Tax incentives and regulation needed for greenhouse emissions reduction

“If Australia is to meet its commitment to reduce greenhouse gas emissions to 43% below 2005 levels by 2030, we need to cut emissions faster,” researchers from Griffith University recently wrote. “Even if all current government policy commitments are achieved – an unlikely outcome given delays in implementation – emissions are still projected to be only 40% below 2005 levels by 2030.”

The principles behind Australia’s emissions reduction focus on technology rather than taxes, says TonyGreco, IPA’s General Manager Technical Policy.

“Technology is influencing a certain level of success in the race to reduce emissions, but it’s not as much as tax policy could achieve, and it’s not enough,” Greco says.

At the recent Asia Oceania Tax Consultants Association (AOTCA) 2023 conference in Tokyo, Greco reported on how Australia’s tax system could incentivise change better. The right tax treatment, he said, will increase and accelerate investment in renewable and energy-efficient solutions to enable greater emissions reduction in less time.

In very specific areas, such as State and Territory treatment of electric vehicle purchases from a fringe benefits tax or stamp duty perspective, the tax system has been used as a carrot to influence positive outcomes, he said.

And, under the Small Business Energy Incentive, businesses with a turnover of less than $50 million can access a bonus deduction equal to 20% of the cost of an eligible asset that improves energy efficiency. But even in this case, assets that have a dominant purpose of generating electricity, such as solar panels, are excluded from the scheme.

Such policies, Greco said, aren’t doing enough to encourage the level of transition that is required to meet Australia’s 2050 net zero goal.

Finding the perfect balance of carrot and stick

Success in encouraging the required level and type of investment in technology, infrastructure, innovation and change across industry sectors requires a delicate balance, says Fiona Reynolds, Chair of the United Nations Global Compact Network Australia and former CEO of UN-supported network Principles for Responsible Investment.

“It’s about balancing the carrot and the stick,” says Reynolds. “You need the right incentives and regulatory environment.”

She points to Europe as an example of “too much stick”, where innovation is stifled by red tape and regulation.

“But if you look at the United States, they’ve introduced the Inflation Reduction Act that is about incentivising a capitalist system with tax incentives and grants to innovate and invest. That is only a year old, and it is working. There has been huge investment into renewable energy and a huge amount of new jobs created.”

And therein lies Australia’s opportunity, Reynolds believes. She says the current government deserves an A on its report card for ambition, direction and effort. And while 10 years of inaction before it came to power left Australia trailing globally, being behind other nations could have its own advantages.

“Because we’ve come a bit later to this, we have the ability to look at what has worked around the world and what hasn’t,” Reynolds says.

“What can we learn? We have to make sure we get the incentives right, and that there is still some regulatory pressure but not too much, not to the point where it stifles innovation.”

Right now, a combination of incentives, frameworks, reporting and transparency is being developed. That’s essential because investors need to know what companies are doing, and when. And companies require confidence around the fact that they won’t be delayed by years of regulatory red tape.

Tax incentives help reduce risk

Consider the risk investors take when they inject capital into new technologies and sectors, Reynolds says.

“Some of these areas really are new. After all, we haven't decarbonised the global economy before,” she says.

“If you’re thinking about new areas of investment, you want to know that some of the risk has been removed. If that’s through the taxation system, that can be good. If it’s through other incentives, if it’s government underwriting, for example, it can also make investors feel more comfortable.”

And there is currently a high level of enthusiasm amongst investors to support renewable technologies, and other solutions that strengthen sustainability, particularly over the long term.

“There is risk in these investments, but there is also huge potential,” Reynolds says. “Investors have opportunities to make investments that are good for Australia, but that they’re also going to make money from because they get in on the ground floor.”

Every form of incentive helps, she says. Tax incentives help solve one issue, among other challenges.

“The government really has to look at each sector of the economy and work out what has to be done in each one,” Reynolds says.

“You’ve got the energy sector, aviation, shipping, agriculture. You’ve got all of these key elements, and you have to work out the pathways for the sector and bring in regulation, legislation, incentives and standards at those sector levels. Plus, entire workforces need upskilling. There is a lot of work to be done, and it is being done.”

The government on 2 November 2023 released its Sustainable Finance Strategy consultation paper, aimed at identifying ways to remove barriers to climate and sustainability investment. The IPA will respond to the consultation paper and welcomes input from members.