Are tax breaks the way to net zero?
Carbon taxation is nothing new and companies in many countries are aware of the price they may have to pay for emissions. Now, the reverse – rewarding
The use of taxation to combat climate change is not a new strategy. Attaching a tax to carbon emissions is already a tactic being used in 27 countries, with 64 carbon-pricing initiatives currently in force across the globe at various levels according to The World Bank. As of 2022, this equates to 23% of global greenhouse gas emissions being covered.
If carbon taxes, making firms or individuals pay for the pollution they emit, is the stick, then tax breaks are arguably the carrot. The use of tax breaks was recently suggested in a policy paper by the UK’s Institute of Directors (IoD) as a way of incentivising corporates to pursue net-zero targets.
The rate of corporation tax in the UK is currently 19%, but the IoD has called upon the government to lower this for companies that achieve net-zero status. Introducing the policy suggestion, IoD chief economist Kitty Ussher said: “Piecemeal and sector-based initiatives can only go so far.
“By creating a future wedge between the corporation tax paid by those businesses that are net zero and those that are not, there would be a clear incentive for all businesses to achieve the desired change. If implemented, we believe that this simple, yet significant, policy change would be a huge stride towards meeting this country’s climate change target.”
Around the world, tax is a tool being used to promote better behaviours. This has already been seen at a consumer level, with the tax breaks awarded in the UK and across Europe for the installation of solar panels and wind turbines. As a concept, tax breaks for corporates can make sense but their application on a global level could raise challenges.
Taxation rates already differ between countries and can be used to gain competitive edges and attract investment. Mike Trotman, an environmental tax expert at business advisory group Xeinadin, sees room for improvement in how the global community approaches net zero from a tax perspective.
“While there may be a converging view between countries about the need to urgently reduce emissions, there is no similar consensus about how tax is used to help achieve this,” says Trotman.
“Consequently, there are many different types of taxes around the world and even significant differences in environmental taxation within countries. For example, the federal government nature of countries like Spain and Germany has led to federal states designing different environmental taxes to suit their particular carbon challenges.”
By creating a future wedge between the corporation tax paid by those businesses that are net zero and those that are not, there would be a clear incentive for all businesses to achieve the desired change.
Attracting investment
Taxation rates already differ between countries and can be used to gain competitive edges and attract investment. Mike Trotman, an environmental tax expert at business advisory group Xeinadin, sees room for improvement in how the global community approaches net zero from a tax perspective.
“While there may be a converging view between countries about the need to urgently reduce emissions, there is no similar consensus about how tax is used to help achieve this,” says Trotman.
“Consequently, there are many different types of taxes around the world and even significant differences in environmental taxation within countries. For example, the federal government nature of countries like Spain and Germany has led to federal states designing different environmental taxes to suit their particular carbon challenges.”
The benefits of net zero are clear to society. However, experts point to tax breaks as being a source of further encouragement for companies to make the necessary changes. Making a tax break a tangible prospect for businesses is key according to Stephen Relf, deputy content manager (tax) at information services hub Croner-i.
He explains for a business to enact real changes to achieve net zero, and with it a handsome tax break, these decisions need to be properly supported: “Tax breaks can have an impact on investment decisions but only where there is certainty and where they form part of a wider range of measures.
“Businesses need to understand how and when tax relief will be given. This means a clear vision – or roadmap – from government for the years ahead, well-drafted legislation, support from [tax authorities] and a commitment from government to stick to its guns. Tax is only part of the picture; for an investment to make sense, all of the pieces must come together.”
Designing taxation policy around net zero, in a way that supports this aim, will require input from across the state. This extends beyond simply assigning corporation tax cuts to companies achieving net-zero status, and Trotman points to wider considerations.
“A switch from the existing approach to tax to regimes that have emissions and the environment as their main principle, would require a radical (and perhaps unlikely) change of philosophy about the role that taxes should play,” says Trotman. “Also, an environmental tax that successfully prompts changes in behaviour, is likely to raise less and less tax – where is the revenue going to come from?”
