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What taxpayers should expect from COP26

The global climate conference could lead to greater harmonisation on carbon pricing, although a global agreement is unlikely. Yet COP26 could have far-reaching implications for energy and financial tax policy.

The 26th United Nations Climate Change conference (COP26) could incentivise countries to introduce tax policies combating climate change and supporting renewable energy. Yet any consensus on how to approach the climate crisis from a tax point of view is likely to be limited.

“I do not think that anything will be decided on carbon taxes at COP26,” said Alice Pirlot, research fellow at the Centre for Business Taxation at Oxford University’s Saïd Business School.

Pirlot added that while discussions could be initiated about a climate club or a minimum carbon price, she has “no big expectations on concrete tax policy for COP26”.

Chris Morgan, head of the global responsible tax programme at KPMG, agreed. “We won’t see a global carbon tax or carbon trading system. What we will see is more commitments from countries to reach net zero and implement something by 2030,” he said.

For multinational enterprises (MNEs), this means that there is little hope of a global solution that could simplify their compliance obligations. It is worth noting that the OECD-led multilateral agreement on digital tax and taxing rights, which sparked hope of a similar deal on the climate, took years of intense negotiations to reach fruition.

However, the climate conference, which will take place in Glasgow from October 31 to November 12, could offer a springboard for multilateral discussions.

Harmonisation would help MNEs

Reaching a global consensus on carbon pricing may be unlikely, but the level to which countries can agree at COP26 will be significant for MNEs.“For companies, COP26 is going to be decisive,” said Morgan.

A degree of harmonisation between countries will give MNEs greater certainty about their obligations and about the extent to which there will be a level playing field for businesses competing internationally.

The need for coordination is also appreciated by OECD Secretary-General Mathias Cormann, who released a statement on carbon pricing to coincide with an OECD report, Carbon Pricing in Times of COVID-19: What has changed in G20 economies?, published on October 27.

“Progress remains uneven across countries and sectors and is not well enough coordinated globally. We need a globally more coherent approach which enables countries to lift their ambition and effort to the level required to meet global net zero by 2050,” said Cormann.

Some countries, particularly wealthy nations in the global west, could agree on the basics of carbon pricing at the conference. However, there would still be some uncertainty because countries such as India are unlikely to sign up to a multilateral agreement.

In a less positive scenario, there will be little agreement and countries will continue to implement their own measures. “If we don’t get at least a good degree of harmonisation coming out of COP26, I can see [carbon borders] expanding,” said Morgan.

This is because countries with ambitious climate policies will be keen to protect domestic companies from competing at a disadvantage against international rivals.

For MNEs, the more harmonisation between countries, the better. Multilateral agreements will help companies to minimise the administrative burden associated with cross-border operations. “What all the companies I speak to want is, they don’t want barriers,” said Morgan.

However, there is no hope at this stage of a coordinated multilateral agreement in the style of the OECD’s pillar one and two solution.

A carbon pricing patchwork

Rather than a multilateral agreement, a patchwork of unilateral, although perhaps coordinated, measures is more likely, tax professionals told ITR.

“I’m not expecting that at any time there will be an agreement that says, [every country] has to apply cap-and-trade or a carbon tax. The important thing is that they apply some measure that gets us to the right place,” said Morgan.

One reason that a multilateral solution is unlikely is that many countries around the world already have domestic tax policies or legislation tackling carbon emissions. 

Carbon taxes are “a lot further advanced, in a sense, than something like the digital services tax with pillar one,” said Michael Ludlow, group head of tax at Swiss Re, referring to the OECD-led BEPS agreement.

“To unify all [those carbon tax policies], you’d be undoing so much domestic legislation,” Ludlow added.

A second reason that unilateral measures could increase is that COP26 provides a focal point for countries to consider their domestic policies. As media attention brings government tax policies under scrutiny, the conference could be a catalyst for countries to announce measures such as carbon taxes and carbon border adjustment mechanisms (CBAMs).

“I think there is a political angle: because COP26 is highly mediatised in the UK, it is likely to be accompanied with big political announcements, including on tax,” said Pirlot. This is true of other countries, too.

Carbon pricing is not the only topic at COP26 that could involve tax policy. Energy and finance are two crucial areas in which tax is also likely to play a role.

Energy and financial tax policy

The COP26 Presidency Programme has dedicated November 4 to“accelerating the global transition to clean energy”, where delegates are likely to discuss tax incentives for renewable energy. Investors and developers have told ITR that clean energy projects need more incentives to boost the sector and mitigate against risks.

“It’s easier to offer [companies] sweeteners to do the right thing than it is to punish them for doing the wrong thing, so I would say [an increase in renewable energy incentives] is almost certain,” said Ludlow.

Climate-friendly finance is also on the agenda, with November 3 dedicated to “mobilising public and private finance flows at scale for mitigation and adaptation”. Tax incentives for ‘green’ bonds and loans could play a role here.

COP26 is loaded with weighty expectations for a radical climate policy that will help to avert catastrophic global warming levels. Yet tax professionals are more circumspect.

“It will be a step forward, but I doubt it will be the great breakthrough that we all wanted,” said Morgan.

With issues including carbon pricing, CBAMs, energy, and finance up for discussion, national governments are likely to wield tax as a policy lever – whether unilaterally or multilaterally.

MNEs hope harmonisation on tax policies will ease the compliance burden, but it is difficult to predict what will happen. ITR will be reporting on the tax issues raised during the conference.

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