The Govermnet has released a green paper in which it proposes a cap and trade scheme and commits to reducing Australia’s greenhouse gas emissions by 60% below 2000 levels by 2050.

At the heart of the Scheme is emissions trading, in which the Government sets a limit on how much carbon pollution industry can produce, and then the Government sells permits up to that limit, creating an incentive to look for cleaner energy options. Companies can buy and sell permits from each other depending on how much they value them.

See our earlier post for details of how a general emissions trading scheme works

The Government intends that revenue raised from the selling of permits will be used to help households and business (see below).

Compensatory changes

The Government announced a range of compensatory arrangements and transitional measures:

· To offset the initial price impact on fuel associated with the introduction of the Scheme, the Government said it would cut fuel taxes on a cent-for-cent basis (this will include fuel used by heavy vehicle road users). The Government will review this measure after one year.

· For rural and regional areas, a rebate will be provided equivalent to the excise cut for businesses in the agricultural and fishing industries for three years.

· Transitional assistance will be provided in the form of a share of free permits to the most emissions-intensive trade-exposed activities.

· The Government also proposes to provide a limited amount of direct assistance to existing coal-fired electricity generators.

· Payments will be increased, above automatic indexation, to people in receipt of pensioner, carer, senior and allowance benefits and to provide other assistance to meet the overall increase in the cost of living flowing from the Scheme.

· Assistance will be increased to other low-income households through the tax and payment system to meet the overall increase in the cost of living flowing from the Scheme.

· ‘Middle-income households’ will also get assistance to help them meet any overall increase in the cost of living flowing from the scheme.

Tax and accounting aspects

The Green Paper says ‘discrete provisions of the income tax law’ would be developed to provide generally the same tax treatment to permits purchased by taxpayers who are carrying on a business or other income-earning activity as would occur under existing legislation. Other tax aspects include:

· the cost of acquiring a permit would be deductible at the time the permit is acquired. If the permit is banked, the effect of the deduction would be deferred until the time the permit is surrendered or sold;

· any proceeds received on the sale of a permit would be treated as assessable income;

· the value of free permits would be included in the taxpayer’s assessable income in the year the permits are received; and

· Scheme transactions would be treated under the normal GST rules.