It is time to abolish the expensive Fuel Tax Credit that incentivises fossil fuel use.

by Adam Gottschalk

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The OECD has recently called for the end of Australia Fuel Tax Credits Scheme, which is growing in cost every year.

Since the Intergovernmental Panel on Climate Change (IPCC) released their First Assessment Report in 1990, the Australian Government has subsidised fossil fuel consumption through the Fuel Tax Credits Scheme to the tune of over $200 billion. This year, the OECD called for an end to this long-standing fossil fuel subsidy.

Australia charges a fuel tax (also called a fuel excise) of around $0.49 per litre for common fuels like diesel and petrol. The Fuel Tax Credits Scheme (FTCS) offers a refund of this tax to certain fuel users.

The FTCS meets the World Trade Organisation’s criteria for a subsidy, as it involves government revenue that would otherwise be due, but is foregone or not collected.

The WTO is not alone in viewing the fuels tax credits as a subsidy. As our recent report highlighted, the OECD, the International Energy Agency (IEA), the International Institute for Sustainable Development (IISD), Overseas Development International (ODI) and Oil Change International all recognise the FTCS as a fossil fuel subsidy.

But more importantly, not only is it recognised as a subsidy, it is also recognised as a subsidy that should end.

The OECD recently called for the end to the FTCS, because it views the credits as “expensive” and because they “limit incentives to reduce fuel use.”

The cost of the FTCS has been extensive. The Commonwealth Budget papers and Australian Taxation Office data shows that, adjusted for inflation, the FTCS has cost a total of $212.8 billion from 1990-91 to 2024-25.

The FTCS is the largest fossil fuel subsidy in Australia. In 2024-25 it is expected to cost the Australian Government $10.2 billion. Even worse the Budget Papers note that the expected increase in the fuel tax credit over the next 4 years “largely reflects an expected increase in the use of fuels that are eligible for the Fuel Tax Credit Scheme”.

In total, Australian state and federal governments provided $14.5 billion worth of subsidies to fossil fuel industries in 2023-24, a 31% increase on 2022-23.

The overwhelming beneficiary of the FTCS is Australia’s mining industry. The coal mining industry received refunds of over $1 billion through the FTCS in 2020-21. This means the FTCS not only subsidises consumption of fossil fuels but also provides subsidies to fossil-fuel producers.

Fossil-fuel subsidies undermine efforts to prevent the worst impacts of climate change. Abolishing the FTCS would free up that money to be spent on domestic or international efforts to mitigate or adapt to climate change with no impact on the budget bottom line.

The FTCS has gone through several iterations and name-changes over the past three decades. Throughout, however, it has constituted a significant, and steadily increasing cost to the Federal Budget. Other than the dip beginning in 2019-20 due to the COVID-19 pandemic and the Australian Government’s 2022 decision to halve the fuel excise in response to the war in Ukraine, the cost of the fuel tax credit has consistently increased. Since 2022, the pandemic recovery and the reinstatement of the fuel excise have corresponded with a return to the FTCS’s upward trend.

By 2027-28 the budget estimates that the cost of the FTCS will reach $12,115m, some 23% higher than the $9,875m in 2023-24.

From both a fiscal and environmental point of view the FTCS is a damaging policy. The government should follow the OECD’s advice and end this expensive subsidy that provides an incentive to businesses to keep using more fossil fuels.

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