Published 9 months ago.
About a 5 minute read.
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.
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
— 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
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?
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
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
But there are, of course, nuances to consider in both approaches:
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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
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
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.
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
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
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
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.
Published Feb 2, 2023 7am EST / 4am PST / 12pm GMT / 1pm CET