Few prices are as visible as fuel. Every day, we drive past figures advertised on signs outside fuel stations, and watch the dollars climb in real time as we fill the tank.
Author
- Amanda Craft
Lecturer in Accounting and Personal Financial Planning, Western Sydney University
The federal Coalition’s new policy, called the Fuel Price Shield , would automatically halve the fuel excise – the tax levied by government on petrol and diesel – when the price of Brent crude averages more than US$100 ($A140) a barrel over a two-week period.
The Coalition says it will fund this measure through $8 billion generated from its planned cuts to the tobacco excise.
The Liberal and Nationals estimate this would cut around 27 cents a litre from fuel prices, or about $15 from a typical tank. The heavy vehicle road user charge, a fee paid by the operators of trucks and buses, would also temporarily fall to zero.
For households already under cost-of-living pressure, that would be a saving. But tax changes do more than adjust what we pay. Research shows they also change public expectations and behaviour. Whether this policy works as intended depends on how Australians respond to cheaper fuel and cheaper tobacco.
Hip-pocket relief, but not for everyone
There is good evidence to show most of the fuel tax cut would reach motorists. When Australia temporarily halved the fuel excise in 2022 in response to surging oil prices driven by Russia’s invasion of Ukraine, the reduction was passed through to motorists in most locations.
But who benefits the most is a different question. Germany, France and Italy all temporarily reduced fuel taxes or provided fuel-price discounts during the 2022 energy shock . The cuts generally reached motorists, but the benefits were not evenly distributed. Recent research estimates 62% of the financial relief went to households with above-median incomes, largely because higher-income households consumed more fuel.
Consumer savings can be uneven. For example, a household driving two cars each day, a tradie travelling between jobs or a farmer living in regional Australia may save considerably more than someone who drives only occasionally.
Not everyone can simply use less fuel. A major review of international research estimated that a 10% increase in petrol prices produces only around a 0.9% reduction in demand in the short term. This makes sense: you can postpone buying a television when prices rise but it’s much harder to postpone getting to work or taking children to school.
What happens when governments step in?
Petrol price movements affect consumer expectations . When prices increase, they worry about inflation, and even though prices may decrease their worry does not lessen to the same extent.
Once governments show they are prepared to step in, people may also start depending on that support.
In Germany, consumers appeared to change their behaviour when they knew the relief was about to end. Consumers filled their tanks before the temporary tax cut expired, with petrol-station sales rising sharply .
How does fuel relate to the tobacco tax?
Separately, the Coalition has proposed cutting tobacco excise by 80% as part of its broader tobacco policy. The argument is that making legal cigarettes cheaper would encourage smokers currently buying illegal tobacco to return to the legal, taxed market. The Coalition says Parliamentary Budget Office modelling estimates find its tobacco policy will raise $8 billion over four years.
This sounds counterintuitive: how can cutting a tax raise revenue? Again, it depends on behaviour.
There is evidence the illegal tobacco market has grown – recent Australian research found reported use or recent purchase of illicitly traded tobacco among smokers increased from 8.6% in 2016 to 16.5% in 2022-23. But this does not prove the high tobacco excise caused the increase. A 2024 review of 68 studies found higher tobacco taxes encourage some consumers to seek cheaper alternatives. But any evidence specifically linking tax increases with illegal tobacco purchases was much weaker.
Making cigarettes substantially cheaper creates another possible response: people may smoke more. In fact, higher tobacco prices are an established way of reducing smoking. Australian Institute of Health and Welfare data shows daily smoking among Australians aged 14 and over fell from 19.5% in 2001 to 5.6% in 2025.
Similar to a fuel tax cut, the effects of cutting tobacco excise would therefore depend on how consumers respond to the lower price. Existing smokers buying legal cigarettes would immediately pay less. But unlike petrol, where many households have limited ability to reduce consumption in the short term, the tobacco policy relies on consumers changing what they buy. Its broader effects depend on whether lower prices mainly shift some smokers back to legal tobacco, or also increase consumption or discourage quitting.
Two tax cuts, one behavioural experiment
The effectiveness of the Fuel Price Shield ultimately depends on how people respond to cheaper prices.
With petrol, the argument is that prices can become so high that asking households to simply use less is unrealistic. Therefore, the Coalition is proposing the government would step in and slash the tax.
With tobacco, the argument is almost the reverse: prices may have become so high that some smokers are finding cheaper substitutes outside the legal market.
Both recognise something important about financial behaviour: people respond to prices, but not always as policymakers expect. They may cut back, switch to alternatives, or keep buying because they have little realistic choice.
So the real test of the Coalition’s fuel policy would not just be whether it successfully reduces the cost of a tank of fuel by $15. It would also be how Australians respond: whether households simply get some relief on fuel they would have bought anyway, or whether cheaper petrol encourages them to use more.
