Australia's Transport Emissions Fall First Time Since Pandemic, EV Incentives Under Review Amid Budget Scrutiny
Australia's transport sector has recorded its first reduction in carbon emissions since the COVID-19 pandemic, a decline attributed to a significant increase in electric vehicle (EV) sales. This development coincides with the government's review of EV tax incentives due to rising costs and a decision to pause new spending on renewable energy rollout in the upcoming federal budget. The government aims to achieve substantial emission reductions by 2030 and 2035, while analysts express differing views on the feasibility of meeting renewable energy targets.
Transport Emissions Decline and Contributing Factors
The Australian transport sector saw a decrease in carbon emissions for the first time since the COVID-19 lockdowns. This reduction is largely linked to a notable rise in electric vehicle sales, which constituted 13% of all new cars sold in 2025, having tripled over the preceding three years. This contributed to an overall 1.9% reduction in Australia's greenhouse gas emissions in the year leading up to September 30.
Historically, the transport sector, responsible for approximately one-fifth of Australia's greenhouse gas pollution, has proven challenging to decarbonize. Emissions in this sector had risen by 23% since mid-2005. Data from the Department of Climate Change and Energy indicates a 0.4% fall in transport sector emissions for the year ending September 2025, primarily due to decreased petrol consumption for road transport.
Across the broader economy, emissions were 2% lower than the previous year, marking the first sustained decrease in greenhouse pollution since the pandemic. This wider reduction is largely driven by renewable energy sources increasingly replacing coal-fired power plants in electricity generation. Other contributing factors include a shift from household gas appliances to electric alternatives and the use of carbon capture and storage technology in oil and gas production.
Climate Targets and Progress
Australia is committed to the Paris Agreement goals, aiming for a 43% emissions cut by 2030 from 2005 levels and at least 62% by 2035. Current projections suggest the country is on track to achieve around a 36% reduction by 2030. The government highlights progress stemming from policies that promote EV adoption, support the construction of wind and solar farms, and increase the uptake of household batteries. With two large coal plants scheduled for closure in the next four years, and more anticipated, the government projects meeting its targets.
The Climate Change Authority estimates that a nearly five-fold increase in clean car sales is necessary, requiring electric vehicles to account for every second light vehicle sold over the next decade to meet the 2035 emissions reduction target. This translates to approximately 9 million EVs sold within the next 10 years.
Review of Electric Vehicle Tax Incentives
Electric vehicle sales in Australia have grown from around 7,000 in 2020 to 157,000 in 2025. The federal government's tax cuts for leasing EVs, introduced in 2022 to accelerate EV adoption, offer fringe-benefit tax savings to employees who purchase an EV priced under $91,387 through a novated lease.
However, the government is reportedly considering changes to, or the removal of, these tax breaks for EVs. This review is prompted by the policy's cost significantly exceeding initial projections. The estimated cost of the fringe benefit waiver for EV leases has increased from an initial $1.9 billion to an anticipated $5.1 billion between 2022-23 and 2026-27, with further increases projected. The zero tariff on imported electric cars is also under review.
Options being explored by Treasury include completely axing the tax breaks, phasing them out, or reducing the current price threshold for eligible vehicles. The Treasury and Finance departments are prioritizing cost savings in the budget, scheduled for May 12.
External Recommendations and Responses
A December report by the Productivity Commission recommended phasing out the EV exemption. The commission estimated the cost per tonne of avoided greenhouse gases due to these tax breaks to be between $1,000 and $20,000. It noted that the exemption primarily benefits individuals with access to salary packaging or novated leases and incentivizes more expensive car purchases. The commission also urged state governments to end EV exemptions from stamp duties and registration discounts.
Industry groups, including the National Automotive Leasing and Salary Packaging Association (NALSPA) and EV manufacturers such as Tesla, Polestar, and BYD, have initiated a public campaign. They argue that discontinuing or reducing the EV incentive would impede the adoption of cleaner vehicles and impact workers by making cars less affordable. Polestar's managing director for Australia stated that backtracking on these measures could undermine the government's target of 50% of new vehicle sales being electric by 2035.
Climate Change and Energy Minister Chris Bowen confirmed that the policy is under review by Treasury, with no conclusions yet reached. The opposition Coalition has previously indicated its policy to eliminate the discount. Separately, state treasurers are considering a potential road user charge for EV drivers, who are currently exempt from fuel excise tax.
Renewable Energy Rollout and Budgetary Adjustments
The Albanese government's upcoming federal budget will not include additional spending for the rollout of renewable energy across Australia's electricity grid next year. This decision aims to secure savings and marks a shift from previous federal budgets since 2022, which allocated billions to wind and solar projects. Senior officials suggest that existing support, such as environmental law reforms designed to expedite project approvals, is already in place for the renewables rollout.
Australia has a target of 82% green energy by 2030. Analysts, including Rystad Energy and the Grattan Institute, have warned that Australia is likely to miss this target, citing delays caused by investor hesitation, planning disputes, and construction cost increases. Climate Change and Energy Minister Chris Bowen disputes these claims, affirming that the 82% green energy target will be achieved through the Capacity Investment Scheme, which saw its funding expanded by 25% last year.
Green energy accounted for 35% of the electricity grid in 2022, rising to 43% by 2025. However, the Australian Energy Market Operator (AEMO) has cautioned that the pace of clean energy deployment is insufficient to maintain stable electricity supply and prices, particularly with the anticipated closures of coal-fired power stations. The government has committed over $70 billion towards emissions reduction across all sectors over the next two decades.
Treasury is also reportedly evaluating other measures to recoup funds, including a proposal to retrieve $3 billion by adjusting the fringe benefit waiver for EV leases, a potential capital gains tax of up to 30% on the sale of wind, solar, and battery projects by foreign investors, and scrutiny of the $22.7 billion Future Made in Australia Fund. While speculation exists about adjusting the Cheaper Home Battery Program, industry sources deem it unlikely due to recent modifications.