“Net Zero” is set to become the phrase of the day. It might even eclipse some of the Covid jargon that has become part of our dictionary over the past two years!
Climate – and the way we live it impacts climate sustainability – was in focus last month, with the COP26 summit in Glasgow.
Promises and promises have been made, and now the governments of the world must fulfill them. So what role does the tax system play in helping to achieve Net Zero, especially how can the UK government promote policies through the skillful use of tax policy?
Governments use the tax system to influence our behaviors all the time, whether it is to discourage behavior (hence the obligation on alcohol and tobacco) or to encourage specific activity. (research and development is an obvious example).
To achieve Net Zero will not be cheap. However, businesses are focusing on the actions they need to take to achieve Net Zero, and the rollout has already begun. Support for these activities can come from the government in the form of a comprehensive tax policy aimed at promoting the green economy.
There are already several types of green taxes:
- Climate change tax – taxes levied by energy suppliers and by businesses and the public sector to incentivize the reduction of greenhouse gas emissions;
- Carbon price support – to encourage generators to invest in low-carbon electricity by increasing the cost of the fossil fuels they use;
- Burial Tax – taxes levied on landfill operators to transfer waste from landfills to other less hazardous waste management methods; and
- Tax Summary – a tax that encourages the use of recycled materials for quarrying of rocks, sand and gravel, which can be harmful to the environment.
However, the tax on fish from this so-called green tax has dropped and, in fact, accounts for only 6% of the tax increase in the 2019/20 tax year. So what needs to happen to encourage more businesses, while curbing the behavior of polluters?
In their policy paper on “Improving the tax system” The CBI says the approach should be a holistic approach. The right combination of violation and decentralization – in the context of the overarching imperative to achieve net-zero – can be put in place for a set of rules to punish polluters but reward for pro-climate behaviour. Incentives that reward good climate behavior will help reduce the burden and compliance costs businesses are facing by going net zero.
Establishing tax policy on the environment and climate is more difficult because the issue is also a global one. As we saw at COP26, the competitive interests of countries and the disparity between developed and developing countries when discussing carbon reduction targets will lead to uneven playing fields. unless there is a common approach to tackling climate change. The same is true for tax policy. For example, if the UK government is overly punishing businesses for taxing carbon, those businesses could very well take their business elsewhere. That is why tax policy must be coordinated so that companies can expect to be treated the same wherever they go.
It is a fundamental principle of tax systems that they are certain and predictable so that businesses know what to expect and can plan accordingly. However, the government’s choice to develop a climate-related tax policy must be balanced, consider the international context and need to provide a clear roadmap for business activities. There is no such small task.
Cathy Bryant
Cathy Bryant is a partner in Blake Morgan’s corporate tax team. A double qualified attorney, Cathy brings a wealth of experience to her advisory role on tax matters in corporate transactions. Cathy also advises on employment tax – for example on employee termination payments, IR35 application and other employment tax related matters. She develops equity incentive programs for employers and advises on the structure and scope of these programs.
