The issue of Net Zero and Taxation

“Net Zero” is set to become the phrase of the day. It may even eclipse some of the Covid jargon that has become part of our lexicon over the last two years!

The climate – and how our way of living has impacted climate sustainability – has been centre stage over the last month, with the COP26 summit in Glasgow.

The pledges and promises have been made, and now governments around the world must deliver. So what role does the tax system play in helping achieve Net Zero, particularly how can the UK government drive policies through clever use of tax policy?

Governments use the tax system to influence our behaviours all the time, whether it is to inhibit behaviour (hence the duties on alcohol and tobacco) or to incentivise particular activity (research and development is an obvious example).

Achieving Net Zero will not be cheap. However, businesses are already focussing on what actions they need to take to achieve Net Zero, and implementation has begun. Support for these activities can come from the government in the form of a comprehensive tax policy that drives the green economy.

There are already several green taxes:

  • Climate change levy – a tax collected by energy suppliers and paid by businesses and the public sector to encourage reduced greenhouse emissions;
  • Carbon price support – aims to drive electricity generators to invest in low-carbon electricity by increasing the cost of the fossil fuels they use;
  • Landfill tax – a tax on landfill operators to divert waste from landfill to other less harmful methods of waste management; and
  • Aggregates levy – a tax to encourage the use of recycled materials over the extraction of rock, sand and gravel, which can damage the environment.

However, the tax take for the fiscus from these so-called green taxes has dropped and, in fact, accounted for just 6% of taxes raised in the 2019/20 tax year. So what needs to happen to incentivise businesses more and at the same time inhibit the behaviours of the polluters?

In their policy paper on “Greening the Tax System” the CBI says that the approach should be a holistic one. The right mix of incentivisation and disincentivisation must be reached – within the context of the overarching imperative to achieve net-zero – so that a set of rules can be devised which penalise polluters but reward pro-climate behaviour. Incentives that reward good climate behaviour will go some way to easing the burden and cost of compliance that businesses are already dealing with in becoming net zero.

Setting tax policy for the environment and the climate is trickier because this issue is also a global one. As we saw at COP26, the competing interests of countries and the disparity between the developed and developing nations when discussing carbon reduction targets will lead to uneven playing fields unless there is a common approach to tackling climate change. This is true for the tax policy too. For example, if the UK government over-punishes businesses in levying carbon taxes, those businesses may very well take their business elsewhere. That’s why tax policy must be coordinated so that companies can expect to be treated in the same way wherever they go.

It is a founding principle of tax systems that they are certain and predictable such that businesses know what to expect and can plan accordingly. However the government chooses to develop its tax policy in relation to the climate, it must be balanced, it must consider the international context, and it needs to provide a clear road map for business. No small task this.

Cathy Bryant

Cathy Bryant is a partner in the Blake Morgan’s corporate team specialising in corporate tax. As a dual qualified lawyer, Cathy brings a depth of experience to her role as an adviser on tax matters in corporate transactions. Cathy also advises on employment taxes – for example on termination payments made to employees, the application of IR35 and other employment related tax matters. She develops share incentive schemes for employers and advises on the structure and scope of these.



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