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Comment: Covid-19, tax policy and climate change

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With business leaders calling on the government for a ‘green recovery’ from Covid-19, it is time to rethink our tax system to make it green at its core. Rather than layering the tax code with standalone taxes targeting specific mischiefs, it would be better to align the tax system as a whole with our environmental objectives.

On 1 June, more than 200 UK firms and investors called for the UK government to deliver a Covid-19 economic recovery plan which is in line with climate goals. The UN has been urging governments to do the same. The UK is in a strong position to show leadership in this area as it prepares to host the (delayed) UN climate summit (COP 26) in Glasgow next year (billed as being the most important meeting since the Paris Agreement was reached in 2015).

In 2019, the UK committed to reaching net zero greenhouse gas emissions by 2050. That will require an annual reduction in the rate of emissions 30% greater than has been achieved on average since 1990. The need for action to meet the 2050 target has naturally been overshadowed recently as the government has deployed all resources in responding to Covid-19. The pandemic has, though, shone a light on how a reduction in travel and consumerism can have a significant and immediate impact on emissions – but at a huge social and economic cost.

Business leaders have called for public investment in innovation, priority to be given to greener sectors, and bail outs to have green strings attached. Should we also be calling for the tax system to have our green goals more in mind?

The tax system can be used as a powerful tool to discourage harmful environmental behaviours, by incorporating a proxy for the cost of the damage into the price paid for goods and services; and to incentivise the use and development of greener alternatives. However, UK revenues from environmental taxes are only mid-range compared to other European countries and have remained almost static over the last 20 years relative to GDP.

Environmental policy has developed in a fragmentary manner. Environmental taxes are targeted at particular mischiefs and often involve standalone ‘new’ taxes. Rather than continuing to layer taxation in this way, it would be better to ensure our tax system as a whole is aligned with our environmental objectives. We should ask ourselves what a successful environmental outcome looks like and line up the whole tax framework to meet that aim.

A truly radical approach would be to bring the environment into the heart of mainstream tax. Businesses respond to the rate of corporate income tax more than anything else, so why not offer lower corporation tax rates for ‘environmentally friendly’ companies? And lower income tax for those who work for them?

Of course, defining what is environmentally friendly is difficult. There needs to be a widely-accepted ‘scoring’ of the impact that individual goods, activities and supply chains have on the climate on a ‘cradle to grave’ basis, taking into account impact on global warming; air, land and sea pollution; and sustainability – as well as wider social considerations such as living standards and public health. But if we don’t invest the time up front to agree what ‘friendly’ means, how do we expect to pull together to reach the 2050 target?

If having different rates of corporation or income tax is too lofty an ambition, then perhaps we can edge forward by building more environmental features into the heart of the tax system.

First, environmental taxes ought to be more visible. If businesses and consumers do not really know the overall level of environmental taxation they are suffering, how will those taxes act as an agent for change? Red, amber, green labelling systems could show the environmental impact of, for example, the foods we buy – with different VAT rates applying accordingly. If we are taxed more visibly on fruits flown into the UK, perhaps we will demand fewer of them, or at least the tax raised can be used to fund an offset to some of the damage.

Secondly, tax policy must incentivise innovation. If the business leaders are right that the government should invest in green innovation to pump-prime the economy, private sector capital should be similarly incentivised through well targeted tax breaks. Covid-19 has shown that there is a high social cost to reducing emissions (the global lockdown has led to a 17% fall in emissions but also a deep economic shock) – so we need to throw everything at finding ways of maintaining current lifestyles at a much lower climate cost.

Thirdly, the climate does not recognise borders so tackling climate change is not something that one country can do on its own. The Covid-19 pandemic has led to unprecedented collective efforts by developed nations to create tests and vaccinations. Imagine if similar efforts were devoted to agreeing international standards and creating new technologies to achieve green objectives.

The boards of large companies are making climate change a standing agenda item, and investors are demanding green investment opportunities. The Chartered Institute of Taxation has decided to explore setting up a climate change working group and is looking for representation from across all the taxes. In-house teams, professional advisers, academia, and campaign groups involved in tax should also put the environment at the front of their thinking.

If we have to raise taxes to pay for the debts incurred in propping up the economy during the lockdown, let’s do it in a way which has a twin aim of reaching net zero emissions by 2050.

With acknowledgement to the contribution by Lauren Redhead, associate at Pinsent Masons.