Decarbonization has become a priority for both governments and businesses as the world grapples with climate change. One of his ways governments around the world are promoting progress is thousands of environmental taxes and incentives. These add complexity to already complex decarbonization decisions, but the good news is that when companies take the time to consider their strategic choices through the lens of taxes and incentives, they often decarbonise. is. When Improve your bottom line.
But in too many organizations, tax leaders aren’t in the room when critical strategic decisions are made. These companies are missing opportunities, facing unexpected costs, and leaving gains on the table that might otherwise help accelerate decarbonization efforts. It may seem obvious, but we argue that all current corporate strategic decisions around sustainability goals must carefully consider taxes and incentives. In fact, without understanding both, it is difficult for companies to make the best business case for their net-zero efforts.
Today, everything from fuel and water to plastic and waste are subject to environmental taxes, all of which can impact your bottom line. For example, the European Union’s Green Deal, a set of policies and initiatives adopted in late 2019 to make Europe the first climate-neutral continent, includes over 1,000 new or amended Tax included. Alongside taxes, there are hundreds of green incentives at the national level and many more at the local level that can influence asset allocation, product development, and overall strategic planning, and are growing in number. . In the US, companies are currently adjusting for the effects of environmental incentives embedded in the US$370 billion Inflation Reduction Act. These range from tax credits and subsidies for green investment to incentives to tap demand for low-carbon products in the construction of federal buildings and transportation projects.
Explore data from more countries with PwC’s interactive Green Taxes and Incentives Tracker.
How will a better understanding of taxes and incentives affect decision-making? Assisted in evaluating grants to One was switching fuel sources and the other was carbon capture and underground storage (CCUS). The organization modeled cost scenarios with and without available government incentives and funding. It was clear that the company would have to apply for a grant.
In fact, the project the cement maker was considering had a capital value of around US$1.5 billion, with incentives representing 50% of the cost and potentially enabling faster progress to net zero. It turns out.
One company found that projects with a capital value of around US$1.5 billion were eligible for incentives equal to 50% of the spend.
no turning back
Despite the benefits of doing so, relatively few companies have included such perspectives on taxes and incentives in their decarbonization plans. In fact, in PwC’s 2022 Annual Global CEO Survey, only 37% of respondents said they have integrated greenhouse gas emissions into their company’s long-term strategy at all, but his 800 out of the top 2,000 companies despite the fact that it has a net-zero effort. But there are also positive signs. For example, in Brazil, his recent PwC survey focused on tax and the environment, society and governance (ESG) found that 45% of companies have set decarbonization targets, and 81% We believe that the preferential treatment of In Brazil’s northeast region, there are several clean energy VAT incentives that are starting to boost investment in wind farms and solar energy.
As a government, we are not waiting for businesses to catch up. Many see taxes and incentives as an important means of achieving global carbon reduction goals. Currently, 30% of the world’s total carbon emissions are subject to carbon pricing systems aimed at limiting emissions, and countries such as Brazil, Indonesia and Turkey have introduced some type of carbon pricing mechanism. An increasing number of countries are considering In addition, PwC research shows that global carbon price floors could reduce emissions by 12% if adopted globally.
Of course, understanding the impact of various environmental taxes and incentives first requires companies to establish a baseline through a deep understanding of their carbon footprint. Once you have that, you can start looking for ways to make the most of your tax and incentives landscape.
A good example is a Fortune 500 energy technology company that is looking to cut its carbon emissions in half by 2030. Armed with a long list of activities and investments that can reduce emissions, from reassessing fuel sources to investing in energy efficiency measures, the company has run the numbers in a variety of scenarios, embracing the challenge as an out-of-the-box opportunity. It is working. The company narrows the options by asking how well the options fit into the overall corporate strategy (not just reducing emissions). Considerations include incentives up to 50% of the cost of decarbonization initiatives. The next step is to operationalize the plan chosen by the company.
As the examples show, to get the most benefit from decarbonization efforts, companies need to assess the environment in which they operate. What are their ambitions for change in the countries they do business in? How will governments in these countries incentivize companies to change how they operate and what their customers do? Different countries have different incentives and taxes, so tracking them can be an important part of making the business case for decarbonization.
Let’s take the example of a Canadian agricultural business. Initially unaware of the availability of state assistance, he discovered that the plan for a food processing facility was eligible for incentives. In just six weeks, the company put together a project plan for a facility designed to meet environmental standards and boost economic growth in the region. The plan met state standards and was eligible for tax incentives.
Or consider the options faced by large data centers with facilities across the European Union. The company has set an interim target for 2030 and has committed to net zero by 2050. To get there, we need to understand which green investments are most effective and in which countries. Should You Invest in Solar Panels? with carbon capture? Should the facility be moved? Answering these questions requires pre- and post-tax calculations that consider the cost of carbon and the incentives to invest in new technologies and regions. Without this data, company leaders cannot make well-informed strategic decisions about moves that could cost millions of dollars. Investors also need this information.
put it all together
Careful country-by-country research can expand the potential benefits of investing in decarbonisation. For example, we recently worked with six multinational organizations to plan to build a 100 megawatt wind farm. where was the problem After comparing the costs and benefits of building plants in numerous jurisdictions, the Netherlands proved to be the best location. In part, this is due to the country’s aggressive decarbonization efforts. But where the country prevailed was tax incentives and investment opportunities that not only made wind farms more affordable, but also amplified the decarbonization potential of the project. . Surplus electricity generated by wind farms is converted into green hydrogen and used as fuel for hydrogen-powered buses on industrial sites and in the region. This combination allowed project developers to optimize funding opportunities while supporting the expansion of greener power sources.
In this rapidly changing environment, it’s worth considering all the options available to reduce emissions. Taxes are not just costs to manage or reduce. They form a major plank of a company’s contribution to a productive society and therefore need to be effectively incorporated into strategy. For many companies and their customers, reducing emissions is high on their list of priorities, so understanding how to meet their environmental goals in the most cost-effective manner is paramount. Governments are looking for ways to achieve this through increasing the number of incentives offered and through targeted taxation. So should companies.
- Barry Murphy An ESG leader for PwC’s Global Tax and Legal Services. Based in London, Partner of PwC UK.
- Niels Muller He specializes in ESG and tax-related issues, with a focus on the energy and industrial sectors. He is based in Amsterdam and is a partner of PwC Netherlands.