The stakes: Climate, revenue, and Australia’s future

Australia faces three structural challenges: failure to meet net zero targets, persistent budget deficits, and weak productivity. Current policies are insufficient to deliver emissions reductions or sustainable growth. The report argues that reform is urgent to secure long-term prosperity and leverage Australia’s comparative advantage in clean energy.

What makes a good tax?

Efficient taxes minimise economic distortions and marginal excess burden. Corrective (Pigouvian) taxes, such as carbon pricing, address market failures by aligning private costs with social costs. Compared to existing taxes, they can improve productivity while raising revenue, making them suitable for addressing emissions and fiscal pressures simultaneously.

Taxing fossil fuels: Current settings and missed opportunities

Australia’s current policy mix is inefficient, complex, and raises limited revenue. Emissions policies cover a narrow share of emissions and create distortions, while fossil fuel taxation is low relative to global peers. Governments captured around 30% of fossil fuel profits versus 75–90% internationally, indicating significant foregone revenue and inefficient resource allocation.

The polluter pays levy: Making polluters accountable for emissions

The proposed Polluter Pays Levy (PPL) taxes carbon embedded in fossil fuels at extraction or import. It would cover over 80% of emissions, compared to about 30% under current policies, and start at $17 per tonne, rising towards EU carbon prices. Modelling suggests around 100 million tonnes of additional annual abatement by 2036 and 2.3 times greater reductions within a decade.

The PPL improves efficiency by replacing fragmented policies, raises approximately $22.6 billion annually, and enhances welfare through clearer investment signals. Recommendations include implementing the PPL from 2026 or transitioning via the Safeguard Mechanism review, with border adjustments to maintain competitiveness and targeted household support packages.

A fair share levy on gas exports

The Fair Share Levy (FSL) is a 40% cashflow tax on excess profits from gas producers, designed to capture economic rents without distorting investment. It would increase average government revenue by about $13 billion annually and align Australia’s tax take closer to international norms.

The FSL is economically neutral, does not raise export prices, and supports higher welfare, GDP, and investment. Evidence from Norway suggests such taxes do not deter investment. The report recommends implementation with transitional arrangements, addressing under-taxation and ensuring Australians receive a fair return from public resources.

Making it work: Policy design and integration

Combined, the PPL and FSL would raise around $35.5 billion annually between 2026 and 2050, totalling nearly $890 billion. After compensation payments averaging $4.1 billion annually, substantial revenue remains for budget repair, green investment, and social spending.

The package delivers positive welfare outcomes, unlike conventional taxes, and supports emissions reduction, productivity, and fiscal sustainability. Recommendations include immediate implementation, integration with existing mechanisms, and ensuring no household is worse off through compensation and targeted support measures.