The Coalition plans to halve the fuel excise when global prices spike. How will Australians respond?
Households might get relief on fuel they would have bought anyway, but cheaper petrol could encourage them to use more.
The Coalition's proposed Fuel Price Shield aims to halve the fuel excise when global Brent crude prices average above US$100 per barrel over two weeks. This measure would be funded by $8 billion generated from cuts to the tobacco excise. The policy could reduce fuel prices by around 27 cents per litre, or $15 per typical tank, providing significant relief for households already struggling with cost of living pressures.
However, the impact of the fuel tax cut would not be evenly distributed. Research suggests that higher-income households, who consume more fuel, would benefit the most. This is because they have more flexibility to adjust their driving habits. For example, households with two cars, tradies travelling between jobs, or farmers in regional areas may save considerably more than those who drive less frequently.
A major review of international research estimated that in response to a 10% increase in petrol prices, demand only decreases by about 0.9% in the short term. This inertia can make it difficult for consumers to reduce fuel consumption even when prices are high. Once governments step in to provide relief, people may become reliant on this support. In Germany, for instance, consumers filled up their tanks before temporary tax cuts expired, indicating a dependence on government intervention.
The Coalition's proposal to cut the tobacco excise by 80% to combat illegal tobacco trade is based on Parliamentary Budget Office modelling. While cutting tobacco excise may raise $8 billion over four years, the relationship between tax increases and illegal tobacco purchases is weaker. A 2024 review of 68 studies found that higher tobacco taxes encourage some consumers to seek cheaper alternatives, but the evidence linking increased excise with illegal purchases is weaker.
Reducing the tobacco excise could lead to two potential outcomes. Existing smokers may pay less for legal cigarettes, while illegal tobacco users might be enticed back to the legal market. However, higher tobacco prices have been shown to reduce smoking rates overall. In Australia, daily smoking among Australians aged 14 and over fell from 19.5% in 2001 to 5.6% in 2025.
Therefore, the effects of lowering tobacco excise would depend on how consumers respond to the lower price. While some smokers may switch to legal cigarettes, others may increase consumption or be discouraged from quitting.
Written by urgent.news from The Conversation AU's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
