Nearly 200 countries have made an unprecedented and historic pledge at the COP26 climate summit to speed up the end of fossil fuel subsidies and reduce the use of coal. Until COP26, coal and fossil fuel subsidies have never been explicitly mentioned in 26 years of treaties and decisions at UN climate talks, despite fossil fuels being one of the key drivers of global warming and $5.9 trillion of subsidies being given annually to coal, oil and gas.

This has been further raised as an issue in Australia by Fortescue founder Andrew Forrest who has privately lobbied government to phase out the multibillion-dollar diesel fuel subsidy and use the funds to support green hydrogen.

Trying to remain politically neutral on Australia's likely response to COP26, it would seem that the immediate future of fuel tax credits is not in jeopardy, but that pressure will be on in the medium term to phase out the fuel tax credits.

The history of Fuel Tax Credits

Fuel excise was introduced in Australia in the 1920s for the specific purpose of road funding. It was extended to diesel in the late 1950s to help cover the cost of road building and maintenance.

The fuel tax credits for eligible businesses have been around in various forms since the beginning.

The excise on fuel is a tax on business inputs as well as on final use by households. Businesses using fuel as inputs into production processes pay excise of 43.3 cents per litre at the time of writing. According to the Australian Taxation Office, in 2021, the total excise collected on all petroleum products was $19.2 billion, but around $7.6 billion of this was rebated. The main recipient industries were mining (about 40%), transport, postal and warehousing (about 20%), and agriculture, forestry and fishing (about 13%).

But despite the growing population, vehicle fleet and total vehicle kilometres driven, revenue from fuel excise continues to decline in real terms as newer, safer vehicles with reduced fuel consumption hit the roads. It has fallen 68% as a share of federal government revenue over 20 years and now contributes only about 2%.

This raises a bigger question about how, with the introduction of electric vehicles, the government will (eventually) replace the funds it receives from the Fuel Tax excise.

Are Fuel Tax Credits a subsidy or tax relief?

Under the fuel tax credits scheme, eligible businesses can claim a rebate, in full or in part, of the excise that they have paid.

It is the view of Treasury that the fuel tax credit scheme is designed to relieve industries of the excise that they pay on the petrol and diesel they use. As they note "... fuel tax credits are not a subsidy for fuel use, but a mechanism to reduce or remove the incidence of excise or duty levied on the fuel used by businesses off-road or in heavy on-road vehicles".

The Productivity Commission prepares a Trade and assistance review annually. The reviews identify and, where possible, quantify government assistance to industry. The reviews do not include the rebates paid under the fuel tax credits scheme as a form of assistance.

In summary, the view of Treasury is that the rebate for excise paid on fuel that eligible businesses use as inputs is not a subsidy to fuel use. Rather, the rebate is designed to relieve businesses of input taxes that can reduce output and living standards. The Productivity Commission does not consider the rebate to be a form of assistance.

The Australian Conservation Foundation, on the other hand and unsurprisingly, says:

"The time is right to remove costly government handouts that prop up a fossil fuel-based economy and invest this money in helping small and medium sized companies access technology that doesn't require polluting diesel fuel to drive and power their businesses."

So, whether you consider the fuel tax credits a subsidy for fossil fuels or a rebate to increase living standards may ultimately be a question of semantics and your point of view. Maybe the truth is somewhere in the middle.

What is the effect of removing Fuel Tax Credits?

While miners are the biggest beneficiaries of the fuel tax credits, many other smaller businesses across a range of industries rely on the credit. The does not make the credit 'right', but it does mean that any move to phase it out must be done appropriately.

I was speaking to a client in the fishing industry who, while accepting the need to move away from fossil fuels (and they have been actively looking at this for several years), lamented the options available for them, especially for fishing fleets away from port for prolonged periods. The technology just does not currently exist.

What is the future for Fuel Tax Credits after COP 26?

COP26 appears to have been a turning point in the international acceptance of the need to phase out the use of fossil fuels. The Australian Government has been equivocal in its comments after the conference, but it seems to me that the writing is on the wall.

Sooner or later, we will have to prepare ourselves for the phasing out of the fuel tax credits.

This article is issued as general commentary - please contact us about your specific circumstances.