Ditching fuel tax credit ‘a $198 carbon tax’, says Menzies Research Centre

The fuel tax credit, which lets businesses claim back the excise they pay on fuel used off public roads for production of goods, should be dumped or wound back, according to billionaire Andrew Forrest, alongside Labor’s Environmental Action Network and 322 Labor branches across Australia.

The independent Parliamentary Budget Office estimates that cutting the credit rate by just a quarter would take $7.7bn from these businesses over the forward estimates to 2029-30, and $30.6bn by 2036-37. Scrapping it entirely would save the government $34.2bn over four years.

The nation’s peak mining lobby already ramped up efforts to protect the $9.1bn fuel tax credits scheme, before renewed fighting in the Iran War shot prices up.

In a new report, “A Carbon Tax by Stealth: Why scrapping fuel tax credits would give Australia one of the world’s highest carbon taxes”, the Menzies Research Centre’s Jarryd Williamson said removing the credit would “not stop anyone using diesel” and would “cut almost no emissions”.

“It would simply tax a fuel these industries cannot do without, at a rate equal to a carbon tax of $198 a tonne. That is a carbon tax by stealth, and one of the highest in the world,” he writes.

Mr Williamson said the Iran War, which led to a cut in fuel excise, only served as a further reminder of the complications a higher diesel price would have on the economy.

“In the same budget in which ministers weighed a permanent tax on off-road fuel, it cut excise for every motorist for three months and committed $14.8bn to securing the nation’s diesel supply, because the war with Iran had shown what happens when it runs short,” he said.

“On the road, fuel excise works as a broad charge for using the road network. For heavy trucks, the government makes the link explicit: they pay 32.4c of every litre’s excise as a road-user charge and claim back the rest. Off the road, that link disappears. Take the credit away, and a farmer, fisher or miner would pay 53.7c a litre on diesel that never touches a road. With no road to pay for, the only thing left for the tax to price is the carbon in the fuel. That is what makes it a carbon tax.”

The Menzies report gives the example of Wimmera grain grower David Jochinke, former vice-president of the National Farmers’ Federation, who uses 80,000 litres of diesel each year to plant and harvest crops. Without the credit, a farm like his would pay an extra $42,960 a year in tax against a forecast profit of $133,000.

Grattan Institute’s Energy and Climate Change program director Alison Reeve said the credit should be cut.

“Even if climate change wasn’t a problem, the FTC would still be an unjustified tax concession. It just gives money away for little public benefit,” Ms Reeve said.

She notes that the FTC is currently a “carbon subsidy” of about $78 a tonne for road freight and $198 a tonne for miners.

“This contrasts the cost of buying an offset which is around $37 per tonne, which some of the big miners have to do for a portion of their emissions. The result is that government policy pays companies more to keep polluting than it charges them to stop,” she said.

The Menzies report says a tax changes behaviour only when there is something to change to.

“There is no electric tractor on sale that can do the work of a diesel one, no electric commercial fishing fleet, and the first battery haul trucks are still in trial. The technology cannot yet scale to an entire fleet,” it says.

The Productivity Commission did not recommend removing the off-road credit but has examined fuel tax credits in its 2025 report on the net zero transition.

It recommended phasing out the credit for heavy vehicles on public roads, but was explicit that “access should be retained for Safeguard Mechanism facilities.”

Extracted in full from:  https://www.theaustralian.com.au/nation/ditching-fuel-tax-credit-a-198-carbon-tax-menzies-research-centre/news-story/8aee5c581a094ad32f0c812fb57d1315