5 minute read 27 Jul 2021
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Tax as a tool towards more sustainable future

By Irmantas Misiunas

EY Lithuania Tax Partner

Passionate about indirect taxes. Thinking of integrated tax solutions using a background in accounting. Skilful in tax dispute resolutions. Embracing recharge with family and sport activities.

5 minute read 27 Jul 2021

Is tax related to sustainability? Yes, and a lot.

European countries have committed to ambitious net-zero plans and tax can be a useful tool to enable a more sustainable future and, thus, contribute towards creation of a long-term value for all stakeholders.

For governments, taxes are used and will continue being used as a lever to achieve these targets. Either through increased tax costs for non-environmentally friendly behaviors or using tax incentives and financing, which can help to drive sustainable business transformation and behaviors with positive environmental impacts.

Reducing carbon emissions is an imperative for Europe and the Baltic countries – the pressure is rising also from stakeholders to act now and carbon taxes are being implemented in the drive towards carbon neutrality.

This presents a distinct challenge – carbon tax is an added cost, and compliance is complex and fast-moving. And it may require changes to business operations.

What are the major moving mechanisms? The European Green Deal sets out to be the leading force for the global fight against climate change, in line with the global agenda of the Paris Agreement.

Europe have put in place a wide range of carbon policy instruments:

1. Emissions Trading System (ETS): 

Works on a cap-and-trade principle, where quantity is set and prices fluctuate.

Reducing carbon emissions is an imperative for Europe and the Baltic countries – the pressure is rising also from stakeholders to act now and carbon taxes are being implemented in the drive towards carbon neutrality.

2. Carbon tax

Prices are set and quantity fluctuates.

3. EU Carbon Border Adjustment Mechanism (EU CBAM):

The mechanism under discussion is designed to reduce carbon leakage and protect competitiveness of the EU businesses, as it could impact the cost of importers.

European Commission proposal for a carbon border adjustment mechanism

4. Offset mechanism

Greenhouse gas emissions are designated on a project or program-based activities. Offset programs issue carbon credits according to an accounting protocol and have their own registry.

5. The EU Plastics Packaging Levy

Achieving the plastics circular economy is a priority as set out in the European Green Deal. The goal is to reduce plastic waste and promoting the use and development of more recyclable plastics. The European Union (EU) Plastics Levy will see EU member states paying €0.80 for every kilogram of non-recyclable plastic packaging waste placed on their market.

 

Understanding your carbon footprint and staying abreast of the green tax landscape and cabon regimes are critical as is modelling the potential impacts of EU CBAM and its impact on supply chain competitiveness, supply chain and trade routes. In short, climate risks and opportunities should be front and center as organizations plan their future growth strategies and report progress, as  potential tax implications may require changing current business operations and models. 

The 2021 Europe Attractiveness survey’s data confirmed that 9 in 10 businesses consider environmental sustainability to be an important factor that determines their investment strategy.

Why should organizations accelerate the implementation of climate strategies?

Organizations are continuing to improve the quality and coverage of climate risk disclosure reporting. Yet, the 2021 EY Global Climate Risk Disclosure Barometer revealed that only 41% of organizations are conducting scenario analysis, and only 15% feature climate change in their financial statements.

According to the 2021 EY CEO Imperative Study, the bigger the company, the greater the stakeholder pressure to launch this process today. Of all the CEOs participated in the EY study, 67% of respondents reported moderate to extreme pressure from stakeholders to engage with global challenges.

In addition, the 2021 Europe Attractiveness survey’s data confirmed that 9 in 10 businesses consider environmental sustainability to be an important factor that determines their investment strategy. Furthermore, investors are preferencing assets with decarbonization strategies. Same trends are observed in the Baltics.

How EY teams can help in this challenge? 

As energy and environmental taxes continue to increase in importance, EY Global Sustainability Tax Network is ready to serve as a trusted business advisor to help:

  • Reduce the cost of operations: The overall costs of operations can be reduced by ensuring energy and environmental taxes are minimized, strategies are adapted, and reliefs are identified and implemented.
  •  Improve the return on investment (ROI) of sustainability-related projects: By identifying and securing sustainability-related incentives and government funding, the ROI of projects from renewable energy investments to energy efficiency retrofits can be positively impacted.
  • Mitigate risk: The threat of audit and penalties from an energy tax perspective can be reduced by ensuring all compliance and reporting requirements are met.
  • Thought leadership: Organisations also want to understand how environmental taxes will develop and how they can influence government policies so that they achieve the desired outcomes without causing undue complexity for businesses.

Every business change has a tax implication – are you aware of what this means for your changing business model?

Summary

European countries have committed to ambitious net-zero plans and the role of business is clear. Investors are preferencing assets with decarbonization strategies. Every business change has a tax implication – are you aware of what this means for your changing business model? Learn more about green taxes here.

  • How EY teams can help? Learn more how EY teams can help you navigate and respond to the complex carbon landscape (PDF)

About this article

By Irmantas Misiunas

EY Lithuania Tax Partner

Passionate about indirect taxes. Thinking of integrated tax solutions using a background in accounting. Skilful in tax dispute resolutions. Embracing recharge with family and sport activities.