Every Australian unwittingly contributes about $563 each year to subsidise fossil fuels – a staggering number given the urgency of climate action.
The scale of these subsidies underscores the enormous policy contradiction facing the Albanese government, which made notable international commitments in its last term, but has yet to fully confront the domestic dimensions of Australia’s fossil fuel habit.
While the government’s actions abroad show clear progress, notably through joining the Clean Energy Transition Partnership (CETP) in late 2023 and releasing clear implementation guidelines for internationally oriented subsidies in December 2024, the domestic landscape tells a different story, one still characterised by vast sums of public money flowing to coal, oil, and gas projects.
Australia’s fossil fuel subsidies reached roughly $A14.5 billion in the 2023-24 financial year alone. This substantial public expenditure includes a variety of mechanisms, from direct financial support for projects like the Northern Territory’s Middle Arm petrochemical hub to extensive infrastructure developments specifically designed to facilitate fossil fuel extraction and export.
At the heart of Australia’s fossil subsidy landscape is the Fuel Tax Credit scheme, responsible for about $7.8 billion annually. Intended to exempt off-road diesel users from road-funding taxes, it effectively provides substantial tax relief for large mining and agricultural operations.
Meanwhile, broader tax incentives, such as accelerated depreciation on mining equipment and exploration tax deductions, further compound the subsidy burden, all the while undermining efforts to reduce Australia’s emissions footprint.
Yet the true cost extends far beyond explicit subsidies. Fossil fuels impose enormous hidden expenses through negative externalities – pollution, public health impacts, and climate-induced disasters.
Coal-fired power stations alone have been estimated to cost Australians approximately $2.4 billion annually in healthcare expenses due to air pollution, manifesting as respiratory illnesses, premature deaths, and increased hospitalisations.
Climate-related disasters like floods and devastating bushfires, amplified by fossil fuel-induced global warming, regularly cost billions more, draining resources from government budgets and diverting funds from critical infrastructure, education, and health services.
Internationally, Australia has made commendable strides. By joining the CETP, the Albanese government committed to ending all new public financing of overseas fossil fuel projects by the end of 2024. The government reinforced this commitment through the release of explicit implementation guidelines in December 2024, clearly prohibiting new international fossil fuel finance except under tightly defined conditions.
Legislative changes were also made to ensure Export Finance Australia, Australia’s export credit agency, aligns its investment decisions with Paris Agreement goals and the CETP principles. These steps mark significant progress, signaling Australia’s seriousness in contributing to global decarbonisation efforts.
However, there remains a stark disconnect between these international commitments and domestic policy realities. Despite clear pledges under the Glasgow Pact, which called explicitly for the phase-out of inefficient fossil fuel subsidies, Australia has yet to set out a comprehensive domestic framework to achieve this goal.
This gap undermines the credibility of its climate commitments and leaves Australia lagging behind international peers like Canada, which has been more explicit in defining and systematically reducing fossil fuel support.
In 2023, Canada introduced a detailed framework to identify, phase out, and transparently report inefficient fossil fuel subsidies. The Canadian government clearly defined these subsidies as financial supports that artificially lower the cost of fossil fuel production or consumption, except where essential for energy access or temporary economic relief.
Importantly, Canada mandated annual reporting to parliament and set explicit timelines for the phase-out of key subsidies. Yet even this relatively robust framework faced criticism for certain loopholes, notably around subsidies related to fossil-based hydrogen and carbon capture, which have continued to allow fossil-related spending under the guise of transition technologies.
Australia could significantly benefit from adopting and improving upon Canada’s approach to domestic fossil fuel subsidies. Currently, Australia’s policy landscape lacks a clear and agreed-upon definition of what constitutes an “inefficient fossil fuel subsidy,” creating ambiguity that hampers meaningful reform.
Establishing this definition transparently and publicly would be an essential first step, enabling clear categorisation and targeted phase-out strategies. Furthermore, committing to an explicit timeline, akin to Canada’s approach, would provide industry certainty and facilitate a structured transition, ensuring Australia’s substantial fossil fuel subsidy regime does not persist indefinitely.
Stakeholders within Australia provide a clear rationale for rapid and decisive reform. While industry groups argue that subsidies are necessary for competitiveness and job security, particularly in regional economies dependent on mining and agriculture, environmental and climate advocacy organisations highlight the detrimental long-term impacts. They emphasise how ongoing subsidies delay essential climate action, crowd out investment in renewable energy, and ultimately prolong Australia’s exposure to volatile fossil fuel markets.
Indigenous communities, often at the forefront of fossil fuel extraction and related environmental damage, have strongly voiced concerns about subsidies that encourage extractive projects threatening their lands and waters. Instead, they advocate redirecting subsidy funds into sustainable development and renewable energy projects, empowering communities to become active participants in Australia’s clean energy transition.
Given the stark realities of Australia’s fossil fuel subsidies, the Albanese government faces a crucial opportunity to align domestic actions with international commitments.
Immediate actions could include establishing a robust definition and clear public reporting mechanism for domestic subsidies, inspired by Canada’s framework but strengthened to avoid exceptions for problematic technologies. Transparent annual reporting would allow public scrutiny and parliamentary accountability, driving political momentum for subsidy phase-outs.
Medium-term policy changes should focus on restructuring and ultimately eliminating the Fuel Tax Credit scheme as currently configured, which predominantly benefits highly profitable mining corporations rather than smaller rural enterprises genuinely needing targeted support.
Approaches that remove the very large tax breaks from mining and fossil fuels while preserving them for the much less material agricultural tax breaks have been proposed and should be considered.
Fortescue’s multi-billion investment in electrified mining equipment should be leveraged as a baseline for what the rest of the industry should do, with removal of the tax credits as a fiscal incentive.
Redirecting these funds toward renewable energy infrastructure, regional economic diversification, and community resilience would generate multiple social and economic benefits, creating new industries and jobs that sustainably replace those supported by fossil fuel dependence.
Using the national majority electoral results to lean on state governments to eliminate infrastructure and land indirect or implicit subsidies to fossil fuel projects is key as well.
All too often in Australia, the states provide strong financial support for dead end fossil fuel projects under the guise of regional economic stimulus. That has to pivot to renewables, transmission, green steel and other economic sectors with a future.
Over the long term, embedding subsidy phase-out targets within legislation would solidify Australia’s climate commitments and prevent future backsliding. This legislative approach would echo the clarity and resolve demonstrated internationally, establishing Australia as a credible leader on climate finance reform.
Furthermore, integrating subsidy removal into broader fiscal reform efforts, such as adjusting taxes to internalize fossil fuel externalities or introducing a comprehensive carbon pricing mechanism, would ensure market mechanisms reinforce subsidy elimination.
While consumer carbon pricing has been found to be too open to populist right wing messaging in both Australia and Canada – but notably not the EU – that doesn’t mean that carbon pricing is dead. Strengthening and expanding the industrial emissions Safeguard Mechanism and ramping up its price per tonne is also something that the Albanese government should be focusing on.
Accelerating the inclusion of embodied carbon limits into the National Construction Code is also something that should be considered, pulling it back from 2028 to a more aggressive date.
While Australia does not have a significant forestry industry, this is a clear opportunity to engage with neighbouring APAC countries on cross-laminated timber construction approaches for multi-unit residential buildings to address the housing crisis. Once again, this is the Canadian commitment, and something that Australia should emulate.
Australia’s efforts can and should be leveraged internationally. By vigorously supporting global agreements on fossil finance phase-outs – such as ongoing OECD negotiations – and investing in clean energy partnerships throughout the Asia-Pacific region, Australia can further amplify its leadership role. This approach would reinforce Australia’s credibility, enhance regional cooperation on climate action, and contribute meaningfully to global decarbonisation.
The $563 each Australian currently pays for fossil subsidies represents both a challenge and an opportunity.
By embracing comprehensive subsidy reform, the Albanese government could transform this hidden cost into a visible investment in Australia’s future – one that reduces emissions, enhances public health, empowers Indigenous communities, and positions Australia firmly as a global clean energy leader.
The time for decisive action is now, and Australia has both the opportunity and the moral imperative to seize it.
