As world leaders meet this week at the United Nations COP26 climate change conference to discuss the growing urgency of the global climate crisis, the topic of carbon taxes is becoming more of an issue.
“I do think there’s more motivation by governments and large multinationals to do more on reducing climate change,” said Kate Barton, global vice chair of tax at Ernst & Young, who has been attending the conference in Glasgow, Scotland. “If I’ve learned anything here during the last week, we really need to get on with the Paris Agreement, Article 6, which said that global warming shouldn’t go over 1.5 [degrees]. If we continue on the current trajectory, the mid to high 2s would be catastrophic for people’s physical wellness, not to mention a whole bunch of other things. I feel like there’s more and more of an urgency to get going here, for companies to decarbonize their supply chains and also for governments to incent and grant them money to help them do that. Governments are considering how you do carbon pricing. Tax codes around the world will be used to get that effected. We’re already seeing that a little bit in some countries, with the cost of carbon being incorporated, and then we’re seeing credits and incentives, the proverbial carrots and sticks, being used.”
Some world leaders are calling on others to get on board with carbon pricing schemes as a way to reduce pollution. Canadian Prime Minister Justin Trudeau, whose country levies such a tax, pointed out that less than 20% of global carbon emissions are currently covered by such as tax. “One of the things we all know needs to come out of COP26 is a clearer call to create a global standard around putting a price on pollution,” Trudeau said, according to the CBC. “Not only will that encourage innovation, it will give that clear price signal to the private sector that making the right capital investments to transform to lower emissions makes sense. It also ensures that those who are leading on pricing pollution don’t get unfairly penalized.”
The Biden administration tried to include a carbon tax in its reconciliation bill, the Build Back Better Act, but it has reportedly been dropped. Back in 2009, a cap-and-trade emissions-trading scheme that was included in the American Clean Energy and Security Act passed in the House, but never advanced in the Senate. The Biden administration is including climate provisions in the bipartisan infrastructure bill along with the Democrats’ reconciliation bill, but it’s unclear whether those will pass. In the meantime, the administration is trying to control emissions through regulation, but those efforts are being challenged in court.
The best hope may be tax credits to incentivize the use of renewable energy sources as part of the carrots and sticks approach.
“Companies need to navigate the labyrinth of all of these rules that are coming up and try to make sure if they can get grants that they will, on the incentive side,” said Barton. “And then, if there are sticks, how can they avoid those negative consequences? We’re going to see pricing of carbon come through the tax codes and then more and more grants and incentives by countries.”
She noted that 11 jurisdictions already have a carbon tax. For now, however, that’s unlikely to be enacted in the U.S. “Joe Biden is struggling on his legislative package,” said Barton. “Unfortunately it seems like he has dropped the carbon tax for right now. He has a lot on the greening of the economy included, so there are a lot of things around climate change in his current package, which continues to change. So Build Back Better is getting iterated as we speak as we go through the U.S. legislative process, which is always fascinating for us tax geeks. We’re reading things here while we’re in Europe at all hours of the evening trying to keep up. But I’m afraid I’m not very hopeful of a carbon tax right now in the United States, at least from what we can see, which is unfortunate because I think if it’s done right, it might be a meaningful way to serve as a catalyst to effect change.”
In the meantime, the infrastructure and reconciliation bills contains tax credits to incentivize various forms of renewable energy. The Build Back Better package would extend existing tax credits for wind and solar energy projects and it proposes a new production tax credit for green hydrogen used to produce energy from renewable sources. There are also various grants and funds in both packages for electric vehicle charging stations, offshore wind transmission, high-capacity transmission lines, energy efficient homes, and more.
“We’re poring over those,” said Barton. “Those are in the carrots and sticks category, mostly carrots, to try to decarbonize certain parts of the supply chain. But with respect to the overall carbon tax, there was a lot of discussion that maybe he would come out with something on that, but he’s struggling to get the party aligned on what’s going to be passable at the Senate level. Even raising the headline corporate tax rate seems to be off the table right now. We need to continue to buckle our seatbelts and see how this progresses.”
The congressional calendar is winding down this year with just weeks to go before the holiday break, she pointed out, and the results of the gubernatorial elections in Virginia and New Jersey this week are factoring into the political calculations in Congress.
Carbon taxes have worked in some countries that have tried them. “We do think that the carbon taxes in the jurisdictions where they’ve been implemented seem to have an impact,” said Barton. “Companies are looking at how they can change their supply chain and do things to minimize those types of taxes. They’re causing companies to take action, which is a good thing. That’s the whole reason for the carbon tax. It’s expensive to have emissions, so these taxes do serve a purpose. They have to be crafted right. We have to make sure that the poorer part of the population doesn’t bear a disproportionate share of the tax because that’s difficult. We saw that in France, for example, with the Yellow Jacket protests. If it ends up being like a lot more tax at the pumps, people have to pay it. It’s a deterrent, but is it too much? Every country will have a take on that.”
In the meantime, tax professionals should advise their clients and the companies where they work to have carbon taxes and renewable energy tax credits and incentives on their radar.
“The advice I would give to the tax professionals in a company right now is lean in on the sustainability journey for your company,” said Barton. “I don’t think there’s a company out there that doesn’t have sustainability as a top three issue. It’s such a huge part of the employee stakeholder promise. The employees of companies want to work for an employer that has sustainability at the heart of their purpose and their mission. So lean in because, if you don’t, you’re going to end up either losing out on benefits or hitting lots of unexpected consequences, which could end up with uncertainty on financial statements and the like, which is never a good look for the tax department.”