It’s the most costly anti-climate policy in the Australian government budget, working against efforts to cut emissions. This financial year, taxpayers will hand over nearly $10.8bn to make it cheaper for miners, farmers and some other industries to use diesel and petrol.
How much? Nearly $30m a day, every day of the year. Or $20,500 a minute, around the clock.
It’s more than the government spends on the air force. It’s more than twice as much as it spends on foreign aid. It’s many times over what it spends on First Nations’ health.
The policy is known as the fuel tax credits scheme. It has received occasional attention in the past, notably in an annual report by the progressive Australia Institute. But there is now a growing chorus of people saying it is a clear fossil fuel subsidy, makes little sense and should be wound back, if not outright abolished, in this term of parliament.
The scheme works like this: most Australians pay an indexed excise, currently 51.6 cents, on every litre of petrol or diesel they buy. Some businesses – those that use the fuel to run vehicles on private roads, or that drive heavy vehicles on public roads, or use diesel for machinery – get that tax refunded.
Supporters of the scheme argue fuel excise exists to fund roads, and those who get the credit are mostly burning the petrol and diesel they buy away from public roads. Why, they ask, should they be paying tax for a service they are not using?
But there are holes in this logic. In reality, fuel excise is mostly not pledged for road building or maintenance. Only about 5% of the revenue is explicitly designated in legislation as road funding. The rest just goes into the budget pot as consolidated revenue. It has been this way for decades.
Once the link between fuel excise and roads is severed, the case for companies getting carved out from the tax quickly becomes less convincing. Australians don’t generally get tax rebates if they are not using the schools, hospitals and childcare centres that receive public money. Why should it be different for multinationals when it comes to road use?
Then there is the climate impact. The Albanese government has committed the country to cutting emissions by at least 62% by 2035 compared with 2005 levels, and in reaching net zero by 2050. Meeting both goals will require significant new national policies and increased commitment across the country. Scientists argue Australia should and could be moving even faster.
There are big decisions ahead about how best to get there, should the government be serious about meeting its targets. A softly-softly approach that bows to corporate lobbying or fears a reprise of resources industry campaigns against tax changes in the Rudd-Gillard years, won’t do it. Stripping away policies that actively encourage pollution should not just be a first step, but should have been dealt with some time ago.
The fuel excise may not have been designed as a carbon price, but it is in practice. It makes it more expensive to use dirty fuels and encourages emissions cuts through either a shift to cleaner cars or by driving less.
Thanks to fuel tax credits, big companies are allowed to pay significantly less to burn dirty fuels than households. The credits strip away what could be an incentive to invest in vehicles and equipment that cut emissions.
They also undermine the safeguard mechanism, a policy that Labor revamped to require major industrial polluters to cut pollution year-on-year or buy carbon offsets.
Criticisms of the scheme are getting sharper. The chair of the government’s Climate Change Authority, former New South Wales Liberal treasurer Matt Kean, was blunt at an Australian Financial Review summit in October, describing it as “insane” that miners were receiving a diesel rebate when the money could go to helping consumers shift away from fossil fuels to renewable energy and electric vehicles.
The OECD has made a similar case. It listed the policy as government support for fossil fuels and called on the Australian government to “reduce or eliminate” exemptions for off-road vehicles and on-road heavy vehicles.
This push now has the backing of a list of organisations, including some with strong Labor links. They include the ACTU and the party’s conservation arm, the Labor Environmental Action Network (known as “Lean”). The Australian Academy of Technological Sciences and Engineering, and Andrew Forrest’s mining company Fortescue – a major beneficiary of the scheme – are also on board.
The Greens and the Australia Institute have argued the credits should be scrapped, though it is generally acknowledged a compromise may be necessary. There are a couple of ideas about what this could look like that overwhelmingly target the credits paid back to large miners that are the main beneficiaries of the scheme, such as BHP, Rio Tinto and Fortescue. Coal companies alone receive more than $1bn a year in fuel tax rebates.
The ACTU has called for a cap so that no company can receive more than $20m in rebates in a year, arguing it would generate at least $14bn in revenue over the next three years without affecting smaller companies. Forrest, Lean and the thinktank Climate Energy Finance back a higher cap of $50m. Credits beyond that amount could be claimed only if the cash went into steps to cut emissions, such as electric trucks and renewable energy infrastructure. Recouped revenue could be spent helping small-scale miners decarbonise.
Climate Energy Finance says this would turn the fossil fuel subsidy into a cleantech investment incentive.
Mining industry groups are predictably opposed to this, and have promised another forceful campaign against Labor if it proposes to unwind the tax break. Perhaps equally predictably, the government has suggested it has no intention of rocking that boat. The federal resources minister, Madeleine King, told Sky News a change was not being considered.
But the numbers facing the treasurer, Jim Chalmers, and the climate change minister, Chris Bowen, don’t lie.
Climate Energy Finance calculated that the top 15 diesel users burned nearly 6bn litres and emitted 16.2m tonnes of carbon dioxide in 2023-24. While doing this they earned nearly $2.9bn in credits.
The fuel tax credit scheme is one of the 20 biggest expenses in the budget, and the cost to taxpayers is increasing rapidly. It leapt 6% this year, and is forecast to have expanded by another 19.9% by mid-2029.
That’s not sustainable, whichever way you cut it.
• Adam Morton is Guardian Australia’s climate and environment editor and writes the Clear Air newsletter
