Learn how governments around the world attempt to mitigate the impacts of climate change with green tax, incentives, standards, and new reporting systems.
In the last green tax article, Green tax or promoting environmentally friendly behavior, we examined what green tax is, looked at types of green taxes, or in other words, environmental taxes, and their underlying principles, and at recent European developments in this area, including the European Green Deal and the Fit for 55 initiative. In this article, we will look more broadly at international green tax programs and initiatives and at the differing directions that national governments have chosen to take to encourage environmentally friendly and sustainable behaviors. These diverging paths include the Inflation Reduction Act in the United States and the United Kingdom's fossil fuel initiatives.
We will also focus on the recently concluded meeting of the United Nations Framework Convention on Climate Change (COP28, which took place between November 30 and December 12 in Dubai and was hosted by the United Arab Emirates), and in particular, will look at the perspectives of developing countries - which often face the worst of the impacts of extreme weather events and slow developing environmental crises - on climate change and related mitigations.
Addressing the environmental changes with The Inflation Reduction Act
The Inflation Reduction Act represents a significant milestone in United States federal legislation, seeking to address inflation through potential reductions in the federal government budget deficit. It was signed into law in August 2022 and contains numerous tax and other incentives to encourage the use and creation of green technology, fuels and energy products, and to boost investment in these areas.
Key measures in the Inflation Reduction Act include:
- Extending tax credits through 2024 for renewable energy production and for investment into energy-related tech/processes and alternative fuels such as renewable and biodiesel
- Creating new tax credits for the generation of zero-emission nuclear, the sale or mixture of sustainable aviation fuel (both after 2023), clean hydrogen production, the production of domestic clean fuel production from 2025, and the domestic production and sale of qualifying wind and solar energy
- Modifying and extending through 2032 the alternative fuel refueling properties credit and the tax credit for nonbusiness energy property, which becomes the new energy-efficient home improvement credit (and is increased from 10% to 30%)
- Modifying tax deduction requirements for energy-efficient commercial buildings, creating a new tax credit for commercial clean vehicles, and modifying the refundable tax credit for electric vehicle (EV) purchases
- Reinstating higher excise taxes for hazardous substances (for example, domestic crude oil and imported petrol) and making the permanent increased rate of coal excise tax
In addition to the measures outlined above, incentives to support the US manufacturing base by facilitating investment have been introduced, including the Advanced Manufacturing Production Tax Credit (or Section 45X credit), which provides a 10% credit (as a percentage of product costs) on the domestic production of batteries, solar panel wafers, wind turbine blades, certain minerals, and other technologies necessary to clean energy production.
The Inflation Reduction Act can play a crucial role in advancing environmental sustainability and reducing the US carbon footprint while also supporting economic growth and addressing inflationary pressures. It's a positive example of how governments can use fiscal policy to achieve multiple objectives simultaneously, and it's in line with the global trend of recognizing the importance of sustainable and green initiatives in the face of climate change and environmental challenges.
The UN COP Negotiations: COP 27/28
Meetings of the United Nations Climate Change Conference, also known as Conferences of the Parties of the UNFCC meetings, or more popularly COP meetings, take place annually. The meetings are numbered sequentially (e.g., COP1, COP2, etc.), and each builds on the previous meetings' outcomes. These conferences play a pivotal role in shaping the global response to climate change. They are instrumental in coordinating international efforts to mitigate the effects of global warming and adapt to its consequences.
COP27 took place in Egypt between November 6 – 20, 2022, with key outcomes including the agreement on a new pooled fund for countries suffering climate change loss, reaffirmation of the need for the 1.5-degree limit on global warming (and associated 43% reduction in emissions required by 2030) stipulated under the Paris Agreement, the postponing of the finance goal for developed countries to support developing countries in making climate adaptations, and acknowledgment of necessary investment in the region of USD4-6tn to meet stated goals. However, the fault lines that appeared during the 2022 meeting over the language used with regard to reducing fossil fuel use, and the necessary speed of emission reductions continued to deepen during the 2023 event, putting the reaching of any agreement at all in jeopardy until very late in (read: almost after) the game.
COP28 took place between November 30-December 12, 2023, in Expo City, Dubai, with negotiations over the outcomes and resolutions from the meeting overrunning due to fundamental disagreements between developing and developed countries and between oil-producing nations and environmentally precarious and smaller nations.
To the relief of all concerned, an agreement was reached almost immediately on the creation of a loss and damage fund to compensate countries impacted most severely by climate change and extreme weather events, as well as an adaptation fund.
However, as during COP 27, deciding whether to commit to 'phasing down' or 'phasing out' fossil fuel use was a major sticking point. Although a draft agreement was initially published by the UAE, it was rejected on December 11 by some as insufficient in scope and too provisional in its wording (containing no concrete mention of either phasing down or phasing out fossil fuel use), leaving participants attempting to reach agreement on a replacement text as the event wound down.
Countries opposed to the strengthening of language on the phasedown/out in the Global Stocktake Under the Paris Agreement included oil-producing nations such as Saudi Arabia and Qatar, whilst those in favor of tougher provisions reportedly included the European Union, the United States, Australia, Norway, and the UK. Still, other participants, such as Cuba, India, China, and Pakistan, objected to the failure to take into account the historic advantages afforded to developed countries by unconstrained emission activity in the past and argued that support should be provided to developing nations in recognition of this.
The eventual 'UAE consensus' text, as formalized at a plenary on December 13, fell short of what had been hoped initially, though, for the first time in such a document, it contained a commitment to transition away from fossil fuel use and towards renewables and clean energy sources, to reach global net zero by 2050. To this end, it committed participants to tripling renewable use and doubling energy efficiency by 2030 to meet the previously agreed emission reduction targets.
In the area of financing and funding, it sought to step up the Nationally Determined Contributions process by encouraging economy-wide emission reduction targets, recognized the need for the scaling up of adaptation finance, and drew attention to the further need for reforms regarding financing architecture, including involving credit rating agencies more in the process.
In his final remarks at the plenary, COP 28 President, Dr. Sultan Al Jaber, observed: "Together, we have confronted realities and we have set the world in the right direction. We have given it a robust action plan to keep 1.5 within reach. It is a plan that is led by the science. It is a balanced plan that tackles emissions, bridges the gap on adaptation, reimagines global finance, and delivers on loss and damage. It is built on common ground. It is strengthened by inclusivity. And it is reinforced by collaboration."
It is planned that COP 29 will take place in Azerbaijan – following some fairly tense negotiations over this aspect of the proceedings as well – with the date provisionally set as 11-24 November 2024.