Australia's Future Tax System

Final Report: Detailed Analysis

Chapter E: Enhancing social and market outcomes

E2. Taxes to improve the environment

E2–2 Revenue from environmental taxes

The OECD (2006) defines 'environmentally related taxes' as any compulsory, unrequited payments to the government that are levied on tax bases deemed to be of particular environmental relevance. In Australia, regulatory approaches have historically been the primary means of addressing environmental issues. While more environmentally related taxes have been used in Australia recently, not all have been well-targeted or effectively implemented. A number of concessions to encourage positive environmental action, such as tax incentives under the Australian government's Landcare program and for water facilities, have also been introduced.

A number of Commonwealth and State charges, fees or levies are classified as environmentally related but do not address a market failure directly. For example, the purpose of taxes such as the Product Stewardship Oil Levy is not to provide taxpayers with an incentive to reduce an environmental spillover, but to generate revenue to be spent on programs with environmental objectives.

According to OECD data, environmentally related taxes in Australia raised revenue equivalent to around 1.95 per cent of gross domestic product in 2006 (see Chart E2–3). Nearly all of this revenue came from excise on motor fuels and from taxes on motor vehicles. These taxes were introduced to raise revenue, not to achieve environmental objectives.

Chart E2–3: International comparison of revenue from environmentally related taxes

Chart E2–3: International comparison of revenue from environmentally related taxes

Source: Heady (2009).

The Australian Government intends to introduce the Carbon Pollution Reduction Scheme (CPRS) in 2011 to reduce the production of greenhouse gases in Australia. Under accounting standards, revenue from the sale of emissions permits will be classified as taxation revenue and hence the scheme will be responsible for raising a significant proportion of environmental tax revenue in Australia (see Box E2–6 for a description of the CPRS and its revenue estimates).

Box E2–6: The Carbon Pollution Reduction Scheme

Climate change is one of the key economic and environmental challenges facing Australia and the world. The central element of the Australian Government's climate change policy framework is the introduction of the Carbon Pollution Reduction Scheme (CPRS). The CPRS, planned to commence on 1 July 2011, is an emissions trading scheme that would cap greenhouse gas emissions and issue tradeable emissions permits up to the cap. For the first year of operation, a transitional fixed price of $10/tonne CO2-equivalent would be applied. Thereafter, emissions prices would be determined by the market (subject to an increasing price cap).

Unlike a fixed-price carbon tax, where the level of aggregate emissions would depend on an emissions price set by government, the CPRS would give the government control over the number of domestic emissions permits released and would allow the permit price to be determined by the market. Under either approach, emissions-intensive goods would be made more expensive relative to low-emission goods, creating an incentive for consumers and businesses to cut emissions by changing what they consume and their methods of production.

The CPRS emissions cap would decline annually, consistent with the Government's emissions reduction targets of between 5 and 25 per cent below 2000 levels in 2020, and 60 per cent below 2000 levels in 2050. The cap trajectory to the end of 5 years would be announced on a rolling basis to provide certainty. Each year the government would issue emissions permits equal to the cap, either through auction or administrative allocation.

Entities covered by the CPRS would be free to emit at any level, within the shrinking overall cap, but would be required to surrender a permit for every tonne of emissions. It is expected that emitters would buy permits if their internal costs of abatement were higher than the permit price, and would reduce their emissions if their abatement costs were lower than the permit price. Similarly, businesses holding permits are likely to sell them and undertake abatement activity if the market price for permits exceeds their cost of abatement. These market incentives work to move permits to their highest value use and to encourage the cheapest abatement to be undertaken first, ensuring that reductions in emissions are achieved at least cost to the community.

In the Australian government budget, revenue from the auctioning of permits is treated as a tax, subject to guidance to be issued under the UN System of National Accounts. The CPRS is expected to generate revenue from permit auctions of around $11½ billion in 2012–13.7

The Australian Government has indicated its intention to allocate 'free' permits to emissions-intensive trade-exposed industries and to use revenue from auctioned permits to assist households and businesses manage the transition to a low-carbon economy.

7 2009–10 Mid-Year Economic and Fiscal Outlook p. 37.