The world faces a growing and ever-present danger accelerated by climate change. As organizations shift operating practices and individuals demand more sustainable working practices, Kate Barton, EY Global Vice Chair – Tax, shares why tax policy will be instrumental in building a more sustainable post-pandemic world.
It has never been more imperative for governments and businesses to work together to build a more sustainable working world.
As the COVID-19 pandemic has shown, catastrophes that may seem isolated in one part of the world can spread across borders, disrupting supply chains and transforming lives.
While 2020 saw carbon emissions drop, as economies look to return to pre-COVID-19 pandemic levels of mobility and consumption, the adverse impact on the environment will increase. And in turn so too will the prospect and intensity of climate-related disasters including bush fires, rising sea levels and ecological destruction.
Much progress has been made in recent years, both at the government and private level, around transforming how organizations view sustainability and operate in order to mitigate their collective impact on the environment.
Many organizations around the world, including EY, have made pledges to become carbon neutral – and indeed carbon negative. Meanwhile environmental, social and governance metrics have risen to the fore of C-suite decision-making, in part driven by consumers that demand more from organizations, and also by a growing public and government consciousness that there is no Planet-B. In the next few years, the global population is expected to hit 8 billion people, and many of the environmental challenges we face today will be compounded as finite resources and local ecosystems are further strained.
CARROTS, NOT STICKS APPROACH
While private organizations have played a leading role in transforming collective behavior, governments around the world have been instrumental in driving – and incentivizing – this change through both carrot and stick approaches.
In a global economy, trade is the essence of growth and prosperity and, when governments work together to collectively incentivize sustainable private behavior, the impact we leave on the planet will be positive – and long-term. Around the world, young people have already lived through two financial crises in the space of a decade and are now experiencing diminished job prospects and limited financial security owing to the COVID-19 pandemic. Without a commitment from both private sector organizations and governments, however small and incremental, to shift their operating practices, they will inherit a very different planet to their parents.
TAX POLICY AS AN ENABLER
Chief among the public sector initiatives to drive transformational and sustainable behavior has been tax policy.
And in recent years, the frequency and prominence with which sustainability and green initiatives have become embedded into national tax codes around the world has grown significantly.
The EY Green Tax Tracker shows that there are now more than 3,600 sustainability incentives and carbon pricing initiatives in 48 national and 34 subnational jurisdictions around the world. These initiatives cover 22% of global greenhouse gas emissions and raised US$45 billion in revenues in 2019.
There are also myriad tax credits, deductions, grants, rebates, and low-interest loans allowing organizations to finance renewable energy and energy efficiency projects, among many others. In addition to this, the OECD now estimates that there are more than 5,600 environmental and energy taxes around the world.
THE GLOBAL IMPERATIVE
Around the world, governments have increasingly put sustainability at the forefront of their policy agendas.
US President Joe Biden’s US $2 trillion infrastructure package included a significant number of rebates and tax incentives designed to encourage private investment in green energy and technology.
In the EU, the European Green Deal (EGD) has sought to make the EU climate neutral by 2050, decoupling economic growth from the use of natural resources. Key EGD initiatives include supporting new business models based on circular product design, promoting bio-based plastics, and a carbon border adjustment mechanism (CBAM).
In Asia, several countries have also pledged to achieve carbon neutrality or net zero emissions, including Japan and South Korea by 2050 and China by 2060, with many more sustainability focused tax concessions in the region.
SUSTAINABILITY AND THE GLOBAL ECONOMIC RECOVERY
Conversations around sustainability are only likely to intensify in the coming years, particularly as governments look to balance record deficits hit during the pandemic. For example, a US$25/tonne carbon tax, adjusted for inflation, could raise more than US$1 trillion over a 10-year budget window. Meanwhile, more and more government budgets are being tied to sustainability. For instance, EU leaders in July 2020 agreed on Next Generation EU, an economic recovery plan to rebuild Member States at a cost of €750 billion, of which 30% will be dedicated to green and sustainable investments.
The business imperative is clear. Organizations that don’t invest in sustainable work practices not only risk reputational harm, but also miss out on opportunities for government support for their green initiatives, and risk getting left behind in an increasingly competitive green economy.
As the world awaits a return to pre-pandemic normality, and as organizations reimagine their operations for the “next normal,” it is imperative governments continue to leverage their national tax codes to drive sustainable practices.
The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms.