Fuel tax in OECD countries, in $ per gallon (source: Wiki)

I was disappointed to read Peter Martin’s report on Tuesday that the Greens will oppose the Government’s plan to restore indexation of the fuel excise (Green opportunity lost in Christine Milne’s road rage). Greens leader Christine Milne said indexation would:

add more congestion to our cities, more pollution from vehicles, and not do a thing for public transport, for getting people to be able to drive less and, when they do drive, to drive more efficiently.

Then on Wednesday Bernard Keane writes that Labor will almost certainly oppose it too (Green-Labor stupidity on fuel excise could be prevented with an X).

The fuel excise has been frozen at 38.1 cents per litre since John Howard abolished indexation in 2001. At current CPI, restoration would increase the tax – and hence the price at the pump – by one cent per year over each of the next four years.

I’m disappointed because I’ve been advocating restoration of indexation in these pages for a couple of years (see What did abolition of fuel excise indexation cost?). I also argued in May that it should be endorsed by political parties with pretensions to a progressive agenda (see Should the fuel excise be increased? Yes Minister! and Is Labor right to oppose indexation of the fuel excise?).

Here’s a quick recap of the key arguments for restoration of indexation I put last time:

  • It would generate significant revenue for public purposes ($2.2 billion over the next four years).
  • It’s not a “new tax”; indexation only maintains the real value of an existing tax.
  • It would claw back some of the currently unpaid social costs of driving (see also Should cars be subsidised?).
  • It would discourage driving by giving motorists an incentive to make fewer journeys and shorter trips, as well as shift to more fuel-efficient vehicles.
  • It would encourage mode shift by making alternative modes like public transport, walking and cycling more attractive relative to driving.
  • As even the Prime Minister acknowledges, it’s a tax on carbon (see What did abolition of petrol excise indexation cost?), as well as a de facto form of road pricing.
  • Taxes on motor fuel are already extraordinarily low in Australia compared to other OECD countries (see exhibit).
  • The Government is promising that only the extra revenue from indexation will be hypothecated to roads, not the existing revenue from the base 38 cents per litre.

Yes, indexation would increase the cost of running a car; an “average” motorist driving a medium-sized car would fork out an extra $65 p.a. by the fourth year compared to what they’re paying this year.

It should be understood though that the abolition of indexation in 2001 means motorists have been getting, and are continuing to get, a progressive reduction in the level of tax and hence in the ‘real’ pump price of petrol.

Peter Martin says that at the time indexation was abolished in 2001 it made up around 38% of the retail price of petrol. Without indexation it will fall to less than 20% when the (nominal) price reaches $2 per litre.

Restoration of indexation wouldn’t increase the ‘real’ level of tax, it would remove a tax ‘cut’.

It’s also important to understand that motorists’ incomes will increase in the future; just as the fuel excise would increase by CPI, so too salaries, wages, pensions and transfer payments will increase at, or in many cases above, the CPI. (1)

Labor and the Greens will inevitably seek to bolster their  position by arguing indexation would be regressive. However Harry Clarke points out that “what matters is the overall incidence of the tax-transfer system, not the equity character of a small part of the tax base.”

In any event, the poorest 20% of households could be compensated for indexation if just 8% of the additional revenue raised was returned to them through the tax-transfer system, according to the Grattan Institute.

So far as hypothecation is concerned, it’s an empty promise, as I’ve pointed out before. The Government will spend much more on roads over the next four years than indexation is expected to raise. The Treasurer claims the Budget will catalyse over $90 Billion in road spending over the next four years.

Contrary to what Christine Milne told Parliament, indexation would lessen congestion in our cities, reduce pollution from vehicles, and make public transport more competitive. It would encourage people to drive less and to drive more fuel-efficient efficient vehicles.

It’s the sort of policy that the Greens and Labor ought to be supporting, not opposing. In fact Labor should’ve restored indexation when the Rudd Government took office.


  1. If a transfer payment doesn’t keep pace with CPI, the proper course is to seek to ensure it does, not to oppose indexation.