Australia's Future Tax System

Consultation Paper Summary

13. Tax‑transfer impacts on the environment


Australia faces significant environmental challenges in the 21st century, ranging from global issues, such as climate change, to local issues, such as water scarcity, land degradation and species loss. Economic development must be undertaken in an environmentally sustainable way, while also recognising that the environment itself has value.

Taxes may provide one means of improving environmental amenity. The tax‑transfer system can also detract from environmental outcomes through the incentives it creates. Such incentives need to be carefully evaluated against other policy objectives.

Consultation questions

Q13.1 Bearing in mind that tax is one of several possible instruments that can address environmental externalities, what opportunities exist to use specific environmental taxes to address Australia's environmental challenges?

Q13.2 Noting that many submissions raise concerns over unintended environmental consequences of taxes and transfers, such as the fringe benefits tax concession for cars, are there features of the tax‑transfer system which encourage poor environmental outcomes and how might such outcomes be addressed?

Q13.3 Given the environmental challenges confronting Australian society, are there opportunities to shape tax‑transfer policies which do not currently affect the environment in ways which could deliver better environmental outcomes?

Key messages in submissions

A range of submissions argue that, in addition to a Carbon Pollution Reduction Scheme, tax concessions should be introduced to further reduce the carbon emissions of the Australian economy by encouraging non‑polluting transport modes, renewable energy generation and energy efficiency investments.

Similarly, a number of submissions argue that a range of tax concessions should be provided for activities and investments that address local environmental problems such as land degradation, inefficient water use and threats to native species. Proposals include incentives to promote the pursuit of conservation activities on private land, such as farmland. There is some support for ensuring that state vehicle transfer and annual registration taxes should be lower for more fuel‑efficient vehicles.

Of submissions concerned about the environment, around a third are primarily concerned with the fringe benefits tax arrangements for motor vehicles. Most argue that the current system encourages people to drive more and contributes to noise, air pollution, greenhouse gas emissions and urban traffic congestion. Many indicate that they would like a tax system which offers some support to sustainable urban transport modes such as cycling, walking or public transport, while recognising that people outside urban areas have limited alternatives to private car travel.

A few submissions argue that tax expenditures should be reviewed to identify those with environmental consequences and reformed to eliminate any destructive impacts.