Whether by carrot or stick, many governments worldwide are trying to push businesses toward climate change transformation.
By Gerri Chanel
On the incentive front, there has been a rapid increase in policy and legislative change to encourage cleantech expenditures. On the penalty front, governments are increasingly imposing taxes and other levies, called “green taxes,” on business activities seen as contributing to negative climate change effects.
More widespread green taxes may not be far over the horizon, after the late 2011 meeting of the world’s climate negotiators in Durban, South Africa.
Many countries, many approaches
Green taxes and other disincentives generally take the form of energy and carbon taxes, but may also include landfill taxes, fuel taxes, customs duties, land taxes or regional and state taxes.
Despite their common goal, individual green taxes are as varied as the countries that levy them. Josephine Bush, EMEIA Tax Leader for Ernst & Young's (EY) Climate Change and Sustainability Services, says, “It can be difficult for businesses to navigate effectively around the incentive and green tax landscape because there is no globally consistent approach.
This is, of course, especially true for global businesses that anticipate an increasing tax burden imposed on businesses via the green tax take. Indeed, many businesses are forecasting for a more than 20% increase in electricity bills as a result of increasing carbon taxes.”
From Kyoto to Durban
The 1997 Kyoto Protocol marked the first major collective step in introducing carbon pricing – a form of green tax – on a global scale via the introduction of a framework for international agreement. The countries which ratified the agreement collectively committed to delivering 5% emissions reductions by 2012. At the Durban meeting, an agreement was reached to extend the Kyoto Protocol for another five years.
“Developing economies are looking to the developed world for guidance as to how to frame their legislative systems,” says Bush. “So it is imperative that events like Durban bring a sense of movement toward a globally consistent approach to the tax regime. This will make the investment landscape much clearer and more stable.”
Some countries use carbon pricing schemes to try to encourage companies to reduce emissions through energy efficiency and renewables projects – and penalize those that do not. One approach is “cap-and-trade” systems, where firms must operate within an annual emissions cap. Companies that reduce emissions can sell surplus allowances to firms unable to meet their targets.
Carbon pricing systems are well under way – US$142b in carbon credits is now traded every year. Ernst & Young's (EY) 2011 survey report, Cleantech and climate change: the role of tax as catalyst for change, surveyed 36 Ernst & Young (EY) country practices to identify emissions trading systems operating in those countries and to identify tax incentives and other mechanisms related to carbon transformation.
Of the 36 countries surveyed, 13 have some kind of emissions cap in place; the same 13 jurisdictions also have carbon trading systems. In the US and Canada, there are also some government caps at subnational levels.
A key element of the European Union’s energy policy is its cap-and-trade system, the Emissions Trading System (ETS). Launched in 2005, it is based on the framework of the international emissions trading structure established by the Kyoto Protocol.
The jury is still out on the effectiveness of carbon pricing schemes. As a result, carbon taxes – levies on carbon dioxide emissions from fossil fuels – are beginning to find their way, with schemes in various countries. Some examples include Finland (1990), Sweden (1991) and Great Britain (2001).
Recent additions include Ireland (2010) and Australia (2011). The US and Canada have subnational taxes on carbon, including Boulder, Colorado (2007), Quebec (2007) and British Columbia (2008).
The carrot and the stick
Managing carbon taxes is only one piece of the equation. According to Bush, “Carbon taxes are here to stay, but equally so are green incentives to invest in green energy. The key to effective operation here is the ability to quantify green tax exposures and to maximize incentive opportunities.
This is only the first step in the role of tax within the decision-making process; there are a multitude of other opportunities to ensure that tax adds value to corporate sustainable agendas.”
DID YOU LIKE THIS ARTICLE?
Subscribe to the Tax Insights newsletter for the latest thinking in tax.