develop fuel quality guidelines or a code of conduct to replace the regulatory standards. Alternatively, an existing independent organisation (such as Standards Australia) could be engaged to perform this function. Fuel suppliers (refineries and importers) and retailers voluntarily agree to abide by the guidelines. Monitoring and sampling is conducted on a voluntary basis by fuel suppliers. The ACCC (under Australian Consumer Law) has responsibility for regulating anti- competitive behaviour and protecting consumer rights.

Co-Regulation

Two co-regulatory options have been considered. Following is an overview of those alternatives. Alternative 1: All companies involved in production, import, distribution and retail of petroleum products would be required to become members of a national fuel quality agreement. The agreement would be administered and managed through an incorporated national fuel quality organisation that advises on standards and oversees compliance and enforcement. Fuel quality standards would continue to be set by the Minister. However, the Minister would be required to consider advice of the national fuel quality organisation on decisions. The Australian Government provides a legislative ‘safety net’ which mandates fuel supplier compliance with the standards. A monitoring, sampling and analysis system would be developed through the covenant and administered by the national fuel quality organisation.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 74. Responsibility for enforcement of compliance with standards would reside with the national fuel quality organisation and the ACCC. Alternative 2: As per Alternative 1 except that: Fuel quality standards including fuel standards, standards relating to additives and granting or varying approvals for variations from the standards would be set by a specially constituted committee of the new entity. The committee would comprise representatives of all key stakeholder groups, as well as Commonwealth and State governments. The relevant Minister would need to sign off on agreed changes to standards. As a condition of membership of the national fuel quality covenant members would agree to meet these standards.

Stakeholder views on regulatory options The Issues Paper sought views from stakeholders on different regulatory options for fuel quality, including retention of the existing Act and alternatives such as co- regulations and self-regulation (Table 24). To the extent that stakeholders expressed any views on regulatory options they were either neutral, supportive or strongly supportive of retaining the existing legislative framework. A few stakeholders expressed interest in a co-regulatory framework but were keen to see more detail about how such a framework would work. Table 24: Stakeholder views on regulatory options

Oppose Neutral or no opinion Support Retain existing Act or amended Act 0 15 10 Introduce self-regulation or co-regulation 10 12 3

Assessment framework used to short-list regulatory options Based on a review of international ‘grey’ literature on regulatory setting and our prior experience Marsden Jacob has developed the following assessment framework to identify which of the regulatory options are likely to be most suitable for the regulation of fuel standards REF _Ref419124728 \h \* MERGEFORMAT . The criteria in the assessment framework are discussed in Table 25.

REF _Ref419124728 \h \* MERGEFORMAT Sources: http://www.aic.gov.au/media_library/conferences/regulation/sylvan.pdf http://www.alrc.gov.au/publications/13-codes-and-co-regulation/factors-determining-regulatory-form http://www.environment.gov.au/resource/fact-sheet-3-strong-assurance-framework http://www.oecd.org/gov/regulatory-policy/42245468.pdf http://www.apsc.gov.au/__data/assets/pdf_file/0015/7440/smarterpolicy.pdf http://stakeholders.ofcom.org.uk/binaries/consultations/coregulation/statement/statement.pdf

The Department of the Environment Review of the Fuel Quality Standards Act 2000 75. Table 25: Assessment framework

Criteria Key Questions Key Considerations

Collective Do the participants have a collective Market power interest interest in addressing the identified Information asymmetries problem? REF _Ref419124728 \h \* MERGEFORMAT Externalities and spillovers Would the solution correspond to the best interests of consumers and the broader public?

Incentive to What incentive(s) do key Incentives of key stakeholders develop stakeholders (industry or standards government) have to develop standards that address the identified problem? Incentive to not Do individual companies have an Industry coverage: a small number of participate/ incentive to not participate / free market players with wide coverage of the free-ride ride? industry. Competitive market with few barriers to entry. Objectives and Can clear and straightforward Homogeneity of products – products are arrangement objectives and arrangements be set? essentially alike or comparable. Clear hierarchy of escalating sanctions. Effective assurance (accreditation of standards, performance assurance and outcomes assurance). Representation on the governing structure would be balanced. The industry or profession cannot simply police itself. External auditing. Regulatory Are the regulations consistent with consistency other related regulations?

REF _Ref419124728 \h \* MERGEFORMAT Fuel industry participants include refineries, wholesalers and retailers

The Department of the Environment Review of the Fuel Quality Standards Act 2000 76. Criteria Key Questions Key Considerations

Risk How do risks to stakeholders Do risks vary by stakeholder type: compare under the regulatory domestic refineries, import terminals, alternatives? retailers and consumers?

Assessment of option long-list against the framework Table 26 compares the performance of the different regulatory options. A traffic light approach is used to reveal performance of the regulatory options against the criteria: ● = meets the criterion; ● = some weaknesses; and ● = unlikely to meet the criterion. The key points that emerge from this analysis are: Co-regulatory and self-regulation options appear to be ill-suited to the regulation of fuel quality outcomes, for the following reasons: No collective interest: Industry, consumers and the broader society have divergent interests where fuel quality standards are concerned. Limited incentive: There is limited incentive for the petroleum industry to develop fuel quality standards that address these divergent interests. Industry incentive centres on maximising financial returns. Mixed participation incentives: Mixed participation incentives mean that is could be challenging to gain industry wide coverage. Lowest common-denominator objectives and outcomes would most likely result. Regulatory consistency will not be achieved. There are risks to air quality and engine operability from reduced fuel standards and/or contaminants in fuel (see Box 7). Australian Government regulation is the preferred alternative against the framework criteria, subject to the regulation delivery a net welfare benefit to the Australian population. State and Territory Government regulation is preferred to co-regulation or self- regulation alternatives.

Box 7: Risks associated with unregulated or poorly regulated fuels

As discussed in section Government monitoring and compliance, the Fuel Quality Standards Act 2000, although imperfect, has been largely successful in ensuring that fuel standards are maintained at a level necessary to achieve health and environmental objectives. Similarly, in section Consumer protection, it is noted that although there have been some instances of fuel contamination in Australia, these have been relatively rare. A move to a less regulated environment however, poses risks in both these areas. Consumer pressures and corporate responsibility will mean that the majority, even the vast majority, of the fuel supply industry will maintain strong quality assurances practices (see Box 5). Nevertheless, in a de-regulated environment there will be a temptation on the part a minority of fuel suppliers to supply less costly but poorer quality or contaminated fuel.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 77. Data on global fuel specifications indicates that although fuel standards in Australia currently lag behind the EU, Japan and (more recently) the US with respect to some fuel parameters (see Table 5), overseas production of low quality fuels is still very substantial – much poorer quality than is currently produced in Australia (e.g. up to 2500 ppm sulfur – Stratas Advisors 2015). Exports of low quality fuels come from the Middle East and North Africa in particular. Major importers of these fuels include a number of South East Asian countries, India and (until recently) China. Furthermore, anecdotal evidence provided by stakeholders indicates that contaminants that can severely affect the operability of vehicles and, in some cases, also have major environmental impacts, are regularly found in fuels supplied in South East and South Asia.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 78. Table 26: Assessment of regulatory options against assessment criteria

Government Government Regulation Regulation Criteria Key Issues (State and Territory Co-Regulation Self-Regulation (Australian Governments) Government) Collective Industry’s prime interest is financial ● ● ● ● interest return linked to maintaining competitive advantage and minimising National collective Collective interest is managed Balancing Balancing collective interests capital development costs. interest across through government stakeholder collective interests would be very difficult, Consumers want cheap fuel that various decision-making processes. could be difficult, particularly given market power maintains vehicle operability. stakeholders is Challenges potentially arise, particularly given and information asymmetry managed through market power and issues. Broader society wants welfare under the Mutual Recognition government information optimising fuel standards that support Act 1992, if states and territories The regulatory framework would decision-making asymmetry issues. economic, health and environmental implement differing standards. be controlled by industry and may processes. outcomes. be designed to benefit incumbents at the expense of possible new entrants, consumers and the broader society.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 79. Government Government Regulation Regulation Criteria Key Issues (State and Territory Co-Regulation Self-Regulation (Australian Governments) Government) Incentive to Government: Government developed ● ● ● ● develop standards seek to balance economic, standards environmental and social welfare Regulatory impact Regulatory impact assessment A balanced A balanced (industry, consumer outcomes. Where welfare optimising assessment requirements stipulate that (industry, and societal) decision-making outcomes are not achieved there is an requirements economic, environmental and consumer and body would need to be incentive for the Australian stipulate that social welfare outcomes are societal) decision- established. There is no market Government to develop standards. economic, robustly assessed. making body incentive for this entity to be Industry: There is limited incentive for environmental and would need to be formed. industry to develop standards that social welfare established. There Elevated fuel quality standards balance economic, environmental and outcomes are is no market will increase costs of production. robustly assessed. incentive for this social welfare outcomes. Industry Maintenance of existing entity to be incentives are maximising financial standards “frozen in time” may formed, although returns linked to maintaining be preferred by domestic the co-regulatory competitive advantage and minimising refineries because it supports framework could capital development costs. existing competitive advantage, require this. Prior to the fuel quality standards because no capital development legislation being introduced standards Maintenance of would be required. However, focused on ‘vehicle operability’ issues existing standards some fuel importers may see a and did not consider environmental “frozen in time” competitive advantage in and health considerations. may be preferred importing lower priced ‘dirty’ by domestic fuels. refineries because it supports existing competitive advantage, because no capital development would be required.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 80. Government Government Regulation Regulation Criteria Key Issues (State and Territory Co-Regulation Self-Regulation (Australian Governments) Government) Incentive to Discussions with stakeholders ● ● ● ● participate/ identified that the major fuel industry free-ride companies have an incentive to Compliance and Compliance and enforcement Major fuel industry Major fuel industry companies participate. enforcement arrangements create an incentive companies have have indicated that they would Small organisations may have a arrangements for participation. indicated that they participate. However, it is reduced incentive to participate as create an incentive would participate. uncertain whether all of the there is there may be opportunities to for participation. Co-regulatory industry would participate, or make financial returns. arrangements whether they would seek to would also provide exploit financial arbitrage an incentive to opportunities. participate. Objectives Where fuel quality is concerned key ● ● ● ● and points are: arrangemen Products are not homogenous. Government Government regulation can deal Co-regulation can Gaining industry-wide coverage t regulation can deal with heterogeneity, assurance support the will be very challenging, Assurance is challenging because with and representation. Noting that management of particularly given product there are many retail outlets and heterogeneity, all of these issues can increase heterogeneity, heterogeneity. linking fuel quality issues with a assurance and regulatory cost. assurance and specific retail outlet is difficult. Reliance on industry to provide representation. representation. assurance arrangements will be Balanced representation would be Noting that all of However, the difficult, because assurance costs hard to achieve. these issues can national reduce financial margins. increase regulatory organisation will Achieving balanced cost. need to navigate representation across all these issues and stakeholder groups will be that could be challenging to achieve. challenging.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 81. Government Government Regulation Regulation Criteria Key Issues (State and Territory Co-Regulation Self-Regulation (Australian Governments) Government) Regulatory consistency ● ● ● ● Regulatory Regulatory consistency would be Regulatory Regulatory consistency would be consistency should difficult to achieve, across consistency is difficult to achieve, because of be achievable, but Australian Government and State achievable but is differing incentives (discussed Regulatory consistency is important consultation has and Territory governments. not assured. above). for vehicle emission and operability confirmed that efficiency to be achieved. harmonisation has Key considerations include domestic thus far not been harmonisation with Motor Vehicle achieved between Standards Act 1989 and international domestic harmonisation with fuel and emissions regulations. standards. Establishing clear links between different regulatory frameworks could facilitate consistency.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 82. Government Government Regulation Regulation Criteria Key Issues (State and Territory Co-Regulation Self-Regulation (Australian Governments) Government) Risk How do risks to stakeholders compare ● ● ● ● under the regulatory alternatives? Government needs Government needs to balance Elevated risks Elevated risks emerge for to balance the risks the risks to all stakeholders. emerge for stakeholders with reduced to all stakeholders. However, Mutual Recognition stakeholders with market power. legislation could present risks. reduced market Government would face high risks ● power. ● of societal backlash if air quality Refinery industry Government standards decline or if stakeholders could Refinery industry stakeholders would face high contaminants in fuel affect engine argue that they could argue that they have risks of societal operability. have elevated risks elevated risks because standards criticism if fuel because standards are likely to be strengthened into quality doesn’t ● are likely to be the future. align with Major refiners and importers strengthened into international could utilise their market power the future. trends. and information asymmetries to ● reduce risk. Major refiners and importers could utilise their market power and information asymmetries to reduce risk.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 83. Short listed options The Australian Government requires that at least three scenarios are assessed in regulatory cost-benefit analysis, one of which must be non-regulatory. Based on this analysis, Marsden Jacob has short-listed the following four options for consideration in the economic analysis.

Option 1 (Base case)

The Base Case is the business as usual option against which the incremental costs and benefits of alternative options are considered. In accordance with the Australian Government’s Guidance Note on Cost-Benefit Analysis the Base Case reflects “what would happen if the current arrangements were to continue” (page 3). REF _Ref419124728 \h \* MERGEFORMAT The Base Case assumes that the existing regulatory arrangements are maintained. Thus the Fuel Quality Standards Act 2000 and associated regulations are retained in their current form. No substantive amendments are made to the Act.

Option 2 (Amended Act)

Under Option 2 the current regulatory framework is largely maintained, with retention of the Fuel Quality Standards Act 2000 and associated regulations. However, key changes are made to improve the administration, compliance and enforcement of the Act. Key regulatory changes under this scenario are detailed in Box 6 and Appendix 3.

Option 3 (Self-regulation)

One deregulation/ self-regulation has been assessed in this analysis. Under this Scenario it is assumed that: Fuel quality legislation and determinations are repealed or sunset (whichever happens first). A governing body is established and endorsed by the petroleum industry to develop fuel quality guidelines or a code of conduct to replace the regulatory standards. Alternatively, an existing independent organisation (such as Standards Australia) could be engaged to perform this function. Fuel suppliers (refineries and importers) and retailers voluntarily agree to abide by the guidelines. Monitoring and sampling is conducted on a voluntary basis by fuel suppliers. The ACCC (under the Australian Consumer Law) has responsibility for regulating anti- competitive behaviour and protecting consumer rights REF _Ref419124728 \h \* MERGEFORMAT .

REF _Ref419124728 \h \* MERGEFORMAT Australian Government Department of the Prime Minister and Cabinet, Office of Best Practice Regulation (July 2014) Cost-Benefit Analysis – Guidance Note

The Department of the Environment Review of the Fuel Quality Standards Act 2000 84. Option 4 (Co-regulation)

Based on the review of alternatives and stakeholder discussions, Alternative 1 of the two co-regulatory alternatives discussed above (Section Options considered) was short- listed in this analysis. Under this Scenario: All companies involved in production, import, distribution and retail of petroleum products would be required to become members of a national fuel quality covenant or agreement. The agreement would be administered and managed through an incorporated national fuel quality organisation that advises on standards and oversees compliance and enforcement. Fuel quality standards would continue to be set by the Minister, consistent with the approach set out in Division 6 of the Fuel Quality Standards Act 2000. However, the Minister would be required to consider advice of the national fuel quality organisation on any decisions relating to: fuel standards under sections 21 and 22 of the Act; fuel quality information standards under section 22A of the Act; fuel additives under section 35(2) of the Act; or granting, varying or revoking an approval under section 13 of the Act. The Australian Government provides a legislative ‘safety net’ which mandates fuel supplier compliance with the standards. Monitoring, sampling, analysis and enforcement of compliance to the standards would no longer be regulated through the Act. Instead, a monitoring, sampling and analysis system would be developed through the covenant and administered by the national fuel quality organisation. Costs involved in implementing administering the system would be funded through an agreed contribution from covenant members. Provision of fuel quality information including labelling guidelines would also be developed and implemented through the covenant. Responsibility for enforcement of compliance with standards would reside with the national fuel quality organisation and the ACCC.

REF _Ref419124728 \h \* MERGEFORMAT In consultations with the review team the ACCC indicated that it does not currently have sufficient resources to take an active role in regulating fuel quality, nor are consumer protection issues related to fuel quality a priority at present. This situation puts a significant question mark against the viability of Options 3 and, to a lesser extent, Option 4.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 85. 6. Economic analysis

1.1 Key findings

From a cost-effectiveness perspective the significant regulatory framework cost savings can be achieved through the implementation of Options 3 and 4. Option 2 will also achieve significant cost savings relative to Option 1. From a broader economic perspective, Option 2 (Revised Act) is estimated to deliver the most economically beneficial outcome. Significant avoided health costs associated with fuel quality Scenario A, relative to other scenarios, is a significant factor driving this outcome. A key cost variable not included in the CBA is the cost of supplying fuel. Threshold analysis identifies that Option 1 (base case) will remain the preferred option relative to Option 3 (self-regulation) provided additional fuel supply costs of Option 1 above Option 3 costs can be kept to less $578 million in present value terms, equivalent to 0.6 cents/litre. Regulatory burden measurement (RBM) reveals that industry regulatory burden does not differ substantially between the four options.

1.2 Approach to the analysis

As detailed in section Short listed options, four regulatory options were shortlisted for economic analysis: Option 1 (Base case) is retention of the Fuel Quality Standards Act 2000 in its current form. Option 2 (Amended Act) is retention of the Act but with amendments to the Act and to the Regulations. Amendments to the Act are assumed to take effect from 2019. Option 3 (Self-regulation) involves industry self-regulation, with fuel quality guidelines replacing regulated standards. Option 4 (Co-regulation) involves new co-regulatory arrangements between the government and the petroleum industry. These four options were then subject to economic analysis, with the economic analysis involving two levels of assessment: 1. Cost-effectiveness assessment. 2. Cost-benefit analysis.

Approach: cost-effectiveness assessment Cost-effectiveness assessment (CEA) is an economic assessment framework that considers only the costs attributable to meeting a specified objective. In this case, CEA was used to assess the administrative type costs of Options 1 to 4 relative to determine the most cost effective pathway (from the four shortlisted options) to achieving nationally consistent fuel quality standards. The main categories of cost

The Department of the Environment Review of the Fuel Quality Standards Act 2000 86. considered in the cost-effectiveness assessment are: Costs to government associated with administering a given regulatory option including: - monitoring and compliance, - legal; and - policy development. Costs to the petroleum industry (including refineries, importers, other fuel suppliers and retailers) of complying with a given regulatory option including: - monitoring and reporting costs; - costs associated with section 13 approvals processes; and - other costs associated with meeting the administrative requirements of fuel regulation. The CEA assesses and presents present values of these costs over a 15 year period (2016 to 2030), applying a discount rate of 7%. By definition, cost-effectiveness assessment does not consider the benefits/ avoided costs associated with a given option. Indeed, the CEA for this review does not consider any of the broader economic impacts of the alternative options such as health and environmental benefits/ avoided costs of the different options or the fuel price impacts of industry investments required to achieve particular fuel quality standards. As such, the outcomes of this CEA merely provide an indication of the most administratively efficient pathway to regulating fuel quality but provide no information on the broader economic (welfare) implications of pursuing different regulatory pathways. Results of the CEA and further details of the administrative type costs applied in the CEA are provided in section Cost-effectiveness assessment.

Approach: cost-benefit analysis Cost-benefit analysis (CBA) is a widely accepted method that compares the benefits and costs associated with alternative options quantified in monetary ($) terms. The scope of CBA is on economic (society wide) costs and benefits as opposed to the private benefits and costs assessed in a financial analysis. The CBA methods applied in this review are consistent with established guidelines (e.g. Department of Finance 2006). The CBAs assesses the Net Present Values (NPVs) of the costs and benefits/avoided costs of each of the options over a 15 year period (2016 to 2030). Net Present Values are calculated in the main case using a standard discount rate of 7%. The net cost/benefit of Options 2 to 4 relative to Option 1 (Base case) is then presented.

Fuel quality scenarios

In addition to the administrative type costs assessed in the CEA, the CBA seeks to assess the broader economic costs and benefits of implementing the alternative regulatory options. The broader economic costs and benefits can be linked to the major objectives of the Act, i.e. health, environmental and vehicle operability, which in turn are determined by the key outcomes of the regulation of fuel quality, i.e. fuel standards. Because it is not possible to be definitive about these outcomes under the different regulatory options, four scenarios were constructed representing different outcomes in

The Department of the Environment Review of the Fuel Quality Standards Act 2000 87. terms of fuel quality standards. In summary the scenarios are: Scenario A: Strengthen fuel quality standards in 2020. Fuel quality standards are strengthened in 2020. Amended parameters include sulfur (ULP and PULP), aromatics (ULP and PULP) and polyaromatics (diesel). Scenario B: Freeze fuel quality standards at current levels. Fuel quality standards remain unchanged from current levels. Scenario C: Backsliding. Fuel quality standards regress for a limited share of the market and for a limited range of fuel parameters. Scenario D: Strengthen fuel quality standards in 2025. Fuel quality standards are strengthened in 2025. Amended standards are the same as for Scenario A. The four scenarios are detailed in Table 27.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 88. Table 27: Fuel quality standards under four different scenarios

Gasoline (Petrol) Diesel Scenario Sulfur Sulfur Polyaromatics 2 20 0 2015 2015 2020 2020 2015 2020 20 1 5 UL P 10 1 Scenario A: pp 0 Strengthen fuel ULP 150 ppm m Aromatics 45 % Aromatics 35 % quality No change 11% wt 8% wt PULP 50 ppm PU Benzene 1% No change p standards in LP p 2020 10 m pp m 1 Scenario B: No 0 Freeze fuel ULP 150 ppm cha Aromatics 45 % quality No change No change 11% wt No change PULP 50 ppm ng Benzene 1% p standards at e p current levels m UL P 30 Scenario C: 0 1 Backsliding - pp Aromatics 50% 0 fuel quality ULP 150 ppm m Aromatics 45 % (20% of market) standards 50 ppm 11% wt No change PULP 50 ppm (20 Benzene 1% Benzene 5% p regress for a % (20% of market) p limited share of of m the market ma rke t)

The Department of the Environment Review of the Fuel Quality Standards Act 2000 89. Gasoline (Petrol) Diesel Scenario Sulfur Sulfur Polyaromatics 2 20 0 2015 2015 2020 2020 2015 2020 20 1 5 PU LP No cha ng e Scenario D: Strengthen fuel quality As per Scenario A, except that changes to standards take effect in 2025 rather than 2020 standards in 2025

The Department of the Environment Review of the Fuel Quality Standards Act 2000 90. Integrated emissions, air quality and health risk modelling was then applied to the four scenarios to assess total health (air pollution) and environmental (greenhouse gas) impacts of each of the scenarios. A range of health impacts linked to emissions of pollutants including PM2.5, NOx, SO2, O3, CO and VOCs were assessed. Greenhouse gas emissions from fuel consumption in vehicles were assessed as well as emissions from the refining of fuels. See section Emissions, air quality and health impacts modelling and for an overview of the methods and results of the health and greenhouse gas emissions assessment. The outputs of the health risk assessment and greenhouse gas emissions assessment were then monetised for the CBA (see sections Health impacts and Vehicle operating and maintenance costs). Additionally, the impacts of the four scenarios on the operating costs of vehicles costs were assessed. Key operating costs assessed are: fuel consumption in vehicles; and the impact of sulfur levels on the life expectancy of 3-way catalysts. The health, environmental and vehicle operating costs associated with each of the four scenarios were then calculated as expected values for each of the four regulatory options. Expected values are calculated as the average cost of two scenarios that have been assigned to each of the options to provide an estimate of their ‘upper bound’ and ‘lower bound’ costs. See Figure 10.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 91. Expected value of costs, central case

Scenario D (upper bound)

Option 1 (Base case) Scenario A (lower bound)

Scenario D (upper bound)

Option 2 (Amended Act) Scenario A (lower bound)

Scenario C (upper bound)

Option 3 (Self-regulation) Scenario B (lower bound)

Scenario B (upper bound)

Option 4 (Co-regulation) Scenario D (lower bound)

Figure 10: Approach to estimating the expected value of costs of scenarios for different options, central case

Thus, as shown in Table 10, for Option 1 (Base case), we are proposing that if the Act is retained in its current form the most likely outcomes in terms of fuel standards are either: standards are strengthened in 2020 (50% probability); or standards are strengthened in 2025 (50% probability). The same scenarios apply to Option 2 (amended Act). For Option 3, we are proposing that with introduction of a self-regulatory framework the most likely outcomes in terms of fuel standards are either: standards remain unchanged at their present levels for the foreseeable future (50% probability); or there is limited backsliding, with some standards being weakened for a small segment of the market (50% probability). For Option 4, we are proposing that with introduction of a co-regulatory framework the most likely outcomes in terms of fuel standards are either:

The Department of the Environment Review of the Fuel Quality Standards Act 2000 92. standards are strengthened in 2025 (50% probability); or standards remain unchanged at their present levels for the foreseeable future (50% probability).

Net costs/ avoided costs

The net costs/ avoided costs of Options 2, 3 and 4 are then assessed relative to the base case, Option 1.

Threshold analysis – fuel price impacts

Finally, a key cost variable not included in the analysis outlined above is the impact of the scenarios on the costs of supplying fuel. Fuel cost impacts will arise as a consequence of the additional capital and operating costs to domestic refineries of meeting strengthened fuel standards (under scenarios A and D) or from the cost of importing higher quality fuel. Early in the review process the petroleum industry, through the Australian Institute of Petroleum (AIP), indicated that within the timeframe of the review it would not be feasible to provide robust estimates of the capital and operating costs of upgrading domestic refineries to the level needed to achieve fuel quality standards similar to those outlined in scenarios A and D (including, for example, reducing sulfur in ULP and PULP to 10 ppm). Similarly, in discussions with international fuel suppliers by the review team, suppliers indicated that it is very difficult to distinguish the price impacts of supplying higher quality fuel versus lower quality fuel, especially when different fuels vary according to only one or two fuel quality parameters such as sulfur (see section Results overview for further discussion of this issue). Given this data gap, the approach taken in the CBA has been to use threshold analysis to determine the present value of refining capital and operating costs (also converted into price, measured as cents/litre) at which one or other of the alternative options would be preferred over the base case (Option 1).

Sensitivity analysis

Results of the CBAs were tested through sensitivity analyses of alternative discount rates and some key cost and benefit variables. Sensitivity analysis is also undertaken varying the approach to expected value calculations from that set out Figure 10. Details of the sensitivity analysis are provided in section Sensitivity analysis.

1.3 Cost-effectiveness assessment

Results overview Table 28 and Table 29 provide an overview of the cost-effectiveness assessment (CEA). Table 28 shows the present value of total regulatory framework costs for each of Options 1 to 4 over 15 years from 2016 to 2030. Table 29 shows the present value of regulatory framework costs of Options 2, 3 and 4 relative to Option 1 (Base case).

The Department of the Environment Review of the Fuel Quality Standards Act 2000 93. The tables reveal that all of the alternative options are projected to achieve cost savings relative to the base case. The most significant savings, particularly under Options 3 and 4, are expected to be achieved through reductions in Government costs, especially compliance and monitoring costs and costs associated with administering the Act. Cost savings to industry are projected to be relatively modest. This reflects the fact the most significant cost to industry under the current regulatory framework relate to fuel quality assurance and, although declining, quality assurance costs are expected to remain significant under alternative regulatory options. Based on results of the CEA, Option 3 (self-regulation) is projected to achieve the most significant savings relative to the base case – $21 million in present value terms. Thus Option 3 could be described as the most cost effective of the four options assessed. It is important however, to put this result in context. First the cost savings that are expected to be achieved with the introduction of a self-regulatory framework are quite modest, with savings of about 18% below the costs of the current regulatory framework and 11% less than Option 2 (amended Act). Further, as discussed earlier, the CEA results only consider regulatory framework costs and don’t consider the broader welfare impacts and risks associated with the different options.

Table 28: Present value of regulatory framework costs, all options ($ million 2015) Option 3 – Option 4 – Option 1 – Option 2 - Self- Co- Base case Revised Act regulation regulation Industry Costs 102.6 100.7 98.4 103.3 Fuel Quality Assurance 86.8 86.8 84.1 84.1 Record keeping 15.0 13.4 12.7 12.7 Act Review 0.1 0.1 0.0 0.0 Guidelines/voluntary standards 0.0 0.0 1.6 0.0 National Fuel Quality 0.0 0.0 6.5 Organisation 0.0 s13 application fee & admin cost 0.7 0.4 0.0 0.0 Government Costs 23.1 17.4 6.6 7.3 s13 application expenses 0.0 0.0 0.0 0.0 Administration of Act 4.2 4.2 0.0 0.0 Review & determination costs 1.0 0.6 0.0 0.0 Compliance, monitoring and 12.5 5.2 5.2 testing 17.9 Admin oversight 0.0 0.0 1.4 2.1 Regulatory framework costs 125.7 118.1 105.0 110.6 Table 29: Present value of regulatory framework costs, Options 2, 3, 4 relative to base case ($ million 2015) Option 2 - Option 3 - Self Option 4 - Co- Revised Act Regulation regulation Industry Costs -1.9 -4.2 0.7 Fuel Quality Assurance 0.0 -2.8 -2.8 Record keeping -1.6 -2.3 -2.3 Act Review 0.0 -0.1 -0.1 Guidelines/voluntary standards 0.0 1.6 0.0 National Fuel Quality 0.0 0.0 6.5 Organisation s13 application fee & admin cost -0.3 -0.7 -0.7 Government Costs -5.7 -16.5 -15.8 s13 application expenses 0.0 -4.2 -4.2 Administration of Act -0.3 -1.0 -1.0

The Department of the Environment Review of the Fuel Quality Standards Act 2000 94. Review & determination cost -5.4 -12.7 -12.7 Compliance, monitoring and 0.0 1.4 2.1 testing Admin oversight -7.6 -20.7 -15.1 Regulatory framework costs -7.6 -20.7 -15.1

Government cost assumptions It is useful to examine some of the key cost assumptions that underpin estimates of government costs for each of the options.

Administration of Act

Under Option 1 (Base case) general administration of the Act is assumed to be approximately $0.5 million per annum, gradually declining to $0.4 million per annum over time. This is significantly lower than historical levels and reflects general budgetary constraints and the recent decision to not continue with the fuel standards consultative committee. Additionally, there are costs associated with legislative reviews, determinations etc. These vary from year to year, but average approximately $0.1 million per annum. Under Option 2 (Amended Act) administration costs are the same as for Option 1. Under Option 3 (Self-regulation) government has no ongoing role in administrative arrangements from 2019. Under Option 4 (Co-regulation) government has only a limited oversight role from 2019, incurring costs of only about $0.1 million every four years. Fuel quality standards continue to be maintained under this option though, with associated legislative review and determination costs.

Monitoring and compliance

Monitoring and compliance represents the largest cost to government under Options 1 and 2. Under Option 1, compliance costs remain steady at historical levels at approximately $2 million per annum, which in turn consist of: ~$0.8 million per annum for 1300 on site tests; ~$0.5 million per annum for 600 off site tests; and ~$0.7 million per annum for legal and administration costs. Under Option 2, compliance costs are assumed to decrease significantly from 2019 onwards. Two main factors that will drive these cost reductions are: a streamlined fuel testing process, already flagged by the Department, which puts a greater emphasis on monitoring problem suppliers and regions; and amendments to compliance provisions of the Act, detailed in Appendix 3, which are expected to achieve savings to legal and administrative costs associated with compliance and monitoring, and small but measurable reductions to costs of undertaking on-site and off-site tests. Under Option 2 therefore, compliance costs fall to approximately $1.2 million per annum, which in turn consist of:

The Department of the Environment Review of the Fuel Quality Standards Act 2000 95. ~$0.5 million per annum for 1000 on site tests; ~$0.2 million per annum for 540 off site tests; and ~$0.5 million per annum for legal and administration costs. Compliance and monitoring is no longer a function of government under Option 3 and Option 4 from 2019.

Industry regulatory and administrative cost assumptions It is also useful to provide an overview of the key industry costs assumptions that underpin industry regulatory cost estimates for each of the options.

Fuel quality assurance

Fuel quality assurance (FQA) represents by far the most significant regulatory cost to industry under each of the options. Under Option 1, the cost of fuel quality assurance across the petroleum industry is estimated to be approximately $10.7 million in 2019, increasing by approximately 1.5% per annum to $12 million per annum by 2030. The cost increase largely reflects an increase in the supply of fuel over this period. The FQA costs comprise: Batch testing of fuels, ~$8.2 million in 2019; Field testing of fuels, ~$1.0 million in 2019; and Record keeping and reporting, ~$1.5 million in 2019. Reductions in the record keeping and reporting component of these costs is expected under Option 2, to ~$1.4 million from 2019. These reductions will be achieved through: reduced time required for record keeping at service stations and central record keeping as a consequence of amendments to the Act; and the removal of annual reporting requirements under proposed amendment to section 67 of the Act (see Appendix 3, amendment 12). Under both Options 3 and 4, FQA costs are estimated to be approximately $8.8 million in 2019, 15% below Option 1 (base case), with FQA costs under the two options comprising: Batch testing of fuels, ~$8.0 million in 2019; Field testing of fuels, ~$0.9 million in 2019; and Record keeping and reporting, ~$1.3 million in 2019. Cost reductions are assumed to come about through reduced batch testing and field testing of fuel by some suppliers REF _Ref419124728 \h \* MERGEFORMAT and reduced reporting and associated record keeping requirements.

REF _Ref419124728 \h \* MERGEFORMAT Assumed to be fuel suppliers who are not members of the main industry organisations such as the AIP and who do not sign up to voluntary standards (Option 3) or the co- regulatory fuel testing arrangements (Option 4).

The Department of the Environment Review of the Fuel Quality Standards Act 2000 96. Section 13 fees and administration costs

Under Option 1 (base case) significant costs are borne by industry linked to section 13 approvals, including application fees and administration costs. These costs vary year on year, but are estimated to be in the order of $0.06 million per annum. It should be noted that these estimates reflect revised section 13 cost recovery arrangements that have already been initiated by the Australian Government and are substantially lower than section 13 costs historically. Under Option 2 section 13 costs are expected to fall still further to approximately $0.03 million per annum. Reductions will be achieved as a consequence of Act amendments iii) and iv) proposed under Option 2 (see Box 5). Under Options 3 and 4 there will be no section 13 approval costs for industry.

Act review and determinations

Under Options 1 and 2 there are expected to be some costs to industry associated with time spent contributing to reviews of the Act and determinations. These costs are estimated at approximately $50,000 every four years. Due to the proposed disbanding of the Fuel Standards Consultative Committee, this represents a cost reduction compared to costs that have historically been borne by industry for reviews. Under Options 3 and 4 these costs will no longer apply.

Additional costs associated with Options 3 and 4

The instigation of Option 3 (Self-regulation) or Option 4 (Co-regulation) will entail costs to industry that aren’t incurred under Option 1 (Base case). Under Option 3 the introduction of a self-regulatory framework will entail costs of developing fuel quality guidelines/voluntary standards. It is assumed that the costs of developing and administrating these guidelines will be borne by industry. Based on information provided by Standards Australia it is estimated that the costs of developing and administrating the guidelines will be approximately $2 million in present value terms over 15 years to 2030. Similarly, the introduction of a co-regulatory framework will entail managing a co- regulatory agreement through an incorporated national fuel quality organisation that advises on standards and oversees compliance and enforcement (see section Short listed options). The costs of establishing and administering the national fuel quality organisation are assumed to fall primarily on the fuel supply industry. It is estimated that the costs of this organisation will be approximately $8.5 million in present value terms over 15 years to 2030. In effect, this will constitute a partial cost shift from government to industry associated with administering fuel quality standards. Further discussion of these and other industry costs is provided in section Regulatory burden measurement.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 97. 1.4 Cost-benefit analysis

Results overview Results of the cost-benefit analysis (CBA) are presented in Table 30 and Table 31. Table 30 shows the present value of total costs of each of Options 1 to 4 over 15 years from 2016 to 2030. Table 31 shows the net present value of (NPV) total costs of Options 2, 3 and 4 relative to Option 1 (Base case). Results in the two tables include results of the cost-effectiveness assessment, as discussed in the previous section, plus the expected values of additional welfare impacts estimated for each of the options including: vehicle operating and maintenance costs; the health impacts of air pollution; and the cost of greenhouse gas emissions. The expected values of these welfare impacts have been allocated to each of the options using the approach set out in section Approach: cost-benefit analysis. Table 30: Results of the CBA, Options 1, 2, 3 and 4 (NPV $ million 2015) Option 2 - Option 3 - Option 4 - Option 1 - Amended Self Co- Base case Act Regulation regulation Industry Costs 102.6 100.7 98.4 103.3 Fuel Quality Assurance 86.8 86.8 84.1 84.1 Record keeping 15.0 13.4 12.7 12.7 Act Review 0.1 0.1 0.0 0.0 Guidelines/voluntary standards 0.0 0.0 1.6 0.0 National Fuel Quality Organisation 0.0 0.0 0.0 6.5 s13 application fee & admin cost 0.7 0.4 0.0 0.0 Government Costs 23.1 17.4 6.6 7.3 s13 application expenses 0.0 0.0 0.0 0.0 Administration of Act 4.2 4.2 0.0 0.0 Review & determination costs 1.0 0.6 0.0 0.0 Compliance, monitoring and testing 17.9 12.5 5.2 5.2 Admin oversight 0.0 0.0 1.4 2.1 Regulatory framework costs 125.7 118.1 105.0 110.6 Welfare Impacts (expected costs) Additional vehicle operating & maintenance costs 75.2 75.2 163.8 135.7 Total health impacts 34,492.9 34,492.9 34,976.8 34,836.9 Total environmental impacts 21,124.8 21,124.8 21,150.7 21,135.4 Additional refining costs Na1 Na Na Na Welfare impacts 55,692.9 55,692.9 56,291.4 56,108.0 Total Costs (excluding refining) 55,818.5 55,810.9 56,396.4 56,218.6

4.1.1.a.i.1. Na = not available

As can be seen in Table 30, the total expected health costs (air pollution) and environmental costs (greenhouse gas emissions) of fuel use are substantial under each of the regulatory options. However, they are greater under Options 3 and 4 than under

The Department of the Environment Review of the Fuel Quality Standards Act 2000 98. Options 1 and 2 (Table 31). Thus the NPV of combined air pollution, greenhouse gas emissions and vehicle operating costs under Option 3 (self-regulation) is estimated to be approximately $599 million greater than these costs under Option 1 (base case) and Option 2 (Amended Act) over the 15 year timeframe of the analysis (Table 31). Similarly, the NPV of combined air pollution, greenhouse gas emissions and vehicle operating costs under Option 4 (co-regulation) is estimated to be approximately $415 million greater than these costs under Options 1 and 2. As previously noted, these outcomes are derived from the expected value approach applied to assessing welfare impacts and discussed in section Approach: cost-benefit analysis. In broad terms, that approach assumes that fuel standards will be higher under Options 1 and 2 in the future than they are under Option 4, which in turn will be higher than under Option 3. The key finding of the cost-benefit analysis therefore, is that government regulation is preferred over the self-regulation and co-regulation options: Option 1 (Base case) and Option 2 (Amended Act) are preferred to either self-regulation (Option 3) or co-regulation (Option 4), since (subject to the threshold test described below) they are expected to have lower welfare costs. Option 2 (Amended Act) is preferred over Option 1 (Base case), since it is estimated to deliver a small net benefit of $8 million compared to the base case due to lower regulatory framework costs. Table 31: Results of the CBA, Options 2, 3 and 4 relative to base case (NPV $ million 2015) Option 2 - Option 3 - Self- Option 4 - Co- Amended Act regulation regulation Industry Costs -1.9 -4.2 0.7 Fuel Quality Assurance 0.0 -2.8 -2.8 Record keeping -1.6 -2.3 -2.3 Act Review 0.0 -0.1 -0.1 Guidelines/voluntary standards 0.0 1.6 0.0 National Fuel Quality Organisation 0.0 0.0 6.5 s13 application fee & admin cost -0.3 -0.7 -0.7 Government Costs -5.7 -16.5 -15.8 s13 application expenses 0.0 -4.2 -4.2 Administration of Act -0.3 -1.0 -1.0 Review & determination cost -5.4 -12.7 -12.7 Compliance, monitoring and testing 0.0 1.4 2.1 Admin oversight -7.6 -20.7 -15.1 Regulatory framework costs -7.6 -20.7 -15.1 Welfare Impacts Additional vehicle operating & 0.0 88.6 60.5 maintenance costs Total health impacts 0.0 483.9 344.0 Total environmental impacts 0.0 26.0 10.7 Additional refining costs na na na Welfare Impacts 0.0 598.5 415.1 Net Benefit/Cost relative to Option 1 7.6 -577.8 -400.0 (excluding refining)

1. Na = not available

The Department of the Environment Review of the Fuel Quality Standards Act 2000 99. Threshold analysis - fuel price impacts

NPV measures the expected benefit (or cost) to society of implementing the policy expressed in monetary terms. An option with the highest NPV is expected to deliver the highest scale of benefits to society. On that basis, Option 2 (amended Act) would be expected to deliver the highest net benefit to society given available costs and benefits data. However, great caution needs to be exercised in interpreting results of the analysis in this manner given the absence of refining cost estimates for each of the options. As previously noted, a key cost variable not included in the CBA outlined in the tables above is the cost of supplying fuel. Fuel cost impacts will arise as a consequence of the additional capital and operating costs to domestic refineries of meeting strengthened fuel standards (under modelled scenarios A and D) or, alternatively, from the cost of importing higher quality fuel. However, it has not been possible to provide a reliable estimate of these fuel costs. Given this data gap, the approach taken in the CBA has been to use threshold analysis to determine the present value of refining capital and operating costs (also converted into price, measured as cents/litre) at which one or other of the alternative options would be preferred over the base case (Option 1). The threshold analysis is presented in Figure 11 and Table 32. The data in the figure and table reveal that: Option 1 (base case) will remain the preferred option relative to Option 3 (self- regulation) provided additional fuel supply costs of Option 1 above Option 3 costs can be kept to less than $578 million in present value terms, equivalent to 0.6 cents/litre. Similarly, Option 1 (base case) will remain the preferred option relative to Option 4 (co- regulation) provided additional fuel supply costs of Option 1 above Option 4 can be kept to less than $400 million in present value terms, equivalent to 0.4 cents/litre.

Figure 11: Threshold analysis - fuel supply costs (NPV $ million 2015)

The Department of the Environment Review of the Fuel Quality Standards Act 2000 100. Table 32: Threshold analysis - fuel supply costs (NPV $ million 2015) Option 3 - Self Option 4 - Co- regulation regulation Option 1 is preferred option as long as refining cost remain below (in NPV terms) 577.8 400.0 Equivalent cents per litre 0.6 0.4

The question remains as to how these fuel supply cost estimates compare with the likely costs of meeting tighter fuel standards in the future under either Scenario A or Scenario D? In response to this question we note again that the petroleum industry was unable, in the timeframe of the review, to provide estimates of the capital and operating costs of upgrading domestic refineries to the level needed to achieve fuel quality standards similar to those outlined in scenarios A and D (including, for example, reducing sulfur in ULP and PULP to 10 ppm). Similarly, in discussions held with international fuel traders by the review team, traders indicated that it is very difficult to determine the fuel price impacts of supplying ultra-low sulfur fuel to Australia, compared to the current price of supplying fuel to Australia through international markets, as defined by the Singapore fuel price, MOPS 95. REF _Ref419124728 \h \* MERGEFORMAT Nevertheless, we can provide the following insights: Some fuel traders have indicated that there is likely to be a price differential at present (albeit difficult to quantify), but over the next few years this differential is likely to tend towards zero or close to zero as a majority of large fuel markets (including the EU, Japan, the US and eventually China) and the major sources of refined fuel to Australia (including Singapore and South Korea) move to ultra-low sulfur fuel consumption and production respectively. The estimated impact of gasoline fuel sulfur upgrades in US to meet the Tier 3 program is US 0.75-0.87 cents/gallon, equivalent to Australian 0.26-0.30 cents/litre (US EPA, 2014). Revised fuel standards under Scenario A will not need to occur until 2020 or until 2025 under Scenario D which means that the costs associated with those revised standards are deferred for 5 to 10 years. Overall, available information suggests that it may be feasible to upgrade fuel standards under Scenarios A or D at a price impact that falls below the threshold values estimated for Options 3 and 4. We cannot be confident on this point however. This points to the importance of undertaking further detailed assessment of the costs and benefits of changing fuel standards, particularly the sulfur specification under Fuel Standard (Petrol) Determination, prior to a decision being made on said standards.

REF _Ref419124728 \h \* MERGEFORMAT The Singapore Petrol Price, referred to as MOPS 95 (Mean Of Platts Singapore) is the price for a shipload cargo of 95 octane unleaded petrol meeting the minimal Platts specification. Many of the critical specifications for Australian 91 octane unleaded petrol (ULP) are similar to those in Singapore 95 octane petrol, which is why Australian ULP is priced against MOPS 95.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 101. Health impacts

Overview

This section discusses the approach and results of valuing the health impacts of Scenarios A to D, assessed through the integrated emissions, air quality and health risk modelling. An overview of the modelling approach and results is provided in section Emissions, air quality and health impacts modelling of this report. Through the integrated emissions, air quality and health risk modelling, the health impacts associated with exposure to PM2.5, SO2, NO2, O3, CO, diesel particles, and air toxics, including benzene, have been assessed for each of the four scenarios. These include changes in mortality, hospital admissions, emergency department attendances and changes in cancer risk. The health impacts are listed in Table 33. The changes in health outcomes associated with these pollutants are discussed in more detail in section Health risk assessment. Valuation estimates are provided in this study for health impacts associated with exposure to PM2.5, SO2, NO2, O3, CO. Valuation estimates are not provided though for the health impacts of exposure to diesel particles and air toxics. This is because the health impacts of exposure to these pollutants can only be expressed as the proportion of exposed population facing an increase in cancer risk. It is not possible to quantify the increase in cancer risk and therefore the increase in occurrence of cancer REF _Ref419124728 \h \* MERGEFORMAT . . Table 33: Mortality and morbidity health impacts

Mortality Morbidity Mortality (long-term) various causes Hospital admissions for respiratory illnesses Mortality (long-term) associated with Hospital admissions for cardiovascular respiratory illnesses illnesses Mortality (long-term) associated with Emergency department admissions / visits for cardiovascular illnesses asthma attacks Mortality (long term) associated with lung cancer Daily mortality associated with various causes Daily mortality associated with respiratory illnesses Daily mortality associated with cardiovascular illnesses

Valuation methodology

For each of the mortality and morbidity health impacts, the main potential costs are: value of a life year (mortality only); pain, suffering and reduced quality of life associated with the illness;

REF _Ref419124728 \h \* MERGEFORMAT Cancers in question are lung cancer, linked to diesel particle emissions, and acute myeloid leukaemia, linked to benzene emissions.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 102. resource costs associated with hospitalisation or emergency department visits. Valuation estimates for each of these are discussed in turn.

Value of a life year The health impacts leading to daily or long-term mortality are valued applying the Value of a Life Year (VOLY). The Office of Best Practice Regulation (OBPR 2014) recommends using $151,000 for the VOLY, measured in 2007 dollars. Using CPI data to convert this estimate in 2015 dollars gives a VOLY of $184,689. We use VOLY instead of the Value of a Statistical Life (VOSL) to measure the cost of a premature death because: the population at risk consists of particularly vulnerable people, e.g. with pre-existing health conditions and is a sub-group of the total population; we expect the population at risk to remain relatively constant over time, changing at the margins in line with population growth and the ageing of the overall population; and as such, we expect that any deaths avoided in a given year will need to be avoided again in the following year. Reduced quality of life Estimates of the value of reduced quality of life due to pain and suffering are derived through a method adopted for use in Australia by Mathers et al. (1999) and further considered by Abelson (2003). This method derives disability weights for a range of diseases and injuries. REF _Ref419124728 \h \* MERGEFORMAT Disability weights range from 0 for no disability to 1 for a state equivalent to death drawing on clinical views of health status derived through expert surveys (Southard et al. 1997). Disability weights are the opposite of quality of life (QoL) indices, which range from 0 (deceased) to 1 (perfect health). Disability weights are then used to derive daily (acute morbidity) or annual (chronic morbidity) costs by applying the weights to the current estimate of the Value of a Life Year (VOLY). These costs provide estimates of the amounts per day or per year that individuals are willing to pay to avoid acute or chronic conditions, respectively. This method is also recommended by the OBPR (2014) for valuing the benefits of reducing the risk of disease or injury. In the case of the morbidity health impacts associated with air pollution, these are acute conditions and therefore costs are estimated as daily costs (see Table 34). In the case of long-term mortality, these are assumed to be chronic conditions prior to premature death and therefore costs are estimated as annual costs (see Table 35). These costs reflect the pain and suffering prior to a premature death and are in addition to VOLY associated with premature deaths. As noted by Abelson (2003), research suggests that most individuals have a higher willingness to pay to avoid painful death. To account for this higher WTP, Abelson (2003) suggests considering pain and suffering separately by adding the value of lost quality of life due to disease or injury to the cost of premature mortality.

REF _Ref419124728 \h \* MERGEFORMAT Disability is defined as a change from health in areas such as mobility, self-care, pain, discomfort, anxiety and depression, and cognitive impairment.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 103. The CBA uses the average cost of health impacts, i.e. the mid-point between low and high costs shown in Table 34 and Table 35 below.

Table 34: Estimated cost associated with lost quality of life for morbidity health impacts

Cost of health impact Health impact Disability weight ($/day) a Low High Low High Respiratory 0.164 0.164 166 415 Pneumonia / Bronchitis 0.132 0.373 100 755 Cardiovascular 0.178 0.353 180 1,429 Cardiac Disease 0.178 0.353 180 1,429 Asthma 0.030 0.230 4 233

Note: a. Based on a VOLY of $184,689

Table 35: Estimated cost associated with lost quality of life prior to long-term mortality

Cost of health impact Health impact Disability weight ($/year)a Low High Low High Cardiovascular 0.178 0.430 32,875 79,416 Cardiopulmonary 0.170 0.530 31,397 97,885 Ischemic Heart Disease 0.178 0.395 32,875 72,952 Respiratory 0.170 0.530 31,397 97,885 Lung Cancer 0.440 0.930 81,263 171,760

Note: a. Based on a VOLY of $184,689 Hospitalisation costs Hospitalisation costs have been estimated drawing on National Hospital Cost Data Collection (NHCDC) for Australian Public Hospitals (IHPA 2015). The NHCDC indicates that the average daily cost of overnight separations for each additional patient admitted to an Australian public hospital in 2012-13 was approximately $1,895 per day. The average cost for non-admitted emergency presentations in 2012-13 is $451. Using CPI data to express these estimates in 2015 dollars gives a cost of $2,006 per day for overnight separations and $477.53 for non-admitted emergency presentations. The other key (and less certain) variable influencing morbidity valuations is the length of hospital admission. Air pollution morbidity value estimates for the United Kingdom presented in Defra (2007) assume average durations of hospital admissions for respiratory and cardiovascular admissions of 8 days and 9 days respectively. Data for Australia compiled by the Australian Institute of Health and Welfare (AIHW 2015) however indicates that the average duration of admissions for respiratory and cardiac admissions are 2-8 days, depending on the specifics of the condition. The average length of stay for bronchitis admissions is 1.5-4 days.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 104. Estimates of the length of stay for asthma emergency department visits are less certain still. AIHW data indicates that average duration of stay for emergency department visits of a semi-urgent or urgent nature is approximately 4-6 hours. However, some of these visits extend into overnight stays with an average duration of 2 days. Compiling the data on daily hospital costs and duration of admission provides low and high estimates for each admission associated with the morbidity health impacts (see Table 36). The CBA uses the average cost of hospitalisation cost, i.e. the mid-point between low and high costs shown in Table 36. Table 36: Estimated hospitalisation costs for morbidity health endpoints

Cost per admission Health impact Duration of admission ($)a Low High Low High Respiratory 2 8 4,013 10,032 Pneumonia / Bronchitis 1.5 4 3,010 8,026 Cardiovascular 2 8 4,013 16,052 Cardiac Disease 2 8 4,013 16,052 Asthma 0.25 2 478 4,013

Note: a. The cost per admission are based on the average cost for overnight separations, with the exception of the lower bound estimate for asthma, which is based on the average cost for non-admitted emergency presentations.

Value of health benefits

The economic cost associated with health impacts have been estimated for four distinct scenarios: Scenario A: Strengthen fuel quality standards in 2020 Scenario B: Freeze fuel quality standards at current levels Scenario C: Backsliding: fuel quality standards regress for a small share of the market Scenario D: Strengthen fuel quality standards in 2025 The annual economic health costs under each scenario in 2015, 2020 and 2030 are presented in Table 37. The results show that the annual economic health costs are lowest under Scenario A, which sees fuel quality standards strengthened in 2020. This is followed by Scenario D, under which a strengthening of standards is delayed by 5 years to 2025. The worst health outcomes occur under Scenarios B and C, which would see health costs increase in excess of $100 million a year.

Table 37: Annual economic health costs (in $million) by scenario and pollutant Scenario Pollutant 2015 2020 2030

Scenario A NO2 488 509 502

SO2 17 18 21 CO 5 5 5

O3 813 900 1,079

PM2.5 2,125 2,180 2,598

The Department of the Environment Review of the Fuel Quality Standards Act 2000 105. Scenario Pollutant 2015 2020 2030 Scenario A Total 3,448 3,612 4,206

Scenario B NO2 488 529 612

SO2 17 19 23 CO 5 5 5

O3 813 894 1,055

PM2.5 2,125 2,291 2,623 Scenario B Total 3,448 3,738 4,319

Scenario C NO2 488 529 612

SO2 17 19 23 CO 5 5 5

O3 813 894 1,055

PM2.5 2,125 2,291 2,623 Scenario C Total 3,448 3,738 4,319

Scenario D NO2 488 529 502

SO2 17 19 21 CO 5 5 5

O3 813 894 1,079

PM2.5 2,125 2,291 2,598 Scenario D Total 3,448 3,738 4,206 Note: Dollar figures presented are in 2015 dollars and rounded; accordingly, rounding errors may occur.

Vehicle operating and maintenance costs As discussed in section Is harmonisation necessary to achieve emission controls and effective operation of engines?, the use of ultra-low sulfur fuel has the potential to have impacts beyond the level of emissions and pollutants. Other potential impacts include: enhancing the fuel consumption capability of some engines by reducing the frequency of their (catalyst) regeneration/ desulfurisation cycles; affecting in-service catalyst durability if sulfur limits are higher than certification levels; and impacts on the reliability of On Board Diagnostic (OBD) systems. The third of these impacts was not considered in the analysis because of difficulties in quantifying OBD reliability. However, the other two impacts, although likely to be relatively minor in the context of overall vehicle maintenance and operating costs, are quantifiable and were therefore assessed for each of the four scenarios.

Fuel consumption

Orbital (2013), MMA (2005) and DIT (2010) have all considered the impact of using low sulfur fuel on the fuel consumption of vehicles. All studies conclude that significant impacts are likely to be confined to lean burn engine technologies. Orbital (2013), although noting that a reduction in fuel sulfur levels from the current 150 ppm and 50 ppm levels to 10 ppm is likely to enhance the fuel consumption of lean burn vehicles by reducing the frequency of their catalyst regeneration (sulfur removal) cycles, concluded that the impact overall would be low due to lower than predicted uptake of this technology. This is correct. Analysis for

The Department of the Environment Review of the Fuel Quality Standards Act 2000 106. MMA in 2005 predicted that the uptake of lean burn technologies in Australia could be anywhere between 30 and 55% of the new vehicle market by 2010. However, available data sourced by the review team and confirmed by stakeholders indicates that lean burn technologies currently only comprise approximately 5% of the new vehicle market and that this share is unlikely to increase significantly in the foreseeable future. Nevertheless, the impacts of using low sulfur fuel on the fuel consumption of these vehicles are quantifiable. Drawing on analysis in MMA 2005 and USEPA 2014, the impact of using higher than certified levels of sulfur on the fuel consumption of lean burn vehicles has been estimated at 2-6%. Depending on the fuel quality scenario adopted, 5% of the new vehicle fleet will be affected until either 2020 (Scenarios A and B), 2030 (Scenario C) or 2025 (Scenario D). A summary of the total number of vehicles affected, the additional fuel consumption of affected vehicles and the cost impacts of the additional fuel consumption is provided in Table 38. Table 38: Estimated impacts of using higher than certified sulfur on fuel consumption

2016 2020 2025 2030

Scenario A No. affected vehicles (000's) 47 191 0 0 Fuel consumption impacts (kilolitres) 2,370 8,792 0 0 Cost of additional fuel consumption 2.9 10.2 0 0 ($m) Scenario B/C 43 66 47 191 No. affected vehicles (000's) 1 6 17,48 22,25 2,370 8,792 Fuel consumption impacts (kilolitres) 9 6 Cost of additional fuel consumption 2.9 10.2 19.7 24.4 ($m) Scenario D 43 47 191 0 No. affected vehicles (000's) 1 17,48 2,370 8,792 0 Fuel consumption impacts (kilolitres) 9 Cost of additional fuel consumption 19. 2.9 10.2 0 ($m) 7

Vehicle maintenance (3-way catalysts)

A number of previous studies have also examined the impact of higher than certified levels of sulfur on the life of 3-way catalysts. As noted in section Is harmonisation necessary to achieve emission controls and effective operation of engines?, the durability issue is important in the context of Euro 5/6 as these standards require manufacturers to demonstrate compliance with the emissions standards at 160,000 km (compared to 100,000 km in Euro 4). Drawing on research cited in Orbital 2013 and USEPA 2014, the number of vehicles affected by catalyst durability has been conservatively estimated at 1% of vehicles from 2019 onwards, five years (or 100,000 km after the introduction of Euro 6). The numbers of vehicles affected is determined by the fuel quality scenario adopted and the timing of the introduction of ultra-low sulfur levels under that scenario. The cost of

The Department of the Environment Review of the Fuel Quality Standards Act 2000 107. reduced catalyst durability for each affected vehicle is estimate at $375 per vehicle, based on the depreciated value of an $800 catalyst. A summary of the total number of vehicles affected and the cost impacts of the loss of catalyst durability is provided in Table 39.

Table 39: Estimated impacts of using higher than certified sulfur on catalyst durability

2016 2020 2025 2030 Scenario A No. affected vehicles 0 18.0 0 0 (000's) Estimated cost impact 0 6.7 0 0 ($m) Scenario B/C No. affected vehicles 19 20 0 18.0 (000's) .3 .5 Estimated cost impact 0 6.7 7.2 7.7 ($m) Scenario D No. affected vehicles 19 0 18.0 0 (000's) .3 Estimated cost impact 0 6.7 7.2 0 ($m)

Cost of greenhouse gas emissions As detailed in section Greenhouse gas emissions, greenhouse gas emissions (GHGs) have been estimated for each of the four scenarios for 2020 and 2030 using the COPERT Australia REF _Ref419124728 \h \* MERGEFORMAT model. Differences between the scenarios, detailed there, are driven by differences in fuel quality specifications which directly impact on emissions of GHGs, especially of N2O and CH4. Additionally, as discussed in section Vehicle operating and maintenance costs, different sulfur specifications under the different scenarios can indirectly impact on GHGs through impacting on the fuel consumption of lean burn vehicles. Greenhouse gas emission estimates considering both of these factors are provided in the table below. Table 40: Estimated emissions of greenhouse gas emissions under Scenarios A, B/C and D (Mt) Scenario A Scenario B/C Scenario D

REF _Ref419124728 \h \* MERGEFORMAT See air quality assessment technical report (PEL 2016a) for a description of this model.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 108. 2020 2030 2020 2030 2020 2030 94.4 113.3 94.2 113.8 94.2 113.5 Valuing the environmental costs of GHGs is a contested issue and there are several possible approaches. Some studies use the marginal abatement cost of carbon, as a proxy for the cost of carbon. Garnaut (2011) however, suggests that a ‘social cost of carbon’ be applied in assessing proposals for regulations. The United States Government (2013) recommends differing social carbon costs depending on the discount rate applied to future impacts but with costs of emissions rising over time. Its recommended social cost ranges from US$11-52/ tonne in 2010 (A$13-59/ tonne) rising to US$14-70/ tonne in 2025 (A$16-80/ tonne). Dietz and Stern (2014) argue that the cost of carbon needed to prevent irreversible climate impacts will need to be set at as high as US$75/ tonne CO2-e (A$80) in the short term and US$133/ tonne CO2-e (A$141) in the longer term. The Australian Treasury (2011) nominally set the cost of carbon at

$29/ tonne of CO2-e ($36/ tonne in $2015), reflecting a medium term abatement cost.

For this study we have used the Treasury value of carbon, valued at $36/ tonne CO2-e in 2015. We recognise though, that there is a rationale for using both higher a lower costs in sensitivity analysis and have used: $13.95 as a lower bound estimate, reflecting the short term marginal abatement cost as indicated by the recent auction price for the Australian Government’s Direct Action program; and $A53 as an upper bound estimate, reflecting the current social cost of carbon as estimated by the US Government (2013).

1.5 Sensitivity analysis

Overview Sensitivity analysis was applied in four main areas to test the implications of changes to key assumptions on results of the analysis. The sensitivity analysis was applied to: alternative discount rates; the proportion of vehicles failing to meet the expected life of 3-way catalysts; fuel consumption impact of high sulfur fuel on lean burn vehicles; and health impacts. The latter three assumptions were combined and tested as part of a ‘high and low case’ analysis, described in more detail below.

Discount rate analysis Consistent with Office of Best Practice Regulation guidelines (Department of Finance and Regulation 2010) a discount rate of 7 % real was applied in the central case analysis. Sensitivity analysis was conducted around alternative discount rates of 3% and 10%. The results of this analysis are presented in Table 41. It reveals that (excluding refining costs) Option 2 has the highest NPV under all discount rates. However, the threshold value (the NPV at which Option 1 is preferred over Options 3 or 4) is moderately

The Department of the Environment Review of the Fuel Quality Standards Act 2000 109. sensitive to the discount rate. Table 41: Net benefit/cost relative to Option 1 (excluding refining) for different discount rates (NPV $ million 2015)

Net benefit/cost relative to Option 1 (excluding refining) Option 2 – Option 3 - Option 4 - Discount rate Revised Act Self Regulation Co-regulation 3% 10.7 -862.7 -581.7 7% 7.6 -577.8 -400.0 10% 6.0 -435.7 -307.5

High and low case analysis The high case combines the following assumptions: The proportion of vehicles failing to meet 3-way catalysts expected life increases from 2% to 10%. The fuel consumption impact of high sulfur fuel on lean burn vehicles increase from 6% to 10% for ULP and from 2% to 4% for PULP. Lower bound health impacts, i.e. Scenario A, are assumed for Options 1 and 2. Upper bound health impacts, i.e. Scenario B, are assumed for Option 4. (See Figure 12). The low case combines the following assumptions: The proportion of vehicles failing to meet 3-way catalysts expected life remains at 2% as under the central case. The fuel consumption impact of high sulfur fuel on Euro 6 lean burn vehicles decrease 6% to 2% for ULP and from 2% to 0% for PULP. Upper bound health impacts, i.e. Scenario D, are assumed for Options 1 and 2. Average health impacts are assumed for Option 4, as under the central case. (See Figure 12). Results of the high and low case analysis are presented in Table 42. It reveals that the threshold value (the NPV at which Option 1 is preferred over Options 3 or 4) is very sensitive to assumptions about costs, in particular the fuel standards scenarios that are applied to those options. Nevertheless, as revealed in Table 43, under all cases, even the low case, it may be feasible to upgrade fuel standards under Scenarios A or D at a price impact that falls below the threshold values estimated for Options 3 and 4. Table 42: Net benefit/cost relative to Option 1 (excluding refining costs), high and low case (NPV $ million 2015) Net benefit/cost relative to Option 1 (excluding refining) Option 2 – Option 3 - Option 4 - Discount rate Revised Act Self Regulation Co-regulation High case 7.6 -994.5 -984.3 Central case 7.6 -577.8 -400.0 Low case 7.6 -304.0 -144.3

The Department of the Environment Review of the Fuel Quality Standards Act 2000 110. Table 43: Threshold value expressed in cents/litre under high and low cases Threshold value , equivalent cents per litre Option 3 - Option 4 - Discount rate Self Regulation Co-regulation High case 1.0 1.0 Central case 0.6 0.4 Low case 0.3 0.1

Expected value of costs, high case Expected value of costs, low case

Option 1 Scenario A Option 1 Scenario D (Base case) (Base case)

Option 2 Scenario A Option 2 Scenario D (Amended Act) (Amended Act)

Scenario C (upper bound) Scenario C (upper bound)

Option 3 Option 3 (Self-regulation) (Self-regulation) Scenario B (lower bound) Scenario B (lower bound)

Scenario B (upper bound)

Option 4 Scenario B Option 4 (Co-regulation) (Co-regulation) Scenario D (lower bound)

Figure 12: Approach to estimating the expected value of costs of scenarios for different options, high and low cases

6.2 Regulatory burden measurement

Approach Regulatory burden measurement (RBM) was undertaken in line with Commonwealth regulatory measurement framework guidance (Department of Prime Minister and Cabinet 2015). Consistent with the guidance, it focuses only on private sector costs (petroleum sector).

The Department of the Environment Review of the Fuel Quality Standards Act 2000 111. The RBM values are provided as a simple average of costs to industry over the first 10 year period (2016 to 2025) and have been disaggregated by major cost types.

Overview of results Table 44 provides an overview of the RBM for Options 1 to 4. Table 45 provides an overview of the RBM for Options 2 to 4 relative to Option 1. The two tables reveal that industry regulatory burden does not differ substantially between the four options, with Option 3 having the lowest regulatory burden at $10.7 million per annum and Option 4 having the highest regulatory burden at $11.3 million per annum. The slightly higher regulatory burden under Option 4 relative the Option 1 (base case) confirms a point made earlier in section Industry regulatory and administrative cost assumptions that, with the requirement for administration of a co-regulatory framework through an industry organisation (such as a National Fuel Quality Organisation) Option 4 will effectively entail a degree of cost shifting from government to industry. It is important to note that the RBM presented below does not include any refinery capital and operating costs that might be associated with implementation of Scenarios A or D under Option1, 2 or 4. Table 44: Regulatory burden of Options 1 to 4 (excluding refining costs) ($ 2015/yr) Option 1 - Option 2 - Option 3 - Option 4 - Base case Revised Act Self Regulation Co-regulation Industry Costs Fuel Quality Assurance 9,425,930 9,425,930 9,152,800 9,152,800 Record keeping 1,630,741 1,462,814 1,392,115 1,392,115 Act Review 10,000 10,000 0 0 Guidelines/voluntary standards 0 0 169,200 0 National Fuel Quality Organisation 0 0 0 706,600 s13 application fee & admin cost 79,308 44,319 0 0 Industry costs (regulatory framework) 11,145,980 10,943,064 10,714,115 11,251,515

Table 45: Regulatory burden of Options 2 to 4 relative to Option 1 (excluding refining costs) ($2015/yr) Option 2 - Option 3 - Option 4 - Revised Act Self Regulation Co-regulation Industry Costs Fuel Quality Assurance 0 -273,130 -273,130 Record keeping -167,927 -238,626 -238,626 Act Review 0 -10,000 -10,000 Guidelines/voluntary standards 0 169,200 0 National Fuel Quality Organisation 0 0 706,600 s13 application fee & admin cost -34,989 -79,308 -79,308 Regulatory burden relative to Option 1 -202,916 -431,865 105,535

The Department of the Environment Review of the Fuel Quality Standards Act 2000 112. 6.3 Conclusions and recommendations

Four regulatory options were subject to economic analysis (cost-effectiveness and cost- benefit analysis).

Cost-benefit analysis The key conclusion from the cost-benefit analysis is that government regulation is preferred over self-regulation and co-regulation options: Option 2 (Revised Act) is estimated to deliver the most economically beneficial outcome, a benefit of $8 million compared to the base case. Option 1 (Base Case) is preferred to either self-regulation (Option 3) or co-regulation (Option 4). Avoided health costs associated with fuel quality Scenario A, relative to other scenarios, is a significant factor driving this outcome. A key cost variable not included in the CBA is the cost of supplying fuel. Fuel cost impacts will arise as a consequence of the additional capital and operating costs to domestic refineries of meeting strengthened fuel standards (under modelled scenarios A and D) or, alternatively, from the cost of importing higher quality fuel. However, it has not been possible to reliably estimate this cost as part of this analysis to threshold analysis has instead been used. Option 1 (base case) will remain the preferred option relative to Option 3 (self- regulation) provided additional fuel supply costs of Option 1 above Option 3 can be kept to less $578 million in present value terms, equivalent to 0.6 cents/litre. Similarly, Option 1 (base case) will remain the preferred option relative to Option 4 (co- regulation) provided additional fuel supply costs of Option 1 above Option 4 can be kept to less than $400 million in present value terms, equivalent to 0.4 cents/litre.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 113. Regulatory burden measurement Regulatory burden measurement (RBM) was also undertaken for each of the options. The RBM reveal that industry regulatory burden does not differ substantially between the four options, with Option 3 having the lowest regulatory burden at $10.6 million per annum and Option 4 having the highest regulatory burden at $11.3 million per annum.

Option 2 implementation The preferred option (Option 2) is essentially a revised form of the Act, with revisions mainly aimed at improving effectiveness and reducing the regulatory burden to industry associated with supplying compliant fuels. It is not anticipated therefore, that there will be significant barriers to effective and timely implementation of the new arrangements. Nevertheless, consistent with RIS requirements, following is the proposed plan for implementing Option 2.

Implementation milestones and timetable Table 46 provides an overview of the milestones to be completed for Option 2, with an indicative timetable for their completion. The proposed timetable for completion of the Act amendments is June 2018. The transition to an amended Act will need to be supported by clear and timely communication with the petroleum and automotive industries and other stakeholders. Determinations on fuel standards under the Act are outside of the scope of this review. Nevertheless, in accordance with the Legislation Act 2003, all legislative instruments made under the Fuel Quality Standards Act 2000 will need to be reviewed and remade by 1 October 2019. In addition, a five year forward schedule (i.e. to 2021) for proposed future determinations should be developed by the Department. The schedule should allow for appropriate consultations with relevant stakeholders.

Table 46: Option 2 implementation milestones and timetable

Milestone Indicative timetable

Draft Act amendments Completed by December 2016 Finalise Act amendments Completed by June 2018 Revised Act takes effect 1 January 2019 Determinations Five year forward schedule to be developed by December 2021 Next Act review 2025

Monitoring and evaluation

Important data requirements for monitoring the effectiveness of the Act includes the following: Details of fuel sampling. Fuel sampling data including the numbers and types of tests, and outcomes of those tests are compiled by the compliance section of the Department. This data should continue to be compiled. Consumer protection information. Noting proposed Act amendments to enhance consumer protection provisions (see section 3.3.2), the Department should consult with

The Department of the Environment Review of the Fuel Quality Standards Act 2000 114. the ACCC and state and territory consumer protection agencies regarding ongoing access to data relating to consumer complaints relating to fuel quality. Vehicle fleet and emissions data. A vehicle fleet database necessary to assess current and future vehicle emissions is currently maintained by the Bureau of Infrastructure, Transport and Regional Economics within the Department of Infrastructure and Regional Development (DIRD). That database should continue to be updated and maintained as a priority. The Department of the Environment and DIRD should also jointly examine the potential for regularly updating vehicle emissions data, similar to that compiled for this review, as an important future input to air quality modelling (see section 7.6).

Act review

As outlined in Box 6, a proposed amendment to section 72 of the Act is to increase the review period from five years to ten years. Consistent with that period, the next independent review of the Act should be completed in 2026.

Recommendations

Recommendation 6 Results of the cost-effectiveness assessment and cost-benefit analysis indicate that Option 2, an amended Act, should be implemented as the preferred regulatory option. Compared to Option 1, Option 2 has the advantages of reducing government costs and industry regulatory burden. Compared to Options 3 and 4, Option 2 offers greater prospects for achieving the health and environmental benefits that result from nationally consistent regulation of fuel quality. Recommendation 7 Given uncertainties regarding the costs and benefits of harmonising fuel quality standards in Australia with international best practice, no decision should be made to harmonise standards including in particular the sulfur content of unleaded petrol and premium unleaded petrol, until further investigation has been undertaken into the costs and benefits and fuel security implications of doing so. Recommendation 8 A plan for implementing Option 2, as outlined in section Option 2 implementation, should be initiated.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 115. 7. Emissions, air quality and health impacts modelling

This section summarises results of the emissions, air quality and health impacts modelling. A comparison of the emission estimates and a comparison of the modelled ground level concentrations for the relevant pollutants have been applied. These comparisons are used to determine if there has been any increase or decrease between the scenarios. The comparative change is also considered for each option from the year 2020 to 2030.

1.2 Modelling approach and key assumptions

An impact assessment approach, involving the integrated modelling of emission estimates, air quality and health impacts has been used. It allows a quantitative link to be established between changes in emissions and the changes in air quality. With this detail it is possible to then quantify the public health benefit across a population. This is a detailed study approach, and draws upon a combination of both actual and assumed information. At the core of the study is the underlying necessity to be able to reliably attribute changes in air quality and associated health impacts to the past and potential future changes of the Act. The impact assessment has been conducted for Sydney and Melbourne to account for the differences in atmospheric behaviour across Australian cities and states. The results have been extrapolated to apply at a national level. The key stages in the assessment include the development of representative scenarios, emissions estimates (based on inventories), atmospheric dispersion modelling, interpretation of results expressed as ground level concentrations of key pollutants, interpretation of results at key population receptor locations, and co-analysis of ground level concentrations with hospital admissions data (morbidity and mortality) as the basis of health risk assessment. The final output from the health risk assessment (for each scenario) is then used as an input to the economic analysis.

1.2.1 Scenarios modelled To investigate and quantify the relative impact of the various regulatory framework options under consideration, a series of future scenarios was defined. The scenarios are representative of the anticipated conditions (fuel quality parameter specification, fleet characteristic including mix and technology and vehicle kilometres travelled (VKT)). As discussed in section Approach to the analysis, the scenarios modelled are: Scenario A: Strengthen fuel quality standards in 2020. Scenario B: Freeze fuel quality standards at current levels. Scenario C: Backsliding. . Scenario D: Strengthen fuel quality standards in 2025. The scenarios analysed, along with the associated fuel specifications and corresponding fleet assumptions are detailed in Table 46.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 116. Table 46: Fuel specifications and associated fleet assumptions for scenarios Scenario Descriptions Fuel specification assumptions Petrol Diesel Fleet Assumptions Back-casting scenarios Back-casting 2000 Fuel specification and fleet assumptions taken from Coffey Geosciences (2000) Back-casting 2015 Hypothetical case - post legislation fuel specification with 2015 fleet technology Sulfur content: ULP = 150 Sulfur content = 10 ppm; Total fleet is taken from Coffey ppm; PULP = 50%; Aromatic = Density = 835 kg/m3 Geosciences (2000) but the 48% technology is based on 2015, i.e. Up to Euro 4 Current Base case (year 2015) Sulfur content: ULP = 150 Sulfur content = 10 ppm; 2015 fleet, current technology, ppm; PULP = 50%; Aromatic = Density = 835 kg/m3 i.e. up to Euro 4 48% Future Scenarios Scenario A The assumption is that Australia would continue on the path of alignment with international trends with the adoption of Euro VI fuel specifications in 2019. The Australian fleet is assumed to continue to grow in size, with proportional increases in all fleet categories. Sulfur content (ULP & PULP) Sulfur content = 10 ppm; Vehicle technology a mix of = 10 ppm; Aromatic = 35% Density = 835 kg/m3 Euro 5 and Euro 6 Scenario B Australia would not progress toward the introduction of Euro VI in 2019 Sulfur content: ULP = 150 Sulfur content = 10 ppm; Including up to Euro 5, i.e. No ppm; PULP = 50%; Density = 835 kg/m3 Euro 6 Aromatic = 48% Scenario C Australia would not progress toward the introduction of Euro VI in 2019, with some decline/slippage in sulfur content in diesel and unleaded petrol Sulfur content: ULP = 150 Sulfur content = 50 ppm; Including up to Euro 5, i.e. No ppm; PULP = 50%; Density = 870 kg/m3 Euro 6 Aromatic = 48% Scenario D Remaining at Euro V beyond 2019 until 2025 when some fuel quality parameters are strengthened in line with Scenario A, (i.e. there is a 5- year lag). It is assumed that this change would most likely occur for the sulfur content in diesel and in unleaded petrol (ULP). The Australian fleet would continue to grow in size, with proportional increases in all fleet categories. 2020: Specifications are Identical Sulfur content: ULP = 150 Sulfur content = 10 ppm; Including up to Euro 5, i.e. No to Scenario B ppm; PULP = 50%; Aromatic = Density = 835 kg/m3 Euro 6 48%

The Department of the Environment Review of the Fuel Quality Standards Act 2000 117. Scenario Descriptions Fuel specification assumptions Petrol Diesel Fleet Assumptions 2030: Specifications are Identical Sulfur content (ULP & PULP) Sulfur content = 10 ppm; Starts to adopt Euro 6 in 2025 to Scenario A = 10 ppm; Aromatic = 35% Density = 835 kg/m3

The Department of the Environment Review of the Fuel Quality Standards Act 2000 118. 1.2.2 Emissions and air quality modelling approach overview REF _Ref419124728 \h \* MERGEFORMAT The combustion of fuel results in a suite of pollutants emitted. There are too many pollutants to feasibly estimate, model and assess at an individual level within the bounds of this study. The parameters included in the emission estimation process are those available within the COPERT Australia model and includes both greenhouse gases and air pollutants. The parameters included in the air quality dispersion modelling were prioritised for inclusion based on their potential impact on human health and availability of adequate data for inclusion in the modelling. COPERT Australia is a national motor vehicle emissions model, designed to estimate emissions for 226 different vehicle classes and for 116 air pollutants. COPERT Australia also accounts for various types of emissions from vehicles including those of hot running, cold-start, evaporative and non-exhaust emissions. COPERT Australia uses Australian emissions testing results to reflect the Australian fleet and activity data and was designed to be used for road transport emission inventories. While there are other international motor vehicle emission estimation programs, COPERT Australia is the program that uses Australian specific data in the generation of the emissions calculations. The other emission estimation programs use different algorithms to determine the motor vehicle emissions and as such different emission inventories would result REF _Ref419124728 \h \* MERGEFORMAT . The key input to COPERT Australia is an input file that must be defined to reflect the local vehicle fleet. This was done on a state by state basis. To investigate and quantify the relative emissions associated with each scenario, it was necessary to define the fleet as well as the changes to the fleet, in terms of the number of different vehicles within each vehicle category, the average vehicle kilometres travelled (VKT) per year, the distribution of driving across the various types of roads within the network, fuel use, and various fuel parameters (specifications and characteristics). The output from COPERT Australia (annual emission estimate for each scenario, for each state), is used as an input parameter to the atmospheric dispersion models REF _Ref419124728 \h \* MERGEFORMAT (for Sydney and Melbourne). The most recent CSIRO developed photochemical dispersion models were selected for this study. The CCAM-CTM dispersion model was configured for Sydney for the financial year 2010/2011 meteorology. The TAPM-CTM dispersion model was configured for Melbourne for the 2006 meteorology. These models were used to determine the fate and transport of the emissions with the results being presented as ground level concentrations of a pollutant. The set-up, inputs and results of the modelling is discussed in detail in the technical report (PEL 2016a)

REF _Ref419124728 \h \* MERGEFORMAT Readers who wish to understand in detail the methods, assumptions and sensitivity analysis applied to the air quality modelling should view the relevant technical report (PEL 2016a).

REF _Ref419124728 \h \* MERGEFORMAT A detailed description and discussion of the limitations of the COPERT Australia model is provided in the technical report (PEL 2016a). The report includes a discussion of the vehicle fleet parameters and projections applied in the model.

REF _Ref419124728 \h \* MERGEFORMAT Also referred to as air quality models

The Department of the Environment Review of the Fuel Quality Standards Act 2000 119. The output from the dispersion models includes the predicted ground-level concentrations of the health-related pollutants, at relevant time-frames, for the emission scenarios. These concentrations were also predicted at a suite of pre-determined receptor locations, identified for their relevance for exposure assessment and the calculation of health risk and impacts.

1.2.3 Key assumptions and limitations The key assumptions and limitation associated with the emissions estimates are: . Fuel specifications are based on regulatory values that might not reflect the actual quality of fuel available for purchase. . COPERT assumes the vehicle technology selected is performing as expected regardless of potential increased deterioration due to the use of low quality fuels. . The air quality effect of changes in vehicle emissions is influenced by the proportion of vehicle emissions to the overall airshed inventory. Where the vehicle emission contribution is not a dominant source within an airshed, changes (improvements) in air quality may appear minimal in the dispersion scenarios, and may be “masked” in the health risk assessment. . GHG assessment does not include the emissions associated with the transport of fuel. This is most important for the Deregulation scenarios where additional fuel may be purchased internationally. The key assumptions and limitation associated with the atmospheric dispersion modelling are as follows: . Motor vehicle emissions files were scaled uniformly to represent each Scenario’s predicted emissions. This simplified method was used as changing the vehicle density in future scenarios was impractical and would introduce an undefinable error.

. PM10 was not included in this assessment for two reasons. One is that vehicle exhaust particulate matter is primarily PM2.5 and consequently changes to fuel standards would influence ground level concentrations of this particle size fraction

to a much greater extent than PM10. In addition, the models used are not ideal for understanding cumulative PM10 concentrations as their base domain is not large enough to capture significant PM10 emissions sources, such as windblown dust from regional locations, bush fires and marine aerosols. Not including PM10 in the assessment is consistent with other studies that used the same dispersion modelling software (EPAV, 2013). . To facilitate the time constraints for this assessment only six months were modelled for Sydney. For the purposes of understanding influences of fuel legislation on air quality, six months modelling is sufficient to cover all meteorological conditions impacting photochemistry and dispersion. The six months were selected to represent all potential conditions in NSW to extrapolate an annual data set necessary for the HRA. . Results should not be interpreted as a representation of likely future air quality given

The Department of the Environment Review of the Fuel Quality Standards Act 2000 120. that the non-vehicle emissions sources within the model are held constant in 2020 and 2030. While imperative for this assessment, in practice all other emission sources would change for the future scenarios. There is the potential for changes to

the other sources to impact the outcome of secondary pollutants, chiefly O3, which is the product of complex photochemical processes acting on NOx and some VOC emissions, known as precursors. It is not emitted directly in any significant

quantities. If additional O3 precursor emissions were also to be included in the future inventory, projected future trends might differ. . Complicated photochemistry within an airshed, and the interrelationships of relevant factors are complex. . The models used in this study are for understanding regional air quality and do not represent roadside air quality conditions. An alternative model capable of resolving very small scales should be used to understand roadside air quality. . The regional model used a very large grid sufficient to cover the majority of the state and territories’ populations. This resulted in limited grid resolution to ensure reasonable computational time. As a result, peaks are not as discernible compared to the results of other studies using different models with different grid resolutions. . The models selected were those used by the regulatory authorities of each state. The different models are fit for purpose to consider the relative change across scenarios, but each state’s results should not be directly compared with the other states. . Only two states were modelled to represent all Australian locations, therefore the results from this assessment should be considered as indicative and not absolute.

1.3 Emissions of air pollutants

Air quality outcomes are considered for NOx, SO2, CO, PM2.5, and VOCs. A comparison of the emission estimates and a comparison of the modelled ground level concentrations have been applied. The comparison of emission estimate considers the vehicle emission inventory in isolation from all other emission sources. The dispersion modelling, provides an understanding of whether or not the vehicle emissions are significant within the inventory, and if the relative changes in air quality can be linked to the scenarios. A comparison of emission estimates and the modelled ground level concentrations is used to determine if there has been any increase or decrease between the scenarios. The comparative change is also considered for each option from the year 2020 to 2030. This is discussed in Section 7.4.

1.4 Greenhouse gas emissions

Greenhouse gas emissions (GHGs) REF _Ref419124728 \h \* MERGEFORMAT related to vehicle use and fuel production were estimated for New South Wales and Victoria. Estimates were made for each agreed scenario in 2020 and 2030. Calculations were also made on a national basis, by scaling the carbon dioxide (CO2), methane (CH4) and nitrous oxide (N2O) emissions by projected vehicle kilometres travelled. Total GHG emissions from motor vehicles and from fuel combustion and fuel

REF _Ref419124728 \h \* MERGEFORMAT Measured as carbon dioxide equivalents, CO2-e

The Department of the Environment Review of the Fuel Quality Standards Act 2000 121. production for NSW, Victoria and all of Australia are summarised in Table 47.

a Table 47: Annual GHG (t CO2-e ) emissions for motor vehicles and fuel production

New South Wales Victoria Australia Scenarios Motor Fuel Motor Fuel Motor Fuel Vehicles Production Vehicles Production Vehicles Production Scenario A 25,602,600 1,966,194 22,244,042 1,640,045 87,744,769 6,646,367 2020 Scenario A 30,205,726 2,123,315 26,962,077 1,746,901 106,129,252 7,188,546 2030 Scenario B 25,652,022 1,966,194 22,076,135 1,640,045 87,546,890 6,646,367 2020 Scenario B 30,328,020 2,123,315 27,081,818 1,746,901 106,576,446 7,188,546 2030 Scenario C 25,652,022 1,966,194 22,076,135 1,640,045 87,546,890 6,646,367 2020 Scenario C 30,328,020 2,123,315 27,081,818 1,746,901 106,576,446 7,188,546 2030 Scenario D 30,238,875 2,123,315 26,991,498 1,746,901 106,244,182 7,188,546 2030

Notes: a. t CO2-e = tonnes of CO2 equivalent

1.5 Emissions and air quality outcomes

Air quality outcomes are considered for NO2, SO2, CO, PM2.5, and VOCs. A comparison of the emission estimates and the modelled ground level concentrations is used to determine if there has been any increase or decrease between the modelled scenarios. Changes between 2020 and 2030 are also considered for each scenario. The emission estimates for each scenario are shown in Table 48 for Melbourne and in Table 49 for Sydney. These tables also show the relative difference and similarities in the total emission estimates. Shading indicates those scenarios that were run in the dispersion models. Table 48: Motor Vehicle Emissions for Scenarios - Melbourne (Tonnes/Year)  Scenario Scenario Scenario Scenario Scenario Scenario Scenario Scenario A Year B Year C Year D Year A Year B Year C Year D Year 2020 2020 2020 2020 2030 2030 2030 2030 CO 99,764 105,848 105,666 105,848 69,252 71,511 71,275 69,243

NOx 23,103 27,470 28,053 27,470 13,614 23,399 24,002 14,923

PM2.5 1,246 1,289 1,304 1,289 1,300 1,429 1,433 1,317

SO2 235 561 789 561 285 664 946 285 VOCs 12,403 12,555 12,516 12,555 12,013 11,508 11,469 11,680 Diesel PM 311 364 379 364 164 293 296 181

The Department of the Environment Review of the Fuel Quality Standards Act 2000 122. Table 49: Motor Vehicle Emissions for Scenarios – Sydney (Tonnes/Year)

Scenario A Scenario C Scenario B Scenario D Scenario A Scenario C Scenario B Scenario D  Year 2020 Year 2020 Year 2020 Year 2020 Year 2030 Year 2030 Year 2030 Year 2030 CO 97,313 102,686 102,455 102,686 67,446 69,831 69,549 67,449

NOx 26,411 31,655 32,366 31,655 14,838 26,221 26,931 16,402

PM2.5 1,468 1,538 1,554 1,538 1,493 1,646 1,650 1,514

SO2 285 580 853 580 336 669 990 336

VOCs 13,612 12,969 12,920 12,969 12,695 11,516 11,469 11,622 Diesel 358 428 444 428 181 334 338 202 PM

A sensitivity analysis of the emissions was undertaken, drawing on data provided by the AIP, by varying assumptions about the current average sulfur content of petrol. The emissions estimated in the sensitivity analysis are almost identical to the emissions adopted in dispersion modelling. The major difference between the two sets of emission estimates is that the SO2 emissions adopted for dispersion modelling is relatively higher than most of the predicted emissions in the sensitivity analysis. The only exception is in Scenario B/C 2030 where the estimated emissions for dispersion modelling is slightly lower than the predicted emissions in sensitivity analysis. Nevertheless, the level of

SO2 emissions is amongst the lowest emitted substance from vehicles. Therefore, the sensitivity analysis results indicate that a conservative approach has been adopted in methodology to determine emissions to air. As a result, this may lead to slightly conservative results in both air quality modelling (ground level concentrations) and subsequent health outcomes. The HRA selected 66 locations to analyse the air quality impacts on human health in Melbourne, and 43 locations in Sydney (reported separately in PEL, 2016b). For the purposes of demonstrating the air quality outcomes, five representative locations, for both Melbourne and Sydney, are presented. Interpretation is provided for each pollutant by scenario. In summary, the analysis shows: . Scenario A may provide a better air quality outcome than Scenarios B, C and D in Melbourne and in the New South Wales Greater Metropolitan Region. . Scenario C produces the highest modelled ground level concentrations for most parameters in both Melbourne and New South Wales, although the increases are relatively small compared with Scenario B. . Scenario D leads to similar modelled outcomes as Scenario C. A comparison of scenarios (by pollutant) is shown in Figure 13 for select receptors in Melbourne and in Figure 14 for Sydney.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 123. Figure 13: Predicted air quality outcomes for selected receptor locations in Melbourne

The Department of the Environment Review of the Fuel Quality Standards Act 2000 124. The Department of the Environment Review of the Fuel Quality Standards Act 2000 125. Figure 14: Predicted air quality outcomes for selected receptor locations in Sydney

The Department of the Environment Review of the Fuel Quality Standards Act 2000 126. The Department of the Environment Review of the Fuel Quality Standards Act 2000 127. 1.6 Health risk assessment

A health risk assessment has been undertaken to assess the potential health benefits/disbenefits associated with changes in air quality arising from the various scenarios. The full assessment is reported in the health risk assessment technical report, which details the methods and assumptions applied to the health risk assessment (PEL 2016b).

1.6.1 Approach overview

The health effects associated with exposure to PM2.5, SO2, NO2, O3, CO, diesel particles, and the air toxics benzene, formaldehyde, toluene and xylenes have been assessed. These include changes in mortality, hospital admissions, emergency department attendances and changes in cancer occurrence. The HRA has been conducted using the outputs of the air dispersion modelling conducted for Melbourne and Sydney. The results obtained for these cities have been extrapolated to the other capital cities to enable an assessment of the impact nationally of potential changes to the Act. Based on the results of the air dispersion modelling, receptors were selected across the Melbourne and Sydney areas to represent the variability in pollutants levels. Receptor locations were identified for each local Government area and population statistics were obtained for these areas for 2001 and 2011. 2001 Australian Bureau of Statistics (ABS) data was used as a measure of the population in 2000 and the 2011 data for 2015. For forward projections of the population to 2020 and 2030 the forecasts from population were used and the population for each area projected forward from the 2011 data. The health outcomes were calculated for each identified local government area (LGA) and summed to give the total number of people affected for the whole airshed. This approach allows for changes in population and air pollution levels over time to be accounted for in the assessment of impacts. Population projections for the other capital cities were made using the same approach used for Melbourne and Sydney. Baseline health statistics were obtained from ABS where possible and from the relevant State Health Departments.

1.6.2 Health impacts of key pollutants, exposure and impact assessment

Health outcomes are considered for SO2, NO2, O3, PM2.5, CO, and air toxics. A comparison of the calculated health outcomes is used to determine if there is any increase or decrease in estimated values between the scenarios. Differences are considered for two time periods, 2020 and 2030. The air quality modelling and health risk assessment produces almost identical outcomes for Scenarios B and C. The two scenarios are therefore considered in tandem. Similarly, outcomes of the modelling for Scenario D are the same as for Scenario B and C in 2020 and for Scenario A in 2030.

(6.2.1) Nitrogen dioxide The change in health outcomes attributable to exposure to NO2 are shown in Table 50. In summary:

The Department of the Environment Review of the Fuel Quality Standards Act 2000 128. Small decreases in health effects are observed for Scenario A between 2020 and 2030.

The predicted decrease in daily mortality all-causes due to NO2 is 15 deaths in Melbourne and 9 deaths in Sydney. Increases in health effects are observed for Scenario B/C between 2020 and 2030. The predicted increase for Melbourne is 15 deaths and for Sydney 9 deaths. Higher health impacts are predicted for Scenario B/C compared to Scenario A with all- cause daily mortality (2020) predicted to increase by 3 deaths in Melbourne and 9 deaths in Sydney. For the 2030 the predicted increases are 24 deaths in Melbourne and 22 in Sydney.

Table 50: Number of attributable health outcomes for NO2 for the 2020 and 2030 scenarios

Melbourne Sydney Health Outcome 2020 2020 2030 2030 2020 2020 2030 2030 Scenari Scenari Scenari Scenari Scenari Scenari Scenari Scenari o A o B/C/D o A/D o B/C o A o B/C/D o A/D o B/C All-cause mortality 271 283 256 322 436 459 425 485 30+years (long-term) Cardiovascular mortality 51 53 48 60 81 86 79 91 30+years (long-term) Respiratory Mortality 13 14 13 16 22 23 21 24 30+ years (long-term) Lung cancer mortality 11 12 10 13 18 18 17 20 30+ years (long-term) Daily mortality all causes 97 100 91 115 153 162 149 171 All ages Daily mortality cardiovascular disease 31 31 28 36 48 51 47 53 All ages Daily mortality respiratory disease 18 19 17 21 29 30 28 32 All ages Hospital admissions respiratory disease 266 273 252 320 440 464 430 490 65+ years Hospital admissions cardiovascular disease 293 293 279 353 172 181 167 191 65+ years Hospital admissions pneumonia and 100 102 94 120 165 173 161 183 bronchitis 65+ years Hospital admissions respiratory disease 109 112 103 132 486 512 475 541 15-64 years Emergency Department visits asthma 19 20 17 22 33 35 32 37 1-14 years

(6.2.2) Sulfur dioxide The change in health outcomes attributable to exposure to SO2 are shown in Table 51. In summary: There are increases in all health outcomes assessed for Scenario A between 2020 and 2030. Population increases over that time has some influence on this result. There are increases in all health outcomes assessed for Scenario B/C between 2020 and 2030.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 129. Higher health impacts are predicted for Scenario B/C compared to Scenario A in Melbourne, with the exception of emergency department visits for Asthma (1-14 years) in Melbourne. For Sydney there is little or no change predicted between the scenarios.

Table 51: Number of attributable health outcomes for SO2

Melbourne Sydney Health Outcome 2020 2020 2030 2030 2020 2020 2030 2030 Scenari Scenari Scenari Scenari Scenari Scenari Scenari Scenari o A o B/C/D o A/D o B/C o A o B/C/D o A/D o B/C Daily mortality all causes 8.6 9.5 9.6 10.7 18 18 21 21 All ages Daily mortality cardiovascular disease 3.5 3.9 3.9 4.5 7 8 9 9 All ages Daily mortality respiratory disease 1.5 1.7 1.7 1.9 3 3 4 4 All ages Hospital admissions respiratory disease 72 75 81 89 204 206 237 237 65+ years Emergency Department 45 41 42 48 83 85 97 99 visits asthma 1-14 years

(6.2.3) Ozone The change in health outcomes attributable to exposure to O3 are shown in Table 52. In summary: There are increases in adverse health outcomes assessed under Scenario A for both Melbourne and Sydney, from 2020 to 2030. For daily all-cause mortality, the predicted increase is 93 deaths in Melbourne and 171 deaths in Sydney. Increases in health effects are predicted for Scenario B/C in 2030. The predicted increase in Melbourne is 75 additional cases and 46 in Sydney. Scenario B/C shows a small decrease in health impact compared to Scenario A. The predicted decreases in daily all-cause mortality for 2020 is 4 cases in Melbourne and 3 cases in Sydney. In 2030 the decreases are larger (Melbourne (22), Sydney (8)).

Table 52: Number of attributable health outcomes for O3

Melbourne Sydney Health Outcome 2020 2020 2030 2030 2020 2020 2030 2030 Scenari Scenari Scenari Scenari Scenar Scenari Scenar Scenar o A o B/C/D o A/D o B/C io A o B/C/D io A/D io B/C Daily mortality all causes 781 777 874 852 890 887 1041 1033 All ages Daily mortality cardiovascular 366 365 414 397 417 416 488 484 disease All ages Daily mortality respiratory disease 104 104 118 113 119 118 139 138 All ages Emergency Department visits 184 183 197 193 239 238 279 277 asthma 1-14 years

The Department of the Environment Review of the Fuel Quality Standards Act 2000 130. (6.2.4) Particles (PM2.5) The change in health outcomes attributable to exposure to PM2.5 are shown in Table 53. In summary:

There are increases in all health outcomes assessed for PM2.5 under Scenario A. The predicted increase in deaths in 2030 from long-term all-cause mortality is 135 in Melbourne and 170 in Sydney. Scenario B/C predicts mixed results, with some health outcomes showing little or no change with time in Melbourne. Scenario B/C shows a general increase in health impact compared to Scenario A in 2020. By 2030 there is little or no difference between the scenario outcomes in Melbourne. At the same time in Sydney there is a predicted increase in all health outcomes, with a long-term all-cause mortality increase of 20 deaths.

Table 53: Number of attributable health outcomes due to PM2.5

Melbourne Sydney Health Outcome 2020 2020 2030 2030 2020 2020 2030 2030 Scenari Scenari Scenari Scenari Scenari Scenari Scenari Scenari o A o B/C/D o A/D o B/C o A o B/C/D o A/D o B/C All-cause mortality 1007 1143 1142 1143 1169 1201 1339 1359 30+years (long-term) Cardiovascular mortality 535 607 607 608 621 638 711 722 30+years (long-term) Ischemic Heart Disease Mortality 353 400 400 400 409 420 468 475 30+ years (long-term) Lung cancer mortality 72 81 81 81 83 85 95 97 30+ years (long-term) Daily mortality all causes 378 433 433 433 441 446 505 512 All ages Daily mortality cardiovascular disease 68 76 77 77 78 79 89 91 All ages Hospital Admissions Cardiac disease 1241 1407 1408 1408 780 789 894 906 65+ Hospital admissions respiratory disease 635 720 720 721 637 644 730 741 65+ years Hospital admissions cardiovascular disease 1058 1224 1224 1225 351 354 402 407 65+ years Hospital admissions pneumonia and 294 323 323 320 1326 1340 1519 1540 bronchitis 65+ years Hospital admissions respiratory disease 588 644 652 653 1524 1540 1746 1770 15-64 years Emergency Department visits asthma 119 102 102 102 106 107 122 123 1-14 years

(6.2.5) Carbon Monoxide The change in health outcomes attributable to exposure to carbon monoxide are shown in Table 54. In summary:

The Department of the Environment Review of the Fuel Quality Standards Act 2000 131. There is little or no change in health outcomes assessed for Scenario A between 2020 and 2030 in Melbourne. There are small increases observed in Sydney. Similarly, there is little or no change in health outcomes assessed for Scenario B/C between 2020 and 2030 in Melbourne. There are small increases observed in Sydney There is no significant difference between Scenario A and B/C for health outcomes for carbon monoxide.

Table 54: Number of attributable health outcomes for CO

Melbourne Sydney Health Outcome 2020 2020 2030 2030 2020 2020 2030 2030 Scenari Scenari Scenari Scenari Scenari Scenari Scenari Scenari o A o B/C/D o A/D o B/C o A o B/C/D o A/D o B/C Daily Mortality all cause 5 4 4 4 5 5 6 6 All ages Hospital Admissions Cardiovascular Disease 14 13 14 14 17 17 20 20 65+ years Hospital Admissions Cardiac Disease 21 20 20 20 25 25 29 29 65+ years

(6.2.6) Air toxics – diesel particles The change in cancer risk attributable to exposure to diesel particles is shown in Table 55. In summary: Under Scenario A there is little or no change predicted in cancer risk from diesel particles in Sydney between 2020 and 2030. For Melbourne the cancer risk is reduced by half during that period. For Scenario B/C, there is a small decrease in cancer risk predicted in 2030 for Melbourne, with an increased risk (approximately 30%) predicted in Sydney. Scenario B/C is predicted to lead to lower cancer risk from diesel particles than Scenario A, with the exception of 2020 in Melbourne.

Table 55: Predicted increases in cancer risk due to diesel PM for all scenarios

Melbourne Sydney Scenario Modelled Increase in cancer risk Diesel PM Scenario A 2020 1.4x10-4 2.1x10-5 Scenario A/D 2030 7.2x10-5 2.7x10-5 Scenario B/C/D 2020 1.7x10-4 1.2x10-5 Scenario B/C 2030 1.3x10-4 1.8x10-5

(6.2.7) Air toxics –benzene The change in cancer risk attributable to exposure to benzene is shown in Table 56. In

The Department of the Environment Review of the Fuel Quality Standards Act 2000 132. summary: Under Scenario A there is no change predicted in cancer risk from exposure to benzene in Melbourne. There is small increase in cancer risk predicted for Sydney. Similarly under Scenario B there is no change predicted in cancer risk from exposure to benzene in Melbourne. There is small increase in cancer risk predicted for Sydney. In Sydney, Scenario B/C is predicted to lead to an increased cancer risk from benzene compared to Scenario A, In Melbourne, there is no change to the cancer risk from ambient exposure to benzene.

Table 56: Predicted increases in cancer risk due to benzene

Melbourne Sydney Scenario Modelled Increase in cancer risk Benzene Scenario A 2020 3.5x10-6 5.2x10-6 Scenario A/D 2030 3.5x10-6 5.5x10-6 Scenario B/C/D 2020 3.5x10-6 7.5x10-6 Scenario B/C 2030 3.5x10-6 8.4x10-6

1.7 Conclusions

The impact of the Act on air quality and public health has been analysed. The purpose of this analysis was to determine if there was a discernible difference in air quality as a result of the legislation and associated fuel quality standards being introduced. To this extent, the regulation of the fuel supplied in Australia (via the 2000 Act) has: . led to a quantifiable reduction in the mass of relevant pollutants emitted in New South Wales and Victoria, associated with vehicle emissions arising from the use of the regulated fuel; . generally led to a quantifiable reduction in the ground level concentrations of the key pollutants arising from the use of the regulated vehicle fuel, with the exception

of ozone (O3) that formed in both Melbourne and Sydney; and . led to a quantifiable reduction in the estimated emissions of the major greenhouse gas emissions arising from the use of the regulated vehicle fuels. Potential changes to fuel quality were also analysed with respect to their air quality impacts. Four possible fuel quality scenarios were considered: . Scenario A (strengthened standards in 2020) results in predicted ground level concentrations in Melbourne and Sydney that are lower than the other scenarios. . Scenarios B and C produce higher modelled ground level concentrations for most key pollutants in both Melbourne and New South Wales, although the increases are relatively small in some cases. . Scenario D produces similar outcomes to the Deregulation option. In terms of future assessments of the potential impact of vehicle emissions post this review, the following recommendations are provided for consideration:

The Department of the Environment Review of the Fuel Quality Standards Act 2000 133. The TAPM-CTM model for Melbourne and CCAM-CTM model for Sydney are considered appropriate for future assessments of the regional impact, noting the following – - both models are currently made accessible and are supported by the CSIRO, which independently undertakes model development and periodic validation of the associated emission inventories. - in the absence of independent ongoing support, either through CSIRO or a state agency, regional modelling of Australian airsheds may become limited. Alternative models need to be considered if near-field impacts (e.g. emission impacts at the road-side) are to be assessed. Improvement in emission estimations and subsequent model predictions would be improved through the following – - Development and acceptance of a standard approach or method for developing the emission files to be used in the models. This should include acceptable default values and key assumptions to ensure that there is continuity from one evaluation to the next. - Access to in-service monitored/measured vehicle exhaust emissions – from each Australian capital city. This would provide a more reflective estimate of the emissions from vehicles, and support the tracking of performance changes over time and with vehicle age. - Alternatively – ambient data may be obtained from future tunnel studies, designed to evaluate air quality within the tunnel (or at discharge vents), with fleet details being assessed based on registration details of model, make and year. Any future investigations and modelling should include analysis of the potential changes to health outcomes and impacts.

Recommendations

The Department of the Environment Review of the Fuel Quality Standards Act 2000 134. References

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The Department of the Environment Review of the Fuel Quality Standards Act 2000 138. Appendix 1: Review terms of reference

Independent Review of the Fuel Quality Standards Act 2000

Context

The Act provides the legislative basis for national fuel quality and fuel quality information standards in Australia. The objectives of the Act are to reduce the level of pollutants and emissions arising from the use of fuel that may cause environmental and health problems, facilitate the adoption of better engine and emission control technology, allow the more effective operation of engines, and to ensure that, where appropriate, information about fuel is provided to consumers when fuel is supplied. Section 72 of the Act requires an independent review to be undertaken at intervals of not longer than 5 years. Additionally, the Regulations, guidelines and determinations (fuel standards) under the Act will sunset, beginning from October 2019.

Scope

The independent review will examine, advise and report on: 1. the appropriateness and relevance of the objects of the Fuel Quality Standards Act including consideration of: a) the interrelationships between fuel quality, vehicle emission standards and other standards, government policies and initiatives, e.g. automotive design and technology, fuel and transport industries, deregulation, productivity, or economic matters. b) the extent to which the Act has been able to meet its objectives. c) the role, if any, of fuel quality standards in meeting the aims of the Plan for a Cleaner Environment and in the development of the National Clean Air Agreement. 2. options, including a preferred option, to meet the objectives recommended in response to point 1, that: a) are efficient and effective b) allocate roles and responsibilities to those best placed to deliver outcomes, e.g. government, industry, community c) identify appropriate sustainable funding models. 3. any implementation issues that will need to be addressed to ensure a smooth transition to any future model. 4. any other relevant matters including environmental, health, technical and regulatory issues.

Governance and Deliverables

The independent review will be undertaken by an independent consultant, contracted by

The Department of the Environment Review of the Fuel Quality Standards Act 2000 139. the Department of the Environment, and provide a report to the Minister for the Environment. The consultant will be supported by a secretariat in the Department and assisted by: advice obtained from states, territories and industry representatives. an advisory group of key agencies: the Department of the Environment, the Department of Industry, the Department of Infrastructure and Regional Development, the Department of Defence, the Department of the Prime Minister and Cabinet, the Treasury and the Department of Finance.

Timeframe and Methodology

The independent review will commence in January 2015, and provide a final report to the Minister by November 2015, which will enable any changes to legislation to be made by 30 June 2016. The independent review will, as relevant, consider: 1. submissions from, and consultations with, business, the community and relevant Commonwealth, state and territory agencies 2. reports from studies relevant to the review, including: a) international and domestic experience and trends in fuel quality and standards and the associated industries, e.g. refining, automotive design, engine manufacture. b) economic value and environmental and human health benefits in reducing emissions from fuel and the role of fuel quality and standards in producing those benefits. The independent review will meet the requirements of the Australian Government Guide to Regulation REF _Ref419124728 \h \* MERGEFORMAT , specifically abiding by the ten principles as relevant and answering the seven Regulation Impact Statement questions.

REF _Ref419124728 \h \* MERGEFORMAT Released as part of the Australian Government’s deregulation agenda - www.cuttingredtape.gov.au

The Department of the Environment Review of the Fuel Quality Standards Act 2000 140. Appendix 2: Stakeholders

Following is a list of stakeholders who provided public submissions in response to the review Issues Paper and/or Draft Report.

Asian Clean Fuels Association Australian Automobile Association Australian Institute of Petroleum Australian National Drag Racing Association Biofuels Association of Australia Brear, Professor Michael Clean Air Society of Australia and New Zealand Confederation of Australian Motor Sport Coogee Energy Environment Protection Authority Victoria Federal Chamber of Automotive Industries Gas Energy Australia Godson, Mr W IOR Energy Mobil Oil Australia Pty Ltd The NSW Environment Protection Authority Queensland Department of Environment Truck Industry Council Western Australia Department of Environment Regulation

Additionally, a number of stakeholders who chose to remain anonymous, provided submissions to the Issues Paper.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 141. Appendix 3: Proposed amendments to the Fuel Quality Standards Act

Following are details of amendments proposed by the Department of the Environment to the Fuel Quality Standard Act and the rationale for those amendments.

Description P Existing law What is wrong Possible amendment 1. Specifying the penalty for a 1 The offence provisions only specify one penalty and do not specify While the “corporate Consideration could be given to body corporate a penalty for individuals and bodies corporate. multiplier” (section 4B of amending the penalty provisions to the Crimes Act 1914) will specify penalties for individuals and increase the penalty by bodies corporate. five when a body corporate is convicted by a court, the corporate multiplier does not apply to the penalty that is applicable for infringement notices. Compare the offence provisions with the civil penalty provisions where separate penalties are specified.

2. Absolute liability 1 Strict liability (as defined in section 6.1 of the Criminal Code) As the offences are strict Consideration could be given to applies to these offences. liability, the defence of applying absolute liability to paragraphs mistake of fact (see 12(1)(c), 12(1()(e), 12A(1)(d) and section 9.2 of the 12A(1)(e). Criminal Code) is available to the defendant. CDPP has indicated that it is not interested in pursuing cases where the defendant has a likely mistake of fact defence. For example, under sections 19 and 19A, a supplier is required to give a service station

The Department of the Environment Review of the Fuel Quality Standards Act 2000 142. owner a statement as to whether or not the fuel complies with the relevant fuel standard. When fuel is found to be non-compliant, this is a strict liability offence, but the service station owner is able to raise the statement by the supplier in its defence. This is unsatisfactory because potentially unsafe fuel is being supplied and no- one can be held liable.

3. Tiered Penalties 1 Currently there is one penalty for each offence and for each civil There is no express Consideration could be given to penalty provision. power to impose a lower introducing a scale of penalties for a penalty for a first first, second, third offence (including a offence/infringement and tier of penalties when breach is dealt a higher penalty for with via an infringement notice). second or subsequent breaches.

4. Supplies fuel 1 To establish a contravention of the listed provisions, it must be The requirement to prove Consideration could be to amending the shown that the person supplies fuel. that a person “supplies” provisions to include the words “supplies fuel has caused issues in or offers for supply”. relation to the inspectors having to first observe the fuel being supplied before they can undertake compliance. This has been the subject of judicial comment.

5. Fuel quality information 1 To prove the offence/civil penalty provision it has to be shown that The existing provisions Consideration could be given to saying standards the supply of the fuel does not comply with the fuel quality are misleading. It gives that the information provided does not information standard. the impression that the comply with the fuel quality information parameters of the fuel standard. supplied must be as set out in the fuel quality information standard. But this would mean that the information standard (as

The Department of the Environment Review of the Fuel Quality Standards Act 2000 143. prepared by the supplier) could over rule the fuel standard. Also the penalty indicates that it is not the same offence as contravening the fuel standard. The EM also notes that it is the label contravening the information standard that makes the offence.

6. Clarify who is a regulated 1 A regulated person has the meaning given by subsection 13(1). There is some suggestion Consideration could be given to person Under subsection 13(1), the Minister may grant an approval to vary that once a person is a inserting a note under subsection 13(1) a fuel standard or a fuel information standard to a person (the regulated person for one to clarify that a regulated person is only approval holder) or any other specified person (a regulated approval holder (and a regulated person in relation to the person). therefore can supply non- approval in which the person is compliant fuel that that specified. This can be more than one. approval holder has been approved to supply), that they can supply non- compliant fuel for all approval holders.

7. Publication of Notices 1 Currently the provisions require that notices etc be Gazetted. There are other more Consideration could be given to modern ways of deciding what the best approach is to publicising the making the information publically information. available. This could be retaining the gazette notices, making them notifiable instruments under the Legislation Act 2003 or placing on the Department’s website.

8. Remove fault elements, 1 Section 18 creates offences for contravening the conditions of Currently, it is only if a Consideration could be given to specify penalty for an approval that are set out in a section 13 notice. person intentionally takes removing the express reference to the individual and a body action or omits to take an fault element and redrafting both corporate and make an action that results in a subsections 18(1) and (2) to make the offence strict liability condition being breached offences strict liability so that they can that the person commits be dealt with by an infringement notice. an offence. In addition, The penalties do not need to be the prosecution must changed except to make an express establish that the person reference to the penalty for a body knows or is reckless as to

The Department of the Environment Review of the Fuel Quality Standards Act 2000 144. whether or not the action corporate. or omission contravenes the condition. Finally, as the offence is not one of strict liability, it should not be enforced via an infringement notice.

9. Power to ask questions – 4 Section 42 enables an inspector who is authorised to enter The provision does not Consideration could be given to a extending provision to all premises by a monitoring warrant to require a person to answer a apply to an inspector who similar power when the inspector is warrants question. enters premises under an authorised to enter premises under an enforcement warrant. enforcement warrant.

10. Standardising provision 5 Section 59 sets out the provisions with respect to monitoring Currently subsection Consideration could be given to with Regulatory Powers warrants. Subsection 59(4) sets out what the warrant must do. 59(4) is not completely amending section 59 so that the warrant (Standard Provisions) Act consistent with section 32 describes the premises to which the 2014 of the Regulatory Powers warrant relates; states that the warrant (Standard Provisions) Act is issued under section 59; and state the 2014. purpose for which the warrant is issued.

11. Definition of 6 Section 65L sets out when an infringement notice may be given. The section does not Consideration could be given limiting the infringement notice offence define what is an issue of an infringement notice to infringement notice offences of strict (and absolute) liability offence with the (as well as contraventions of civil implication that in theory penalty provisions). an infringement notice could be issues for an offence that is not one of strict liability.

12. Reference to prescribed 6 Subsection 65M(3) states that in an infringement notice for a civil The use of the word Consideration could be given to penalty penalty provision the penalty should not exceed an amount equal “prescribed” has caused replacing the word “prescribed” with to one-fifth of the maximum penalty prescribed for contravening the uncertainty as to whether “that a court could impose” or something provision. the amount needs to be similar. prescribed in the Regulations.

13. Annual Statements 6 Annual Statements Information is also Consideration could be given to collected by the Bureau repealing this provision to prevent of Resource and Energy industry having to supply the same data Economics twice.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 145. 14. Aggregate of Data 6 Section 67A places restrictions on the disclosure of information There is confusion about Consideration could be given to obtained under the Act. whether section 67A inserting a note saying that this does not prevents the publication prevent the publication of aggregated of aggregated material data. that has been de- Consideration cold also be given to personalised. amending section 67A to allow There is uncertainty as to disclosure of fuel quality testing results whether information to government agencies that administer obtained under the Act environmental protection laws – subject can be disclosed to to that information not being passed on government agencies. to a third party.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 146. Appendix 4: Amendments to draft report requested by stakeholders

A draft report for the Review of the Fuel Quality Standards Act 2000 was released for stakeholder and public consultation in February 2016. A list of publicly available submissions can be found at the review website at http://www.marsdenjacob.com.au/review-of-fuel-quality-standards-act-2000/. As a consequence of submissions on the draft report numerous revisions have been made to text in the final report. As well, a number of submissions proposed changes or additions to recommendations or to potential Act amendments discussed in the draft report. The following table provides an overview of changes affecting report recommendations or Act amendments requested by stakeholders and review team responses.

Issue raised by stakeholders Response

As noted on p.13 of the report, the Australian Government has Agree. A recommendation to that indicated its intention to disband the Fuel Standards Consultative effect has been added to section Committee (FSCC). A number of stakeholders noted the important Conclusions and role of the FSCC and suggested that an advisory body is still required, either in its current form or in a revised form. recommendations. The WA Department of Environment Regulation has requested that Agree. Subject to conditions that amendments to S67A of the Act include a provision that allows the this information is not passed on Australian Government to disclose fuel quality testing results to to a third party, this would appear government agencies that administer environmental protection to be a sensible arrangement. laws. The Department’s view is noted. The Queensland Department of Transport and Main Roads argues However, a review period of 10 that the proposal to increase the review period, under section 72 of years will not affect the capacity of the Act, from five years to ten years (see Box 6, item ii) is too long the Australian Government to given the stated desire to achieve harmonisation with international make determinations under the standards. Act. The view of Mobil is noted. Mobil Oil Australia Pty Ltd questions the proposed Act amendment Consideration should be given to relating to Absolute liability (see Appendix 3, amendment 2), arguing the concern it raises when framing that holding service station owners liable when fuel is found to be any amendments to paragraphs non-compliant is harsh as they do not have the tools to verify the 12(1)(c), 12(1()(e), 12A(1)(d) and composition of the fuel and are relying on the system of others. 12A(1)(e) of the Act. Mobil Oil Australia Pty Ltd has questioned the need for amendments to the Act to improve the coordination of fuel quality The dissenting view of Mobil is determinations and ADRs (see Box 6, item vi), arguing that there has noted. been no failure in the process in the past.

The Department of the Environment Review of the Fuel Quality Standards Act 2000 147.