Carbon pricing and taxation: an examination of the taxation of emissions trading transactions from a domestic and international perspective

The economic arguments in support of the use of emissions trading schemes as a mechanism to reduce harmful greenhouse gas emissions rely on the ability of the schemes to internalise the cost of the pollution externality through a price signal – the cost of an emission permit. Taxation has the potential to distort this price signal if emissions trading transactions are not subject to the same tax treatment across entities but, to date, the issue of the application of taxation regimes to such transactions has received little academic consideration. The prospect of inconsistent tax treatment is heightened where emissions trading systems are linked internationally, allowing permits to flow between jurisdictions. This thesis systematically examines the direct (income) taxation of carbon trading transactions in order to determine instances in practice where inconsistent tax outcomes may arise and makes recommendations for tax law design. The thesis builds up a picture of emissions trading taxation through three layers. The first is the treatment of relevant transactions for financial accounting purposes. This is necessary given that many jurisdictions take accounting profits as the starting point in determining tax liability. The second element is domestic taxation and involves a detailed, comparative analysis of the domestic tax treatment of emissions trading transactions in Australia and the United Kingdom. These jurisdictions are amenable to comparison given that the United Kingdom is representative of jurisdictions that apply ordinary tax rules to these transactions, whereas Australia has adopted specifically designed tax rules to address the unusual features of the transactions. The third element is international taxation, where this necessarily involves the application of both international tax rules found in domestic law and tax treaties. These rules are applied to six hypothetical trading transactions which could arise under linked trading schemes in order to systematically test the outcomes against the goal of inter-firm neutrality. For these purposes, the representative tax systems are again based on the Australia and United Kingdom models and the tax treaty network is assumed to be based on the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention on Income and on Capital.