Premier Bligh recently announced that the Queensland government fuel subsidy would be abolished.

The subsidy meant the Queensland government paid $0.081 per litre of fuel that Queenslanders used. According to Dr John Quiggin the annual cost of the scheme was nearly $600 million or $140 for each of the 4.3 million Queenslanders.

Here are three arguments why abolishing the fuel subsidy is a good idea – environmental, social, and fiscal:

1) Fuel use has a negative impact on the environment that is not taken into consideration by most people when they choose how much fuel to use – there is a negative externality. Subsequently, the presence of the subsidy encourages too much consumption; it may act to impede the development of alternatives; and it distorts the choices of consumers, moving them away from environmentally-friendly alternatives.

2) Fuel is used in cars which when used impose negative externalities on other drivers. These include more congestion on the road and an increased chance of having an accident. For these reasons a subsidy encourages the use of a car far more than is efficient.

3) Due to recent economic events the revenue of the Queensland government has dramatically reduced. At this time there are a lot more productive ways that nearly $600 million can be spent. The opportunity cost of the fuel subsidy spending is simply too high.

Finally, it is worth noting that fuel prices at Queensland petrol stations will not rise by 8.1 cents per litre when the subsidy is abolished. Although some commercial customers were able to get the subsidy directly, regular consumers had the subsidy built into the price by the fuel companies. These companies did not pass-through the full subsidy. I’d expect that at most the price of fuel will rise by 4 or 5 cents per litre.

Further Reading:
John Quiggin, a respected Queensland economist, argued against the subsidy a few weeks before it was abolished: http://johnquiggin.com/index.php/archives/2009/05/29/end-the-fuel-subsidy/