Approaches to the taxation treatment of carbon emission allowances and liabilities: comparing the UK and Australia

With the development of emissions trading schemes as a policy instrument to combat climate change and the growing interest in linking complementary schemes, the taxation consequences of transactions involving emission allowances are increasingly important. With the purpose of highlighting the strengths and weaknesses of approaches that have developed to date, this article analyses the tax treatment of relevant transactions under the UK Corporation Tax, which takes accounting profits as the starting point, and compares that to the legislatively prescribed approach that has been developed in Australia. The emphasis is on three main issues: the treatment of free allocations; the recognition of emission liabilities; and the asset characterisation of allowances. The potential consequences of the differences in tax treatment are illustrated.