Tax and Climate Change

Climate Change is a global issue that disproportionally affects the younger generations and developing countries, though awareness amongst all is higher than ever. With this in mind, London Tax Society invited Paul Howard, tax expert and self-proclaimed eco-warrior to discuss Climate Change in the context of tax and generate a discussion of how our tax system could be used to achieve Net-Zero (or better). This article is based on Paul’s talk.

The definition of Climate Change, isn’t solely restricted to the temperature, though this is where we feel the effects most – for example, the heatwave in mid-July 2022, when temperatures in the UK reached over 40 degrees Celsius for the first time on record. Climate Change means an increase in CO2 emissions to the point that the earth begins to heat up. As a result of the increased temperatures, the icecaps melt causing an increase in sea levels, which threaten coastal human habitations and the issue is not restricted to developing countries – Cardiff will be mainly under water within the next 30 years¹. More acidic seas because of the additional carbon dioxide absorbed by oceans and converted into carbonic acid endanger marine life. Sea levels also threaten coastal wetlands because they become salty and acidic.

Aside from temperatures unendurable for humans and land being threatened by the sea, an increase in atmospheric pollution is another danger to health, ours and that of other land based species, resulting in a loss of biodiversity. Land and marine species are part of very finely balanced food chains. A small change in that balance can have huge implications. Already, a number of animal species have died out and at some point, that could be us.

Most people recognise that fixing Climate Change will require a significant reduction in consumption, in particular plastic. Aside from the obvious, that plastic is generated from oil (a fossil fuel) and turning it into a usable material releases a huge amount of carbon dioxide² into the atmosphere, the end product has a huge impact on animals as well. Plastic is a problem in the oceans as creatures eat it and most animals including humans have microplastics circulating in their bodies. As yet, the level of danger microplastics can cause in our bodies is still being researched. Suffice to say, it is unlikely that ingestion of synthetic product is of benefit³.

If we stop buying plastic bottles or using carrier bags, the demand is reduced and the products are no longer produced. After the plastic bag charge was introduced in October 2015, demand reduced significantly⁴ by July 2016. The plastic bag charge was not a tax and proceeds from the charge did not go to the Government. As such, we saw increased contributions by the big supermarkets to environmental campaigns and consequently, shoppers were educated as to the good deeds.

Unfortunately, questions relating to tax policy and Climate Change are not always so simple. One of the biggest questions in relation to Climate Change and tax is who should bear the cost of implementing the changes and for governments, how can they make policies to protect the environment while keeping that party in power? Objectively speaking, those who don’t have a stake in the future of the planet would probably not want to change comfortable lifestyles ‘just’ to help younger generations. Conversely, those who have a stake in the future, may not be old enough to vote for or apply for the changes, instigate the changes or, (the very youngest) to even understand there is a problem.

Similarly, those in the developing world are disproportionally affected by Climate Change, which is caused by the consumers, the majority of whom are in the West. To solve the climate crisis, we are reliant on the general global demographic being willing to sacrifice for others. When it comes to tax, this is not a vote-winner.

Then we have the Government – bearing in mind that vilifying the use of fossil fuels in exchange for renewable sources of energy, may not only lose them voters but also financial support. What the Government needs to look at therefore is three fold 1) how to reduce consumption and 2) encourage the use of renewable resources while 3) retaining voting power and funding.

The ten point plan
The ten point plan was developed by the UK Government in 2020 to help the UK in reaching net zero by 2050. The ideas in the ten point plan⁵ are sound, but the plan does not discuss how each step could be funded. There was a recent court case taken by Client Earth, Friends of the Earth and the Good Law Project ([2022] EWHC 1841 (Admin)) that determined that the Government’s plan did not comply with the Climate Change Act.

Further, there seems to be little understanding of the effects of all these steps. For example, step 4 suggests a shift to electric vehicles, without a discussion of how to offset the carbon emissions caused in their manufacture. Naysayers say that the batteries are notoriously difficult to recycle, without perhaps considering that batteries without enough charge to power a car could actually be used to power homes. If those same homes were powered by renewable energy, each building could be self-sustainable. On the other hand there may not be enough Lithium to build the requisite number of batteries so the answer might lie in moving away from private vehicles and having suitable and efficient public transport infrastructure instead i.e. significant investment funded by…tax rises?

The Government is focusing on use of the R&D tax credit as a driver to encourage research and development of greener products and fuels. This needs to be combined with a tax on the generation of energy from fossil fuels, with certainty that the cost will not be passed onto the consumer or retailer. The windfall tax (Energy Profits levy) would have been ideal for this had it not provided a rebate for research into finding more gas or oil reserves.

Other than the R&D tax credit and ensuring that motor related tax changes remain up to date given the move to electric cars, there is little mention of how taxes can be used to help implement the ten point plan or whether it might be better to use grants rather than tax to encourage change in behaviour.

In October 2021, the Chartered Institute of Taxation (CIOT) responded to the ten point plan and set out a “tax policy roadmap”. Broadly speaking, the roadmap highlighted that the Government’s plan did not set out how taxes could be used for funding the recommended changes. Some key points that need to be looked at in relation to Climate Change and tax policy are:

• Should carbon allowance schemes and environmental taxes be used to generate income?
• Are changes to mainstream taxes appropriate? This goes back to the economics of Climate Change – who should pay for it?
• Any policies made should balance simplicity with effectiveness. As we have seen in the past, overcomplicated tax laws make it more tempting and arguably easier for taxpayers to find loopholes. If the intent here is to change behaviour, the rules should be clear and unequivocal as far as possible.
• Balance sticks with carrots. As mentioned above, the ideal would be to encourage the use/development of renewable energy (for example) while penalising the use of fossil fuels.
• The public needs more visibility of carbon prices and environmental taxes. The more transparency there is, the better. For example (biodegradeable) food packaging could state that a particular item costs more (i.e. additional tax) to offset carbon emissions from its production and also, what that extra tax would be used for. And then the supermarkets can work with Governments to ensure the money was used in such a way that benefited the environment, such as planting additional trees or protecting natural habitats.
• Cross-border issues – carbon leakage and harmonisation. Global warming is as the name demonstrates, a global issue. Moving production out of the UK to reduce UK Carbon Dioxide emissions to Net Zero will not benefit the planet at the end of the day. In moving production to achieve our climate goals, we have passed the problem to other nations who are unlikely to give up their new capacity to make money.

Existing Climate Change related tax in the UK
In the UK, we have a range of taxes that (are said to) relate to the environment. These include the Climate Change Levy (CCL), paid by industrial, commercial, agricultural and public service businesses on electricity, gas and solid fuels. We also have the Landfill Tax, an Aggregates Levy, a Plastic Packaging Tax (PPT), Air Passenger Duty to name a few.

On the other side of the coin, we also have a number of reliefs available to encourage businesses to reduce emissions. These include

• Carbon Price Support rates of CCL, which encourages industry to use low carbon technology – paid by owners of electricity generating stations
• Capital allowances on energy efficient items – 100% for electric vehicles
• zero vehicle excise duty for electric vehicles with zero emissions
• reduced benefit in kind rates for electric cars

The problem with a lot of these policies (e.g. domestic carbon pricing and PPT) is that they are apply to UK carbon/plastic/resources and therefore, businesses can simply shift production to another jurisdiction with a cheaper carbon tariff or no PPT to reduce the UK liability. This does not change consumer behaviour so there is no reduction in production, and nor do they encourage more sustainable forms of manufacture.

Global warming is a global problem and Government’s need to react to it in the same way as they did to terrorism threats. Almost overnight, we were restricted to one plastic bag of liquids each up to 100ml (usually in plastic bottles or tubes) for air travel. In the same way, Climate Change is an almost immediate threat, but it is one that is foreseeable and manageable. This does not make it any less dangerous. The fact that it affects the whole world means that it should be seen as significant a threat and action needs to be taken cohesively and immediately.

Governments need to consider whether it is time to tax on a global basis with international tax systems as we have with the global minimum corporation tax rate. This requires consensus between governments, which is very difficult, though not impossible if every country has the same goal. One country acting alone is limited in what it might achieve. If for example, the UK unilaterally imposes an emissions levy on imported goods, this will be seen as a tariff which is illegal under international law. If every country does this, production of lower carbon materials will increase.

As tax systems become more transparent and given initiatives like the global minimum corporation tax rate, the framework is in place to implement global levies. Perhaps a global minimum corporate carbon levy or a global minimum requirement to offset all carbon emissions. Drastic? Perhaps. Required? Absolutely.

And if it means consumers consume less overseas manufactured products, perhaps that’s not such a bad thing. The Government’s aim at this stage should then be to ensure that the disparity between rich and poor does not grow as a result, but this is a discussion for another time.

Capitalism v the Climate
Climate Change is an emotive issue and who should bear the cost of it is a very difficult question. The answer will depend very much on who you ask and really there is no right answer unless everyone has the same goals.

Industrialisation has caused a major disconnect between humanity and the natural environment to the point that lawmakers and big corporates (generally in big cities) may never have seen a farm or understand the delicate balance of our ecosystems.

Education is key, but change with education alone will not be quick enough. At the same time as educating, governments can implement policies with the aim of changing behaviour short term and attitudes in the long term.

The good news is that reversal of the effects of Climate Change could happen quickly if Governments and people are united in their goal. One of the biggest benefits of Covid-19 was how quickly rivers began to flow cleaner and the skies around polluted cities cleared⁶ when we (humans) stopped polluting our planet. So fixing Climate Change may not take long if there is a global shift in how we perceive our environment. However, it will require a globally cohesive attitude from all governments. On that basis alone, it might be a while before we start.

1. https://www.walesonline.co.uk/news/wales-news/flooding-wales-submerged-climate-change-20870932
2. https://timeforchange.org/plastic-bags-and-plastic-bottles-co2-emissions-during-their-lifetime/
3. https://get-green-now.com/microplastics-health-guide/
4. theguardian.com/environment/2016/jul/30/england-plastic-bag-usage-drops-85-per-cent-since5p-charge-introduced
5. https://www.gov.uk/government/publications/the-ten-point-plan-for-a-green-industrial-revolution
6. https://www.weforum.org/agenda/2020/04/coronavirus-lockdowns-air-pollution/

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