Tax professionals told ITR that compliance concerns for MNEs are increasingly shifting towards non-traditional taxes such as a carbon tax. This is partly due to a cultural shift that has been slowly gathering momentum, but the COVID-19 pandemic is likely to provide a more immediate impetus for change as politicians call for a green recovery.
Meanwhile, the change of administration in the US in January 2021 has ushered in an era of increased environmental focus as President Joe Biden and his Secretary of the Treasury, Janet Yellen, advocate for environmental reform.
“Indirect taxes, energy and environmental taxes are increasing and increasing” while corporate income tax is decreasing in importance, said Helene Geijtenbeek, partner of global innovation and investment incentives at Deloitte.
Alice Pirlot, a research fellow at the Oxford University Centre for Business Taxation, agreed. “We still see them as different from CIT and VAT, but carbon taxes will become the new normal,” she added.
The momentum for carbon taxes is demonstrated by two events in recent weeks. First, the American Petroleum Institute (API), the largest US oil and gas trade association, publicly endorsed carbon pricing, joined by household names including BP and Chevron.
Fossil fuel companies often see carbon pricing as preferable to increased regulation, and API’s statement insisted that carbon pricing legislation should “avoid regulatory duplication”.
Meanwhile, the Canadian Supreme Court ruled on March 25 that the country’s federal carbon price is constitutional, after the states Saskatchewan, Ontario, and Alberta argued for the power to determine their own climate policies. This result could set a precedent for other countries that operate with a federal and state system, such as the US and Brazil.
Carbon taxes on the rise
Carbon taxes have been increasing in popularity with governments around the world since the Paris Agreement came into force in 2016. Carbon pricing, either in the form of taxes or an emissions trading scheme (ETS), offers an obvious solution to ambitious climate targets and increased impetus for a ‘green recovery’ from the pandemic.
The World Bank’s carbon pricing map identifies 64 carbon pricing initiatives implemented or scheduled worldwide, covering 46 national jurisdictions and 35 subnational jurisdictions. Many of these have emerged in the past two years. In 2020, these initiatives would cover 22.3% of global greenhouse gas emissions.
In-house tax directors are responding to the rapid changes in legislation by gathering information that could help them comply with the changes. One tax director at a multinational energy firm said that they had launched an internal survey to determine the effect of carbon taxes in different jurisdictions, in response to an enquiry from managers.
The enquiry was linked to a suggestion that the company’s carbon footprint could affect its ability to secure bank financing, which underlines the increasing prevalence of ESG factors across company departments.
“ESG factors are gaining momentum as strong drivers of private foreign direct investment and institutional investment, as stakeholders lend their support to more sustainable, less carbon‑intensive opportunities,” said tax partners from law firm Osler, Hoskin and Harcourt.
Meanwhile, the global pandemic has inevitably affected the carbon tax landscape. The OECD, International Monetary Fund (IMF) and other intergovernmental institutions are working on policies to support a green economic recovery, and carbon taxes will play an important part.
International carbon pricing issues
Tax professionals suggested that there could be an increased impetus for carbon taxes due to the pandemic. However, there are some difficulties around carbon pricing that remain unresolved by governments and international bodies.
The first is that both carbon taxes and ETS mechanisms require sustained monitoring and intervention by governments, but this has not always materialised. “Theoretically it could work but it requires governments year-by-year to intervene,” said John Christensen, director and chair of the board at Tax Justice Network.
The pandemic tested the resilience and efficacy of carbon pricing mechanisms globally. As economic activity slowed, some ETS prices fell, reducing the incentive for industry to reduce its reliance on fossil fuels. For example, in the first quarter of 2020, the EU ETS allowance prices decreased from their 2019 price of around 25 euros ($30) to 17 euros.
One example for EU governments to follow is Sweden, which introduced its carbon tax in 1991 at a rate of €24 per tonne, and has stepped this up to €114 in 2021. This gradual progression gave businesses time to adapt and ensured that the tax was politically palatable.
Another concern is global consistency. If some countries have more ambitious climate targets than others, there is a danger of ‘carbon leakage’ which could damage domestic economies as industry moves to countries that offer lower tax rates. The EU is working on a carbon border adjustment mechanism, but the US is not in favour.
A global institution for tax could help to regulate the global carbon markets and ensure consistency. “We don’t have a world tax authority that can help to agree a framework within which either carbon trading or carbon taxing can happen,” said Christensen.
In the meantime, institutions such as the OECD and the UN are working on the problem.
The landscape of carbon taxes is muddied and complex, particularly as the world continues to grapple with the economic implications of the pandemic. Nevertheless, there has been steady progress on increasing carbon taxes, and the EU’s consideration of carbon border adjustments could provide the impetus for countries to step up their carbon pricing ambitions.
This momentum is likely to be accelerated by the political support for a ‘green recovery’. Tax directors should investigate their companies’ current and future obligations to ensure they are not caught out.
