Finance & Investment

Unlocking the Power of Tax to Drive Climate Action

Global government action must accelerate to ensure the ‘polluter pays’ principle is enacted. In turn, businesses and citizens will be compelled to consider the cost of carbon-intensive goods.

Brand Provided | By Rebecca Ward | Published 1 year ago | About a 5 minute read

Image: Shell

Recent news that Shell will pay UK tax for the first time in five years may have you scratching your head. After years of government tax reductions and incentives, the new windfall tax on oil and gas companies — a result of the ongoing war in Ukraine — means they now face higher taxes. This is grabbing public attention at a time when citizens, too, are feeling the pinch.

Taxes are an incredibly emotive issue. Through a sustainability lens, critics are raising valid questions about corporate greenwash and doublespeak. We’ve seen a surge in organisations using sustainability reporting to build trust with stakeholders and demonstrate their commitment to sustainable development; at the same time, organisations are increasingly being judged on their tax practices, and it is unlikely that environmental and social claims will resonate coming from those who exploit their multinational nature to avoid tax payments. How much trust can truly be engendered by those who continue to use aggressive tax practices to minimise their contribution to society?

Leveraging tax to propel climate action

Tax is a mechanism used by governments to ensure that companies operating in their jurisdiction contribute to economic stability and funding for public services and infrastructure. Tax revenue can also be mobilised to progress climate action, improve living standards for citizens, and provide a key financing mechanism for achieving the UN Sustainable Development Goals (SDGs). In this way, we encourage companies to see tax as an engine for good and transparency as a competitive advantage to showcase businesses that can sustainably achieve shared value creation.

There are two key methods by which governments can leverage tax policy to enable climate action: Investing tax revenue into climate action and the green transition, and ensuring tax policies deter activities that are not compatible with achieving the goals of the Glasgow Climate Pact. But there are, of course, nuances to consider in both approaches:

Funds raised via carbon pricing must be distributed fairly, in a way that supports the just transition. By recycling revenue raised through carbon taxing, governments can support lower-income households to reduce their energy use — for example, compensating the switch from oil heating to electric heat pumps and subsidising effective insulation measures.
It is also important to ensure that taxes that aim to discourage pollution are correctly targeting emissions generation. Implementing a blanket tax on energy, for example, does not differentiate between GHG-emitting fossil fuels and clean energy sources. Instead, it is combustion fuels that should be subject to higher tax rates. Governments can — and should — go further by considering the warming potential of fuels, subjecting those with the largest impact on the climate to the highest taxes. Yet in 2023, the EU continues not to tax jet fuel for cargo flights and is only now beginning to introduce jet fuel tax for commercial flights.

Global government action must accelerate to ensure the ‘polluter pays’ principle is enacted. In turn, businesses and citizens will be compelled to consider the cost of carbon-intensive goods.

Putting an end to the domino effect

On the other side, society is urging businesses to move away from legal tax compliance as a minimum standard. It is no secret that the world’s largest multinational corporations have been implementing aggressive tax practices, such as profit shifting, for many years to minimise tax payments. In turn, organisations are drastically minimising government revenue in the countries where they operate. What’s more, these tactics often result in a domino effect, with sector peers having little choice but to follow suit to remain competitive. While the OECD has created guidelines to avoid unfair transfer pricing, organisations often find frowned-upon — but legal — methods to shift profits and significantly reduce their tax payments. For this reason, the call for tax transparency — from investors, governments, civil society and other businesses — is increasing.

To this end, frameworks such as GRI are introducing and strengthening requirements on organisations to report transparently on their tax practices. Currently voluntary, the GRI tax standard (GRI 207) requires businesses to report on their approach to tax — including their tax governance and risk management; stakeholder engagement on tax; and crucially, their country-by-county tax payments. Unlike requirements under the OECD guidelines, businesses that report against GRI 207 make these disclosures available to the public. There has already been uptake from big players including Allianz, BP and Mondi. And various elements of GRI 207 are included in the upcoming EU country-by-country reporting directive and UN tax convention bill. It is a pragmatic, forward-looking move, then, for businesses to prepare for this shifting regulatory landscape by adopting the GRI tax standard in their reporting.

Partnering for change

Transparency is an important first step; but we need to see action beyond disclosure. We cannot rely on tax transparency to increase spending on climate action. There is momentum and desire for the green transition in the private sector; but the public sector must act in partnership to mobilise private resources. Tangible climate action requires public-private partnerships, initiated by government investments and incentives for research and development to fast-track clean technologies. So, as well as paying their “fair share” of taxes, business must lobby government to push for climate action. Global coalitions have initiated such lobbyist movements at recent COP15 and COP27 events. We call on businesses ramp up these efforts — to unlock the potential for tax revenues to accelerate change. In the spirit of the final UN SDG (17), partnerships between the public and private sector can accelerate the climate action we so desperately need.