The Co-operative Intelligent Transport System, if established, could send internet-connected vehicles alerts based on their location and let smart vehicles "talk" to one another about potential hazards or hard-to-see pedestrians.
A consultation paper on the technology, issued this week, follows a nine-month trial in Queensland that found the safety alerts could reduce car accidents by as much as 20 per cent.
And transport experts said the technology could also pave the way for self-driving cars to operate safely on Australian roads.
The federal Transport Department called for submissions on the technology this week from the public, car manufacturers and other groups from the automotive industry.
The consultation paper describes a smart traffic system as one that allows "road vehicles to communicate with other vehicles, road infrastructure and data services" as well as notifying "vulnerable road users such as pedestrians and cyclists" about possible accidents.
The technology had the potential, the consultation paper said, to improve road safety, road productivity, traffic congestion, journey times and environmental sustainability, as well as improving the safety of "automated vehicles" or self-driving cars when they become available.
iMove Australia managing director Ian Christensen said the technology's biggest impact could be on averting car crashes and reducing Australia's road toll.Â
"We're still suffering 1000 deaths a year and thousands of crashes on our roads. It's unacceptably high by any judgement," he said.
"The question is what can we do about that and is this a cost-effective further intervention? I think the answer is yes, it probably is."
Mr Christensen said a basic version of the smart traffic system could give warnings about pot holes, road works, red lights, traffic jams or road spills to vehicles over the mobile network.
But more advanced versions of the technology could see connected vehicles swap information about "obscured pedestrians or cyclists" they had detected by the side of the road or at intersections, he said, potentially saving lives.
"A pedestrian or cyclist could be crossing the road and could easily be obscured by a bus or a truck," Mr Christensen said.
"This is all about improving context and making better decisions, reducing misjudgements."
Connected traffic technology has been trialled in the United States, Japan and Europe, as well as Queensland, where almost 500 vehicles in Ipswich were fitted with alert systems developed by South Australian firm Cohda Wireless.
The nine-month trial, in which participants covered 2.7 million kilometres, showed the technology reduced red-light breaches by 22 per cent and had the potential to reduce crashes by up to 20 per cent.
Mr Christensen a smart traffic system could take some time to introduce to Australia, as only Toyota, Ford and Volkswagen vehicles were equipped to receive alerts, but the consultation paper suggested the federal government is serious about its introduction.
Submissions on a smart traffic system will close on February 3.
