A proposal to remove Australia’s fuel tax credit, supported by activists, the Greens, and sections of the Labor Party, has drawn sharp criticism from industry groups and analysts who describe it as a covert carbon tax with potentially severe economic consequences.
The fuel tax credit allows businesses to reclaim excise paid on fuel used off public roads for production activities, such as mining, agriculture, and fishing. Billionaire Andrew Forrest, Labor’s Environmental Action Network, and over 300 Labor branches across Australia have advocated for the credit’s reduction or elimination as a means to address carbon emissions.
An analysis from the Menzies Research Centre warns that abolishing the credit would effectively impose a tax on diesel equivalent to $198 per tonne of carbon emissions, among the highest globally. The group’s report, titled “A Carbon Tax by Stealth,” argues that such a move would increase operational costs for sectors heavily dependent on diesel without significantly reducing emissions. Jarryd Williamson, a lead author of the report, emphasized that industries like mining and farming cannot simply switch away from diesel, and that higher fuel costs would be passed on with minimal environmental benefit.
The independent Parliamentary Budget Office estimated that reducing the credit by 25% could cost businesses $7.7 billion through 2029-30 and $30.6 billion by 2036-37. Complete removal would save the government approximately $34.2 billion over four years.
Opponents of the credit contend that it represents an unjustified subsidy to polluting industries. Alison Reeves, director of the Energy and Climate Change program at the Grattan Institute, described the credit as effectively a subsidy of $78 per tonne for road freight and $198 per tonne for miners—significantly exceeding the current price of carbon offsets, which stands at around $37 per tonne. Reeves argued that current policy inadvertently rewards continued emissions rather than encouraging reductions.
The Menzies report cited the example of Wimmera grain grower David Jochimke, a former vice president of the National Farmers’ Federation, who uses 80,000 litres of diesel annually for crop production. Without the credit, his farm would face an additional $42,960 in costs, equating to nearly a third of a forecasted profit of $133,000.
While the Productivity Commission has reviewed fuel tax credits in the context of Australia’s net zero transition, it has not recommended removing off-road credits altogether. Its 2025 report suggested phasing out credits for heavy vehicles on public roads but emphasized retaining access for sectors covered by the Safeguard Mechanism.
The debate over the fuel tax credit comes amid broader fiscal and economic discussions. Labor figures, including Treasurer Jim Chalmers and Finance Minister Katy Gallagher, have underscored the government’s efforts to manage spending and achieve savings, while maintaining cost-of-living supports such as increased pensions and JobSeeker payments. Some voices within Labor caution against cuts to the care economy, arguing such measures would disproportionately harm vulnerable populations.
Senator David Shoebridge highlighted corporate profits and tax concessions as central inflation drivers, urging a focus on taxing large corporations rather than burdening consumers. Similarly, public sector union representatives warn against further interest rate hikes by the Reserve Bank of Australia, which they describe as inflicting hardship on households without addressing underlying inflation causes.
As the government prepares for its mid-year budget update, these competing priorities reflect the complex challenges of balancing economic competitiveness, environmental goals, and social welfare.