Fuel tax credits are worth $8 billion a year to the businesses that receive them, but only about half that outlay is justified in economic or social terms. Fuel tax credits are gnawing away an ever-growing share of fuel tax revenue: a decade ago, credits reduced gross fuel tax revenue by 30 per cent; today, it’s almost 40 per cent. Winding back the credits could reduce the structural budget deficit by about 10 per cent, or $4 billion a year.

Fuel tax is imposed at a current rate of 47.7 cents per litre – but not all fuel use attracts the charge. No fuel tax is payable for vehicles that only drive off–road, such as trucks on mine–sites, or for other off–road uses such as in heavy machinery, and for heating and cooling. And a reduced rate of fuel tax is payable for on–road vehicles heavier than 4.5 tonnes, such as semi-trailers, B-doubles, and passenger buses.

The mechanism for refunding the fuel tax paid at the bowser is fuel tax credits. Companies claim credits at either a full or partial rate, currently 20.5 cents per litre.

Fuel tax credits were introduced 40 years ago, but the more favourable deal for bigger on-road vehicles has only been in place since 1999.

There is no business reason why larger vehicles should pay less than smaller vehicles – in fact quite the reverse, since heavy vehicles do far more damage to road surfaces.

The usual tax-policy orthodoxy is that governments should not tax business inputs, to avoid skewing business decisions about what goods and services to produce and with what inputs. Important as these arguments are, they don’t hold when the input itself causes harm. And that’s the situation with burning diesel.

Burning diesel contributes about 17 per cent of Australia’s total carbon emissions. Using a conservative international benchmark price of $75 per tonne of carbon emitted, this harm can be expressed in monetary terms as 20 cents per litre of diesel.

Politicians promote fuel tax credits as a way to help regional Australia.

For now, credits support Australian exporters, particularly miners and farmers. But this advantage has a use-by date, because Europe, the UK, the US, and Canada are imposing or planning to impose levies on specific imported products to reflect the carbon taxes that would have been paid had the goods been produced domestically (known as Carbon Border Adjustment Mechanisms).

This report calls for an overhaul of fuel taxes in Australia. On-road heavy vehicles should pay the same rate as utes, vans, cars, and small trucks used by Australian businesses. Off-road vehicles and machinery should still be eligible for fuel tax credits, but at a lower rate than at present, to reflect the carbon emissions and other damage they cause to the community as a whole.

The impact on households would be extremely small: prices at the supermarket would increase by an average of about 0.35 of 1 per cent – or 35 cents on a $100 grocery shop.

These reforms would improve the efficiency of the tax system, contribute to budget repair, and help Australia hit its target of net-zero emissions by 2050.