Jason Collins
Chair of the Climate Change Working Group, the Chartered Institute of Taxation
Green taxes serve as a powerful tool to align economic growth with environmental, social and governance (ESG) principles, stimulating eco-friendly practices and contributing to net zero goals.
The tax system can encourage eco-friendly practices by taxing polluting behaviours or providing tax relief to drive the uptake of green alternatives. In the UK, environmental taxes include the Climate Change Levy, Plastic Packaging Tax and Landfill Tax, which incentivise cleaner energy in the commercial sector — encouraging increased use of recycled plastic and controlling waste in construction.
Incentives and benefits for ESG
The Government is also able to embed green incentivisation in existing taxes, such as the zero-rate VAT on the installation of energy-saving materials, enhanced capital allowances for green installations in commercial properties or employee tax incentives for electric vehicles.
An All-Party Parliamentary Group report has suggested launching a comprehensive strategy to maximise ESG benefits, address market failures and strengthen the ESG market. The report calls for HM Treasury to review how policy incentivises investment in decarbonisation via the tax system by the end of this year.
The OECD has also published environmental tax recommendations for policymakers. Having an ESG strategy demonstrates practices and metrics that minimise negative impacts and enhance positive contributions to the environment, society and corporate governance.
The UK government offers nearly £5 billion to support businesses in the UK in their efforts to research or adopt environmentally sustainable practices.
Green tax integration
Green taxes can play a pivotal role in shaping ESG behaviours. They offer incentives and drive behavioural changes tied to ESG performance, encouraging eco-friendly practices and investment decisions.
Tax integration into an organisation’s ESG strategy involves understanding incentives, assessing risks and compliance and aligning governance with tax contributions. More professional advisory firms now offer tax and ESG advisory services to keep abreast of new sustainable incentives worldwide, promoting mitigation and innovation to attract foreign investments.
Policies fostering ESG-aligned behaviours
The UK government offers nearly £5 billion to support businesses in the UK in their efforts to research or adopt environmentally sustainable practices. This is further supported by green tax incentives.
The EU supports clean tech investments within its borders through the Temporary Crisis and Transition State Aid Framework, relaxing state aid rules until 2025 to encourage and retain clean-tech investments in Europe. Further, the European Parliament recently blocked efforts to weaken the new European Sustainability Reporting Standards.
Over 50,000 companies large and listed companies with a substantial EU presence will soon have to assess and report their environmental impact. As the world shifts towards sustainability, integrating tax incentives with ESG practices is vital for a greener and economically resilient future.