But only big mining firms should face a limit, it said, with some of their rebates redirected to alternative technologies, smaller mining companies and energy security measures.
Advisory firm Cyan Ventures released the findings from its review of Australia's Fuel Tax Credit Scheme on Monday, in which it proposed an alternative to current reforms.
The report comes as the price of diesel remains high following conflict in the Middle East, and as the federal government reviews rules for the nation's biggest polluters under the Safeguard Mechanism.
The Fuel Security and the Diesel Fuel Tax Rebate report analysed the impact of three proposed reforms to the scheme, which refunds fuel taxes to businesses in sectors including mining, agriculture, construction and transport.
Reforms proposed for the scheme, which cost $10 billion in the 2025 financial year, include removing the rebate, tighter emission limits, and a tax incentive based on green investments.
But the analysis identified another option that could reduce the mining industry's reliance on diesel, Cyan Ventures co-founder Shaun Chau said.
"The biggest issue right now is that the price of diesel is really high, and Australia imports 85 per cent of (its) diesel," he told AAP.
"We've got a policy that is effectively disincentivising us from moving away from diesel at the exact moment that we need to be exploring all the options to get off diesel."
Under the alternative proposal, called a Fuel Security Reinvestment Mechanism, large mining firms would face restrictions on fuel tax credits above $50 million.
They would retain 65 per cent of credits above the threshold for investment in technologies such as heavy-duty electric vehicles and renewable energy, while 25 per cent would return to the federal budget, and 10 per cent would support smaller mining firms.
The reform would affect about 18 large mining companies, Mr Chau said, and could return $4.75 billion directly to the budget and displace up to 4665 megalitres of diesel by 2035.
"A lot of the focus (of reform) has been on the short-term competitiveness for the industry," he said.
"We think this is relatively straightforward and would be beneficial for all of the stakeholders."
Changes could be introduced over four years, the report said, and would exclude farming, fishing and trucking businesses, as well as mines with fewer than 10 years left to operate.
Small mining firms often struggled to upgrade technology due to high operating costs, Cyan Ventures analyst Pulkit Athavle said, and would benefit from the reform.
"The reinvestment package would help smaller operators access electrification and other diesel alternatives that can lower their energy costs and emissions," he said.
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