Greening the Fuel Tax Credit Scheme for a future-ready Australia

Eliza Chaney, University of Melbourne Faculty of Business and Economics COP29 Global Voices Fellow

Executive Summary

Successfully decarbonising Australia’s mining industry is central to our transition to green energy whilst ensuring sustainable national economic growth and prosperity. Mining is a major economic driver contributing 14% of Gross Domestic Product (GDP), however it is also one of the nation’s largest carbon emitters, generating around 80% of Australia’s total scope 1 carbon emissions, primarily due to its reliance on diesel-powered equipment. 

The Fuel Tax Credit Scheme (FTCS) provides tax credits to businesses for the fuel excise and currently disproportionately benefits the mining sector, disincentivising electrification and adoption of clean energy in production. An estimated $4.8 billion of the total $10.2 billion claimed in 2024-25 went to the mining industry with $1.4 billion to the coal industry alone, a significant subsidisation of fossil fuel use that contradicts Australia’s net-zero commitments. Without reform the industry’s continued reliance on fossil fuels will obstruct Australia’s climate goals and the global transition to renewable energy. 

This proposal posits that the Australian Government implements a tiered reform of the FTCS that introduces a Transition Tax Incentive. Under this model, the Government would preserve full FTCS eligibility for credits up to $50 million per consolidated group per financial year and apply a dynamic carbon price-based reduction to any credits claimed above the $50 million threshold, with a gradual expansion to capture more of the industry over the coming decade. The reduction would be dynamically calculated using the Australian Carbon Credit Unit (ACCU) spot price per tonne CO2-e and the carbon intensity of fuel (currently 2.31kg CO2-e/litre for petrol). 

Under this policy, any amount foregone by the company by the FTCS reduction beyond the cap that the company would have otherwise received can be claimed on electrification and decarbonisation expenditure, ensuring some funds previously used to support fuel use are rediverted to support the establishment of a cleaner mining sector. The cap would only affect the 10 largest mining companies in Australia and would protect business performance. The reform would be phased in over five years and administered by the Australian Taxation Office and Department of Treasury. 

Implementation challenges include potential industry pushback, employment concerns and political resistance from mining lobby groups. The policy limits industry-wide disruption by targeting only the largest mining entities and reinvesting funds to support their transition. Proper regulatory oversight, consultation with key stakeholders and affected companies, and financial support for affected industries will be critical to mitigating transition risks. Reforming the FTCS presents an opportunity for Australia to decarbonise one of its most polluting but economically important industries, while positioning itself as a leader in sustainable resource extraction.

Problem Identification

The decarbonisation of Australia’s mining industry is essential to Australia’s energy transition and economic growth over the next decade. The Australian Energy Market Operator (AEMO) estimates that Australia will need to invest ~$121 billion in new energy infrastructure by 2050 to meet its decarbonisation goals. There is significant investment required in transmission, generation, and storage required before 2030 to reach the target of 82% renewable electricity (AEMO, 2023). Looking globally, the International Energy Agency (IEA) has estimated that a further $800 billion USD (~$1.2 trillion AUD) of new investment in critical minerals mining is required by 2050 to meet global net zero emissions targets (International Energy Agency, 2023). 

The Australian mining sector is one of the key contributors to the economy, accounting for approximately 14% of total GDP in 2023 (International Trade Administration, 2024). The industry is also one of the largest contributors to carbon dioxide emissions, responsible for around 80% of Australia’s total scope 1 carbon emissions (Climate Analytics, 2024) due to its heavy reliance on fuel-powered vehicles and machinery. Additionally, decarbonising the extraction of critical minerals such as lithium, nickel and cobalt, which are key to renewable energy technologies, will require additional investment to move away from the industry’s current reliance on heavy diesel vehicles and towards electrification, whilst meeting the global and domestic demand for these resources.

A key headwind to this electrification process is the Fuel Tax Credit Scheme (FTCS), which allows companies to claim tax credits on the fuel excise. The FTCS as it currently stands is disproportionately benefitting the mining industry and disincentives the necessary investment and changes within the industry in order to decarbonise. The exemption for large-scale industrial emitters to pay a fuel excise distorts fossil fuel consumption, resulting in the mining industry paying the marginal cost of fuel, rather than the true cost (that is paid by consumers and other businesses). The FTCS resulted in $7.8 billion in credits claimed by mining companies alone in 2022 - one of the largest tax concessions in Australia’s economy (Australian Conservation Foundation, 2022). In 2024-25, approximately $4.8 billion will go to the mining industry (The Australia Institute, 2024).

Context

Originally there was a direct link between fuel excises raised and road/infrastructure funding but this largely ceased in 1992, and the excise now exists as a general revenue-raising tax (Parliamentary Budget Office, 2022). In 2006, the FTCS was first introduced in Australia in the Fuel Tax Act 2006 (Cth) for fuel used in heavy vehicles and in a range of other business activities with eligibility being expanded to include taxable fuels used in additional business activities, machinery, plant and equipment (Australian Taxation Office, 2014).

The two key components of the fuel tax system are 

• the tax collected from producers and importers of fuel - passed on to consumers via higher prices at the pump; and 

• the fuel tax credit system which refunds eligible businesses for all fuel tax paid (currently 50.8c /L as at March 2025) on consumption so as to not tax fuel as a business input (Parliamentary Budget Office, 2022). 

  
  

The Mining Industry

The largest beneficiary of the FTCS is the mining industry, which accounts for 47% of all claims paid under the Scheme in FY2023 (Climate Energy Finance, 2024). In FY 22-23, the FTCS cost Australian taxpayers $7.8 billion, with $3.5 billion in credits claimed by mining companies alone (Australian Conservation Foundation, 2022).

Eligible businesses can make claims for tax credits to be paid back to them by submitting their Business Activity Statements (BAS), with the credit paid back in cash.

For FY24-25, the FTCS is projected to cost the Australian economy $10.2 billion, with $4.8 billion going to the mining industry and $1.4 billion to the coal sector alone. The agriculture, forestry, and fishing industries combined are only expected to receive $1.3 billion in fuel tax credits (The Australia Institute, 2024). 

Studies by the Grattan Institute and the Australian Conservation Foundation indicate that the FTCS has a distortionary impact on corporate incentives, particularly in high-emission sectors. The FTCS acts as an effective subsidy on fossil fuel consumption for mining companies and removes incentives to invest in clean technology, inhibiting Australia’s net zero by 2050 ambitions. The OECD, International Energy Agency, and Institute for Sustainable Development all include the Australian FTCS in their calculations of global fossil fuel subsidies.

Relevant industry stakeholders include the Minerals Council of Australia, which represents over 125 firms in Australia’s resources and fossil fuels sector including the largest beneficiaries of the FTCS and has consistently lobbied against amendments to the scheme.

Other key stakeholders related to this policy problem include the mining companies as beneficiaries of the FTCS, who are naturally reluctant to change the amount that they receive in tax credits. The Australian Government, particularly the Department of Treasury, Department of Finance and the Australian Taxation Office, are responsible for legislation and implementation of this change, and local communities will be impacted by the economic changes brought about by amendment to the FTCS. The mining industry itself employs 314,800 Australians, about 2.2% of the population (Department of Employment and Workplace Relations, 2023). The broader resources sector, which includes mining, oil, and gas extraction, employed over 290,000 people as of 2023, and the Mining Equipment, Technology and Services (METS) also employs around 300,000 individuals (Department of Employment and Workplace Relations, 2023). 

Current Policy Landscape

The Safeguard Mechanism is the primary policy to incentivise the reduction of emissions from Australia’s biggest industrial facilities (DCCEEW, 2024). It legislates limits, known as ‘baselines’ on the greenhouse gas emissions of these facilities, with gradually decreasing limits to achieve Australia’s emission reduction targets of 43% below 2005 levels by 2030 and net zero by 2050 (Department of Climate Change, Energy, the Environment and Water, 2024). 

If an organisation exceeds its baseline, it is penalised for excess emissions by surrendering Australian Carbon Credit Units (ACCUs), each representing 1 tonne CO2-e, available for purchase at a spot price of about $35 (as at July 2025), or the recently introduced Safeguard Mechanism Credits (SMCs) which are expected to trade at similar prices (Clean Energy Regulator, 2025). At a price of $35/t CO2-e, that roughly translates to 9 cents/litre of diesel consumed (370 litres of diesel consumed = 1 tonne CO2-e/$35). With the current fuel tax credit sitting at 50.8 cents/litre, the incentive for fuel use via the credit is approximately five times stronger than that of the Safeguard disincentive. That is to say, for every dollar paid under the safeguard mechanism for fuel use, a business receives $5 in fuel credits.

There have been campaigns from various think tanks and lobby groups such as the Grattan Institute and the Climate Change Authority to reform or repeal the FTCS, but have largely failed to enact change. This is due to the highly political nature of the issue and successful lobbying against reform by the Minerals Council of Australia (MCA), Association of Mining and Exploration Companies and the National Farmers Federation. In 2014, the MCA commissioned research by Deloitte Access Economics arguing against reform to the FTCS, which was submitted to Parliament.

International Case Studies

Around the world, there are many examples of reforms of fuel tax credit systems that have emerged in recent years. Indonesia significantly reduced its subsidies for fossil fuels in its 2015 budget which resulted in savings of $15.6 billion USD that year. This was redirected to social and economic development programs (International Institute for Sustainable Development, 2016) and decreased consumption of gasoline and diesel in the first six months of 2015 by 9% and 6% respectively (Beaton et al., 2017). 

Nigeria also removed fuel subsidies entirely by 2023. Fuel subsidies had been previously estimated to cost the Government 40% of its total revenue base in 2022 (Onyeiwu, 2024). The United Nations estimates that the removal of this subsidy has led to a 30% decrease in daily fuel usage, saving around 42,800 tonnes of CO₂ emissions between 2022-23 (Usigbe, 2023). 

India has gradually reduced government subsidies on petroleum products such as gasoline and diesel by 72%, however this remains nine times higher than renewable energy subsidies (Pandey, 2023). Despite the rollback of subsidies, India’s total fossil fuel consumption has largely trended upward due to strong economic and population growth, with more aggressive action required to curb the increases (International Energy Agency, 2021). 

There are several policy solutions available which could be implemented to effectively incentivise the Australian mining industry to take steps to decarbonise mining operations.

Policy Options

1. Exclude the mining industry from the Fuel Tax Credit Scheme

   
   

Option 1 would exclude mining companies entirely from being eligible for subsidies under the FTCS, whilst continuing eligibility for the agricultural and transport sectors. This option would immediately remove the disincentive and generate $4.8 billion in revenue which could be reinvested directly into the Clean Energy Finance Corporation (CEFC) to fund subsidies and investments for electrification efforts, the development and adoption of cleaner technologies, and decarbonisation infrastructure for the critical minerals mining sector. Although this would rapidly advance Australia’s climate goals, there is likely to be significant industry pushback, particularly from the MCA as such a policy would cause significant industry shocks, threatening employment and company profitability.

2. Modify the Safeguard Mechanism to disincentivise fuel use

   
   

   Option 2 would see reform of the Safeguard Mechanism to increase the prices of ACCUs and SMCs to make fuel use more expensive and thus incentivise decarbonisation. In order to overcome the fuel tax credit disincentive, the price of these credits would have to be changed from being set by the market via supply and demand, to at least $188 or higher, with current prices and measurements, in order to outweigh the current credit received from fuel usage. This is the preferred policy of the Fuel Tax Credit Alliance, as it is likely to not cause large disruptions to companies that don’t go over their baselines and preserves the FTCS, however this policy could have wide scale consequences for other companies and industries whilst simultaneously not directly targeting decarbonisation of mining. 

   
   

3. Introduce an incentive payment for decarbonisation of mining

   To facilitate the transition towards greener practices in the mining sector, the Australian Government could introduce an incentive payment for companies decarbonising their operations through eligible electrification and other activities, submitted via their BAS as they do with the FTCS. This would incentivise companies to invest in decarbonisation activities, without being penalised for being an early mover in the market. 
   

   By providing financial support specifically for decarbonisation projects, the Government can stimulate innovation and drive down the carbon footprint of mining, which is essential for the production of clean energy technologies in Australia and continuing to strengthen our leadership in the global export market. This would require significant Government funding depending on the uptake of the incentive payment which may mean other areas of the budget are strained or necessitate other budget cuts. Additionally, determining the eligibility and scale of the subsidies will involve complex administrative processes and may take a number of years to implement as well as the extant risk of misuse.

2. Cap Fuel Tax Credit Scheme and introduce Targeted Transition Tax via FTCS Reduction Option 4 would reform the FTCS by reducing the fuel credit rate by the dynamic calculated carbon cost per litre of fuel (currently 8 cents/litre) for FTCS claims exceeding $50 million per consolidated group. Rather than imposing a hard cap, this introduces a carbon price signal above a high-income threshold, thereby effectively imposing a Transition Tax Incentive only to the largest industry players. This is a selective adjustment that maintains the overall scheme integrity while increasing efficiency and equity in fossil fuel subsidy treatment. 

   
   

   The $50 million cap would mean that only the 10 biggest consolidated mining groups are targeted initially, which safeguards against the agricultural industry being affected. These companies are shown here based on 2022 numbers in the table below from Climate Energy Finance Australia.

   
   

   

   
   

   Since the FTCS rate has now increased from 38.1 cents/litre to 50.8 cents/litre, Whitehaven Coal and Mineral Resources would also be captured in the $50 million cap (Climate Energy Finance, 2024). By setting the reduced FTCS rate from 50.8 cents/litre to 42.8 cents/litre, above the $50 million threshold, the policy preserves the benefit for smaller operators and the agricultural sector.

   
   

   The cap would create increased public revenue for reinvestment, encouraging accountability and focusing efforts to decarbonise mining in Australia. Although this approach ensures a smoother transition away from fossil fuels and limits immediate financial shocks, it may still provoke some industry resistance due to inconsistent tax treatment but it creates a more economically rational and climate transition-aligned framework to balance Australia’s fiscal responsibility, investor certainty, and climate ambition. Some short-term adjustments may be required, particularly for high-consumption operators, and transitional support and implementation timelines would be helpful to mitigate passed-on cost pressures.

Policy Recommendation

Reforming the Fuel Tax Credit Scheme with a Tiered Transition Incentive

To support Australia’s commitment to sustainable development, targeted fiscal reform is needed to incentivise decarbonisation in the mining industry. Option 4, introducing a tiered reduction to the FTCS is recommended as it provides a balanced mechanism; deterring continued reliance on carbon-intensive operations while unlocking capital for electrification and decarbonisation innovation. 

Under this policy, the Australian Government would maintain the full FTCS eligibility up to $50 million in credits per consolidated group (group of entities owned by the same company and treated as one taxpayer for income tax purposes). Any FTCS credit claims above this threshold each financial year would be reduced by an efficient carbon price, calculated by multiplying the carbon price per tonne (ACCU spot price in AUD) by the amount of carbon emitted per litre of fuel (kgs), functioning effectively as a carbon price on large-scale fuel use in the mining sector. Rather than applying a blanket cap, this progressive model ensures a more efficient marginal tax rate that reflects emissions intensity and capacity to invest in greener operations. Using today’s numbers with the current ACCU spot price of $35/tonne CO2-e and 2.31kg CO2-e/litre of petrol, an efficient carbon tax would be a $0.08 cents/litre reduction. As the ACCU spot price increases over time, so too would the FTCS reduction rate, creating an efficient incentivisation mechanism. For example, if the carbon price per tonne was to reach $100, all credits over $50 million would be reduced by 23 cents/litre. 

To support companies to decarbonise, a reinvestment mechanism should be established. For additional funds over the $50 million cap, any forgone credit from the currently calculated 8 cents/L reduction can be recouped by the company as an “decarbonisation credit”, but only if the company invests those funds in approved  decarbonisation activities set out by the Government. 

This approach enables targeted companies to maintain balance sheet stability, helps to mitigate the adverse environmental impacts of fuel used in mining operations and pushes investment in innovative decarbonisation projects. Redirecting these substantial funds into decarbonisation projects aligns with both national climate commitments and the growing global demand for responsibly sourced critical minerals, thereby enhancing Australia's competitive edge in the evolving market for clean energy and technology. Oversight of this policy change falls within the remit of the Department of Treasury, with the Federal Treasurer holding direct decision-making authority.

This mechanism will assist in internalising the negative externalities of fossil fuel consumption and promote a more efficient allocation of resources, where the largest fuel consumers, mainly in mining and resources, help fund their own transition to cleaner operations.

The Fuel Tax Act (2006) (Cth) Chapter 3, Part 3.3 Special Rules would need to be amended to introduce and include a $50 million cap per consolidated group, per annum on fuel tax credits issued under the FTCS, with any amount over that being reduced by the calculated carbon cost per litre of fuel. 

By setting a $50 million threshold, the policy targets major emitters without burdening smaller, less carbon-intensive industries. This approach ensures that investment capital is used strategically to reduce emissions whilst still supporting operational needs within the sector, essentially operating as a tied grant. 

This policy should be introduced with an initial five-year timeline. At the conclusion of the initial period, the policy would undergo comprehensive review and be expanded to include other companies/entities by lowering the cap threshold.

Risks

Economic

While the reform would only apply to approximately the 10 largest mining companies, these operators are significant employers and contributors to regional economies. Some short-term financial impacts may occur as companies adjust to reduced profit margins resulting from the partial FTCS reduction. This could lead to job losses, delayed capital investment, or passing on of increased costs on to consumers, contributing to inflationary pressure. To minimise these disruptions and support a just transition, funding should be allocated under the CEFC to assist impacted communities and adjacent industries. The amount of funding should be determined by the scale of the impact, but to illustrate, the Queensland Government is investing up to $50 million in the Mount Isa Transition Fund to support works and the town affected by the closure of Glencore’s Mount Isa copper mine (Queensland Government, 2024). By providing targeted financial assistance through the CEFC, the Government can facilitate a more inclusive and equitable transition to a low-carbon economy. 

Political The political complexity of FTCS reform is well established. The Minerals Council of Australia and the Fuel Tax Credit Alliance represent powerful stakeholder groups with significant lobbying influence. Past resistance has stalled meaningful reform efforts. To mitigate this risk, the Government should engage mining companies directly in the policy design phase, providing predictability, tailored compliance pathways, and opportunities for co-investment.

Cultural

Public sentiment, particularly in communities and local economies that are reliant on mining, may reflect scepticism or concern over perceived job threats or economic decline. Furthermore, resistance to change and cultural divide is likely to eventuate given the unequal distribution of the impacts of this policy. Such a policy change will also require significant political support in order for the Government to feel confident in implementation. 

Environmental

There would be a significant environmental benefit to the introduction of this policy. It does however rely on companies effectively utilising the returned funds for meaningful decarbonisation activity. As companies may prioritise short-term financial survival to adjust to the rearrangement of their balance sheets, the long-term investments required for electrification and decarbonisation may not be realised. 

Appropriate regulatory frameworks, support mechanisms, monitoring and evaluation mechanisms are also required in order for this policy to effectively achieve its objectives. In order for companies to receive the electrification credit back, they would have to provide evidence of investment and expenditure for electrification with their BAS for the credit to be paid. 

References

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The views and opinions expressed by Global Voices Fellows do not necessarily reflect those of the organisation or its staff.