MRC Report: A Carbon Tax by Stealth

Why scrapping fuel tax credits would give australia one of the world’s highest carbon taxes

Published: October 2026

Author: Jarryd Williamson

Australia is losing its competitive edge. Productivity is stagnant, energy costs are rising and the regulatory burden keeps growing. The economy grew just 2.1 per cent in the year to June 2026, and output per hour worked fell.

Tax is also contributing to Australia’s declining competitiveness. Yet there is a push to raise the burden further by scrapping the Fuel Tax Credit Scheme.

Activists, the Greens, the chair of the Climate Change Authority and a growing group inside the governing Labor Party want the credit cut or abolished. They call it a fossil fuel subsidy. It is not, and Treasury has said so for 15 years. Removing it would not save money. It would instead be a new tax on the food, minerals and timber Australia produces.

The credit lets businesses claim back the excise they pay on fuel used off public roads. 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.

This paper finds:

1. Removing the credit would amount to a carbon tax of $198 a tonne on diesel.

2. The credit is a refund of tax already paid, not a handout.

3. Most claimants are small businesses.

4. Farmers would be hit hardest.

5. It would cut almost no emissions.

6. The timing could hardly be worse.