If you were asked to name the big ticket items in the federal government’s budget you might think of Medicare services ($21bn) or the aged pension ($45bn), or perhaps the child care rebate ($7bn) or the army and air force ($12bn). 

What may not spring to mind is the $6billion in subsidies currently paid to users of fuel through the fuel tax credits scheme every year. In fact, the fuel tax credit scheme is the government’s 18th biggest single spending program.

While most Australians pay tax on every litre of fuel consumed, as it currently operates, the fuel tax credits scheme enables certain privileged industries to have this tax refunded.

Some of Australia’s biggest resource and mining companies, including BHP Billiton and Rio Tinto, currently receive massive fuel subsidies for their operations. In fact, the mining industry receives almost 40 per cent of the fuel subsidies the federal government hands out. The mining industry receives the largest slice of the fuel subsidy pie by far.

The Australian Conservation Foundation is advocating for reform of the fuel tax credits scheme because subsidising fuel on an ongoing basis has immediate consequences for the environment and prevents Australian industry innovating and transitioning our economy to cleaner energy sources.

We are not alone in this call for change, the Truck Industry Council is calling for reform of the scheme to provide incentives for a cleaner Australian truck fleet.

We are arguing the scheme is in need of reform - not that it be abolished. Clearly, the agricultural sector and smaller businesses rely on the subsidy and removing it would have negative consequences on them.

This reform could cap the amount of subsidy available to any single beneficiary. We propose that a $20,000 cap would ensure the vast majority of agricultural claimants would continue to claim as they do now – but that multi-national companies would not be able to use the scheme to simply add to their profit margins.

Reform of the fuel subsidies scheme will actually improve the position of farmers and farming communities. The billions that could be saved under this proposal could be redirected toward much-needed rural infrastructure or research and development that improves energy use on farms.

Unfortunately much of the budget and tax reform debate is driven by vested interests and rent seekers who have much to gain if the Government leaves in places benefits they currently enjoy. We’d like the farming community to input into this debate on how best to reform this dinosaur subsidy in a way that protects their constituents.

We’d like the farming community to input into this debate on how best to reform this dinosaur subsidy in a way that protects their constituents.

As a country we should be able to have a discussion about what the government prioritises through its budget decisions. That includes the $6 billion fuel subsidy scheme. We believe our proposal balances the need to provide the right incentives for innovation and to reduce pollution, while ensuring the scheme remains in place for agricultural and small businesses that are more reliant on it. 

Australia has the potential to be a leader in clean energy innovation in urban and rural communities. Reaching this potential involves both investing in research and development and ensuring incentives in the system are appropriately directed.

We need to remove costly government handouts that prop up a fossil fuel based economy at a time when Australia and the world is moving toward a cleaner, more sustainable future.

This article first appeared in the Newcastle Herald

Matt Rose

Economist at Australian Conservation Foundation.