George Bull

Written by:

George Bull

Senior Tax Partner

Carbon taxes, climate change and sustainable investment decisions

  • September 2017
  • 3 minutes

The transition from currency-based taxes to carbon-based taxes is an inevitable and important part of the world’s response to global warming. A recent research paper from Schroders suggests these carbon taxes will have to rise considerably to meet existing global carbon commitments.

However, no tax system can change the hard reality that the world is finite. It’s the only one we have. Future financial forecasts cannot therefore be based on the assumption that worldwide net economic growth can continue.

There is a moral argument, not shared by everybody, that those who currently have most should be prepared to change their lifestyles more, to approximately equate lifestyle expectations around the world. That’s first-world nations as well as developing countries.

At its simplest, a rationed system of carbon permits allows industries which consume fossil fuels to continue their operations but with higher costs. Those costs will variously reduce profits, or result in an increase to customers, or reduce shareholder returns.

Experience to date with carbon taxes demonstrates several key problems. First, businesses which are subject to carbon taxes are generally vocal in their opposition to the arrangements. Second, some jurisdictions which have imposed carbon tax systems have been accused of inconsistency, letting off the biggest polluters for reasons of domestic political expediency.

Compliant companies may find it politically desirable to complain about the imposition of carbon taxes, because the resultant price increases are passed on to consumers and the companies want it to be understood that this is not a situation of their making. A further iteration in the same debate will see the costs incurred by compliant companies reducing the dividends available to their shareholders, unless the playing-field is levelled by forcing non-compliant companies to toe the line. That then brings us onto the whole question of shareholder activism and sustainable investment strategies, which itself is part of the thrust of the Schroders report.

These issues are exacerbated when a manufacturer in a regime which imposes carbon taxes exports its products to a jurisdiction which does not have the same tax regime. Mismatches may result in price un-competitiveness.

Of course, the world has to start somewhere in the move to carbon taxes. It would be tempting, therefore, to regard these problems as teething troubles. News of China’s commitment to operating a carbon tax regime is welcome, although it remains to be seen how it will be structured and how strictly it will be enforced.

Major hold-outs such as the USA cause concern not only because they act as a role model for other jurisdictions which are minded not to change their ways, but also because the absence of carbon taxes can be used to boost exports from the hold-outs. To put it another way, there will always be a market for high-carbon goods produced in dirty economies.

Will we ever see 100 per cent move to carbon-based taxes worldwide? Probably not. Will there be sufficient progress to make a difference to anthropogenic climate change? I hope so but my instinctive reaction is that a very high proportion of adoption will be required – say 80 per cent – to share the burden equally around the globe and to curtail rising temperatures.

For more information please comment below or get in touch with George Bull.

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