Cars & traffic

Jun 15, 2014

Is the fuel excise a “carbon tax on steroids”?

It might've been a gaffe, but Tony Abbott is right to say the fuel excise is effectively a carbon tax. The Greens and Labor should support the Government's plan to restore indexation

Alan Davies — Editor of The Urbanist

Alan Davies

Editor of The Urbanist

Expected extra revenue from indexation of fuel excise compared to planned Commonwealth expenditure on roads (source: Budget 2014/15 Building Australia's Infrastructure)

Prime Minister Tony Abbott is right to say that the 38 cents per litre fuel excise acts “as a carbon price signal” and is effectively a “carbon tax on steroids”.

But Greens leader Christine Milne is wrong to say, as she did on Insiders on Sunday, that the fuel excise is not a carbon price signal because:

it’s attached to putting all of that money into more roads to create more congestion with cars that are some of the most polluting on the planet because we don’t have efficiency standards.

Mr Abbott’s claim is jaw-droppingly hypocritical and politically amateurish given his government is intent on rolling-back Labor’s carbon tax, as well as restoring indexation of the fuel excise.

Not surprisingly, Labor’s transport spokesperson Anthony Albanese was quick to pull him up:

He’s railed about a price on carbon wrecking the economy, now he’s conceded that his big new petrol tax is just that – it’s a carbon tax on steroids.

But however embarrassing it might be for him, Mr Abbott’s description is right. As I noted back in March 2012 (see What did abolition of petrol excise indexation cost?), the Productivity Commission says the excise on petrol effectively operates like a carbon tax, deterring people from driving.

CSIRO calculated the excise would’ve increased to around 50 cents per litre by that time if indexation by the CPI had not been abolished by the Howard Government. It estimated the “missing” 12 cents per litre was equivalent to a carbon tax of $50 per tonne (see Will a carbon tax double the price of petrol?).

The fuel excise is a significant deterrent to driving. At present, it adds about 4 cents per kilometre to the cost of running the average car, or around $600 per year (1).

The additional cost makes driving less attractive. It encourages motorists to travel fewer kilometres, shift to more fuel-efficient vehicles, or use alternative modes like public transport or walking.

Although its primary purpose is simply to raise revenue, the fuel excise nevertheless also claws back some of the social costs like pollution that motorists impose on others.

While there are better or poorer ways that revenue can be spent, how it’s applied or misapplied does not detract from the efficacy of the fuel excise as a price signal.

The former Labor government understood this. It didn’t spend the revenue from its carbon tax on measures to improve sustainability; it gave it back to the electorate as compensation.

Ms Milne’s claim the Government is “putting all that money into more roads” is also wrong, or at best it’s misleading. I think it’s unfortunate the Government has resorted to hypothecation to sell indexation, but it’s only proposing to tie the incremental net revenue from indexation to roads, not the much larger $0.38 base tax as Ms Milne seems to imply. Indexation will increase the excise by one cent per litre over each of the first four years.

Also, as I noted recently (see Is Labor right to oppose indexation of fuel excise?), the promised hypothecation will make no real material difference. The Government proposes to spend much more on roads over the next four years than the extra $2.2 billion it expects to get from indexation over this period (see exhibit).

Mr Albanese’s reference to the Government’s “big new petrol tax” is also misleading. Restoring indexation is not creating a new tax; it’s purpose is simply to maintain the real value of an existing tax.

I think Ms Milne is right to say the Abbott Government ought to be taking firm action to raise fuel efficiency standards and ought to be spending more on public transport. But she should recognise that indexation is a vital part of the same agenda and shouldn’t be made conditional on how the proceeds are spent.

In fact all sides should get off the hypothecation bandwagon – whether for roads or public transport – and continue to treat the fuel excise as a flexible revenue source that’s available for all contingencies.


  1. The additional burden of indexation on the average household in the first year is estimated at 41 cents per week; and on the average family, 55 cents per week.
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11 thoughts on “Is the fuel excise a “carbon tax on steroids”?

  1. Alan Davies

    Bruce The Moose #10:

    Indexation was abolished in the first place by John Howard so he could win favour with “his battlers”.

    In any event, indexation isn’t a new tax or even an increase in the (real) level of tax. It’s purpose is maintain the real value of the excise by linking it to the CPI.

  2. Bruce The Moose

    Consistent with LNP policy, it preferentially targets the battlers again!

  3. Dylan Nicholson

    Mark, high-quality perhaps, but if you know roads will only be used by bicycles and light-weight/lower-speed electric vehicles, they can be built for a fraction of the cost of roads intended for heavy motorised vehicles.

  4. Liamj

    By the same logic the GST is a food tax, because it applies to some processed foods. Sure theres lots of food not GST-ed, same as the majority of fossil fuel carbon burnt in Oz & released as greenhouse gases is not taxed under fuel excise.

    I can see the entertainment value in pinning the carbon tax tail on the Abbott donkey, but thats trivial compared to Australias all too gross irresponsibility. Pretending we have a carbon tax (whether Abbotts fuel excise fumbling or arguably Gillards token -5% target) is just a facade for our continued profiteering from climate change denial.

  5. Mark Duffett

    In any case, Milne also has to recognise that electric vehicles and bicycles need high-quality roads as much as their fossil-driven cousins.

  6. Bob's Uncle

    Wow, he admitted the excise increase is effectively a carbon tax?

    Sounds like a Gillard moment on steroids.

  7. David Penington

    As a as a carbon price signal, the fuel excise doesn’t apply to miners, farmers, power generators who use diesel, and other who get diesel fuel tax rebates or regional transport rebates. It’s a pretty poor carbon tax.

  8. Lubo Gregor

    So instead of a carbon tax, we get a hydrocarbon tax. It’s probably because you can’t see CO2 according to Abbot so it does not exist. Petrol, you can see and smell (I guess it’s a bit pinkish so it would be making him a touch uncomfortable), but at least our Rhode Scholar can see where the tax money are coming from, not some invisible substance that the scientists made up in order to bring down all conservative governments around the world.

  9. Tom the first and best


    I would have to disagree that Australia`s economy suffered in 1974 as a result of the oil crisis. Unemployment increased significantly and this was part of the undoing on the Whitlam Government.

    Not that an increase in the oil price is not a good thing but there are costs.

  10. Stuart Coyle

    I didn’t think that steroids generated carbon dioxide, but I may be wrong…anyway I don’t see how taxing fuel affects body builders.

  11. pjrob1957

    A graph I have found intriguing for some time on the subject of road safety will be found on this page, .
    It describes a sharp 30% drop from 1971 to 1974 of road deaths.
    This is about the same drop as we experienced in the state of Victoria. But this graph is from the Netherlands.
    Why is this interesting?
    The only common factor between the Netherlands and Victoria was the oil crisis.
    The price of petrol went up and people in both societies reduced unnecessary driving. Nether economy really suffered. I remember a funny story from back then where a GMH employee rode a horse to work because petrol was too expensive but nothing serious. We simply cut down on the drives which were more likely to result in an accident.
    Its not all that bad a thing for the price of petrol to go up. People adjust.
    But we save lives.
    Back here we were all told that it was seatbelt law that had produced the 30% drop. It made sense. The decrease in deaths per accident as reported by hospitals was about the same.
    But NL put in its seatbelt law in 1975 in time for a rapid rise in deaths produced by oil prices going down. Sweden at the same time put in seatbelt law, had the same experience of rising deaths and reported the anomaly of 30% less deaths per accident as reported by hospitals.
    All in all it made it very hard to work out if seatbelt law had made a difference across the board but much easier to see that the very much more unpalatable reality was that higher petrol prices really does save lives.

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