As the race to respond to the climate emergency and fund the green transition intensifies, the US' Inflation Reduction Act (IRA) and the EU's Green Deal (including its Carbon Border Adjustment Mechanism (CBAM)) have emerged as significant pieces of legislation, generating global debate about how best to reach net zero targets. As multinational companies navigate these twin policy landscapes, new challenges, tensions and opportunities are emerging.
KPMG International hosted this roundtable discussion to explore how multinational companies are responding to these policies, which approach is likely to be more effective - incentives or carbon pricing - or perhaps a combination of both, and how low-income or vulnerable economies might be affected.
The conversation, which focused on perspectives from the UK, EU and US, was held under the Chatham House Rule and was attended by nine expert participants (see below for a list of attendees). The write up below summarizes the personal views of participants and does not necessarily reflect the view of any particular organization, including KPMG.
Subsequent conversations focusing on perspectives from ASPAC and the global south are planned for the later part of 2023.
Executive summary
- A combination of incentives with a strong and rising price on carbon is likely to be the most effective method to drive towards a green transition.
- Regulation is a third dimension to consider but thoughtful crafting is necessary to avoid it becoming a blunt tool that stifles innovation.
- Tax based incentives can have the benefit of relative simplicity over cash-based subsidies that might require project-by-project approval
- Measures to prevent carbon leakage like Carbon Border Adjustment Mechanisms may be justified but consideration needs to be given as to how to avoid a transfer of wealth from developing to developed countries.
- It is of the greatest importance that all measures are carefully considered to ensure that the burden of legislation does not unfairly impact developing nations and that these nations are a part of the conversations at a global level.
- You must consider what global institutions may be needed to tackle these issues with the greatest effect.
Use the carrot?
Are incentives effective and are they compliant with the rules of the World Trade Organization (WTO)?
It was generally thought that incentives can be a useful tool – although they do need to be properly focused, costed and monitored. One participant noted that about 10 years ago various renewable projects were uneconomical without some form of subsidy. Now, due to improved technology and a growing market which were supported by subsidies, in many places such projects are more viable than ones relying on traditional fossil fuels. Nevertheless, other projects still required subsidies to be feasible.
The Inflation Reduction Act in the US (which came into force in August 2022 and provides tax credits for various decarbonization measures) was viewed as a success. It was noted that it was intended to drive decarbonization within the US economy and not to attract foreign investment but it has resulted in some European and Asian companies relocating activity to the US to benefit from the incentives.
One participant noted that the IRA’s relative simplicity and clarity are beneficial. In Europe, there are various -traditionally cash – subsidies, but the process is more complex as these are given on a project-by-project basis. It was also thought that the US subsidies were more generous than in the EU. The IRA has resulted in some relaxation in the EU on State Aid rules to allow EU countries to give more subsidies for decarbonization technologies and one participant thought there was competition between the US and EU on climate.
It was questioned whether the IRA breaches WTO rules and distorts international competition. It was noted, however, that there isn’t much effective enforcement happening currently and investors may look more to Investment Treaties to try and gain access to IRA benefits.
Participants pointed out that while subsidies help the development and spread of green technology there is also a need to reduce consumption in certain areas – for example in relation to travel.
Use the stick?
Is carbon pricing going to be more effective and will incentives hold greater appeal for multinationals?
Participants agreed that carbon pricing was needed as well as subsidies. The rationale for Border Carbon Adjustments (BCAs) such as the EU’s Carbon Border Adjustment Mechanism (CBAM)1 to address concerns of carbon leakage 2 was also recognized.
It was also noted that when CBAM was introduced it impacted ambition in some Asian economies and resulted in them changing their perspective on the measures they need to take to accelerate decarbonization. A concern was generally expressed that BCAs could result in a wealth transfer from developing countries to developed ones.
In regards to WTO rules , it was thought that it is not entirely clear if BCAs meet the relevant test. This will be highly dependent on the rules of the BCA and how they are applied in practice but it should be possible for them to be justified under the exception in Article XX of the General Agreement on Trade and Tariffs (GATT)3.
It was noted that if decarbonization pathways are successful, taxes on emissions will be reduced. Shifting taxes to wealth as the carbon tax base decreases was suggested as one possibility.
What about regulation?
A necessary third dimension or a blunt tool – and what about capacity?
It was suggested that regulation is the third dimension, after pricing and incentives.
It was highlighted that regulation is useful where there is a need to act quickly but it can be too blunt an instrument. It is important to allow industries time to develop and adapt to ensure that the regulation implemented doesn’t hamper innovation or create excessive costs, especially in the area of climate change.
One participant noted that in some developing nations regulation can be perceived as being tied to corruption and is therefore treated with suspicion.
It was also discussed that capacity is an additional barrier to regulation in developing nations. During the COVID-19 pandemic, for example, it was developed nations who regulated the most because they had the mechanisms and capacity in place to be able to do so – though nations with more experience in dealing with epidemics seemed to do well.
Inequality and the Global South
Ensuring that the burden of legislation does not unfairly impact developing nations
Overall, it was agreed that the EU and US constructively competing on climate policy is a good thing and a step towards aggressive action on climate issues. One common area of concern though was the need to craft incentives carefully to ensure they do not create regressive wealth transfers from developing countries to developed ones.
One participant expressed a need to have guardrails to make sure policies do not perpetuate and deepen inequities between countries. A suggestion was made that it might be necessary to create a type of “custodian” of revenues from BCA-type measures, to be given back to low-income countries for specific purposes – such as a restructuring of economies towards renewable resources.
Another participant highlighted that WTO rules around intellectual property, as they currently stand, present an issue around climate technology and manufacturing – how might it be possible to give developing nations a fair chance to participate in this area?
There was consensus that consideration of the cross-border impact and spillover effects of climate policies is crucial. Policies which shut out lower and middle-income nations will be ineffective in their climate ambitions in the long run.
Where is the joined-up thinking?
Where are conversations being held and what institutions do we need to host them?
Participants agreed there was a need for joined-up thinking and fora in which the interaction of subsidies, pricing and regulation together with the international dimension could be discussed. It was noted that there were few places where such a dialogue was being held publicly.
Many participants commented on the need for some measure of reform within the WTO. It was suggested that it would be worthwhile for member countries to agree on interpretations of the WTO rules which would support carbon emission reduction policies. However, note should be taken of concerns raised by developing countries about policy initiatives in developed ones.
One participant argued that if the most desired outcome is some form of global carbon tax, then it is imperative to determine who can broker that. What global institutions are required to oversee the process?
Summary:
Participants agreed that the optimum policies should include a strong and rising price on carbon, well-targeted incentives and just transition measures. And most critically, the inclusion of developing countries – especially low-income and least-developed countries – in the dialogue and in the design and implementation of these policies is expected to be crucial to their success.
Contributors to the discussion included:
- Alessandro Bucchieri, Head of Tax Affairs, Enel Group
- Elena Crete, Head of the Climate & Energy Programme, The UN's Sustainable Development Solutions Network
- Clarence Edwards, Executive Director, E3G Washington DC
- Becky Holloway, Programme Director, Jericho Chambers
- Neal Lawson, Partner, Jericho
- Chris Morgan, Head of the KPMG Global Responsible Tax Project, KPMG International
- Molly Scott Cato, Former Professor of Green Economics, Roehampton University and Speaker on Economy and Finance for the Green Party of England and Wales
- Rachel Thrasher, Researcher, Boston University Global Development Policy Center’s Global Economic Governance Initiative
- Grant Wardell-Johnson, Global Tax Policy Leader, KPMG International
The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International.
