Tax incentives - a powerful tool in driving investment in environmentally sustainable outcomes
Environmental, social and governance (ESG) has become a vital component to business, with increasing scrutiny on companies to achieve sustainability-related goals. Join us as we examine how to add value to your ESG agenda through the latest global tax and ESG developments.
Environmental initiatives have become increasingly important in the fight against climate change, and tax incentives are a powerful tool in driving investment in environmentally sustainable outcomes.
Governments can use tax policy measures to change the relative prices of sustainable and unsustainable activities and, therefore, incentivise market responses to achieve ESG objectives.
Having awareness and foresight of these opportunities is just as important a part of global and regional ‘horizon-scanning’ as tax costs.
Environmental change programmes can be expensive in the short term, making it difficult to get the traction needed to get projects started.
If you, as part of the tax and finance function, can add incentives – in particular, “cash-back” incentives – into the cost-benefit mix, then you can drive and maximise value for your organisation. When it comes to tax adding value to an organisation’s ESG agenda, this is one of the crucial ways you can begin to do this.
"With environmental tax incentives being enacted at an increasingly rapid pace, it will be even more critical for your organisation to stay up-to-date on global developments in order to take advantage of the many tax rate reductions, credits, and special deductions around the world." - Pierre Docx, International Tax Advisor, Grant Thornton Netherlands
Governments globally are committed to reducing greenhouse gas emissions and their impact on climate change. A number of countries are competing by offering incentives for environmentally friendly projects, such as grid-connected wind or biomass projects.
Taking full advantage of all these incentives can help pay for ESG goals and drive the reallocation of capital towards more sustainable outcomes.
In response, companies are increasingly working on identifying the tax implications of their ESG strategy. Understanding the tax incentives, savings opportunities, and other sustainability-related benefits that may be available to their business.
These “sustainable” incentives are not only aimed at mitigating the effects of climate change, but also at boosting innovation and creating jobs.
Sustainable tax incentives come in various forms, including tax credits, deductions and exemptions.
These may include, amongst many other things:
For example, Italy’s patent box relief (the Italian Super Ecobonus scheme) gives the possibility of deducting 110% of costs incurred in relation to eligible assets. With the European Union Green Deal and various incentives associated with it, the implemented incentives play a significant role in driving investments in environmentally sustainable outcomes.
“The Netherlands has introduced some tax facilities in relation to investment in environmentally friendly assets and/or investments that cause energy savings and sustainable energy. The investment deduction can amount to 45.5% of the investment costs (changing to 40% during 2024). Luxembourg on the other hand also provides aid for investments in renewable energy production. This varies between 30% to 65% of the investments.” Pierre Docx, International Tax Advisor, Grant Thornton Netherlands.
"Remember, if you take full advantage of all incentives, tax incentives can help pay for, or offset, the cost of your sustainability goals.” - April Little, Partner, Sustainability and Tax, Grant Thornton US
“In Argentina, the implementation of tax regulations related to sustainability might be quite relegated by other economic and tax issues that occupy the agenda,” comments Julia Adano, Lead Tax Partner at Grant Thornton Argentina. “However, some districts have regulations that provide benefits or incentives for environmentally friendly and sustainable practices and initiatives.”
The City of Buenos Aires, for example, has the 'Incentives for Environmental Improvement of Companies in the City with the Property Tax and Remuneration Rate for Lighting, Sweeping and Cleaning, Maintenance and Conservation of Sink Services' Programme, which grants discounts on tax payments for companies that meet responsible energy consumption and/or environmental care requirements. “The City Government also has a positioning policy in public tenders, which gives priority and a higher score to companies that carry out ESG policies related to gender equality,” highlights Adano.
At a national level, the country has different laws and decrees that promote the production and use of renewable energy. In this regard, Julia Adano points out that “the National Distributed Generation Law (Law N° 27,424) could benefit companies and individuals of any industry. It promotes the generation of energy from renewable sources for self-consumption and the injection of surpluses into the grid, through tax credit certificates and the granting of loans, incentives, guarantees and capital contributions for the implementation of distributed generation systems of renewable origin".
As a complement to incentives to drive ESG goals, companies can consider issuing Green Bonds to sell on the International Carbon Market, either through emission trading or offsets, and reinvesting in new ESG projects. “In countries like Argentina, which are not as industrialized as other regions, the carbon footprint is not as significant as in those with a larger secondary industry, and the Carbon Market is a strategy that could be beneficial for many sectors and businesses,” Adano concludes.
“In Argentina, the implementation of tax regulations related to sustainability might be quite relegated by other economic and tax issues that occupy the agenda. However, some districts have regulations that provide benefits or incentives for environmentally friendly and sustainable practices and initiatives”. - Julia Adano, Lead Tax Partner at Grant Thornton Argentina
The US has recently enacted the Inflation Reduction Act, which provides a variety of energy-related incentives such as credits for electric vehicles and renewable energy sources. With this legislation, many of the credits are even transferable so that they can be monetised more easily.
Many other countries across the world have a variety of incentives to encourage responsible environment management. For example, Canada has over 150 incentive programs available, including over 30 new or upgraded programs introduced in the 2022 federal budget. These are aimed at automation, clean technologies, and increased energy efficiency.
Some are in the form of a reduced corporate tax rate on certain sectors – such as technology and manufacturing – while others are in the form of credits or accelerated deductions. Meanwhile, Japan’s 2021 tax reform bill provides tax credits for digital transformation and carbon neutrality, leading the way for many other APAC countries to do the same.
“Different countries have different approaches, which may be replicated by others or may encourage competition. Remember, if you take full advantage of all incentives, tax incentives can help pay for, or offset, the cost of your sustainability goals.” April Little, Partner, Sustainability and Tax, Grant Thornton US
Multinational businesses investing in their ESG strategy should consider the regulatory tools as introduced by the European Green Deal and the US Inflation Reduction Act among others. These will help develop a structure which includes the tax measures to facilitate the transition to a sustainable economy.
“With environmental tax incentives being enacted at an increasingly rapid pace, it will be even more critical for your organisation to stay up-to-date on global developments in order to take advantage of the many tax rate reductions, credits, and special deductions around the world.” Pierre Docx, International Tax Advisor, Grant Thornton Netherlands
Taking full advantage of all available tax incentives can help significantly in paying for your organisation’s ESG goals. It’s extremely important that you remain knowledgeable about different developments across the globe to be able to extract the most value from these incentives. Some countries may be further ahead than others when it comes to offering incentives, however there is clear evidence of policies being replicated globally, so remaining up to date with global developments will allow you to gain the maximum amount when incentives do become available to you.
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