Final Report: Detailed Analysis
E2. Taxes to improve the environment
Once the Carbon Pollution Reduction Scheme (CPRS) is operational, additional measures which seek to reduce emissions (in sectors covered by the CPRS), and which are not justified on other grounds, should be phased out.
The industry assistance arrangements introduced in consequence of the CPRS should be regarded as transitional. The Government's policy is to commission an independent review of the CPRS, including in relation to emission-intensive trade-exposed (EITEs) assistance, every five years starting in 2014. To complement this, the Productivity Commission should be asked to undertake and publish an annual review of CPRS-related assistance arrangements for the life of the CPRS to provide a basis for future decisions on assistance policy. To assist the Productivity Commission, an Associate Commissioner with appropriate knowledge and industry expertise should be appointed to the review.
The government should continue to monitor tax concessions aimed at supporting environmental outcomes, and consider replacing them with targeted spending programs where this would be a more effective and efficient method of achieving the appropriate environmental outcome.
The proposed CPRS is a broad-based permit trading scheme applied directly to greenhouse gases (and to highly correlated proxies in the case of fuels). As such, it can be expected to achieve given reduction targets in a cost-effective manner relative to other instruments. The Review has not considered the underlying policy goal, or the design, of the CPRS itself.
Some submissions to the Review have argued that the CPRS alone will not be enough to achieve sufficient cuts in Australia's carbon emissions, and have proposed a range of additional tax incentives such as accelerated depreciation for investments that reduce carbon emissions, and differential stamp and registration duties for cars.
These arguments are not convincing. Under the CPRS, the quantity of emissions permits will be fixed in aggregate, resulting in a price for carbon. It is the quantity of permits that delivers the reduction in greenhouse gas emissions achieved through a range of abatement activities that respond to the price for carbon across a range of sectors. The principle of the CPRS is that decisions about how this abatement occurs within the economy are best left to the ingenuity and innovation of private decision-makers in response to price signals. If more aggressive emission cuts are needed, the most cost-effective way to achieve this would be to lower the quantity of permits.
With the CPRS in place, and provided it retains its design integrity, imposing measures to accelerate the uptake of particular technologies or practices in the sectors covered by the scheme will not deliver additional abatement, but will generally reduce efficiency and increase the costs of reaching the abatement target (see Box E2–7).
Box E2–7: The Carbon Pollution Reduction Scheme and supplementary policies
Under the CPRS the Australian government sets an overall emissions cap and then requires emitters to acquit carbon permits for each tonne of greenhouse gas emissions. Capping emissions below current levels creates demand for scarce permits that leads to the emergence of a carbon price. Over time, the carbon price drives structural change in the economy by increasing the cost of more emissions-intensive goods and services and encouraging the development of low-emissions technologies and processes.
A key benefit of broad-based emissions trading schemes is that, like taxes, they do not dictate how businesses and households reduce their emissions. They are technology-neutral and allow affected entities, which have the best information about their abatement options, to decide the least-cost means of reducing their emissions.
Supplementary policies used in sectors of the economy covered by the CPRS will not achieve more abatement than the CPRS alone. In the example below (Chart E2–4 Panel A) illustrates an emissions trading scheme operating in isolation. The abatement required to meet the emissions reduction target is the horizontal distance A1, and is achieved with permit price P1.
The marginal abatement cost curve is upward-sloping, reflecting that each unit of abatement becomes more expensive as cheaper abatement opportunities are exhausted. The cost of abatement is given by the shaded area under the marginal abatement cost curve.
In Panel B, a supplementary policy is introduced that achieves a quantity of abatement, shown as A3, the cost of which is reflected by the shaded area above A3. As the supplementary policy generates abatement of A3 the abatement required from the emissions trading scheme to meet a specified target falls by the same amount (that is, A1 falls to A2 where A1 = A2 + A3). Total emissions, therefore, are the same with and without the supplementary policy.
In this example, the supplementary policy has encouraged more expensive abatement. This is reflected in Panel B which results in a larger shaded area below the marginal abatement cost curve (that is, the shaded area above A2 and A3 in Panel B is greater than the shaded area above A1 in Panel A).
Chart E2–4: Effect of a supplementary policy in the presence of a general carbon price
Panel A: Emissions trading
Panel B: Emissions trading with
Source: Treasury, based on Productivity Commission Submission to Garnaut Climate Change Review 2008.
Supplementary policies do not affect the environmental outcome, but they may affect the economy-wide cost of achieving an emissions reduction goal and who bears the cost. For example, suppose the government introduces concessional tax treatment for one particular form of abatement in a sector covered by the CPRS. The tax concession would lower the after-tax costs faced by firms undertaking the abatement, encouraging a higher level of abatement in the particular sector where the tax concession was introduced. This would be matched by a commensurate decrease in required abatement elsewhere in the economy. Further, instead of polluters paying a tax to society, they would receive payment from society for achieving abatement
In the example above, the abatement achieved by the supplementary policy comes at a relatively high cost (including the cost borne by the taxpayer as the government uses taxes to fund the concession) as it displaces relatively cheaper abatement. That is, if the abatement undertaken due to the supplementary mechanism were as cheap as the next unit of abatement under the CPRS, the supplementary mechanism would not be required because the abatement would have occurred anyway. This highlights the importance of targeting supplementary policies at clearly identified market failures that create barriers to the take-up of cheaper abatement opportunities.
In addition to raising the costs of abatement, ill-targeted supplementary policies can affect the predictability of the carbon price. For example, while raising the overall cost of abatement, the supplementary policy in the example above results in a lower carbon price (that is, P1 moves to P2). This could delay investment decisions and ultimately raise the cost of achieving structural change in the economy.
Supplementary policies to deliver additional greenhouse gas abatement should be considered only where there are clearly identified market failures not adequately addressed by the CPRS. They should only be undertaken where the benefits of intervention outweigh the costs. Areas where there may be scope for supplementary measures include:
- the provision of information where information failures prevent individuals or businesses from adopting cost-effective abatement options; or
- where cost-effective abatement opportunities are available in sectors not covered by the CPRS.
Unless they are consistent with these principles, existing tax concessions for emissions-efficiency investments should be abolished (see Recommendation 58).
Differentiated car stamp duties and luxury car tax
The Council of Australian Governments requested on 2 July 2009 that the Review:
consider the merit of financial incentives for the purchase of fuel efficient cars and assess the merits of differential stamp duty and registration regimes linked to environmental performance.
Also, the Australian Government requested that the Review consider:
phasing out the Luxury Car Tax and phasing in a tax on vehicle fuel inefficiency and consequent greenhouse gas emissions …
Both Queensland and the Australian Capital Territory (ACT) have different rates of stamp duty for certain 'environmentally friendly' cars. In Queensland stamp duty varies depending on the number of cylinders, or whether the vehicle has a hybrid fuel/electric engine. The ACT scheme charges different rates according to fuel efficiency of the car. Further, Victoria charges a higher rate of stamp duty on used cars (where the value of the car is less than $57,010) than on new cars on the premise that used cars are less fuel-efficient than new cars.
In relation to vehicle registration renewal, all states levy an annual tax that is higher for heavier vehicles and/or for vehicles with larger engines.
Measures that provide subsidies or impose penalties through registration fees or stamp duties to encourage the purchase of more fuel-efficient vehicles are not supported. Such supplementary measures serve only to increase the overall costs of abatement.
Moreover, targeting vehicle fuel efficiency as a means of achieving reduced emissions is a blunt instrument compared to targeting emissions directly by reflecting the cost of carbon emissions in fuel prices. Individual emissions levels depend not only on the efficiency of the vehicle, but also on other factors, particularly distance travelled, weight carried and driver behaviour. Proposed subsidy schemes would reward people who purchase a fuel-efficient vehicle yet travel large distances, and penalise people who purchases a less expensive, less fuel-efficient vehicle, but travel rarely. Such instruments are less cost-effective than relying on a pollution charge alone.
Furthermore, equity and cost issues arise if stamp duties are used as the basis for delivering a point-of-purchase incentive. Since stamp duties are levied as a proportion of the price of a vehicle, a discounted rate for more efficient vehicles would provide a far greater subsidy to purchasers of expensive efficient cars, even though the higher price delivers no greater fuel saving. Conversely, the price difference between an efficient cheap car and an inefficient cheap car may be too small relative to the lifecycle fuel consumption benefits of the efficient car.
Further, such schemes do not consider the lifecycle greenhouse gas emissions involved in the production and recycling of cars. If levied on second-hand cars, as current stamp duties are, the tax may encourage premature scrapping of older cars in favour of new cars.
Differential luxury car tax, stamp duty and registration schemes aimed at encouraging the purchase of more fuel-efficient vehicles should be abolished once the CPRS (or equivalent scheme) is introduced.
Any lack of readily available information about fuel efficiency could affect efficient vehicle purchasing decisions. This market failure is already addressed directly by requiring that fuel consumption information be displayed on new vehicles.
Longer-term operation of the CPRS
While the CPRS would deliver cost-effective abatement relative to other intervention options, over the longer term the efficiency of the scheme could be further improved by phasing out unnecessary instruments that may reduce its cost-effectiveness and broadening the base, and recycling any revenue raised, in excess of that needed to fund household and other transitional assistance, to reduce other taxes.
Phase out other carbon reduction policy instruments
Australian and State governments have, in the absence of a clear price signal for greenhouse gases, introduced a range of subsidies, tax concessions and expenditure programs to promote greenhouse gas reductions. As noted by Wilkins (2008):
Currently there are in excess of 200 relevant programs around Australia in the States and Territories. Many have the potential to interfere with an emissions trading scheme.
To the extent that these programs do not address market failures other than those covered by the CPRS, they are unnecessary, inefficient and will ultimately result in higher costs being borne by the Australian public (see Recommendation 58). They should be phased out as quickly as practical once the CPRS becomes operational. The Australian Government's response to the Wilkins Review has removed some of these unnecessary programs but further action, including a rationalisation of state programs, would be beneficial.
One program that should be reconsidered once the CPRS becomes fully operational is the expanded national Renewable Energy Target (RET). The RET legislation is designed to ensure that 20 per cent of Australia's electricity supply is from renewable sources like solar, wind, geothermal and biomass by 2020. Wholesale purchasers of electricity are required to contribute proportionally to an additional 45,000 gigawatt hours (GWh) of renewable energy per year by 2020.
The RET will assist the energy sector transition to the introduction of the CPRS, by helping accelerate the deployment of renewable energy in the shorter term. As noted by Garnaut (2008), a RET will force the use of renewables in instances where non-renewable generation options (like gas) would achieve the CPRS target at lower cost. This implies unnecessarily high electricity prices, leading to higher costs for goods and services produced using electricity as an input (Garnaut 2008). The RET will conclude in 2030 as the CPRS matures.
Broaden the base of the CPRS if it will result in a net benefit
Ideally, the base to which a trading scheme is applied should be as broad as possible to maximise opportunities for low-cost abatement. The sectors covered by the current design of the CPRS account for around 75 per cent of Australia's greenhouse gases.
Additionally, the broadness of the CPRS may deliver benefits over the current tax arrangements in some areas. For example, to the extent that the CPRS will apply to liquefied petroleum gas (LPG) whereas excise does not, the broader base is likely to reduce misallocation of resources by reducing the tax bias in favour of LPG.
Carbon-sink forests and biodiversity
Carbon-sink forests can be included within the CPRS framework on a voluntary basis following accreditation. Associated tax arrangements provide for immediate deduction of establishment costs for such forests until 2011–12, after which the costs would be subject to tax depreciation at the same rate as horticultural plants.Carbon-sink forests are a potentially low-cost means of reducing net emissions while providing the landowner with revenues through progressive harvesting and replanting.
A possible side-effect of these arrangements is the planting of inappropriate, single-tree species, with associated reductions in biodiversity.
While recognising this potential problem, proposals to limit carbon-sink forests to the planting of biodiverse forests are not supported. A number of studies suggest that the use of carbon-sink forests can be a cost-effective means of offsetting carbon emissions (for example, Richards & Stokes 2004, Lubowski et al. 2005). A Senate committee heard recently that the cost of planting a forest with around 40 species of tree is approximately twice that of planting a single-species forest (Senate Rural and Regional Affairs and Transport Committee 2008). Consequently, requiring that only biodiverse forestry projects be accredited under the CPRS would significantly reduce the scope for forests to be utilised as a cost-effective abatement measure.
A more effective means of improving biodiversity outcomes would be to compensate forest providers directly for the additional costs of multi-species forests. This would properly reflect the fact that government is, in effect, purchasing an environmental service, while also targeting spending to the most effective areas.
Arrangements like the Environmental Stewardship Program or Victoria's BushTender program may be appropriate mechanisms to deliver management agreement payments that remunerate carbon-sink forest investors for the additional costs of planting and maintaining biodiverse forests in perpetuity.
Phase out transitional assistance
Under the proposed arrangements, all revenue raised by the CPRS would be returned through targeted assistance. This assistance includes:
- household assistance: through increases to income support, family payments, tax offsets to support low- and middle-income households and energy efficiency measures;
- fuel tax adjustment: reducing fuel excise to maintain the overall tax on petrol over the first three years of the scheme's operation;
- industry assistance: comprising free permits provided to emissions-intensive trade-exposed industries (EITEs), which may not be able to pass on costs in the absence of a global agreement on emissions reductions, free permits to some existing coal-fired electricity generation plants, and support for clean technologies;
- targeted support: including support for information provision, for medium and large enterprises to reduce the impact of CPRS-related electricity price increases, for the food processing industry, for small business and community organisations to invest in energy efficiency equipment, as well as grants for innovative projects; and
- structural adjustment assistance: for those adversely affected by the scheme's introduction.
Assistance in general should be viewed as transitional in nature and, apart from appropriately designed household assistance, be abolished in the longer term. Of course, this will depend in part on future development of CPRS targets and international developments.
The household assistance arrangements applying to transfers will result in automatic and ongoing increases in assistance to reflect any price increase caused by changes in the CPRS target. As a result, no further assistance for transfer recipients for such price changes is required. As wages are not indexed in such a manner, if assistance is to be provided to the broader public it should be done through the income tax system (for example, through the current LITO or through increases in the tax free threshold). Such an approach is aimed at maintaining incentives for workforce participation for those members of society who are particularly sensitive to real wage movements (as higher prices result in lower real wages). Providing such income tax cuts may be important for macroeconomic stability as the proposed tax cuts will lessen the pressure for compensating wage increases (Freebairn 2008).
Assistance to individuals and families in the form of compensation to overall income (such as tax cuts and income support increases) maintain the carbon price signal and therefore the incentive to reduce carbon emissions. On the other hand, any assistance arrangements that would blunt carbon price signals should be avoided.
The fact that the CPRS imposes a price on the domestic production of carbon, for those emitters covered by scheme, is important in considering other forms of assistance to trade-exposed Australian-based businesses emitting carbon. Without other nations imposing mechanisms to price carbon, this could lead to investment in Australia, particularly in EITE industries, moving offshore for no net reduction in global emissions — compared to where no CPRS is in place. On the other hand, investors will consider the risk that carbon pricing will be introduced in other countries before it is actually introduced. In some cases, the certainty provided by an established carbon pricing system may increase the attractiveness of Australia.
Assistance provided to EITEs is scheduled to phase down by 1.3 per cent per annum via the carbon productivity contribution. In 2014 the Independent Expert Review will report on the appropriateness of EITE assistance, including detailed work by the Productivity Commission on carbon constraints in other jurisdictions.
The Government's policy is to commission an independent review of the CPRS, including EITEs assistance, every five years starting in 2014. To complement this, reviews should be undertaken annually by the Productivity Commission to provide a basis for future decisions on assistance policy and should take into account the extent of effective carbon pricing in other countries. To assist the Productivity Commission, an Associate Commissioner with appropriate knowledge and industry expertise should be appointed to the review (see Recommendation 59).
In relation to support for energy efficiency purchases, support for specific abatement activities is redundant under the CPRS and will serve only to increase the overall cost to the economy of achieving any given abatement target. The extent to which energy efficiency will contribute to national emissions reductions should be left to the market.
Similarly, there is no convincing evidence of significant market failures associated with innovation and low-cost technologies to address climate change over and above those addressed by existing intellectual property rights and general support for research and development. Through putting a price on emissions, a key benefit of the CPRS would be to provide a strong incentive for the development of emissions-reducing technologies and practices, whether or not other countries also implement carbon-reduction policies. If there were to be a market failure in research and development, it should be addressed through existing broad-based arrangements to support research and development rather than through targeted, industry-specific programs.
The tax system currently incorporates a number of tax concessions intended to promote environmentally beneficial activities such as Landcare operations and environmental protection expenditures. The majority of these concessions are directed towards primary producers. Three-quarters of land in Australia is in private hands and, consequently, private landholders have an important role in preserving and improving the environment.
Tax concessions are not a successful means of targeting the degradation problems that cause the largest public costs (Mues, Moon & Grivas 1996). Moreover, some commentators, such as Edwards, Dumsday and Chisholm (1996), have suggested that providing subsidies for remediation and rehabilitation may perversely encourage land degradation, since the marginal cost of repairing it is lower.
Furthermore, every tax concession increases the complexity of the tax system. While only a small proportion of taxpayers may be eligible for a given concession, the extra costs associated with understanding, claiming and administering every concession, and their interactions, build up. The cost of this increasing complexity should be considered whenever governments look at options for delivering programs (see Section G4 Client experience of the tax and transfer system).
Environmental land management
The environmental impacts of land use are among Australia's most significant environmental challenges. Major problems include the loss of biodiversity, the pollution of water ways, soil erosion, salinity and soil acidity (Australian State of the Environment Committee 2006). Significant changes in land management practices are needed to avoid passing irreversible environmental damage on to future Australians.
However, the tax system is generally not a practical or efficient means of driving this change due to the limitations of tax concessions discussed above.
There may be considerable national benefit in governments collectively developing and adopting a comprehensive national approach to environmental land management. A central element should be a legislated 'duty of care' on landholders, as proposed by the then Industry Commission in 1998 (see also House of Representatives 2001). This would reflect the principle that the community's right to a clean and sustainable environment overrides the rights of individuals to unrestricted use of their private property.
Several States have already moved in this direction, in relation to specific problems, by legislating for an environmental duty of care including weed control (under which farmers are obliged to take steps to prevent the spread of certain weeds on their property). Another example of such an approach is Queensland's recent strategy to protect the Great Barrier Reef from agricultural runoff pollution (under which primary producers are obliged to adopt practices that limit runoff from their land).
Indeed, duty of care arrangements — which impose obligations on land owners in order to achieve social objectives — have a long history in Australia's urban areas, being used to achieve objectives such as preserving architectural heritage or significant trees.
Some States have also legislated for a general environmental duty of care 9, though these provisions do not appear to have been operationalised to any great extent, possibly due to uncertainty about what standard of care the duty actually imposes on landholders (see Box E-8).
Box E2–8: A framework for an environmental duty of care
The objective of introducing a statutory environmental duty of care would be to prevent future environmental harm. It would not demand remediation of past environmental damage. It would require land managers to take all reasonable and practical steps to prevent harm to the environment.
Desired outcomes, focused on preserving ecosystem integrity, would be developed in consultation with affected parties, and incorporated into the legislative framework. Land managers employing practices insufficient to meet the desired outcomes would be considered in breach of their duty of care.
The main challenge would be to define the standard of care required precisely enough to give land managers certainty about their obligations.
Voluntary codes of practice or guidelines for catchment or sub‑catchment areas would be developed. These codes would reflect best practice and provide guidance to land managers about appropriate land management practices. Adoption of a code, while voluntary, could be a defence against enforcement action.
A phased approach could be used to encourage compliance, ranging from positive measures such as providing information and advice to official warnings, administrative compliance orders and civil penalties.
Over time, scientific knowledge and technology will improve. This will have implications for the appropriate standard of care. What is expected under the duty of care should therefore be periodically reviewed.
To address this, the introduction of a statutory duty of care would need to be complemented by other instruments, such as codes of practice, indicating how the duty of care can be met. These codes should be included in all relevant jurisdictional legislation, but with the applicable standards developed and applied at an appropriate regional level to reflect environmental and geographical differences. It is important that these standards allow the adoption of flexible and innovative approaches by landholders, and minimise compliance costs.
A duty of care may impose some additional cost on landholders, but this would better reflect the true cost of production. In addition, funding available under existing government programs, such as the $2.25 billion Caring for Our Country, could be used to help landholders transition to the required standard where necessary.
Under this approach, services of high environmental value that are beyond the standard of care required (such as extensive remediation of past damage) could be purchased from private landholders by governments through programs such as the Environmental Stewardship program (see Box E2–9).
Under the Environmental Stewardship Program, the Australian government purchases high-value environmental and ecosystem services on behalf of the broader community from individuals or organisations that own or manage freehold, leasehold or native title land. Landholders enter long-term contracts under which they are paid to deliver such services. The Victorian BushTender program (on which the Environmental Stewardship Program was modelled) operates in a similar way.
The objective of programs like Environmental Stewardship program and BushTender is the same as the objective of current environmental tax expenditures for primary industries, but they avoid many of the problems associated with tax expenditures. Specifically, these programs allow spending to be targeted to high-value conservation and ecosystem service areas identified by the government. The benefit the landholders receive is based on the service they offer the public, rather than the marginal tax rate they face, or whether they operate a business. In addition, government expenditure on these public goods is transparent and is reported in annual budget publications.
Existing environmental taxes should be retained only if they effectively address a clear market failure and if their quantum reflects the size of the spillover effect involved.
As noted earlier, some existing 'environmental' taxes are not, themselves, intended to address an environmental spillover, but are intended primarily to raise revenue to fund associated environmental programs. For example, the waste levies imposed by some States are unlikely to match the costs of providing landfill services and the environmental spillover associated with landfill. Revenues are sometimes earmarked to environmental programs (see Box E2–10).
Product stewardship schemes
Some product stewardship schemes have the effect of raising revenue to fund associated environmental programs rather than directly targeting the environmental spillover. They target the purchase of the good that may lead to the environmental damage. Those benefiting from that production or consumption should therefore fund any programs designed to deal with the environmental damage that may occur.
If this approach is used it is important that taxing and spending programs are closely aligned. For example, using a tax that then funds a payment (of the same amount) when the product is returned for correct disposal clearly links the tax to the refund.
Product stewardship arrangements aim to reduce the environmental impact of a product throughout its lifecycle. This usually involves holding manufacturers responsible for designing and selling products that have minimal environmental impact while holding consumers responsible for ensuring their use and disposal of a product does not harm the environment.
The Commonwealth Product Stewardship Oil levy (see Box E2–10) is an example of where a levy is applied to all importers and manufacturers to fund the collection and recycling of used oil. South Australia's beverage container deposit legislation is another example. It is most likely that these taxes are passed onto consumers in the form of higher prices.
Governments should implement such arrangements only when the costs of the scheme are less than the cost of damage to the environment, human health and public amenity that the arrangements will prevent. Such schemes are most likely to be appropriate where the damage done by inappropriate disposal is high and it is difficult to prosecute the people responsible.
Reducing the consumption of resources is not sufficient reason for governments to intervene, since the price mechanism reflects scarcity. There has to be a spillover or external cost to society from consuming or disposing a particular product.
Also, each policy instrument needs to be assessed on its individual marginal benefit to the environment. For example, the benefit from applying a tax on pollution arising from production of a good should be considered and assessed independently from the benefit of reducing environmental damage arising from that good's disposal.
When evaluating these arrangements, governments should also consider the incentives they may unintentionally create. For example, beverage container deposit schemes can reduce the viability of kerbside recycling by removing high-value glass and aluminium from the waste stream.
State waste levies
Most States impose a levy on waste disposed of in landfill as well as to the gate fee (a user charge). The levies are intended to discourage waste going to landfill. Some States hypothecate the revenue to environmental programs. The revenue collected through these levies can be substantial. For instance, the NSW Waste and Environment levy is estimated to raise $260 million in 2008–09.
As noted by the Productivity Commission, the externalities of disposal to a properly located, engineered and managed landfill are typically small, broad landfill levies are not a practical way to target any residual externalities and, in some States, the levies impose unwarranted costs on the community (Productivity Commission 2006a, pp. 220–228). Moreover, the levies may encourage illegal dumping of waste, rather than waste minimisation.
Product Stewardship for Oil Program levy
This levy is imposed on the purchase of virgin petroleum-based motor oil produced or imported into Australia, at a rate of 5.449 cents per litre. This rate was based on an estimate of the cost of the associated used-oil recycling program. In 2007–08 it collected $27.6 million.
Used oil can result in significant environmental harm if it is disposed of inappropriately. However, the levy is not intended to change behaviour in relation to oil disposal. Rather, the levy raises revenue used to fund a used-oil recycling program. The merits of the associated oil-recycling program should be reviewed. As noted by Productivity Commission (2006a), the provision of a greater subsidy for recycling used oil into 'high value' products distorts the used-oil market. In particular, the merits of a used-oil collection subsidy should be explored.
Tax concessions introduced for non-environmental purposes but which promote behaviour with adverse environmental consequences should be reviewed. Such a review would consider whether the social benefit of the activity supported by the concession outweighs the social cost associated with the environmental damage. Key tax concessions identified by the Review as having environmental consequences include the concessional application of fringe benefits tax to cars and certain concessions provided to the primary production sector.
Fringe benefits tax
The current statutory formula for valuing car fringe benefits applies so that the taxable value of a car fringe benefit falls as total kilometres rise.
At the margin, these arrangements may create an incentive for individuals to travel additional kilometres, adding to carbon pollution and congestion. To address this issue, the Review is recommending that car fringe benefits be valued at a single statutory rate of 20 per cent that would apply regardless of the kilometres travelled (see Recommendation 9b, Section A1 Personal income tax).
Concessional treatment for primary production
Tax concessions that favour agriculture and forestry include undervaluation of natural livestock inventory increases, and accelerated depreciation for plantation forestry and horticultural crops. These provisions encourage higher levels of the favoured activities. Environmental spillovers may include excessive stocking rates and expansion of primary production into marginal areas (Freebairn 2009).
A range of petroleum excise exemptions may have unintended impacts on the environment. The petroleum excise system is considered further in Section E3 Road transport taxes.
8 S40-1005 ITAA97 expenditure can be claimed as a tax deduction at 7 per cent a year. See page 16 of www.environment.gov.au/minister/wong/2009/pubs/wilkinsresponse.pdf.
9 Queensland: Environmental Protection Act 1994 s319; Victoria: Catchment and Land Protection Act 1994 (Vic); also South Australia and the Australian Capital Territory.
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Once the Carbon Pollution Reduction Scheme (CPRS) is operational, additional measures which seek to reduce emissions (in sectors covered by the CPRS), and which are not justified on other grounds, should be phased out.
The industry assistance arrangements introduced in consequence of the CPRS should be regarded as transitional. The Government's policy is to commission an independent review of the CPRS, including in relation to emissions-intensive trade-exposed (EITEs) assistance, every five years starting in 2014. To complement this, the Productivity Commission should be asked to undertake and publish an annual review of CPRS-related assistance arrangements for the life of the CPRS to provide a basis for future decisions on assistance policy. To assist the Productivity Commission, an Associate Commissioner with appropriate knowledge and industry expertise should be appointed to the review.
Fringe benefits that are readily valued and attributable to individual employees should be taxed in the hands of employees through the PAYG system. Other fringe benefits, including those incidental to an individual's employment, should remain taxed to employers at the top marginal rate (and non-reportable for employees). The scope of fringe benefits that are subject to tax should be simplified.
- The current formula for valuing car fringe benefits should be replaced with a single statutory rate of 20 per cent, regardless of the kilometres travelled.