1. Introduction: Tax as a Driver of Behaviour

Although the primary purpose of taxation is to raise revenue to fund government functions and for redistribution purposes, governments have long recognised that taxes influence behaviour and therefore can be used to achieve policy objectives, in addition or alternatively to other policy instruments such as direct regulation.^[1] Taxes can directly and indirectly drive taxpayers to adopt, limit or abstain from certain behaviours and therefore can be used by governments as a tool in pursuing climate policy objectives. A recent systematic review by the Organisation for Economic Co-operation and Development (‘OECD’) of empirical studies measuring the effectiveness of taxes and other policy instruments in achieving climate policy objectives confirmed that carbon taxes and other taxes are effective in reducing emissions.^[2] However, that same review revealed that there are still large evidence gaps in relation to many regions and sectors, meaning that the effectiveness of such policies is often not formally evaluated. In this chapter, we will examine some examples of how the tax system can and is used in Australia to influence both corporate and individual taxpayers in relation to climate change issues. Although many alternatives are available, to date the Australian tax system has only adopted quite narrowly targeted measures, and ex post evidence of their effectiveness is often not available.^[3]

Edward Ross, writing in 1892, explained the role of tax, in particular a ‘prohibitive tax’, as a desirable and more precise or delicate tool for the state to shape societal outcomes than criminalising an undesirable phenomenon.^[4] Ross used the term ‘phenomenon’ as the general term for the tax base—that is, the act, person, thing or condition that gives rise to the obligation to pay tax (referred to as the ‘contribution’).^[5] Ross identified that from the individual taxpayer perspective the payment of tax is an evil, and the taxpayer will seek to reduce taxation by minimising the occasion of the contribution, thereby suppressing some of the phenomena. He noted that ‘scarcely any tax will be so light as to suppress none of the taxed phenomena or so heavy as to suppress all.’^[6] Thus tax can be seen as tool to suppress certain behaviours to address a societal need or goal, such as taxes on tobacco and alcohol, which by raising the prices of these products serve to discourage consumption and thereby reduce the harmful impacts on individual health and the burden on the public health system. This approach is intuitively useful in thinking about the role of taxation in addressing climate change. To stop certain behaviours — for example, emitting GHGs — one can impose a tax on them.

The concept of imposing a tax on certain undesirable activities is often called a Pigouvian tax, after the British economist Arthur Pigou and drawing on his influential work The Economics of Welfare.^[7] Pigouvian taxes are designed to internalise the external costs of an activity that causes negative side effects, known as externalities, which the market does not otherwise recognise. Pigouvian taxes or pricing can form part of environmental policy mixes where ‘large market failures remain unaddressed — among them the adverse effects of greenhouse gas emissions, [and] the loss of biodiversity.’^[8] A true Pigouvian tax is one where the actual cost of the externality is recouped by the tax, providing revenue that may then be directed to ameliorate the damage. A carbon tax is the oft-cited example of this and is discussed in more detail below.

Tax systems can similarly be used to encourage certain activities that have societal benefits or to meet societal goals. These are sometimes referred to as Pigouvian subsidies. Each year Federal Treasury produces a report measuring the value of the major subsidies that are part of the tax system, which are referred to in the report as ‘tax expenditures’.^[9] A tax expenditure represents a variation from the standard tax treatment and can be by way of a tax exemption or concessional taxation, or the provision of deductions or rebates that would not otherwise be available.^[10] Tax expenditures can be a substitute for more direct government spending. Some examples of the use of tax expenditures in Australia to support climate policy are considered in this chapter.

This chapter focuses on features of the federal tax system, with reference to provisions of the Income Tax Assessment Act 1997 (Cth) (‘ITAA 1997’) and the Income Tax Assessment Act 1936 (Cth) (‘ITAA 1936’) and other relevant Commonwealth tax legislation. There is firstly a discussion of the tax issues related to carbon pricing. Although the federal tax system contains a variety of measures that could be considered to have a climate impact, by way of example, this chapter focuses on tax rules related to motor vehicles, which can impact transport emissions. The revenue systems of the states and territories can also play a part in addressing climate change.