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Tax & AccountingNovember 22, 2023

Green tax or promoting environmentally friendly behavior

Explore key recent green tax developments on a regional and national level, in particular examining the new reporting and compliance requirements for taxes.

In a world grappling with the urgent need for environmental conservation and sustainable practices, the role of taxation has taken center stage in the pursuit of a greener future. 

In the following article, we look at key recent green tax developments on a regional and national level, in particular examining how the new reporting and compliance requirements being developed are likely to affect businesses and the tools that are available to help them meet their obligations and the needs of their customers. 

What are green taxes? 

Green taxes, also known as environmental taxes or eco-taxes, are fiscal policy measures imposed by governments to promote environmentally friendly behavior and address environmental issues. These taxes are typically designed to internalize the external costs associated with certain activities, products, or services that have negative environmental impacts. 

The primary objectives of green taxes are to: 

Encourage Sustainability: Green taxes are intended to incentivize individuals, businesses, and industries to adopt more sustainable practices, reduce pollution, and conserve natural resources. By taxing environmentally harmful activities or products, governments aim to make them less economically attractive while encouraging alternatives that have a lower environmental impact. 

Generate Revenue: While the primary purpose of green taxes is to influence behavior, they can also generate revenue for the government. This revenue can then be reinvested in environmental protection initiatives, clean energy projects, or other programs aimed at mitigating environmental damage. 

Common examples of green taxes include: 

Carbon tax: Imposed on the carbon content of fossil fuels, carbon taxes incentivize the reduction of greenhouse gas emissions by making carbon-intensive activities more expensive. 

Congestion charges: Levied in urban areas to reduce traffic congestion, congestion charges encourage the use of public transportation and reduce air pollution. 

Landfill taxes: These taxes are imposed on waste disposal in landfills, encouraging waste reduction, recycling, and responsible waste management practices. 

Plastic bag taxes: Often applied at the point of sale, these taxes discourage the use of single-use plastic bags and promote reusable alternatives. 

Pigouvian taxes: Named after economist Arthur Pigou, these taxes are designed to correct market failures by internalizing external costs. For instance, taxing activities that produce pollution or negative externalities. 

Green taxes can be an effective tool in achieving environmental goals and addressing climate change by shifting economic incentives towards more environmentally friendly and/or sustainable practices. However, they should be carefully designed to avoid disproportionately burdening low-income individuals or industries and to ensure that the revenue collected is used for environmentally beneficial purposes. 
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Green tax principles 

Although the end goal of slowing climate change is quite clear for all parties, the types of tax measures imposed, and the motivations, nuances, and driving principles behind them are likely to differ significantly from country to country, as are the associated compliance and reporting requirements, for example:

Windfall taxes, such as those approved by Ireland in the summer of 2023, impose a 75% temporary solidarity contribution on windfall gains (above a certain threshold) made by companies in the mineral extraction, refining, and manufacturing sectors in the 2022-2023 period.

VAT reductions/exemptions on "clean" technology and associated services, for example, the production, installation, and use of solar panels, where Ireland is also leading the field, having introduced a zero percent rate on the supply and installation of such technology, from May 2023.

Reduced tax rates, tax credits, and payroll tax incentives that can be used to encourage investment in certain "green" sectors, research, and development, such as the incentives in place for "green shipping" in Luxembourg, including reduced registration fees for emission reductions, and tax credits for investments in green technology for ships.

Increased tax rates and broader tax scope in relation to polluting activity, such as those taxes that are under consideration in Estonia for vehicles, or the removal of subsidies for the mining, refining, and use of fossil fuels.

Against the background of increasingly extreme weather events and disasters, taking action urgently on climate change is becoming a high priority for individuals, companies, national governments and international bodies. According to a Eurobarometer survey conducted in July 2023:

  • 93% of those polled expressed the belief that climate change is a “serious problem facing the world”, while
  • 58% thought that the speed of transition towards a “green economy” should be increased.

But what does this mean in practice, how will it be accomplished, and how effective is it likely to be?

The European Green Deal, and Fit for 55

First launched in December 2019, the European Green Deal is the European Union’s (EU) climate change action plan, which has among its stated aims: making the EU the first “climate neutral continent” by 2050, decoupling economic growth from resource use, and ensuring that no person or nation is left behind.

The EU has committed to reducing greenhouse gas emissions by 55% by 2030 (and, in fact, looks set to surpass this goal), with various different initiatives in the pipeline, including increasing the share of renewable energy used within the Union to 42.5% (with a stretch goal of 45%) by 2030, and putting in place energy efficiency improvement targets of 39% to 41% by 2030.

One of the key frameworks for achieving this, initially announced in July 2021, is the "Fit for 55" initiative, which contains measures to encourage the use of renewable fuels and building materials, to boost innovation and investment in "green" technologies, to boost international cooperation with regard to the energy purchase, to encourage reduction in emissions share for traditionally high energy consuming sectors such as aviation, and to encourage the use of lower carbon transport methods more generally. To this end, legislation has been adopted with a view to adapting the EU’s climate, energy, tax, and transport policies in order to reduce net greenhouse gas emissions, and thereby potentially slow the rate of climate change.

As stated, "Fit for 55" aims to accomplish a significant net reduction in greenhouse gas emissions by 2030 by:

  • Rationalizing incentives and exemptions offered by EU member states to businesses in traditionally polluting sectors (such as mineral extraction, fuel, and industry) 
  • Updating the scope and rates for taxable energy products in order to encourage the use of "clean" fuels and energy generation methods 
  • Introducing – between 2026 and 2034 - a Carbon Border Adjustment Mechanism (CBAM) whereby imports of iron, steel, fertilizers, certain building materials, etc., are required to have a carbon "price" factored into their production 
  • Implementing European Sustainability Reporting Standards (ESRS) 
  • Expanding the existing emissions trading scheme to cover CO2 emissions from large ships; creating a new emissions trading scheme for fuel used in road-building and construction and phasing out free emission allowances for aviation (by 2026) 

Progress has been made legislatively in a number of areas, including on September 15, 2023, via the gazetting by the European Community of rules implementing the transitional stage of the CBAM. 

Under the new rules, between October 1 of this year and the end of 2025, importers need to report on emissions embedded in their imports but do not need to make any financial adjustments. Additionally, although importers are being asked to collect Q4 data from the October 1 start date, they won’t need to submit a final report on this until January 31, 2024. 

Green tax: the article final thoughts

According to the economic position and political stance of the government imposing them, green taxes can be employed variously to change behavior, to break the link between continually expanding resource use and economic growth, to increase sustainability, and, importantly, to boost revenue collection. 

What all of these different tax types have in common, however, is that businesses will need to put in place new processes and resources to record, administer, collect, and remit them. 

The global climate situation and the measures that are being taken by national governments and multilateral organizations with a view to mitigating the impacts of climate change, green taxes, incentives, standards and reporting systems are likely to become increasingly important in the coming years

With this in mind, businesses will need to be prepared to proactively tackle these issues in terms of headcount, resources, cash flow, and reporting and compliance tools and systems.

Stay tuned for the next green tax blog article, where we will explore global environmental tax initiatives, including The Inflation Reduction Act in the United States, the United Kingdom's initiatives, the United Nations Framework Convention on Climate Change, and developing countries' perspectives. 

Do not miss the second part of the blog series:

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Streamline your tax and accounting operations, and supercharge your team’s efficiency with the expert solutions from Wolters Kluwer.
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