While the Paris Agreement sets out a clear target, namely to keep the increase in global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C, the tools are in the hands of governments. Since there is strong evidence that the climate is warming, governments are expected to undertake significant tax reforms, and the use of taxes and sustainability incentives to tackle climate change has become increasingly apparent.
This Insight aims to provide a snapshot of current tax reforms and incentives connected to climate change around the world.
Broadly speaking, governments can choose to tax environmental “bad players” by introducing environmental taxes. The Organization for Economic Co-Operation and Development (OECD) notes that these taxes have numerous advantages, including “environmental effectiveness, economic efficiency, the ability to raise revenue and transparency.”
Under Article 2 of Regulation (EU) No 691/2011, an environmental tax is “a tax whose tax base is a physical unit (or a proxy of it) that has a proven, specific negative impact on the environment.” Four broad subcategories of environmental taxes are identified, namely energy taxes, transport taxes, pollution taxes and resources taxes (although in practice, they often overlap).
In a nutshell, here is a selection of environmental taxes that have been introduced in various countries around the world:
- in Spain, the Hydrocarbon Tax (Impuesto especial sobre Hidrocarburos) is the most important tax in terms of profits for the country. This is an indirect tax on the production of hydrocarbon used as fuel, additives or used to increase the volume of hydrocarbon;
- in Italy, the so called Plastic Tax has recently been introduced to promote environmental sustainability. It should be effective starting from fiscal year 2020 and is aimed at reducing the production and consumption of plastic. It consists in a proportional tax on manufactured products in plastic for single use (MACSI) as bottles, bags and food containers. The tax obligation arises with the production or the import of the taxable products and is due at the moment of release into consumption. The tax rate is fixed at 0.45 euros ($0.51) per each kilo of plastic included in the single item;
- in Austria, every aircraft owner must pay a flight fee to the tax office for every passenger departing from Austria. The flight tax is 3.50 euros per passenger for short-haul flights, 7.50 euros for medium-haul flights and 17.50 euros for long-haul flights;
- in China, the Environment Protection Tax (EPT) targets organizations and other business operators who release taxable pollutants directly to the environment. “Taxable pollutants” include air pollutants, water pollutants, solid pollutants and noise, covered by the lists attached to the EPT law;
- Peru has a contribution called “Aporte por Regulación” to tax mining, hydrocarbon and electricity companies at a rate of 1% on the sales invoiced (although different rates may apply on each sector);
- Switzerland introduced a CO2 tax in 2008, with the goal of reducing the use of fossil thermal fuels. As of 2018, the rate of the levy is 96 Swiss francs ($103) per ton of CO2.
Another option available to governments to tackle climate change is providing relief for environmental “good players.” Governments may decide to offer tax credits, subsidies or other incentives to encourage individuals and companies to engage in behaviors and develop technologies that can impact positively the environment.
Interestingly, such a tool is less popular than environmental taxes. This could be explained simply by the fact that tax expenditures are a cost for governments. The OECD also points out that, by reducing costs, tax subsidies may indirectly increase pollution and inevitably involve “picking winners,” which may prejudice other good alternatives.
Examples of sustainability incentives can be found in France, where the most recent French finance bill enlarged the mechanism of accelerated depreciation for energy-efficient and renewable energy property (so-called suramortissement). Regarding individuals, the energy transition tax credit (CITE) was revoked and replaced by a premium granted under restricted income conditions. In the end, this premium is likely to concern only low-income individuals who may not have the resources to invest in energy-efficient and renewable energy.
Italy grants several investment reliefs related to environmental sustainability, such as the “Ecobonus” tax credit which allows a deduction from the taxable income for eligible expenses incurred in maintaining, restoring and improving the energy efficiency of Italian properties. With regard to individual taxpayers, the so called “green-bonus” provides for an income tax credit on eligible costs incurred for the creation and maintenance of green and uncovered areas to housing units, such as terraces, gardens and balconies.
Another example is Hungary, which provides tax credits for environmental reasons. For example, a tax allowance is granted for independent environmental projects with an investment value of at least 100 million forints ($337 million): taxpayers may reduce their corporate income tax liability by 80% with such tax credit.
In Russia, partial reimbursement of the interest expense on loans issued by Russian banks to finance investments in energy conservation and energy efficiency projects is provided by a federal law on energy conservation and on improving energy efficiency.
What Does the Future Hold?
Even though no country has shown a strong will to use taxation as a tool to achieve the Paris Agreement’s goals, a few have made an effort to implement tax reforms connected to climate change.
For instance, Germany announced the introduction of a carbon dioxide price and an increase of the air traffic tax at the end of 2019. The carbon price will come into effect in 2021 and the air traffic tax will increase in April 2020. In addition, the value-added tax (VAT) charged on train tickets was reduced by 12%.
In Austria, the new government program 2020–2024 announced an eco-social tax reform. Among other things, the levy on short-haul and medium-haul flights is to be increased significantly. Also, the engine-related insurance tax is to be increased, without cap.
The Spanish government would be willing to introduce a new carbon border tax as proposed by the European Commission. Peru has introduced a tax on consumption of plastic bags from 2019 onward.
The introduction of a carbon tax in Russia is under discussion, although its adoption remains unclear. Government initiatives to introduce a new tax may face resistance from the business community and/or taxpayers. The case of France is similar, where the carbon tax on fuels was repealed after weeks of “gilets jaunes” protests in Paris and major cities across the country, suggesting that the politics of carbon pricing can be very challenging.
Finally, despite not having environmental taxes per se, it should be noted that the primary legislation for environmental protection in the United Arab Emirates is Federal Law No. 24 of 1999 for the protection and development of the environment. Dubai, in particular, aims to have 75% clean energy by 2050, pursuant to the Dubai Clean Energy Strategy.
Article 4 of the Paris Agreement stipulates that developed countries shall take the lead by undertaking economy-wide absolute emission reduction targets. However, it seems that there is still a lot to do to achieve the Paris Agreement’s goals.
Basically, the current framework of taxes and sustainability incentives might not be enough to motivate taxpayers to decisive actions aimed at environmental protection. This is why most companies may opt to pay taxes, rather than adopt behaviors that could positively impact the environment.
Eva Aubry is Counsel with CMS Francis Lefebvre Avocats and Carlo Gnetti is Partner with CMS Adonnino Ascoli & Cavasola Scamoni.
With thanks for the invaluable input of Marie Dedoubat and Luca Scibelli and our CMS colleagues around the world.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.