Overhaul fuel tax credits to put a price on burning diesel

Fuel tax is currently imposed at a rate of 48¢ a litre – but not all fuel use attracts the charge. No fuel tax is payable for vehicles that only drive off-road, such as trucks on mine-sites, or for other off-road uses such as in heavy machinery, and for heating and cooling. And a reduced rate of fuel tax is payable for on-road vehicles heavier than 4.5 tonnes, such as semi-trailers, B-doubles, and passenger buses.

The mechanism for refunding the fuel tax paid at the bowser is fuel tax credits. Companies claim credits at either a full or partial rate, currently 21¢ per litre.

Fuel tax credits were introduced 40 years ago, but the more favourable deal for bigger on-road vehicles has only been in place since 1999. There is no business reason why larger vehicles should pay less than smaller vehicles – in fact, quite the reverse, since heavy vehicles do far more damage to road surfaces.

The usual tax-policy orthodoxy is that governments should not tax business inputs, to avoid skewing business decisions about what goods and services to produce and with what inputs. Important as these arguments are, they don’t hold when the input itself causes harm. And that’s the situation with burning diesel.

Burning diesel contributes about 17 per cent of Australia’s total carbon emissions. Using a conservative international benchmark price of $75 per tonne of carbon emitted, this harm can be expressed in monetary terms as 20¢ per litre of diesel. While carbon prices are uncertain at present, it’s clear that the current price of burning diesel – zero – is too low.

Fuel tax credits are overdue for an overhaul. On-road heavy vehicles should be paying the same rate as utes, vans, cars, and small trucks used by Australian businesses. Off-road vehicles and machinery should still be eligible for fuel tax credits, but at a lower rate than at present, to take account of the carbon emissions and other damage they cause to the community as a whole.

The cost impacts of this reform would be very modest. Grattan Institute calculates that prices at the supermarket would increase by an average of about 0.35 of 1 per cent – or 35¢ on a $100 grocery shop. For a low-income household, the average increase in all costs would be 0.09 of 1 per cent, equivalent to $42 per year. High-income households would typically face a lower percentage increase in the cost of living, but a higher dollar increase of about $100 per year.

The increase to business costs would be below 0.5 of 1 per cent for most types of businesses. At the moment, fuel tax credits support Australian exporters, particularly miners and farmers. But this advantage has a use-by date, because Europe is introducing a levy, known as a Carbon Border Adjustment Mechanism, on specific imported products, and the US, UK, and Canada are considering following suit. The European levy is designed to put local producers, who face a higher carbon price, on a fair footing with producers elsewhere sending goods into that market, who face a lower or no carbon price. It’s also to encourage cleaner industrial production in non-European countries.

And it’s primarily large mining and agriculture businesses that would notice if fuel tax credits were wound back. Almost all businesses in these industries with turnover of $100 million or more per year claim the credits, whereas only a tiny minority of the numerous small firms, with turnover up to $200,000, do. The same is true of the other main industries with high claims: transport, construction, and manufacturing.

Saving $4 billion a year does not come without some ripples on the surface of the economy, but for this reform, they would be very small. This is one of the least-hard ways the government could knock a chunk off the structural deficit at the same time as supporting the goal of net-zero emissions by 2050.