Prime Minister Tony Abbott has said Australia’s 38 cents per litre fuel excise acts “as a carbon price signal”, which is politically amateurish, but quite correct.

Not surprisingly, Labor’s transport spokesperson Anthony Albanese was quick to pull him up:

“He’s railed about a price on carbon wrecking the economy, now he’s conceded that his big new petrol tax is just that — it’s a carbon tax on steroids.”

But however embarrassing it might be for him, Abbott’s description of the fuel excise is right. As I noted back in March 2012, the Productivity Commission says the excise on petrol effectively operates like a carbon tax, deterring people from driving.

CSIRO calculated the excise would have increased to around 50 cents per litre by that time if indexation by the CPI had not been abolished by the Howard government. It estimated the “missing” 12 cents per litre was equivalent to a carbon tax of $50 per tonne.

The fuel excise is a significant deterrent to driving. At present, it adds about 4 cents per kilometre to the cost of running the average car, or around $600 per year. The additional burden of indexation on the average household in the first year is estimated at 41 cents per week, and on the average family, 55 cents per week.

The additional cost makes driving less attractive. It encourages motorists to travel fewer kilometres, shift to more fuel-efficient vehicles, or use alternative modes like public transport or walking.

Although its primary purpose is simply to raise revenue, the fuel excise nevertheless also claws back some of the social costs like pollution that motorists impose on others.

While there are better or poorer ways that revenue can be spent, how it’s applied or misapplied does not detract from the efficacy of the fuel excise as a price signal.

The former Labor government understood this. It didn’t spend the revenue from its carbon tax on measures to improve sustainability; it gave it back to the electorate as compensation.

But Greens leader Christine Milne is wrong to say, as she did on Insiders on Sunday, that the fuel excise is not a carbon price signal because:

“… it’s attached to putting all of that money into more roads to create more congestion with cars that are some of the most polluting on the planet because we don’t have efficiency standards.”

Milne’s claim the government is “putting all that money into more roads” is also wrong, or at best it’s misleading. I think it’s unfortunate the government has resorted to hypothecation to sell indexation, but it’s only proposing to tie the incremental net revenue from indexation to roads, not the much larger $0.38 base tax as Milne seems to imply. Indexation will increase the excise by one cent per litre over each of the first four years.

Expected revenue from indexation of fuel excise compared to planned Commonwealth expenditure on roads (source: budget 2014-15 Building Australia’s Infrastructure)

Also, as I noted recently, the promised hypothecation will make no real material difference. The government proposes to spend much more on roads over the next four years than the extra $2.2 billion it expects to get from indexation over this period.