Slashing fuel tax credits could help cut the federal budget deficit and carbon emissions, without stinging household budgets.

The $8 billion a year in fuel tax credits given to businesses should be cut in half, according to a Grattan Institute report.

Supporting leading sectors such as agriculture and mining, the tax office applies the credits to fuel used in machinery, equipment, processing and heavy vehicles.

“Cutting fuel tax credits in the way we recommend would have next-to-no impact on household budgets,” report lead author Marion Terrill said.

“We calculate that prices at the supermarket would increase by an average of just 35 cents on a $100 grocery shop.”

The public policy think tank says removing the tax break for on-road users, and roughly halving it for off-road users would save about $4 billion a year, and could instead be spent on the health system, aged care and disability services.

“It would shrink the budget deficit and help Australia hit net-zero carbon emissions by 2050,” Ms Terrill said.

Burning diesel, still the go-to fuel for many, contributes almost a fifth of national carbon emissions.

Energy costs will be a key issue in the lead up to the federal budget as the government considers further measures to reduce pressure on household budgets.

But the peak body for the oil and gas industry says investment, not intervention, would help drive down power bills.

Late last year the government intervened in the energy market by introducing a temporary 12-month price cap on coal and gas.

The previous budget forecast a 56 per cent increase in electricity prices and 44 per cent in gas prices for households over the next two years without government intervention.

But in its submission for the May budget, the Australian Petroleum Production and Exploration Association said government intervention was not the solution.

Price caps, legal hurdles and delays for new projects, create significant uncertainty and make investors nervous about allocating new capital, chief executive Samantha McCulloch said.

“The government should take note of the lessons from the price cap implementation when considering permanent regulation of gas prices through a mandatory code of conduct,” she said.

“It would send a positive signal to investors to recommit to an open, market-based economy.”

APPEA’s submission also called on the government to provide clear policy direction and priority hubs for low emissions projects to promote Australia as a regional leader in carbon storage.

Ms McCulloch said investment in new gas supplies would meet demand and drive down prices and the road map would contribute to net zero emissions ambitions.

“The value of our energy resources and their contribution to the economy, jobs and net zero cannot be taken for granted,” she said.

“Clear, stable policies are essential to provide industry with confidence to invest in the new energy supplies needed.”

Market data shows wholesale electricity prices and spot gas prices are falling in the wake of government intervention.

The federal energy department told last week’s parliamentary cost of living inquiry that the reduction was consistent with estimates about the impact of the government’s energy price relief plan.

– AAP