The role of the tax system in a greener future

Abstract

Ahead of the commencement of action against climate change in 2020 under the Paris Agreement, COP24 saw nations come together to design the rule book for global emissions reductions. Australia also reinforced its commitment to the Paris Agreement and its emission reduction targets. Critical to this is the design of the rules for international trade in emissions permits or credits, which were due to be agreed in Madrid as part of the COP25 in December 2019. However, the participants failed to come to any consensus, getting caught up in technical issues such as the rules for carbon market mechanisms. Instead we wait for an intersessional meeting in Bonn in June 2020 and COP26 in Glasgow in November 2020. The tax policy approach and framework adopted in relation to the energy transition, including for example the introduction and tax treatment of any carbon price or emissions trading scheme, has the potential to either support or distort the ultimate objectives of the transition. So, what does the transition to a greener future mean for the tax mix and how it will it impact the revenues of government? What role does tax play in the energy transition? What are the current rules in Australia and how do they compare to other fiscal regimes globally? How can existing rules in Australia be adapted to best support the effective design of carbon pricing policies? What reforms are necessary?