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Tax & AccountingESGJanuary 10, 2024

The increasing importance of global green tax initiatives

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. 

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The United Kingdom's fossil fuel initiatives 

The impact of failing to address climate change will affect all countries eventually (and some more immediately, as countries closer to the tipping point – either geographically, environmentally, or fiscally – have pointed out!) 

However, international bodies (with the possible exception of the EU) have few tools at their disposal to compel action in a certain direction, and this can mean governments pursuing their own economic interests in a different direction of travel than that intended by their peers. 

A key example of this is the United Kingdom. In May 2022, the UK put in place a 25% windfall tax for oil and gas firms, known as the Energy Profits Levy, bringing their overall tax rate up to 65% (from a previous headline 40% rate). The EPL rate was increased to 35% in January 2023, bringing the top rate to 75%, with an investment allowance also in place to ensure continued investment in the sector. 

However, in June 2023, the UK authorities stated that if oil and gas prices fall to, or below, USD71.40 per barrel for oil, or GBP0.54 per therm for gas, for two consecutive periods of three months, the windfall tax will be removed. 

On July 31, 2023, the UK authorities also announced plans to grant hundreds of new oil and gas licenses, arguing that domestic gas production has a carbon footprint, one-quarter of that relating to the importing of liquified natural gas. This policy was underlined in the King's Speech, delivered on November 7, 2023, given the UK's insistence on the complete phase out fossil fuel use at the COP 28 meeting, this stance raised some eyebrows, especially among countries in the global south, which have accused the UK and other developed nations of hypocrisy. 

Developing country green tax perspectives 

The reaching of an agreement at COP 27 on the creation of a designated fund to assist developing countries that have suffered climate-related loss and damage had been a hard-fought battle, and was welcomed the fact that agreement was reached on such a fund on the first day of COP 28 was further good news. The fund - with initial funding reported to be in the region of $429M – is designed to help developing countries cope with the costs of extreme weather events and mitigate the impact of factors such as rising sea levels and ocean acidification

However, factors such as scale, speed of implementation, and replenishment of the fund were not mentioned in the resolution as initially released and remain to be hammered out, and smaller, often tourism-reliant – nations such as the Maldives and Palau, and countries which are highly impacted by flooding and extreme heat, such as Pakistan, or Somalia, will be keen to see this happen as soon as possible. These participants in the talks feel that their voices are often not heard in the debate, despite their environmental precarity. 

As touched upon above, smaller environmentally precarious island nation states, for example, in the Pacific, have taken an increasingly strong stance on climate change, attempting to hold their larger counterparts to account on emission reduction targets and associated actions, and this likely contributed to the final restructuring of the COP 28 agreement. 

Green tax: The final thoughts

The escalating significance of global green tax initiatives underscores a growing recognition of the urgent need for environmental sustainability. As the world grapples with the complex challenges posed by climate change, governments and international bodies are increasingly turning to green taxes as a crucial tool for steering economic behavior towards more environmentally sustainable practices. These initiatives are designed to use tax reforms not only to deter environmentally harmful activities but also to incentivize the adoption of eco-friendly alternatives. By imposing taxes on carbon emissions promoting decarbonization, resource consumption, or pollution, governments aim to align economic activities with environmental conservation goals, fostering a harmonious balance between economic growth and ecological well-being. 

Furthermore, the rise of global green tax initiatives reflects a broader shift towards integrating environmental considerations into economic policymaking. Countries and organizations are recognizing that addressing climate change requires a multifaceted approach, and green taxes play a pivotal role in this strategy. The revenue generated from these taxes can be earmarked for investments in sustainable infrastructure, renewable energy projects, and other initiatives that contribute to the transition towards a greener and more resilient global economy. As these initiatives gain traction, businesses worldwide are compelled to adapt and incorporate environmentally responsible practices into their operations, marking a transformative moment in the global economic landscape. 

Read the first part of the blog series: 

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