How Australia’s largest fossil fuel subsidy could decarbonise mining

Fossil fuel subsidies in Australia reached $11 billion in 2022-23, extending decades of direct capital transfers and tax concessions to some of Australia’s most polluting industries and making Australia one of the G20’s largest providers of subsidies for fossil fuels.

Over 88% of Australia’s fossil fuel subsidies were funnelled into the production and consumption of hyperinflationary, hyper-volatile, high-emission refined petroleum products – i.e. diesel and gasoline. 

Since the introduction of the Fuel Tax Act of 2006, government subsidies for the consumption of diesel have cost over $95 billion in tax foregone to the Australian economy, via the Fuel Tax Credit Scheme (FTCS). 

This cost is only growing year on year, and is increasingly unjustifiable both economically and in light of our obligation to reduce emissions as the climate crisis escalates. 

The scale of the impact to our economy is enormous. The FTCS is the largest fossil fuel subsidy in Australia and is the 18th largest government expense program in 2023-24. The federal government estimates the FTCS will cost over $9.5 billion in tax concessions in 2023-24 alone, with the credits largely going to Australia’s bulk commodity and fossil fuel mining firms. 

And our new modelling published today shows that in 2022-23 to 20219-30, fuel tax credits paid to the mining sector will cost the economy a cumulative $37 billion – nearly twice the entire federal capital commitment to the flagship Rewiring the Nation program. 

Since its implementation, 40-47% of all FTC tax concessions have been provided to mining, despite the sector accounting for only 0.9% of all entities that claim fuel tax credits across Australia. 

This is doubly concerning given the fact that the unabated use of diesel across mining has played a critical role in undermining our climate targets, with mining emissions rising 65% since 2005. This is a headwind to these firms’ net zero emissions pledges.

Lack of fuel efficiency standards and poor emissions regulation have facilitated the mining industry to contribute significantly to what is now the largest unregulated source of air pollution in Australia. In contrast, all other economic sectors of Australia have declined to a total 25% emissions reduction over the same time period. 

The FTCS has also been a significant driver in rising diesel consumption and the fleet of off-road diesel engines and back up power used in mining. In 2022-23, Australia imported 29 billion litres of diesel at a cost of $33bn, rising 197% in two years, as volumes grew by 32%.

As a result of continued lobbying by the fossil fuel industry, high-emission industries have been in effect shielded from the impact and burden of rising fuel costs that are shouldered by Australian individual taxpayers.

Reform is sorely and urgently needed

Our report calls for a $50m cap to the FTCS per year per consolidated group. Our modelling shows this would affect only seven companies in 2023-24 – and only the largest mining firms: BHP, Rio Tinto, FMG, Glencore, Hancock Prospecting, Peabody Energy and Yancoal Australia.

The proposed reform would not affect tax credits provided to agriculture, transport or manufacturing firms. 

And despite only affecting seven firms in 2023-24, our new analysis demonstrates the reform would generate over $14 billion through to 2029-30 in additional tax revenue.

Critically, we are not calling for a bigger tax grab from mining. This recovered revenue should be entirely reinvested in turbocharging decarbonisation of the mining sector.

CEF recommends the revenue be directed to a special purpose fund within the National Reconstruction Fund aimed at scaling domestic capabilities in zero-emission mining equipment manufacturing and deployment i.e. full-electric haul trucks, then locomotives and heavy mining equipment, and embed decarbonisation in Australia’s resources sector. 

We should incentivise the world’s most advanced battery and haulage vehicle manufacturers – Liebherr, Komatsu and Caterpillar – to leverage Australia’s world leading mining sector as a global hotspot for leading mining electrification.

Australia could exit 2030 with the world’s first EV mine haulage industry, learning by doing as we drive “embodied decarbonisation” into our bulk commodity exports, a first, tangible step before the even bigger gains to be had from our potential $100bn per annum value-add from green iron.

The scale of the opportunity is massive and it has the potential to position Australia as a global first-mover in this space. It could be a key plank of our urgently needed policy and funding response to the  more than $US800 billion US Inflation Reduction Act, the largest subsidy program in world history.

The IRA has catapulted the US into the global energy transition race, pulling onshore an unprecedented boom in public and private investment into mining, refining, manufacturing and deployments of zero-emissions technologies of the future.

The international race is on, as our trade partners and competitors scale up their energy transition efforts to bolster their competitiveness, energy security and supply chains.

Australia’s needs now to respond on a scale commensurate with our momentous competitive advantages. We are #1 globally in iron ore, coking coal and lithium, and #2 in thermal coal. By embodying decarbonisation in our world-leading mining exports via mining haulage electrification

Australia can assist our key trade partners to deliver on their decarbonisation objectives, even as we create a $14bn tailwind to crowd-in private capital and leverage the collective buying power of our mining majors to improve our energy security, reduce our fossil fuel import reliance and dilute our exposure to the hyperinflation of fossil fuel commodities, and deliver the likes of BHP a 2030 interim decarbonisation target credible to their shareholders.

The persistence of massive public subsidies to fossil fuels by the Federal Government is unconscionable, a headwind that undermines our commitments to a 43% reduction in national emissions by 2030 on 2005 levels.

They are the  product of six decades of embedded political and lobbying power of our domestic fossil fuel industries, a dominant influence over Australia’s decisions on energy policy. 

Our negligence, to date, on fossil fuel subsidy reform puts our climate goals at risk, our Paris Agreement obligations in jeopardy, and places us many decades behind our US and EU peers.

To fail to implement the FTCS policy reform needed to help us pivot to the industries of the future would be to squander our once-in-a-century opportunity to take our place as a global zero-emissions industry and trade leader. Time for political resolve and strategic foresight.

Tim Buckley is director of Climate Energy Finance. Matt Pollard is global EV supply chain analyst at CEF