Climate Change and Tax Law: Tax Policy and Emissions Trading

Abstract:     
The tax treatment of transactions under an emissions trading scheme is of critical importance as the taxation system has the potential to either distort or support the scheme. As pointed out in the Australian Government's recent discussion paper, the "Green Paper", the primary tax policy objective in the design of the tax rules applicable to emissions trading is to support the scheme objective of reducing emissions in the most cost-effective manner. This paper provides an overview and analysis of the income tax implications of Australia's proposed emissions trading scheme, the Carbon Pollution Reduction Scheme. The paper begins with a description of the discrete income tax regime which is proposed to apply to transactions involving permits and an evaluation of the regime against the stated tax policy objectives. The paper provides detailed analysis of the treatment of free permits that are proposed to be issued to emissions-intensive trade-exposed industries. The paper also comments on income taxation issues raised by each of the following proposed scheme features: fixing liability under the scheme; assistance to strongly affected industries; the price cap; foreign ownership of permits; and the development of forward markets.

Keywords: Emissions trading, Income tax, Carbon emissions, Tax policy

JEL Classifications: K10, K30, K32, K34

Working Paper Series