Business consequences of tax driving net zero ambitions
KPMG experts consider what the consequences might be if tax is used as a lever to drive decarbonisation.
Tackling climate change is a key issue. This has become more pressing than ever with the fuel price increases and growing uncertainty caused by the Russian invasion of Ukraine.
There are many questions to address:
How fast will changes be made?
To what extent will tax be used as a stick or a carrot?
What impact will taxes or regulation have on business? How will these interact with each other?
This article looks at some of the measures that governments might introduce – in particular, tax-related ones – and the potential impact on business.
Carbon pricing (whether by a tax or an emissions trading system) is likely to be one of the key instruments used by many governments to address climate change.
Governments will likely also use other instruments – including incentives, regulations, and targets – and different countries may rely, to very differing degrees, on each of these levers.
The Russian invasion of Ukraine and the energy crisis may initially slightly slow decarbonisation and alter the pathway to net zero but is creating an even greater sense of urgency and, in the medium to long term, is likely to accelerate progress.
A significant increase in a country’s carbon price will likely drive concerns about carbon leakage and increase calls for carbon border adjustment mechanisms (CBAMs).
CBAMs raise many issues of complexity, WTO compliance, and trade distortion. Hence the suggestion by some for a ‘carbon club’, which could take account of the differing policy options and pathways chosen by individual countries.
What leaders in the space are saying
Carrot versus sticks; tax versus regulation
Governments have many levers at their disposal to influence how businesses and citizens respond to climate change. Each lever brings its own implications and knock-on effects for behaviours, the economy, and society more broadly. More information can be found by downloading the report on which this article is based.
With direct subsidies, governments may be quite specific about what they incentivise, like installing solar panels or hydrogen boilers, but there’s also a lot of heavy lifting involved in terms of administration. Governments may adopt measures to provide for a behavioural shift as individuals and companies work out cheaper alternatives.
Putting a price on carbon
The ability of tax costs to drive behaviour is one reason why carbon pricing has been used as a key way to promote businesses’ transition to green energy alternatives. By putting an economic cost on the carbon emissions embedded in a product or service, businesses and consumers are incentivised to shift from fossil fuels (where, historically, the total cost of environmental externalities has not been borne) toward low-carbon alternatives. More information is available here.
Businesses should prepare for a multifaceted approach. It may look different across jurisdictions, as governments pull multiple levers. We expect that many will consider carbon pricing the most effective, whether through ETS [Emissions Trading System] programmes, carbon taxes, or both in combination. Still, other jurisdictions are going to favour an incentive model for driving the change needed.
The circular economy
The clean energy transition is critical, but some jurisdictions might also take measures to support the move to a circular economy more broadly. In these jurisdictions, businesses may have to develop more circular business models based on repair, resale, and retaining value; processes that can be knowledge-intensive and take time, energy, and innovative thinking to develop. More information is available here.
In addition to introducing incentives, industry is, first and foremost, looking for a removal of barriers to facilitate the move from linear to circular business models.