Why sustainability leaders should engage more with their tax function

Table with equipment in conference room. Close up. 3D Rendering

Leaders tasked with designing and delivering an organisation’s sustainability strategy, including – but not limited to – net zero, will usually reference a multitude of reporting obligations as a driver of activity – but rarely will you hear them talk about tax.

However, governments are increasingly using fiscal policy as a key lever to move towards their sustainability goals.

As a driver of behaviour change

Taxes can be used to penalise business practices that have an adverse environmental impact.

For example, the UK plastic packaging tax (UK PPT) aims to provide an economic incentive for businesses to use recycled plastic in the manufacture of plastic packaging. HMRC, the UK tax authority, estimate that as a result of UK PPT, the use of recycled plastic in packaging could increase by around 40% – which, based on current estimates, would be equal to carbon emission reductions of nearly 200,000 metric tonnes in 2022 to 2023 alone.

For incentivisation and investment

Public revenues generated from environmental (and other) taxes can be directed to incentivise certain activities, by reducing their effective cost or by providing additional public investment into the project.

For instance, one of the objectives of the EU Social Climate Fund which will employ €72.2bn in revenues from the auctioning of 2025-2032 Emissions Trading System allowances, is to support measures and investments that reduce emissions in the road transport and buildings sectors.

As governments seek to meet their Nationally Determined Contributions, we expect that implementation of these environment-focused fiscal measures will accelerate.

Three ways in which working with your tax team can enable your sustainability progress

1) A more effective and ambitious transition plan

Where businesses face future charges for carbon emissions or other environmental impacts, sustainable transformation should, in principle, defray some of these costs.

In many cases, however, this may not be the case.

The transition plan may not align with government strategy or tax incentive criteria, or emissions reductions may take place on footprint elements which are not subject to carbon pricing or taxation, while leaving an emissions footprint in locations where charges will continue to apply.

Ensuring that transition plans are aligned with existing and new fiscal measures can maximise future cost mitigations, while grants and tax incentives can accelerate and amplify change through strategic alignment with government policy.

2) A stronger business case for value-led change

Reflecting the fiscal impact of “not acting” on sustainability matters, such as decarbonisation, can strengthen the case for change.

As a simplified example, if, without action, the business will be exposed to future carbon taxes which could be mitigated through decarbonisation, the potential benefit of mitigating these upcoming costs through transformation should be reflected in the business case.

This will strengthen the financial case for decarbonisation, making the argument for value-led change.

3) An advance view of potential “showstoppers”

In some cases, seemingly attractive commercial decisions can be turned on their head by unfavourable tax treatments.

As an example of this, without use of an appropriate customs procedure, a UK toll manufacturing structure envisaged as part of a decarbonisation plan would lead to a 20% cost, because Import VAT would be irrecoverable. This could render the proposed structure impracticable.

Mitigating tax risk when planning a business transition is always important – and no less so where the transition is to meet the business’s sustainability goals.

The interactions between tax and delivering a successful sustainability strategy are becoming more noticeable as businesses and governments embark on the next wave of transition. The businesses that develop their internal links between tax and sustainability will be in a better position to respond to future developments.

Action inspires action. Stay ahead of the curve with sustainability and energy newsletters from edie