Crawford School of Public Policy TTPI Tax and Transfer Policy Institute

Tax and pollution

TTPI – Policy Brief 1/2020 May 2020

Maria Sandoval-Guzman PhD Candidate Curtin University

Miranda Stewart Professor, University of Melbourne Fellow, Tax and Transfer Policy Institute Australian National University

Tax and Transfer Policy Institute Crawford School of Public Policy College of Asia and the Pacific +61 2 6125 9318 [email protected]

The Australian National University Canberra ACT 0200 Australia www.anu.edu.au CRICOS Provider No. 00120C

* This Policy Brief is based on work commissioned by the Australian Conservation Foundation (ACF). The work is independent research and the options and recommendations do not necessarily reflect the views of the ACF.

THE AUSTRALIAN NATIONAL UNIVERSITY Policy Brief - Tax and Pollution

This policy brief discusses tax and pollution. SUMMARY OF POLICY OPTIONS The brief identifies the elements in the Policy option 1. Reintroduce a carbon Australian tax system that may affect price/carbon emissions trading system. pollution by altering the incentives of economic agents in relation to polluting the Policy option 2. Review income tax law environment, through the distortion of price mechanisms for operation of a CPRS. signals and the externalisation of costs that Policy option 3. Maintain or improve are ultimately borne by the environment and carbon sink forest and carbon sequestration society. tax provisions. The tax system is a powerful driver of Policy option 4. Increase taxes on Australia’s economy. Taxation can change consumption of goods and services in the price of a good or service making it more sectors that produce significant carbon or less financially attractive to consumers emissions. and investors. It can shift a market to prefer one technology or another especially if they Policy option 5. Price fuel appropriately for are directly substitutable. It can encourage long-term sustainable use. or discourage certain behaviour. This brief Policy option 6. Introduce road user is focused on the effects of the tax system charges, congestion or distance-based road on air pollution, particularly carbon taxation. emissions, fuels and vehicle use. The brief also identifies other issues where the tax Policy option 7. Increase implementation system may have an impact, including of user charges for car parking. water pollution and waste. The brief draws Policy option 8. Reform Fringe Benefits on existing literature and some experiences Tax provisions for cars. in other countries. Policy option 9. Support consumers and This brief sets out policy options for reform businesses to shift to energy efficient or of the tax system to reduce or prevent electric vehicles. pollution. These policy options take into consideration the fact that tax policies which Policy option 10. Explore reforms to car alter production decisions can have registration measures. efficiency and distributional costs. The best Policy option 11. Review eligibility for strategy may be the reduction or removal of deductions for pollution clean-up costs. incentives currently altering production decisions towards polluting options. Policy Policy option 12. Target business instant alternatives are also considered for asset write-off concessions towards energy consumption-based channels, since taxes efficient capital investments and explore that alter consumption decisions may have accelerated depreciation for upgrade to lower efficiency costs than those altering equipment that achieves specified production decisions. Overall, a package of environmental efficiency gains. tax and other reforms would be required to deal with population-wide effects.

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Policy Brief - Tax and Pollution

In 2019, 53% of Australia’s greenhouse gas CARBON POLLUTION emissions were estimated to come from In 2015, Australia’s carbon emissions were electricity and direct combustion; 19% from 22.6 tonnes per capita (tCO2eq/cap), the transport; 13% from agriculture; 11% from highest amongst industrialised economies fugitives (the extraction, processing and and just behind Bahrain, Brunei, Kuwait, delivery of fossil fuels); 7% from industrial Qatar, Trinidad and Tobago and the United processes and product use; and 2% from Arab Emirates. Consumption-based waste (disposal of solid waste and emissions estimates, which take trade into wastewater), as shown in Figure 1. Land account (production-based emissions use, land use change and forestry (a minus embedded CO2 in exported goods measure that includes both emissions and plus embedded CO2 in imported goods) sequestration) had a negative contribution place Australia’s emissions at 3.5 times the to emissions, at minus 4%. country’s share of global population.

Figure 1: Australia - Emissions by sector (Mt CO2-e)

Electricity 34% Direct combustion

Transport

19% 19% Agriculture

13% Fugitives 11%

7% Industrial processes and 2% product use Waste Share of total (2019) Land use, land use change -4% and forestry

Own construction. Source: Department of the Environment and Energy 2019, Australia's Emissions Projections 2019.

Policy options Policy option 1. Reintroduce a carbon A range of tax policy options may be price/carbon emissions trading system considered to reduce Australia’s carbon Empirical evidence indicates that carbon emissions by altering production and pricing plays a key role in tilting energy consumption decisions. The most important mixes in a low-carbon direction (e.g. Best & remains a price on carbon or cap and trade Burke 2018). The Economists' Statement system. We also identify several other on Carbon Dividends published on 17 policy options. January 2019, the largest public statement of economists in history, is now signed by more than 3,500 economists, including 27 Nobel laureates. The Statement advises that pricing carbon through a cap and trade TTPI Policy Brief 1/2020 3

Policy Brief - Tax and Pollution system or carbon tax offers the most cost- incentivise households and businesses to effective lever to reduce carbon emissions adjust towards an economy with lower at the scale and speed that is necessary, pollution, higher energy efficiency and more sending a powerful price signal and steering sustainable energy sources. For emissions- economic agents towards a low-carbon intensive trade-exposed activities, free future. carbon units were issued under a Jobs and Competitiveness Program. Coal-fired The average annual growth rate of carbon electricity generators were also issued free dioxide emissions per capita from fossil fuel carbon units. Measures were enacted to combustion has been significantly lower for assist low- and middle-income households countries that have had a carbon price and to provide for fuel tax adjustments, as compared to countries without, even after well as a variety of industry assistance controlling for the use of other policies measures. aimed at reducing emissions. Scientists argue that a carbon price is an opportunity The Henry Tax Review (2009) proceeded to restructure agricultural, resource and on the assumption that the CPRS would go rural Australia for long term sustainability. ahead, so it did not specifically address this issue. However, the Review advised that Emission Trading Schemes in Australia: transitional industry assistance through tax Background and non-tax measures, to support Australia introduced a cap-and-trade implementation of the CPRS, should be carbon emissions trading scheme, the phased out. The Review accepted that Carbon Pollution Reduction Scheme compensation for the overall income of (CPRS), in the Clean Energy Act 2011. The individuals and households, in the form of CPRS was intended to be the main element tax cuts and increased income support, was in Australia’s effort to reduce greenhouse compatible with carbon price signals to gas emissions in line with the Kyoto achieve emissions reductions. agreement. The CPRS only operated for Emission Trading Schemes: Current three years. It was repealed by the Abbott proposals Government in the Clean Energy Legislation (Carbon Tax Repeal) Act 2014. The Economists’ Statement (2019) asserts that a carbon tax should increase annually The former CPRS set a carbon pollution cap until emission targets are met; these on the sum of total auctioned carbon units gradual increases will replace various and total issued free carbon units. The carbon regulations that are less efficient, mechanism required that producers changing regulations for price signals. The surrender one eligible emissions unit for Statement recognises, however, that the each tonne of carbon dioxide equivalence of carbon tax needs to be revenue-neutral and the greenhouse gas emissions from their proposes that revenue be returned to activity. The obligation to buy carbon units, individuals through lump-sum rebates to initially at a set price, operated like a carbon offset increased energy prices. tax. Producers with insufficient carbon units would be required to pay a unit shortfall A 2019 report by the International Monetary charge. Fund (IMF) models the likely impact on emissions, fiscal revenues, local air Under the CPRS, revenue from the sale of pollution mortality, and economic welfare emissions units would be channelled to impacts of a range of instruments including TTPI Policy Brief 1/2020 4

Policy Brief - Tax and Pollution comprehensive carbon taxes, emissions Fund and started on 1 July 2016, applying trading systems, taxes on individual fuels, to around 140 large businesses (covering and incentives for energy efficiency. The around half of Australia’s emissions) by IMF paper points to emissions trading requiring them to keep emissions within schemes as a competitive alternative for baseline levels. Since the mechanism is Australia; studies have also shown that based on crediting and purchasing present costs could be more than offset elements to lower the country’s emissions – when considering future welfare and funding businesses to undertake efficiency gains (Kotlikoff et al 2019). The productivity-enhancing projects– it could be IMF report also stresses other mitigation built upon towards a larger cap-and-trade instruments, such as the use of revenue- scheme. neutral tax subsidy schemes to promote Policy option 2. Review income tax law cleaner power generation, shifting to mechanisms for operation of a CPRS cleaner vehicles, and improvements in energy efficiency without an increase in fuel Several provisions to support operation of a prices (see below; see Policy Brief 2). In CPRS remain in the Income Tax subsequent analysis, the IMF has also Assessment Act 1997 (ITAA97). These identified the opportunity for industrialised should be reviewed for operational countries like Australia to use carbon pricing effectiveness to support a new carbon cap revenue to decrease taxes on labour and and trade system. The ITAA97 also capital income, which implies a retooling of contains provisions on registered emissions the tax system rather than an increase in the units (Kyoto or Australian carbon credit overall tax burden; a range of approaches units) and their international transfers, and are suggested by the IMF. on the trading stock treatment of units, which are currently not applicable as there During the 2019 Federal election campaign, is no CPRS in operation. the Liberal National Party Coalition proposed a climate solutions package and The use of tax deductions and exemptions the Australian Labor Party (ALP) proposed or grants in the income tax law should be a climate change action plan. Neither party investigated to identify what is the most expressed an intention of reintroducing a efficient, transparent mechanism to support carbon pricing mechanism or emissions industry transition to a low carbon future, on trading scheme. On registered emissions reintroduction of a cap and trade system. units (ITAA97 section 420.1), the Coalition Previously, the Henry Tax Review received intends to carry over surplus Kyoto credits. submissions supporting a range of tax However, we note that the Kyoto Protocol incentives for reducing pollution and energy establishes that no country may comply with efficiency to support transition under the its reduction commitments exclusively CPRS. Submissions argued for accelerated through use of these Kyoto mechanisms. depreciation for investments that reduce carbon emissions, and for lower taxes on The ALP proposed a plan to expand the energy-efficient or hybrid cars. The Review previous Turnbull Government's safeguard advised against these special provisions, mechanism, forcing around 250 of arguing that supplementary policies could Australia's biggest polluters to cap their affect the economy-wide goal of achieving emissions. This excluded the farming emission reductions through price signals sector. The safeguard mechanism is and private decision-making. already part of the Emissions Reduction TTPI Policy Brief 1/2020 5

Policy Brief - Tax and Pollution

Policy option 3. Maintain or improve No deduction is provided for taxpayers not carbon sink forest and carbon in a business, or for private individuals or sequestration tax provisions entities. In addition, all other forestry Income tax reforms were made at the time investment or business activities are of introduction of the CPRS to support excluded. There may be scope to extend a Australia’s carbon emission reduction tax incentive for private individuals, or goals. Carbon sink forest investment is investors, to invest in carbon sequestration supported by Subdivision 40-J of ITAA97, operations or forests in Australia. Exploring which allows a deduction for capital Australia’s potential to build an industry for expenditure by a taxpayer carrying on a carbon sequestration could lead to business, where the expenditure is incurred significant emissions offsets, with estimates nearly double the amount of the to establish trees that meet the suggesting country’s annual emissions could be offset requirements for carbon sequestration through carbon capture. (Section 40-1000). The cost of establishing the trees is deductible at a write-off rate of Consumption taxes 7% per year, in general. Strict conditions are Tax policy may be used to increase the applied to define establishment costs of price of consuming goods and services for carbon sink trees (Section 40-1010). carbon producing sectors, through levying a The Carbon Credits (Carbon Farming tax (or increasing the tax) on consumption. Initiative) Act 2011 establishes the In Australia, taxes on consumption are low guidelines for sequestration and relative to other OECD countries. Figure 2 mechanism for determining Australian shows that the Goods and Services Tax carbon credit units, which may be issued in (GST) and excises generate only 22% of relation to eligible offsets projects. total federal taxation liabilities.

Figure 2: Australian government taxation liabilities by source, 2016-17

51.2%

Share of of total Share 20.2% 16.2%

5.8% 4.8% 1.1% 0.7%

Individual income tax Company income tax GST Excise Super fund income tax FBT PRRT, LCT, WET

Source: Australian Taxation Office 2019, Taxation Statistics 2016-17. GST: Goods and Services Tax; FBT: Fringe Benefits Tax; PRRT: Petroleum Resource Rent Tax; LCT: Luxury Car Tax; WET: Wine Equalisation Tax. TTPI Policy Brief 1/2020 6

Policy Brief - Tax and Pollution

Policy options for such GST-free treatment is equity, although high income households benefit Policy option 4. Increase taxes on significantly from GST-free meat, dairy and consumption of goods and services in fresh produce. Another example of GST- sectors that produce significant carbon free treatment of an item, with negative emissions environmental effects, is the GST-free The Goods and Services Tax (GST) is status of bottled water, which is often levied at a 10% rate on a wide range of supplied in plastic, and whether, or not, the goods and services, but with significant water is imported. It is questionable whether base exemptions and input-taxed items, this GST-free status is appropriate taking including basic food, water and sewage account contemporary policy concerns services, health and education. In addition, around environmental impact. excises are charged on alcohol, tobacco A further example of the role Australian and fuel. consumers play in rising greenhouse Many exemptions from the GST base have emissions are the imports of highly- an equity goal, but can have a negative polluting, emission-intensive goods and environmental impact, as well as reducing services from countries with lower the efficiency, simplicity and revenue from environmental standards. For instance, it this tax. One example is the exemption of has been estimated that about 20% of water and sewage supplies from the GST. China’s air pollutant emissions are related Another example is the exemption of food. to exports for foreign consumption (Wang et As shown in Figure 1, in Australia al 2017). This effectively externalises the agriculture is a significant producer of pollution to the source country, with carbon emissions; cattle (meat and dairy) negative environmental and health impacts accounts for 70% of greenhouse gas for its population, and increasing global emissions by the sector. Globally, livestock greenhouse emissions overall. accounts for 15% of greenhouse emissions, and is a major source of land and water On the production side, it is important to degradation; the consumption of fossil fuel assess the emissions and pollution derived along the sector supply chains, in itself, from export-oriented goods and services produced in Australia. All exports are GST- accounts for about 20% of the livestock sector emissions. According to the Food free, consistent with Australia’s destination- and Agriculture Organisation of the United based consumption tax design. This does Nations, emissions reduction from the not take account of whether economic and livestock sector can be achieved by tax policy benefits of the current system reducing production and consumption, by outweigh environmental and social costs, lowering emission intensity of production, or for example, of meat or livestock exports. by a combination of the two. However, this is consistent with the broad policy design of a GST intended to tax All meats for human consumption are GST- consumption where the consumer is free, as are milk, cream and cheese. The located. exemption reduces the cost of consumption of meat and dairy relative to other goods Broadening the base of the GST would be and services. Fresh and tinned vegetables more neutral and raise revenue, which can and fruits are also GST-free, as are sugar, be used to ensure distributional equity, honey, jams and syrups. The main reason while having potential to improve TTPI Policy Brief 1/2020 7

Policy Brief - Tax and Pollution environmental outcomes (see analysis in greases; and recycled fuel and fuel Hasan and Sinning 2017). A reform to make products are excisable goods if they are the GST more neutral or increasing the produced or manufactured in Australia. relative price of polluting goods and Imported fuel products are subject to services, could serve both tax and customs duty at a rate equivalent to excise environmental policy goals. On the other duty, ensuring they are treated consistently hand, GST concessions, or new measures with domestically manufactured goods. for GST-free treatment could be introduced These imported fuels are called excise for supply of goods and services with equivalent goods (EEGs). positive environmental effects. The A reduction of fuel excise is provided to European Parliament has consulted on businesses in certain circumstances reduced VAT rates for goods and services through fuel tax credits (or rebates), the with positive cultural, social or most widely known being the diesel fuel environmental effects, and zero-rate VAT rebate. The diesel fuel rebate provides exemptions have been proposed on equity, businesses with a credit for the excise or social, health or environmental grounds. customs duty that is included in the price of Any policy to increase or reduce the general fuel used in machinery, plant, equipment, GST on environmental grounds requires and vehicles travelling off public roads or on careful evaluation against tax policy goals of private roads. The amount of the fuel tax simplicity and equity, taking account of credit depends on when the fuel is acquired, revenue impacts and distributional effects what fuel is used and the activity in which on households. It also requires agreement the fuel is used. between the federal, State and Territory Fuel tax credits can be claimed for eligible governments, as part of a system-wide fuel acquired, manufactured or imported reform. and used in business. Some fuels (aviation and non-transport gaseous fuels and FUEL TAXES additives) and activities are not eligible, In Australia, the supply and consumption of including petrol and other fuel used in light fuel is subject to the GST and excise taxes vehicles of 4.5 tonnes gross vehicle mass at varying rates. As at April 2020, all retail (GVM) or less, travelling on public roads. fuel prices include GST at the standard rate Prior to July 2016, biodiesel and fuel of 10% (or 1/11 of the total price paid). ethanol (other than part of a blend with Excise rates on fuel and petroleum products another fuel) were ineligible fuels as well. (other than aviation fuels) are applied at Under the Fuel Tax Act 2006, businesses varying levels. After a period of time when seeking a fuel tax credit for the use of diesel indexation of excise rates was halted (and fuel in a heavy vehicle must satisfy one of required a decision of government), since four environmental criteria to be eligible. 2015, excise rate have been automatically The environmental criteria apply to diesel indexed twice a year in line with the vehicles over 4.5 tonnes gross vehicle mass consumer price index (CPI). which are used in an on-road business Petroleum fuels, including petrol and diesel; activity. Vehicles over 4.5 tonnes which gaseous fuels; biofuels; crude oil and operate on other fuels such as petrol, LPG condensate; solvents, such as white spirits or CNG are not subject to the environmental and turpentine; lubricants, such as oils and criteria. These criteria do not apply to motor

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Policy Brief - Tax and Pollution vehicles which are used in carrying on a Council of Australia, ‘Why fuel tax credits primary production business and which are are not a subsidy’ (2014)). primarily used on an agricultural property. The Henry Tax Review accepted in 2009 The fuel tax credit equalises the tax that fuel tax credits remove the cascading of treatment of electricity generation using tax on business inputs, and are not a liquid fuels with the tax treatment of coal or subsidy for the use of fuel since they are natural gas inputs to electricity generation. meant to limit fuel tax impacts on The main arguments in support of the diesel production, not consumption. The Review fuel credit are first, that the fuel tax would also concluded that while excise is an otherwise apply to heavy vehicles as a effective and administratively simple tax for business input taxes that would lead to raising revenue, it is less effective as a cascading, or double taxation, as the tax is means of meeting social or environmental levied on businesses and then on objectives, since an excise does not consumers. Second, that it applies for ‘off- substantially alter the decision to drive in road’ diesel use, and does not relate to the particular vehicles, in particular areas, at cost of public roads. (See, e.g. Deloitte particular times. report commissioned by the Minerals

Table 1. Fuel tax credit and excise rates - select fuel types (April 2020)

Tax credit: All other business Tax credit: Offset for uses (including Heavy vehicles heavy vehicles Fuel type Unit to power Excise rates for travelling on travelling on auxiliary public roads private roads equipment of a heavy vehicle) Liquid fuels, for example cents per 16.5 42.3 42.3 100% diesel or petrol litre Blended fuels: B5, B20, cents per E10 (<20% biodiesel; 16.5 42.3 42.3 100% litre <10% ethanol) Liquefied petroleum gas cents per 0.0 13.8 13.8 100% (LPG) litre Liquefied natural gas cents per (LNG) or compressed 0.0 29.0 29.0 100% kilogram natural gas (CNG) cents per Biodiesel (B100) 0.0 5.6 5.6 100% litre

Own construction. Source: Australian Taxation Office, Fuel tax credits – Business; Australian Taxation Office, Excise rates for fuel.

Policy options rebate do not address the role of the fuel tax The diesel fuel rebate reduces the excise in achieving the environmental goal of tax for resource extraction and agricultural discouraging use of polluting fuel by raising enterprises, which are both large its price, and do not provide price incentives contributors to greenhouse gas emissions. for companies to use cleaner inputs. The arguments in support of the diesel fuel

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Policy Brief - Tax and Pollution

Policy option 5. Price fuel appropriately consumption is considered to be relatively for long-term sustainable use inelastic. This means that an increase in A review of Australia’s fuel taxes, to change price will not lead to a decrease of the same the logic underpinning them and making magnitude in quantity demanded. them uniform and higher, is overdue. This Nonetheless, the Parliamentary Budget decline in fuel excise would likely require reducing the rebate on Office found that a receipts was the most significant change in fuel taxes for business. Australian tax receipts as share of GDP There are also revenue implications of since 2001-02. The decline (in Green, changing fuel consumption that should be Figure 3) was driven by the freeze in examined in a review. In estimating indexation of the excise (until 2015) and revenues from the excise, the Australian improvements in fuel efficiency. Tax Office has acknowledged that fuel Figure 3. Trends in tax receipts, excises and consumption compared to other taxes

Source: Parliamentary Budget Office 2018, using ATO, ABS and Treasury Final Budget Outcome data and PBO analysis.

Revenue from the fuel excise can be efficiency standpoint. If a good or service is expected to further decrease as vehicles provided at no charge to a user, then some become more efficient and consumers users will consume it even if the benefit that make the switch to hybrid and electric cars. they receive from it is less than the cost of Hence, it is important to consider alternative providing it, negatively affecting societal revenue sources and mechanisms which wellbeing. A charge that covers the cost of could help address the negative providing the service is not a tax in itself, externalities from the costs of road unless it is in excess of its cost or unrelated transport, such as congestion, noise to it –for instance, to pursue environmental pollution and air pollution. goals. Road pricing Policy options In Australia, no explicit charges are levied Road pricing and user charges can help on road use. The Henry Tax Review (2009) raise revenue by managing demand (De addressed user charges in its analysis of Percy and Wanna 2018 provide a recent local government taxes from an economic analysis and overview). A strategy of road

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Policy Brief - Tax and Pollution pricing needs to be complemented by Policy option 8. Reform Fringe Benefits improved public transport alternatives and Tax provisions for cars urban and rural infrastructure. The The Fringe Benefits Tax (FBT) is levied by distributional impact of road pricing is the Commonwealth government on various unclear, but it may be regressive. However, in-kind benefits provided by employers to if combined with substantial measures to employees, at a flat rate of 45% subject to improve access to and efficiency of public various valuation rules, concessions and transportation, this has the potential for exemptions. The FBT was introduced in progressivity and positive environmental 1986 as a back up to the personal income impact. Infrastructure Partnerships tax on wages of employees. Australia has recently issued a paper about road user charging for electric vehicles that It is timely to call for a review of the do not pay fuel taxes; careful analysis is environmental impact of various FBT rules, needed, as this policy needs to be balanced especially concessional treatment or with the goal to encourage the uptake of exemption of cars and carparking electric vehicles (see below). exemptions and valuation rules. The concessional treatment of car parking fringe Policy option 6. Introduce road user benefits under the Fringe Benefits Tax charges, congestion or distance-based Assessment Act 1986 (FBT Act) includes road taxation exemptions for small businesses, A measure that could be implemented in discounted valuation rules, and exemptions large cities is a congestion charge, as is for a range of charitable employers. With the done in London. Road pricing and exception of parking for disabled congestion charges may be able to be employees, these exemptions and implemented today, from an administrative discounts may be less appropriate today. standpoint, through the use of auto and By requiring that cars be parked for more electronic payment options that already than four hours in place of employment, the apply for some urban roads, such as the FBT concession for car parking incentivises ones available for Sydney tolls. individual use of vehicles. A possibility could be to replace these concessions with a Policy option 7. Increase implementation concession focused on public transport, of user charges for car parking carpooling, electric cars or bicycle use, that User charges for car parking are within the could apply for small or large businesses. governmental scope of local governments The concessional treatment of employer- or city councils. These charges may provide provided cars under the FBT also generates an efficient, non-distortionary mechanism perverse environmental outcomes. This for reducing private vehicle use. However, if concession subsidises car use without any too high and if alternative transport options conditions related to energy efficient cars or are not available, these also have potential overall environmental impact. There are two to be regressive. They should be combined ways to calculate the FBT on cars: the with enhanced public transport, cycling and statutory formula method (based on the walking alternatives for urban travel. car’s cost price) and the operating cost method (based on the costs of operating the car). The size of the FBT benefit increases, the greater the distance driven.

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Policy Brief - Tax and Pollution

This FBT concession could be removed or before the luxury car tax applies. For a car refocused on bicycles or public transport priced at $100,000 (including GST), this options for employees. If an FBT effectively translates to a tax saving of concession for cars is to be retained, it $2,400 for a hybrid or electric vehicles would be better to base the concession on compared to a conventional vehicle. the efficiency (or electric powering) of the Policy options vehicle, so that drivers of electric or highly fuel-efficient vehicles receive a concession, Policy option 9. Support consumers and while inefficient vehicles are taxed more businesses to shift to energy efficient or heavily. electric vehicles Energy efficient or electric vehicles There are a range of ways in which the tax system, both direct and indirect taxes, could The market share of electric vehicles in be refocused to support the production or Australia is small, comprising only 0.2% of consumption of energy efficient or electric purchases in 2017. Of these, businesses vehicles. For the 2019 election, the bought 63%, private buyers purchased 34% Coalition put forward a national electric and the government bought the remaining vehicle strategy, but it did not outline 3%. Australia has no special income tax tangible measures. Labor proposed more rules to support take-up of electric or energy ambitious incentives to reach a target of one efficient vehicles, bicycles or other forms of in two new vehicles being electric by 2030. energy efficient transportation, and to create disincentives for “gas guzzlers”, The luxury car tax threshold could be apart from the fuel taxes described above. retargeted to support uptake of electric In general, the GST applies at a flat rate of vehicles in Australia, while the luxury car tax 10% (1/11 price-inclusive rate) to all vehicle would still apply to all vehicles over the purchases. Infrastructure Partnerships existing or a lower threshold that rely on Australia (2019) projects that electric fossil fuels. As noted above, the FBT car vehicle uptake in Australia will increase to concessions could be refocused on electric above 60% by 2046, although Australia’s cars. uptake is projected to be slower than the Other countries have experimented with a global trend. This will require significant range of policy options. Norway, for investment in charging infrastructure in instance, offers an array of tax incentives cities. through its EV policy for the take-up of zero A luxury car tax applies to motor vehicles emission vehicles (hydrogen and electric), that have a GST-inclusive price over and it is now their highest per capita market. $67,525. The luxury car tax is 33% of the The incentives will be reviewed at the end GST-exclusive value of the car that exceeds of 2021 and include: the luxury car tax threshold; generally, • no purchase/import taxes (1990-), motor vehicle purchases are only subject to • exemption from 25% VAT on purchase GST. In 2017, 83% of electric vehicle (2001-2020), models available in Australia fell into the • no annual road tax (1996-), luxury vehicle category. A concession exists • for eligible fuel-efficient hybrid or electric no charges on toll roads or ferries motor vehicles, which require as of January (1997- 2017), • 2020, a GST-inclusive price over $75,526 free municipal parking (1999- 2017) and from 2018 a parking fee for EVs was TTPI Policy Brief 1/2020 12

Policy Brief - Tax and Pollution

introduced locally with an upper limit of adopted in cities. These issues are maximum 50% of full price, broached in the recommendations below • access to bus lanes (2005-). New rules and in Policy Brief 2 – Tax and Energy. allow local authorities to limit the access Policy option 10. Explore reforms to car to only include EVs that carry one or registration measures more passengers (2016), • 50% reduced company car tax (2000- Car registration fees are flat rate charges 2018), later reduced to 40%, levied by State governments. In some • exemption from 25% VAT on leasing states, differential rules apply for energy (2015), efficient or hybrid vehicles. Car registration • fiscal compensation for scrapping of fees could be increased for more fossil fuel-based vans when converting environmentally damaging cars, whether to a zero-emission van (2018). older or polluting, relative to hybrid or electric vehicles. However, this requires It is important to consider the revenue and careful consideration of equity factors. equity implications of these measures. Those on higher incomes are most likely to In Victoria, all hybrid vehicles and electric- be able to afford an electric vehicle and so powered passenger cars automatically any subsidies or tax exemptions will be benefit from a $100 registration discount regressive; however, a retargeted (hybrid motorcycles receive a nil registration concession aimed at take-up of electric fee). There are no discounts for electric vehicles may still be appropriate. In heavy vehicles or electric motorcycles. On addition, the choice of energy source should the other hand, primary producer vehicles in be considered. In Norway, 99% of electricity Victoria qualify for reduced registration fees. is hydropowered, in contrast to Australia, The Australian Capital Territory provides an where coal and gas account for over 75% of example of different approaches. First, electricity generation. This means that duties paid on a car registration are electric vehicles are still mostly reliant on calculated both on the price of the car and fossil fuels in Australia and there remains a (for eligible vehicles) on the car’s Green compelling argument for improving Vehicle rating by the Australian incentives for the uptake of renewable Government, which categorises vehicles energy sources in general. This needs to be from environmentally leading edge models a comprehensive strategy addressing (top rating) to models with below average consumption and production, as studies environmental performance (lowest rating). have found that consumers overwhelmingly Second, a concession of a 20% discount on believe car manufacturers are responsible registration exists for gas and electric for reducing vehicle emissions. powered vehicles, plug-in hybrid vehicles Further challenges arise in the adoption of and hydrogen fuel cell vehicles. Previously, electric vehicles in Australia because of the the ACT offered Greenfleet with car continent’s large size, sparse population registrations and renewals as an option to and substantial distances of travel for many; reduce environmental impacts. For an this may increase the cost and impact of annual tax-deductible subscription of $40, installing charging infrastructure, relative to the Greenfleet organisation would plant 17 other countries. On the other hand, most of native trees in the ACT on behalf of the the Australian population is urbanised and user, intending to cancel out the vehicle’s charging infrastructure could be easily greenhouse gas emissions and creating TTPI Policy Brief 1/2020 13

Policy Brief - Tax and Pollution new forests to reduce soil salinity and iii) waste that is on or from a site erosion. Since the Greenfleet subscription where an entity was carrying on was tax deductible, revenue considerations any business that the taxpayer are also relevant. has acquired and carry on substantially unchanged as your POLLUTION AND WASTE CLEAN- earning activity. UP AND PREVENTION This provision provides a deduction for The income tax law provides an immediate taxpaying entities operating on a site, deduction for expenditure which has the mainly businesses, reduced by any GST sole or dominant purpose of “environmental input tax credits. The provision does not protection activities”. These are pollution require the clean up or waste treatment to prevention, treatment or clean-up activities be a regulatory obligation of the taxpayer of a business, income-earning activity, or and applies to waste or pollution that had its mining or exploration activity (Section source onsite but extends offsite. 40.755 of ITAA97). An immediate deduction However, there are some limits to this is also available under Section 40-735 of provision and uncertainties in its the ITAA97 on certain expenditure that is interpretation. For example, the incurred on mine site rehabilitation after 1 Commissioner does not accept that erosion July 2001, following mining and quarrying of land (such as dunes into the sea) is operations, exploration or prospecting or “pollution” for this provision (Joseph 2013). ancillary mining activities. There is no deduction for expenditure The specific definition of environmental incurred by an entity that is not carrying out protection activities in section 40-755 of (or previously carried out) an income- ITAA97 includes the following activities earning activity that caused the pollution or carried on by, or for, the taxpayer: waste; is on the site of the business; or was produced by a previous business carried a) preventing, fighting or remedying: out on that site; and there is doubt as to i) pollution resulting, or likely to whether simply holding and leasing land to result, from the taxpayer’s generate income qualifies as an “income- earning activity; or earning activity” for this purpose (Joseph ii) pollution of or from the site of the 2013). taxpayer’s earning activity; or iii) pollution of or from a site where There is no deduction under Section 40-755 an entity was carrying on any for the cost of: business that the taxpayer has • acquiring land, acquired and carry on • constructing a building, structure or substantially unchanged as your structural improvement to the land, earning activity; • altering or improving an existing b) treating, cleaning up, removing or building or structural improvement, or storing: • plant and equipment that would i) waste resulting, or likely to result, otherwise be deductible under the from the taxpayer’s earning general capital allowance rules, for activity; or example because it is used in the ii) waste that is on or from the site of ordinary course of the business, or the taxpayer’s earning activity; or TTPI Policy Brief 1/2020 14

Policy Brief - Tax and Pollution

• a bond or security (however described) does not draw distinctions based on for performing environmental protection pollution prevention, environmental or clean activities. technology features of capital plant and equipment. Taxpayers may follow the No deduction is available where a site is Commissioner’s schedule of depreciation held only for producing capital gain (not rates or may choose to depreciate an asset business income). Finally, no deduction is by estimating its effective life as used in that provided for relevant expenditure incurred business. Intellectual property (such as by a private individual where the activity or patents or registered designs) including on site is for private use, or for expenditure by environmentally friendly processes or an entity deriving exempt income (or itself equipment is also able to be depreciated being exempt from tax). over designated periods. Policy options The capital cost of investment in “clean” Policy option 11. Review eligibility for technology used in a business or income- deductions for pollution clean-up costs producing activity, such as equipment that will use less energy, or produce less The environmental rehabilitation and pollution, is depreciable under the general pollution clean-up rules in the income tax rules but attracts no additional tax are focused on business expenses and do concession or subsidy. not provide any subsidy for clean up or pollution prevention costs on private land. On the other hand, some plant and Where other rules would apply for a equipment used in resource-intensive or taxpayer in relation to pollution clean-up polluting industries is eligible for a “capped” activity, such as equipment depreciation effective life which provides accelerated rules, these other rules prevail although depreciation for that plant and equipment. they would be less generous. As explained Assets including airplanes, buses, trucks, below, accelerated depreciation rules apply oil and gas assets, harvesters and tractors to clean up or prevention equipment, or to in the oil and gas, primary production and new equipment for these purposes. A airline industries are eligible for “capped” review of the use, design and effectiveness effective lives, reducing their after-tax cost. of these rules is timely. It would need to take For example, the capped effective life for account of both environmental and tax aircraft is set by legislation at 10 years, even policy goals of the deduction. though the Commissioner of Taxation found that commercial airliner may be expected to Clean technology, plant and be in use for 20 years or more. equipment There are no special deductions for capital The income tax law provides general rules expenditure on structural improvements or for deduction of expenses, or for capital alterations to a building to use less energy allowances (depreciation), for the cost of or to reduce pollution; general rules for plant, equipment and buildings used in a building depreciation may apply (Division 43 business or other income-producing activity of ITAA97). (Division 40 ITAA97). Small businesses (under $10 million annual The depreciation rate for capital allowances turnover) are eligible for an ‘instant asset is prepared by reference to estimates made write-off’ which is an immediate deduction of the effective life of depreciating assets. It for plant and equipment up to $30,000 for TTPI Policy Brief 1/2020 15

Policy Brief - Tax and Pollution each asset (up until 11 March 2020). In required, as in the case of household solar response to COVID-19, from 12 March power (see Policy Brief 2). Alternatively, a 2020 until 30 June 2020 the instant asset higher tax could be levied to increase the write-off is significantly expanded: price of polluting or less energy efficient household equipment. • threshold amount for each asset is $150,000 (up from $30,000) Policy options

• businesses with an aggregated Policy option 12. Target business instant turnover of up to $500 million (up from asset write-off concessions towards $50 million) are eligible. energy efficient capital investments and explore accelerated depreciation for From 1 July 2020 the instant asset write-off upgrade to equipment that achieves will only be available for small businesses specified environmental efficiency gains with a turnover of less than $10 million and the threshold will be $1,000. Capital allowance depreciation and accelerated business investment Neither the pre-existing instant asset write- deductions for plant, equipment and off nor the COVID19 expansion is targeted buildings should be reviewed with the goal based on energy-reduction or pollution of targeting these towards environmentally prevention goals. The concession is utilised friendly or energy efficient assets. by many businesses to purchase vehicles Alternatively, it may be appropriate to (the two examples on the ATO website refer provide businesses with a larger to purchase of a van and a ute, concession or accelerated depreciation for respectively). These vehicles are mostly the cost of environmentally efficient or fossil-fuel based. pollution prevention plant and equipment. In 2018, the ALP proposed to expand The tax ‘caps’ that provide accelerated accelerated depreciation of plant, depreciation for inefficient and polluting equipment and intangibles in its ‘Australian equipment should be removed. Investment Guarantee’, and to extend Further issues: pollution and waste eligibility to businesses of any size. This permits a deduction for 20% of the capital We address land rehabilitation and cost of new assets exceeding a cost of conservation in Policy Brief 3. A range of $20,000, in the first year of operation. There further issues relating to waste generation is no targeting towards energy-reduction or and disposal and potential tax or fiscal pollution prevention assets. Again, this is measures to address them, is listed here. likely to be used by many businesses for • Recycling and waste levies (e.g. the purchase of vehicles powered by fossil NSW waste levy). fuels. The estimated fiscal cost of this • Tax on polluting items and activities, measure is about $1.8 billion each year. such as a plastic tax; higher GST on fast Private consumers are not entitled to any fashion to better include in price the deduction for the cost of investment in environmental costs of production buildings, plant or equipment used for (water, electricity) and the costs of personal consumption, such as in their own disposal or recycling for local councils. home. To support take-up of An alternative is a scheme like environmentally efficient equipment by Germany’s Packaging Act, with rules for private consumers, subsidies may be increased recycling and provisions to TTPI Policy Brief 1/2020 16

Policy Brief - Tax and Pollution

ensure that businesses using packaging also pay for their collection and recycling. • Plastics production and use – the “plastic tax”. • Dumping fees at the State or local level and interstate competition (for instance, dumping materials in Yass to avoid cost of disposal in the ACT).

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