14 September, 2022 / Research

The carbon tax impact on businesses

KPMG paper advises companies to brace for mix of tax incentives and penalties in decarbonisation drive

The carbon tax impact on businesses

Businesses should expect a multifaceted approach from governments pushing for a net-zero economy including a range of regulation and tax incentives and penalties to change behaviour, according to KPMG.

The consultancy firm has published a report, Business consequences of tax driving net zero ambitions, which outlined the variety of tax measures governments have at their disposal that could be used to decarbonise the economy as well as what these measures may mean for businesses.

“Whether through regulation or tax, carrots or sticks, governments will be trying to influence the behaviour of businesses,” the paper stated.

Grant Wardell-Johnson, head of global tax policy group at KPMG International, said: “Businesses should prepare for a multifaceted approach.

“It may look different across jurisdictions, as governments pull multiple levers. We expect many will consider carbon pricing the most effective, whether through emissions trading system (ETS) programs, carbon taxes or both in combination; still, other jurisdictions are going to favour an incentive model for driving the change needed.”

Pricing carbon

Carbon pricing could likely be raised and its coverage expanded as currently only 4% of global emissions are at a level required to meet 2030 decarbonisation targets, the report explained.

The EU, which is leading the way on carbon pricing, favours an ETS itself, but it is often argued a carbon tax would be a better instrument in developing countries. Other jurisdictions prefer focusing on regulation and incentives.

ETSs “use carbon pricing to create market-based incentives for reducing emissions” the paper stated. It went on to say in this system companies can trade allowances as they need, the carbon price is market-driven and the cap on emissions is set by government that limits the allowances available.

Carbon taxes, meanwhile, impose a fixed charge on carbon emissions – usually by taxing the embedded carbon content of fossil fuels and sometimes by measuring and putting a charge on emissions at the facility producing them.

EU moves

The report, written by The Global Responsible Tax Project at KPMG International, also discusses the recent statement of intent from the European Union – the proposed “REPower EU” action plan – on the need for low-carbon policy measures to speed up the move to a low-carbon economy globally.

“The effect of these proposals is there is now a broad alignment between the low carbon agenda and the security of the supply agenda,” said Mike Hayes, KPMG IMPACT global head of climate change and decarbonization and KPMG International global head of renewables.

“Businesses should be aware the end result is likely to be a much greater deployment of renewable energy, a greater focus on energy efficiency and an acceleration of policy measures designed to encourage investment in technologies such as green hydrogen.

“It is possible the EU will look to various forms of tax incentives to help drive this accelerated transition across the Union, and more detailed announcements are expected in the coming months.”

Tailored approach

The paper also explained carbon pricing is more likely to be applied when a government is trying to allow businesses flexibility in choosing the carbon abatement methods they use. However non-tax measures are also an option. Direct subsidies for one particular environmental solution, for example, can be seen when government has a high level of confidence in that solution but it is still being offered at a high cost.  

Tim Sarson, partner at KPMG in the UK said: “With direct subsidies, governments may be quite specific about what they incentivise, like installing solar panels or hydrogen boilers, but there’s also a lot of heavy lifting involved in terms of administration. Governments may adopt measures to provide for a behavioral shift as individuals and companies work out cheaper alternatives.”

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