14 Jun 2021 | 08.27 am
Guest Blog: Deirdre Hogan, EY Ireland
Taxation can help make the world more sustainable
14 Jun 2021 | 08.27 am
Making the world more sustainable has become an economic, social and environmental imperative. Achieving that goal will require a significant change in mindset and behaviours for people, businesses and governments, writes EY’s Deirdre Hogan
While there are many ways to drive behavioural change, one of the key levers available to governments is taxation, both as an incentive and deterrent. Arguably there cannot be economic or social sustainability without environmental sustainability. Implemented successfully, ‘sustainability taxation’ can play a key role in delivering the environmental aspect.
Sustainability taxation is a broad term and encompasses both the stick of higher taxes and the carrot of incentives and subsidies. To drive real change, sustainability taxation needs to be implemented in such a way that it provides certainty in terms of its impact on personal income levels and incentivises businesses in a way that allows them to continue to grow and make revenue increasing investments while doing the right things for the environment.
Environmental taxes have, to a certain extent at least, been seen as a poor relation in most countries when it came to generating revenue and changing behaviours. In reality, they were merely a nod to climate change issues. Less than 10% of EU member states’ total revenue from taxes and social contributions came from environmental taxes in 2018.
However, we have now reached a point where real and effective steps are being taken to combat climate change and create a more sustainable environment, even in the midst of a global pandemic.
Here in Ireland, Budget 2021 increased our commitments and actions to achieving environmental sustainability. However, there is still a large gap between those commitments and how we are going to achieve them.
As things stand, very little revenue (6.9% in 2018) is generated from environmental taxes, and that level actually fell in 2019 according to the CSO. A total of €5 billion in environment related taxes was collected in 2019, a drop of 2.1% on 2018. The main reason for the fall related to a decrease in the Public Service Obligation Levy, the charge that all electricity customers in Ireland pay to contribute to the costs associated with producing sustainable and renewable energy.
Of even greater concern has been the fall in environmental taxes levied on households. According to the CSO, these taxes totalled €2.7 billion, a 66% share of environmental taxes, in 2010. By 2019 they had fallen to €2.6 billion, a 52% share of the total environmental tax take.
Environment taxes levied on service and manufacturing industries did increase somewhat over the same period. In 2010, service industries paid €1.0 billion, a 23.3% share of total environment taxes, while manufacturing paid €400 million, a 10% share. These figures rose to €1.6 billion (32.1%) and €700 million (14.5%) respectively in 2019.
We currently have 15 different environmental taxes in Ireland encompassing energy taxes, transport taxes and pollution and resource taxes. Very little of it is ring-fenced for sustainability purposes. Accordingly, there is little evidence to suggest that the application of environmental taxes has been used to achieve a more sustainable environment.
While the current Carbon Tax rate may not have a huge impact on individual households and businesses, the increases planned for the coming years will certainly become a financial burden. The tax has increased from €6 per tonne to €26 per tonne since 2018 and is scheduled to further increase to €100 per tonne in 2025.
The regressive nature of the tax may be unfair to many, but there cannot be real and lasting change without some degree of pain. The onus is on the government to protect the most vulnerable in society when it comes to bearing that pain.
Certain businesses will also need some level of protection. For example, those businesses more severely impacted such as road hauliers should be offered the means and support to move to more sustainable energy sources in a way that ensures their continued viability.
It is also important that those businesses and sectors which contribute most to carbon emissions are sufficiently targeted. For example, agriculture is a major contributor to Ireland’s greenhouse gas emissions but is arguably the least impacted by the environmental taxes currently in place. According to the CSO, the sector contributed just €60 million, or a 1.3% share of environmental taxes, in 2019.
It is inequitable to exempt some industries from the tax for what are effectively purely political reasons. However, applying the tax fairly and in a way that does not cause irreversible economic or social damage is a very difficult balancing act.
Businesses now also have a clear imperative to adopt CSR strategies and to reduce their carbon footprints dramatically. Individuals are also adopting very welcome changes in behaviour.
But the government must still shoulder its fair share when it comes to taxation. While a review of the Irish tax system in general is something for consideration at another time, ways to make the system more environmentally sustainable will need to be found within the current framework if real progress is to be made towards meeting our commitments under the Paris Agreement.
• Deirdre Hogan (pictured) is a Tax Partner in EY Ireland