How tax policies deliver environment-friendly life

Sustainability is a major theme across the world. This has been driven by climate change which has had devastating effects on some parts of the world.

The negative effects have had a disproportionate impact on developing countries due to their limited ability to mitigate the impact of climate change.

Climate change has been touted by some scientists as a potentially existential threat to the human population.

The world has come together through the UN to ensure coherence in the global fight against climate change.

The United Nations Framework Convention on Climate Change has been organising annual events that bring together Heads of State, ministers, negotiators, climate activists, civil society representatives and private sector players.

Africa hosted COP 27 with a focus on delivering action on several issues that are critical to tackling climate change.

The key issues are the reduction of greenhouse gas emissions, building resilience, adaptation and delivery of commitments to finance climate action in developing countries.

What is the role of tax in sustainability?

The use of tax policies to achieve economic outcomes is common across the globe.

It is, however, an emerging trend that tax policies are now being used to achieve environment-friendly outcomes. There is a mix of tax policies that enable governments to adopt a carrot-and-stick approach.

The carrot entails the use of a wide range of incentives, which take the form of grants, tax credits, subsidies, tax exemptions and tax rebates.

The stick entails the use of punitive measures to discourage activities that create negative environmental externalities. This could take the form of taxes, levies and fees.

The reduction of greenhouse gases (GNGs) has been termed a critical driver in managing the increase in the global average temperature to below two degrees above the pre-industrial level.

Tax policies are being deployed as a lever to drive carbon mitigation. The tools that have been deployed in different parts of the world include carbon pricing, green energy incentives, taxation of emissions and the taxation of certain plastics. 

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This strategy seeks to motivate organisations to transition to environment-friendly inputs, products and processes. It is also meant to ensure that the biggest polluters offset the effects of their activities by paying a price.

Environmental taxes are a major policy tool and newer forms of environmental taxes are being introduced by different countries to drive behaviour change. This includes fuel taxes, pollution charges, recycling fees, congestion fees and plastic taxes. 

The taxes are being combined with incentives for activities that reduce emissions and organizations that adopt clean technologies. The set-up of carbon markets to facilitate carbon pricing is taking shape in various countries. 

From a societal perspective, the use of consumer taxes is becoming a common policy tool. This is meant to act as a disincentive for certain activities and products.

For instance, excise taxes are being introduced to drive a change in the behaviours of consumers and producers. Products that have been targeted in this drive are those with a high concentration of sugar, fat, and meat, among others.

The use of plastic bags and other plastic packaging has been blamed for both land pollution and water pollution. It has been observed that most plastic products find their way into landfills, lakes and oceans after their disposal. 

To mitigate the negative effects, some countries have completely banned the use of certain categories of plastic packaging.

For instance, Kenya, in 2017, banned the use of single-use plastic carrier bags.

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Other governments have imposed plastic packaging taxes to discourage the use of plastic bags and related packaging.

The creation of a proper and enabling regulatory environment has also been central to the achievement of set goals. For instance, the introduction of an enabling legal and regulatory mechanism to operate emission trading systems and voluntary carbon markets. 

Through the Finance Act, 2022, Kenya introduced a lower corporate income tax rate of 15 per cent for the first 10 years of the commencement of the operations of a company that operates a carbon market exchange or emission trading system that has been certified by the Nairobi International Financial Centre Authority.

By and large, the tax function will be critical to the implementation of the organisation’s sustainability strategy.
Maina is Associate Director at Ernst & Young LLP (EY). The views expressed herein are not necessarily those of EY.