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Four ways tax can help businesses fight against climate change

Business can leverage tax opportunities now to combat climate change.

In brief

  • Businesses do not need to wait for more government action to address climate change.
  • There are opportunities now to add long-term business value and address climate change.

The 2021 United Nations Climate Change Conference, known as COP26, is an opportunity for world leaders to discuss how they are meeting their commitments under the Paris Agreement to limit global warming to 1.5 degrees. With time running short to make that ambition a reality, countries are renewing and sometimes increasing, their commitments and sharing revised action plans, many with tax components. Countries are looking to levers such as tax policy to drive carbon mitigation strategies. Tax policy tools include carbon pricing, incentives for green energy and taxes on emissions to encourage progress on these commitments.

Businesses will be at the center of implementing many of these new policies and should pay close attention to new policy developments, some of which may be a direct outcome of the COP. However, there are already many tax opportunities available for businesses to combat climate change.

The discussions at COP26 are framed around four goals: mitigate, adapt, finance and collaborate. Looking through these same lenses, businesses can be proactive in four ways.

Mitigate future tax risk

Under the Paris Agreement, every country has emissions reduction targets, known as Nationally Determined Contributions (NDCs), to mitigate global warming. Environmental taxes are a core tool to drive businesses to reach these targets. They appear in a number of forms: tax incentives for reduced emissions and clean technologies, carbon pricing initiatives, fuel taxes, pollution charges, recycling fees, congestion fees and plastic taxes, just to name a few. New tax tools are not unexpected as countries reaffirm their individual emission reduction ambitions. Indeed, according to the 2021 EY Climate Cash and Tax Barometer, 545 new or amended policies committed to supporting different energy types have been introduced since early 2020.

Businesses can reduce their future exposure to these taxes by reviewing their carbon footprint and adopting new practices now. Reducing carbon emissions, decreasing dependence on fossil fuels, embracing new production methods are examples of the kinds of policies that may enable companies to manage their environmental tax burdens in the future.

Adapt with new methods and technologies

As leaders at COP26 look for ways to help communities and habitats to adapt to the changes generated by current levels of climate change, businesses can also adapt – by developing new practices and new ways of operating. Now is the time to reduce, switch and innovate, becoming more resilient and relying less on antiquated processes and dwindling resources. In addition to reducing consumption and emissions, businesses can switch to alternative fuels and renewable resources, such as by retrofitting machines and motor fleets. The options to innovate are boundless, and companies can explore more efficient methods, improved materials and streamlined processes. There is opportunity here for forward-leaning businesses. Proper planning can support clean initiatives, including making use of capital investment subsidies, depreciation allowances and research and development credits. The EY Green Tax Tracker offers a snapshot of these opportunities across the globe. Companies should explore these opportunities and determine how to best integrate with their other business goals.

Finance using green options

The switch to a greener economy, and managing the risks created by change that has already taken place, requires funding. This is a key focus of leaders at COP26 as they seek to mobilize both public and private sources of funding for infrastructure, technology and innovation. New funding opportunities will complement the options already available to businesses, including tax advantaged bonds and other programs that offer opportunities for green financing already open to businesses today. The EY Green Tax Tracker reports over 3,600 available sustainability incentives in the form of tax credits, grants, loans and others. Further, the 2021 EY Climate Cash and Tax Barometer reports $162 billion in just green bonds issued in 2020 and total combined climate financing of $1.9 trillion since 2013 with $4 trillion set to be invested by 2030. These funding options are available now for businesses that meet the qualifying criteria.

Collaborate with everyone

The Paris Agreement also recognizes that it will take all stakeholders – governments, businesses and individuals – working together to find solutions to address climate change. It is critical for business to stay involved in the policy development. Focus on the discussion and pay close attention to the rapidly evolving policy landscape, modeling the potential impacts of these developments and sharing that feedback with policymakers. Businesses can also take this same approach with their stakeholders by engaging with employees, customers, shareholders and others to find opportunities for action and improvement. Working together, across geographies and sectors, businesses can contribute to the debate and welcome the best ideas to fight climate change.

Summary

With time running short to address climate change, businesses can act today to manage their future tax risk, use tax incentives to support innovation, utilize green financing options and work with the global community to find solutions.

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