The Fuel Tax Credits Scheme: Time to Scrap Australia’s Most Expensive Anti-Climate Policy
Australia’s Fuel Tax Credits Scheme is one of the largest line items in the Federal Budget. It is also one of the most contentious.
According to the April 2024 briefing in the Australian Institute, the scheme is expected to cost $9.6bn in 2023-24, making it the 18th largest expense in the budget (1). More recent reporting in The Guardian puts the figure closer to $10.8bn this financial year, or nearly $30m a day. (2)
Whatever figure one prefers, the scale is not disputed.
The question is whether this policy remains fit for purpose in a country that has legislated net zero by 2050 and a 62 to 70 percent emissions reduction target by 2035.
What Is the Fuel Tax Credits Scheme?
Australia charges a fuel excise on petrol and diesel. As outlined in the Australia Institute briefing, this tax is around 47 cents per litre and raises roughly $20bn per year.
Under the Fuel Tax Credits Scheme, eligible businesses can claim a rebate on the fuel excise paid. This primarily applies to diesel used off public roads, such as in mining operations, heavy vehicles and agricultural machinery. Heavy vehicles using public roads also receive partial credits, net of a road user charge 260225 Fuel tax subsidy.
The overwhelming beneficiaries are in mining. The Australia Institute briefing shows iron ore and coal mining each receiving over $1bn per year in benefits. Reporting in the Australian Financial Review notes that major miners have banked almost $60bn in diesel rebates in less than 20 years. (3)
The government and industry groups resist the term “subsidy”, arguing that the scheme simply removes an input tax and that fuel excise exists to fund roads. However, as the briefing by the Australia Institute correctly explains, 95 percent of fuel excise revenue goes into consolidated revenue, not into a dedicated road fund.
International bodies are far less equivocal. The OECD, IEA, IISD and others explicitly classify the Fuel Tax Credits Scheme as a fossil fuel subsidy under World Trade Organisation definitions that include foregone government revenue.
The terminology debate continues domestically. The fiscal impact does not.
Why Is It Bad for the Environment?
At its core, the scheme lowers the effective price of diesel for large industrial users.
The Guardian describes it as the government’s “most costly anti-climate policy”, arguing it works directly against emissions reduction efforts. By refunding excise, it weakens price signals that would otherwise encourage fuel efficiency, electrification or operational changes.
In effect, households pay full fuel excise while some of the largest corporate diesel users do not. As Adam Morton notes, this strips away what could function as a de facto carbon price signal.
The Australia Institute briefing also highlights that the scheme may delay uptake of lower-emissions technologies in mining. Andrew Forrest has argued that phasing out access between 2025 and 2030 would accelerate deployment of alternatives to diesel.
The Climate Change Authority chair, Matt Kean, is quoted in the AFR and described the ongoing diesel rebate as “insane”, arguing funds would be better directed to electrification and consumer transition support.
When Australia has committed to deep emissions cuts this decade, maintaining a policy that makes it cheaper to burn fossil fuels appears contradictory.
The Fiscal Opportunity
The fiscal dimension is equally significant.
At roughly $10bn per year, the scheme costs more than Australia spends on foreign aid and more than several major defence programs. The Australia Institute briefing compares the scheme’s cost to Pacific climate assistance, noting that fuel tax credits exceed aid to multiple Pacific nations combined.
These are not marginal dollars. They are transformative sums.
Redirected strategically, even a portion of this revenue could fund:
• Electrification of heavy mining equipment and haul trucks
• Renewable energy infrastructure in resource regions
• Grid upgrades and storage
• Industrial decarbonisation funds for hard-to-abate sectors
• Resilience and adaptation infrastructure
• Household electrification and energy efficiency programs
Some proposals put forward do not require full abolition of the policy. The Guardian reports that the ACTU has suggested a cap of $20m per company per year, while other groups support a $50m cap with excess rebates contingent on emissions reduction investment.
It is also reported that, Climate Energy Finance has argued that such reform could convert the subsidy into a clean technology investment incentive.
The policy choice is not binary between supporting industry and supporting climate. It is about aligning support with transition.
Why Reform Makes Investment Sense
From an investor’s perspective, the Fuel Tax Credits Scheme distorts capital allocation.
First, it entrenches diesel dependency in sectors that will ultimately need to electrify. That increases long-term transition risk.
Second, it crowds out fiscal space that could be used to accelerate grid build-out, storage deployment and industrial transformation. These are areas where private capital is seeking clarity and co-investment.
Third, as the Australia Institute correctly state, international bodies including the OECD have called for reduction or elimination of fuel tax exemptions. In a world of tightening climate disclosure standards and carbon border adjustments, persistent fossil fuel subsidies undermine Australia’s credibility.
Policy alignment matters for capital flows.
Scrapping or reforming the scheme would send a clear signal that Australia is serious about decarbonisation. It would reduce long-term fiscal leakage and strengthen incentives for innovation in mining and heavy industry.
Yes, industry groups will resist. They have historically done so effectively. But the energy transition will require difficult choices.
The longer the scheme remains untouched, the larger the fiscal and emissions opportunity cost becomes.
The Bottom Line
The Fuel Tax Credits Scheme refunds billions in fuel excise to major diesel users each year. International bodies classify it as a fossil fuel subsidy. Its cost exceeds $10bn annually. Its beneficiaries are concentrated in high-emitting sectors.
At a time when Australia has committed to net zero and deeper 2035 targets, maintaining such a policy is inconsistent with stated ambition.
Scrapping or substantially reforming the scheme would free billions for electrification, clean infrastructure and resilience. It would strengthen price signals, align fiscal settings with climate policy and reduce long-term transition risk.
From both an environmental and investment perspective, it is time to move on.
References
1. Campbell R, Morison E, Ryan M, Saunders M, Le MN, Adhikari A, Scicluna K, Simpson E, Anderson L, Australia’s Fuel Tax Credits and the debate over fossil fuel subsidies. The Australia Institute, 13 May 2024. https://australiainstitute.org.au/report/fossil-fuel-subsidies-in-australia-2024/
2. Morton A, Australia’s most costly anti-climate policy hits taxpayers for $30m a day as calls mount to wind back fuel tax credits. The Guardian, 25 February 2026. https://www.theguardian.com/environment/commentisfree/2026/feb/25/australia-fuel-tax-credit-scheme-government-anti-climate-policy-under-pressure
3. Cropp R, Labor’s climate chief takes aim at ‘insane’ diesel subsidy. Australian Financial Review, 22 October 2025. https://www.afr.com/policy/energy-and-climate/labor-s-climate-chief-takes-aim-at-insane-diesel-subsidy-20251022-p5n4e3
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