A carbon tax by stealth
a new mrc report finds that removing fuel tax credits would amount to a carbon tax by stealth of around $198 a tonne on diesel.
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. It rests on two longstanding principles. The first is a basic rule of good tax design: tax should fall on what people consume, not on the inputs businesses use to produce it. Treasury has said that “general revenue raising taxes should not apply to business inputs.”The second is fairness. When the excise was extended to diesel in 1957, it applied only to vehicles on public roads, and diesel used on farms, boats and mine sites was exempt.
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.
Regional Australia runs on diesel. Its businesses have already absorbed large cost increases. Wages have risen around 15 per cent since June 2022, and electricity prices rose 13.2 per cent in the year to August 2026. A higher diesel bill would be passed on to consumers, add to the cost of living and make it harder for the Reserve Bank to bring inflation down.
Before the 2022 election, Anthony Albanese promised: “There will be no carbon tax, ever.” His Resources Minister, Madeleine King, has said: “We’re not proposing any changes to the diesel fuel rebate.” The Government should keep that promise.
This paper finds:
1. Removing the credit would amount to a carbon tax of $198 a tonne on diesel. That amounts to about US$138 per tonne, approaching the explicit carbon tax rates of Switzerland, Sweden and Norway. It is five times the price Australia’s own carbon market puts on a tonne of emissions, and more than eight times the $23 a tonne carbon price the Gillard Government applied in 2012.
2. The credit is a refund of tax already paid, not a handout. Every dollar claimed was first paid as fuel excise. In Treasury’s words, “there is no subsidy, just as a tax refund for income tax paid does not constitute a subsidy.”
3. Most claimants are small businesses. About 182,000 businesses claim the credit. Four in five claim less than $10,000 a year.
4. Farmers would be hit hardest. The Parliamentary Budget Office found the credit is worth the equivalent of 75 per cent of the income tax paid by agriculture and 63 per cent of that paid by transport.
5. It would cut almost no emissions. There is no electric tractor on sale in Australia that can do the work of a large diesel one, no electric commercial fishing fleet, and battery haul trucks are still in trial. The Productivity Commission found about 90 per cent of mining’s emissions are already covered by the Safeguard Mechanism.
6. The timing could hardly be worse. Tax has reached 24.1 per cent of GDP, a tenth of a point below the record. The Reserve Bank has raised rates four times this year, and diesel prices rose more than 80 per cent in six weeks after the war with Iran began.
Recommendations
1. Rule it out. The Prime Minister and Treasurer should commit in the 2026-27 Mid-Year Economic and Fiscal Outlook to keeping the off-road fuel tax credit at the full excise rate for the remainder of this term and the next. The Opposition should make the same commitment. This would give businesses confidence to make additional capital investments in Australia.
2. No new carbon costs on industry. Heavy industry already carries a carbon cost through the Safeguard Mechanism, on top of the highest tax burden in 20 years. The Government should rule out a second carbon price through the fuel tax system and review the burden the Safeguard Mechanism itself places on Australian producers.
3. Fix road charging properly. Any change to credits for heavy vehicles on public roads should wait for a national road user charging scheme that covers all vehicles, including electric ones. Since the High Court struck down Victoria’s electric vehicle charge, that reform has to be led by the Commonwealth through National Cabinet.
