How can tax policy help reduce the effects of climate change?

23 Mar 2021

In a recent report, the Confederation of British Industry (CBI) urged the government to overhaul its policy on environmental taxes to help the UK get back on track to achieve net-zero carbon dioxide emission goals. Here, we outline some of the points raised by the business group.

Current commitments

The government has committed to a target of significantly reducing net-zero emissions by 2050. In 2019, the Climate Change Committee (CCC) estimated that the annual investment cost associated with achieving net-zero will be £50 billion between 2030 and 2050. The CCC highlighted that most of the investment would likely come from the UK private sector.

In December 2020, Prime Minister Boris Johnson announced an ambitious new plan for at least a 68% reduction in greenhouse gas emissions by the end of 2030. The target is amongst the highest in the world and commits the UK to cutting emissions at the fastest current rate of any major economy.

In its report entitled 'Greening the Tax System', the CBI states that fiscal measures, including environmental taxes and tax incentives, will be key in driving real change. These could work to potentially discourage harmful environmental behaviours and incentivise the investment of environmentally friendly measures.

Designing a tax policy suitable for net-zero

The CBI suggested that tax and regulatory systems should be considered holistically and analysed to determine how each element drives the delivery of net-zero. It highlighted a number of principles to be used in tax policy design and when reviewing existing policies. These include:

  • polluter pays: green taxes should be targeted to a pollutant or polluting behaviour
  • certainty: the CBI finds that the most frequently cited external barrier which is stopping or slowing down businesses in progressing with their climate objectives is an uncertain policy and regulatory environment. The government should provide long-term certainty to shore up confidence in regard to investment
  • international co-operation: the government should use its role and platform to implore other countries to bring forward their plans to cut emissions
  • the 'carrot and stick' approach: the CBI suggests that the government should seek to tax a 'bad' aspect, such as pollution, and reward a 'good' aspect
  • investment in green technologies: according to the CBI, taxation should be used as a tool to support the investment in a host of low-carbon technology.

Short-term and long-term actions

Within the report, the CBI recommends focusing on three main short-term aims in order to help the UK reach its net-zero goal. These include encouraging a faster adoption of zero emission vehicles; supporting energy efficiency, low carbon heat and the utilisation of renewables in new buildings; and motivating businesses to innovate in order to help reduce industrial emissions.

In relation to long-term goals, the business group recommends that the government give companies certainty on the taxation of emissions and transport. The CBI has urged the government to review fuel duty; transition to sustainable aviation; and outline a holistic tax policy vision to achieve its climate change goals.

Businesses also require a 'long-term tax policy framework with the net-zero target at its core', the CBI stated.

The report can be read in full here.

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