Three types of Sustainability-Related Tax Incentives (EY)

Example of a Sustainability-Related Tax: Carbon Tax

Over twenty countries already have a carbon tax which ranges from $137 US dollars per metric ton of CO2-equivalent in Sweden to $25 in the United Kingdom (Statista). But there are many other tax regimes out there that either punish or reward performance.

In fact, according to EY’s Green Tax Tracker’s assessment of global sustainability tax policy, there are “3,600 sustainability incentives available, more than 80 carbon pricing systems in effect and in excess of 4,300 other environmental taxes with more than 1,000 exemptions for qualifying activities or taxpayers.”

How does an accounting function take advantage of this emerging and fluid tax environment? EY’s tax performance management model (shown above) organizes the response into four areas:  planning, accounting, compliance and controversy.

Sustainability tax policy exposures and opportunities for a firm depend on internal factors, such as operations, finance/tax, and product mix, and external factors, such as government regulations, trade policy, and stakeholders interests. Companies can manage their tax performance through effective planning for how the accounting department will maintain compliance and prepare proactively for any controversies through proper social and environmental risk assessment.

Sustainability and resulting changes in tax policy brings risks and opportunities to a company. Important considerations:

• Return on Investment: The tax incentives associated with investing in sustainable practices can be included in the calculation of ROI for a proposed project.

• Cost Reduction: Decision-makers within a company may consider changing behaviors that have a negative effect on the environment as a result of existing or potential energy and environmental taxes.

• Tax Treatment: Many concerns are arising regarding the tax treatment of emerging regulations around the world. For example, tax policies treat offsets and allowances differently for different revenues and expenses. With uncertainty regarding the treatment of offsets and allowances of carbon regimes, companies could end up minimizing the effects of new policies.