Taxes and Charges to Manage Oil Demand in Australia: Policy Recommendations for the Australian Government

Summary

This paper assesses the options available to the Australian federal government to reduce demand for gasoline and diesel through taxation and charges.

The paper begins by highlighting the need for gasoline and diesel demand management (despite relatively slowly growing consumption) as a result of the economic impact of price volatility, Australia’s increasing dependence on imported oil and Australia’s dubious distinction of being the world’s worst per capita emitter of greenhouse gases. The paper then goes on to examine two broad categories of taxation type actions that the Australian federal government could take: (1) taxation and charges applying directly to fuel, or  (2) taxation and charges applying indirectly to fuel.

The paper concludes that the most appropriate strategy for the Australian federal government given the significant political constraints is to implement an effective wholesale price floor on crude oil at USD64/barrel, remove distortions in import tariffs and fringe benefit taxes that encourage fuel consumption and provide significant incentives for state governments to implement congestion pricing in capital cities. Theoretically superior concepts such as large increases in fuel taxes are not recommended due to the political impossibility of implementing them.

The recommended actions in this paper do not represent a comprehensive transportation energy strategy as only taxation and charges options are considered and important non-tax components such as direct support for alternative fuels and vehicle efficiency standards are not discussed. Nevertheless, the taxation and charges concepts recommended, would, if implemented, significantly reduce Australia’s long term consumption of oil.