• Tax and Net Zero: How do Green Tax policies in individual countries compare?
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Tax and Net Zero: How do Green Tax policies in individual countries compare?

22 september 2022

Original content provided by BDO

Most of us will understand that the key to avoiding the worst impacts of climate change is to try and keep global temperature increases below 2%. To achieve this, it is believed that net zero must be reached by 2050. Net zero refers to a state in which the greenhouse gases going into the atmosphere are balanced by their removal out of the atmosphere. Organisations, governments and individuals across the world are making efforts to reach this goal.

In early 2022, BDO’s Global Tax practice undertook research among its tax professionals regarding the “green taxes” policies in their jurisdictions, in order to make a clear and measurable assessment of global green tax policies and their effectiveness. With responses from over 35 jurisdictions, we have assessed how environmental tax policies compare across countries and to determine which successful, already implemented policies our own governments could consider as we work internationally to build a strong, operational green tax agenda in our own jurisdiction.

Each country was asked to provide details on various areas, including:

  • Firm commitments on net zero;
  • Specific areas in which green tax changes have been introduced;
  • Green-focused incentives, such as increased tax relief for research and development (R&D) and green investment; and
  • Whether a desire for behavioural change was a factor underlying any of the tax policy changes.

Key survey results

The responses received demonstrated that only a few jurisdictions have a coherent strategy for using the tax system to achieve net zero. Many of the policies introduced thus far appear to have been hampered in their effectiveness by a lack of realistic alternatives for businesses and consumers. Furthermore, many often conflate the need for a tax system to raise revenue to support an economy and the need to influence behaviour.

View our visualisation of the data which demonstrates an initial snapshot of the key findings from 36 BDO countries following our survey in Spring 2022. This will be followed by the launch of our full interactive map which will demonstrate a full set of indicators, breaking down the key Tax in ESG approaches countries are taking.  

Progress in the major economies

Looking at the G-7, the UK was the first major world economy to enshrine the move to net zero in law. This was followed in France by their commitment to achieving carbon neutrality by 2050, and in Germany by the Climate Protection Act, amended in 2021 to bring forward the target date for greenhouse gas neutrality to 2045. 

Whether currently reflected in legislation or not, there is a consistent desire across the G-7 to meet the net zero target, with several countries setting interim targets for reductions in carbon emissions by 2030. 

The responses from BDO member firms reveal that the approach to achieving carbon neutrality is less consistent. Some jurisdictions adopt a strict regulatory approach, some take a more incentives-based approach, and some appear to rely on nudges towards behavioural change. This drives home the balance that needs to be struck between governmental action and personal behavioural change for tax to play an effective role in reaching net zero.

The Dutch government actively seeks ways to make the Dutch population aware of climate change and their own responsibility in this matter.”

Tax Professional, BDO Netherlands

Canada

In Canada, there is an imminent ban on single-use plastics, and one that is somewhat broader than the UK’s similar plastic bag tax and new Plastic Packaging Tax (see below). There is also a federal fuel charge that varies depending on the carbon content of the fuel in question. In provinces where the fuel charge is administered by the federal government, all revenues collected in a province are returned to households and businesses in the province through a refundable income tax credit.

France

According to the current French administration, environmental taxation is one of the main economic tools at its disposal to promote the transition to a decarbonised economy by changing the behaviour of households and businesses. The French approach consists of integrating the costs of environmental damage (called "negative externalities") into the price of goods and services. Increasing the cost of polluting goods and services is seen as a key element in making it possible to strengthen the competitiveness of recyclable products and to steer producers and consumers towards more environmentally friendly activities and sectors. Thus, the incentive for ‘better’ environmental behaviours is that the more polluting choices are more expensive (i.e., ‘the polluter pays’ principle). This ranges from the Taxe générale sur les activités polluantes" (TGAP or General Tax on Polluting Activities) aimed at industries responsible for the release of polluting emissions to reduced tax-deductible amortisation for more polluting cars. 

According to French administration, environmental taxation is one of the main economic tools aimed at promoting the ecological transition and changing the behaviour of households and businesses.
Tax Professional, BDO France

Germany

Germany has also introduced a few measures that seek to ensure that the polluter pays. These include an aviation tax, which imposes a tax burden on air travel as an environmentally harmful means of transport, and environmentally related charges imposed for the disposal of waste. Alongside these are greenhouse gas quotas and elevated pricing related to CO2 emissions that make fossil fuels more expensive.

Evidencing a more holistic approach to tackling the problem of climate change using tax, Germany has introduced several “carrots” aimed at rewarding good behaviour. For example, tax incentives are available for the construction/renovation of real estate for measures that contribute to the efficient use or saving of energy, such as efficient systems, use of environmentally friendly energy (solar power, heat pumps, etc.) and better insulation.

Additionally, Germany is promoting a transition to e-mobility with subsidies and tax breaks, especially for company or occupational vehicles. To move passengers away from air travel, a reduced rate of VAT is applied to long-distance rail tickets. Significant efforts are also being made to increase R&D in green technology. The direction of travel is interesting, with a reduced VAT rate on products of plant origin or organic meat being discussed as options to discourage the consumption of highly damaging mass-produced foods and ultra-processed foods. 

Japan

The Japanese government has revised the plan for combating global warming and re-set the target for 2030 as a 46% reduction from 2013 (up from a 26% reduction target set in 2016), and several laws for environmental measures have been updated due to the revision. They were also the first Asian country to introduce a carbon tax. Under the current Japanese tax law, the global warming countermeasure tax is introduced to all fossil fuels according to the environmental impact (CO2 emissions). It has introduced a “carbon neutral investment promotion” incentive for eligible enterprises, which provides a tax credit or special depreciation deduction for capital investment that produces products with significant decarbonization effects (such as Lithium-ion batteries) or achieves decarbonization in their manufacturing processes.

South Korea

In South Korea, the use of specific enhanced incentives for R&D is expanding. For example, in February 2022, the National Assembly extended the technology criteria to 48 types of carbon reduction technology, such as carbon capture, usage and storage (CCUS), hydrogen and renewables. This not only extends the R&D tax credit but also provides increased cash grants for foreign investors that invest in this technology in South Korea.

Given the short time frame within which the net zero target is to be met, the fact that specific green R&D tax credits do not appear within many of the other jurisdictions’ tax toolkit is surprising. It is an area in which other governments could follow South Korea’s lead.

United States of America

The U.S. offers several green energy tax credits and incentives at the federal level. As is to be expected, there is significant variety in measures at the state level, with California at the vanguard of change. Tax credits and incentives also focus on the U.S. automotive industry, with both Michigan and Tennessee creating new tax incentives for the development and production of electric vehicles.

United Kingdom

The polluter pays model can undoubtedly have a beneficial impact on behaviours. In the UK, there was a dramatic reduction in the issue of single-use plastic bags in the years following the introduction of the plastic bag charge at the point of sale. However, we note that changing behaviour is possible only when the polluter, in this case the consumer, can be provided with a viable and acceptable alternative: this will also be key to the success of the new Plastic Packaging Tax, which aims to encourage the use of recycled plastic in packaging.

Although the UK’s capital allowances system effectively offers 100% tax relief through, for example, the annual investment allowance, it remains a relatively blunt instrument with little to target specific relief towards supporting the climate change agenda.

In recent years the OECD has made stunning progress in aligning minimum tax standards around the world from BEPS to the GloBE minimum corporation tax rate. In March, ministers and representatives from the OECD member states, as well as several other countries, committed in an OECD declaration to intensify work on climate and the environment?

Interesting ideas from smaller economies

Turning the spotlight on some of the measures being introduced by smaller economies reveals some innovative, interesting ideas for larger jurisdictions to consider. 

Estonia

Estonia has introduced a series of green tax measures, including natural resource and pollution charges, an excise duty on packaging and road usage fees for heavy duty vehicles.

Knowledge-based, skills-based and attitudinal approaches to climate change will be introduced at all levels of education and in non-formal environmental education.” Tax Professional, BDO Estonia

Guyana

The government of Guyana believes the country is already at net zero. To retain this position, fiscal policy includes the waiver of taxes on energy from renewable sources and promoting the use of electric vehicles. Guyana also introduced a corporate tax waiver for certain investments in renewable energy, and renewable energy equipment can be written off over two years for tax purposes. Import duties on renewable energy equipment, electric cars and charging stations are waived. These programs are much more forward-thinking than many of the G-7 policies aimed at promoting positive behaviours, rather than continually punishing poor behaviours.

Iceland

Iceland closely follows the “polluter pays” model, with taxes on fossil fuels that increase significantly in correlation to CO2 emissions. This model is also followed in both China and Spain, with policies that disincentivise ‘bad’ behaviours through higher environmental taxes rather than provide incentives for less-polluting behaviours.  

Consensus over consistency

Overall, the responses received seem to indicate that, despite a broad global consensus in seeking to achieve net zero, there is a less than consistent approach in terms of tax policy. There are common areas of focus, such as the use of “pollution” taxes, the move towards the use of electric vehicles and the effort to reduce plastic packaging by taxing single-use plastics. But the overall impression is of an unstructured, piecemeal approach in most economies. 

Relying exclusively on a punitive approach to achieve net zero raises some concerns:

  • Increased behavioural taxes can accelerate a move towards the outsourcing of bad behaviours to other jurisdictions. There is a need to look at the entire supply chain, rather than adopting an “out of sight, out of mind” attitude. 
  • Increased costs will inevitably migrate to the end user, disproportionately affecting those with lower incomes.
  • Increased costs are likely to be unpopular and potentially vulnerable to political pressure as the political cycle moves towards an election.
  • Increasing costs for businesses are inevitably viewed as damaging national businesses that compete globally. Steps can be taken to mitigate this: for example, the EU has proposed adopting a “Carbon border adjustment” mechanism from 2026 to ensure that products imported into the EU are taxed if they do not meet EU CO2 standards.
  • The more successful taxes are in changing behaviours, the less revenue they will generate. For example, in the UK, vehicle excise duty and fuel duty raised GBP 35 billion for the Exchequer, an estimated 4% of all receipts in 2021/22. Electric vehicle owners pay no fuel duty or vehicle excise duty. What is going to fill the revenue gap – particularly in light of the unpopularity of road pricing measures? Fifteen years ago, a petition against the introduction of road pricing attracted more than one million signatures. 

Incentivising behaviour

The use of incentives is an approach being adopted in several jurisdictions, largely related to the use and provision of electric vehicles and capital investment in energy-efficient assets. It would be a mistake to focus solely on relief/incentives for obviously “green” sectors, such as offshore wind generation. What is needed is for all businesses to seek to develop greener ways of doing business.

A way forward

There is no easy answer, as there are broader implications to both the “polluter pays” and “incentives” models. What is needed is a holistic approach that combines the two models.

Taxation policy is clearly a key driver in the move towards net zero and governments should seek to be both innovative and ambitious if they are going to meet their individual net zero goals. For individuals, these behaviours include changing how they use transport, reducing household waste (including food waste) and moving towards energy efficient homes. Businesses should be encouraged to facilitate more sustainable approaches.

Overall, the use of incentives should be prioritised over punitive taxes, as this will encourage both good behaviours and the development of new technologies to be incorporated into a green “business as usual.” Ultimately, climate change is a global problem, so as well as setting a high standard on green taxes, we hope that all governments will engage with other countries through the OECD to give green taxes the same priority now given to tax avoidance. We can only hope that the OECD’s next major tax project will seek to align minimum standards in green tax policies globally.