What role can tax play in fighting the climate crisis?

The dialogue of climate change – and what we can do to reduce our impact on the environment – has increased in pace and urgency each year. Enter carbon tax.

With COP27 drawing to a close, and the recent Just Stop Oil protests dominating our feeds, climate change has been at the forefront of public discourse over the past month. 

With this in mind, we asked ourselves what role tax could play in fighting the climate crisis. 

We know that tax can incentivise certain behaviours. Take smoking as an example; high taxes placed on consumers have been recognized as one of the most effective population-based strategies for decreasing smoking and its adverse health consequences.

Prior to last year’s climate conference in Glasgow, we observed the introduction of green fiscal initiatives across the UK & Europe, including:

• Charges for plastic bags
• The shift to paper / metal straws
• Banning of CFC gasses
• Discounts for those of us who take our reusable cups to the coffee shop

So how will taxes be used in the future to encourage behaviours that positively impact the environment? 

What carbon taxes are we starting to see?

Since April 2022 all CPG’s (consumer packaged goods companies) in the UK have had to pay an additional tax on the import and production of plastics if they are made up of less than 30% recycled materials.  The hope is that this will be an incentive for companies to use recycled plastics. 

Amanda Stokes discusses this further ‘By introducing a tax, I think the government is trying to stimulate recycling and reduce use of virgin plastics. It’s working to encourage manufacturers, brands, and retailers to use more environmentally friendly materials.’

As part of the European Union’s Packaging levy, from 2020 all EU member states have been required to contribute 0.80 for each kilogram of packaging waste which isn’t recycled at the end of life. However, they have left each country to decide how they will cover these costs. 

Here’s how some EU countries will do this…

• Spain & Italy will introduce a non-reusable plastic tax in January 2023.
• Poland & Sweden are in the process of drafting up similar legislation.
• The Netherlands are also yet to finalise how they’ll pay the plastic levy. Unlike the countries listed above, they have some previous experience when it comes to plastic taxes, which they levied between 2008 and 2013 which they are re exploring. In the meantime, they have imposed contributions rather than a tax on plastic packaging. 
• Luxembourg has introduced a 17% VAT rate on certain plastic products.
• Latvia levies tax on single use plastic accessories, plastic bags &  plastic packaging as part of their NRT (national resource tax).
• Hungary introduced a product charge of plastics in 2011, which rates being dependent on the type of plastic product or the profile of the taxable person involved.
• Germany announced in June 2022 they will not pass on the ‘so-called’ plastics tax, believing it will be an instrument, which strictly speaking is not a tax but a method for calculating member states’ annual contributions to the EU budget. 
• Switzerland & France also have no current plans to introduce a plastic tax.

*WTS Global has created a detailed run down of Plastic Tax Initiatives across Europe.

As you can see, countries across Europe are taking different approaches to the packaging levy, some introducing new taxes, others integrating initiatives in with pre-existing policies.

The complexities

Carbon taxes are complicated. They are notoriously difficult to track.

Not only does it involve brand new costs for businesses to factor it, it also increases compliance. Whilst everyone is still getting to grips with new initiatives, it is important for tax teams to maintain close relationships with their clients to ensure complete transparency on the impact these new taxes are likely to have. 

In this blog, we’ve mostly focused on the UK & Europe, however this picture varies even more on a global scale. 

With different regions having control over the finite details of carbon taxation, tax functions will need to have the knowledge and technology necessary  to ensure compliance on a global scale.

Taxes may change the environment but how does it impact tax recruitment?

We’re not positioned to commentate on the economics and theory behind ‘carbon tax’ but we’re curious about how the introduction of taxes like the plastic tax will impact the landscape for tax recruitment.

The implementation of carbon pricing isn’t going to be linear. For many, this is unchartered territory.

63% of International Tax Review respondents note that environmental tax changes should be in the top 5 priorities for in-house tax teams. 

It’s likely we’ll see an increase in demand for advisory, compliance and tax technology services whilst firms get to grips with the variety of green taxes out there. 

In the last year we have noticed an increase in indirect tax professionals specialising in carbon  taxes, which we predict will continue to rise in the coming years.

The development and implementation of sufficient technology will be crucial in drawing out complex carbon data to ensure accurate reporting. Policy changes are always a headache for those in compliance, however tax technology will be key in easing this burdensome work.

Advisors in particular will play a key role in ensuring their clients are taking advantage of the full range of carbon incentives out there. It’s likely more legislation will be introduced in the coming months, meaning tax functions will have to work hard with leadership teams to identify and  capitalise on these.

Is the tax world ready to tackle climate change?

It’s clear, plastic taxes are the tip of the iceberg when it comes to using taxation as a force to combat the climate crisis.

48% of the ITR‘s survey respondents highlight that in-house tax teams will play a significant role in shaping future environmental policy. 

One Big 4 firm is currently tracking 3,600 different carbon tax incentives being offered around the globe.

While the journey ahead will be rocky for tax teams, the destination could contribute significantly to creating a sustainable economy.

We’ll be keeping a close eye on the demand for Environmental Tax specialists over the coming years, so if you’re already working in this area, get in touch. We’d love to hear more about the changes your seeing on the ground.

Want to find our more? Check out the complete International Tax Review Survey.

Katie Thomas is a Senior Research & Content Consultant for Indirect Tax.