Applying tax to polluting activity internalizes the cost that otherwise would be borne by society, providing an incentive to both companies to reduce polluting activity and to consumers to switch away from consuming polluting goods and services. By putting a cost on polluting activity, green taxes provide a price signal that encourages investment in green technology and products. Tax policy can also be used to provide incentives for green investment, for example in the form of credits and deductions.
It has been estimated that an investment of around US$4bn per year into the clean energy sector alone will be needed in order to ensure that the world becomes carbon neutral by 2050. Such funding is unlikely to be provided solely by governments, meaning private investment is required. There are, however, a number of barriers to ensuring private capital is invested either in new technologies or in certain parts of the world, particularly in developing countries. Tax is only one of these barriers, and unlikely to be the major one, but tax holds an important role in facilitating investment.
As responsible investment becomes increasingly attractive, we continue to look at the role tax plays in ESG through KPMG’s Global Responsible Tax Program.
Themes in this section include:
- How can tax policy drive investment into a green recovery?
- Potential designs for a carbon border adjustment mechanism
- The compatibility of a carbon border adjustment mechanism with World Trade Organisation rules