Notwithstanding the terrible pandemic we are currently living through, the climate change question has continued to create headlines and is likely to take centre stage in our lives for the foreseeable future, writes Michael Hayes, KPMG Global Head of Renewables.
The similarities between the COVID-19 crisis and climate change have been well documented elsewhere. The reality is that as national Governments and the European Union plan for a post-COVID economic recovery, the Green Agenda is assuming real significance particularly as part of the various stimulus plans being put in place. The EU Green Deal is testament to this and reflects a determination that new investment arising as a result of various stimulus packages will be focused on building back a greener economy.
Coupled with this, we are seeing the rise of net zero commitments from both countries (most recently China) and major corporations (BP, Shell, Microsoft) and this trend is only going to accelerate as well as science-based targets. Here in Ireland, the Government has now published its Climate Action Bill which is designed to put in place the relevant measures to decarbonise the Irish economy over a short period of time and commits Ireland to net zero carbon emissions by 2050.
This global and local transformation to net zero economies is going to have vast implications for budgetary policy and we are already starting to see signs in terms of the type of budgetary policies the EU is starting to develop. These policies will manifest itself in two forms:
This article asks what all of these developments mean for Irish budgetary policy both for Budget 2021 and for subsequent years.
There is no doubt in my mind that tax policy is going to play a fundamental role as Governments consider actions to reduce carbon emissions and to focus on achieving their net zero objectives. Some evidence of this from the European Union is already clear:
This is really just the beginning of a whole new approach to climate where tax measures (both incentivising and punitive) will be used to really drive different behaviours on carbon emissions and this should be considered separately from the whole question of funding climate and decarbonisation initiatives. Heretofore, tax policy was typically designed with other objectives in mind principally economic and social. However, carbon and climate objectives will now start to feature significantly in Irish budgets with some early steps in Budget 2021 but with more pronounced actions in subsequent budgets.
These measures will be necessary for a number of reasons not least because of the increased focus from the European Union on the climate actions being taken by individual member states and Ireland remains very much under the spotlight in this regard. Also, the Irish Government have made very strong commitments in this area in the recent Programme for Government and in the Climate Action Bill. Additionally, Irish citizens are now much more strident in demanding climate action. To be fair, this new Government recognises the reality and appears willing to respond positively.
Increasingly, we are likely to see levels of carbon emissions as a key difference between something that gets more favourable tax treatment than something that does not. This could apply to many different areas of future Government investment including roads, agriculture and energy.
While many different solutions for climate change will be considered over the next five to ten years, it is very clear that tax policy will take on a very important role. The evidence from history is clear – tax policy has always been one of the most effective tools available to Government to change economic patterns and social behaviours and we have seen the positive effects of informed tax policies on infrastructure and other sectors in the Irish economy. Hopefully, it will now play a key part in helping to drive real change on the climate agenda.