There are a number of global commitments to limit global warming and implement net-zero greenhouse gas emission targets. The European Union, the United States and many other countries have set a target to reach net-zero emissions by 2050 in addition to commitments made in the Paris Agreement.
Governments have often used tax policies as a way to shape the behaviour of businesses and individuals (for example punitive taxes on high-sugar foods and drinks, increased excise duties on tobacco and alcohol). Governments are now increasingly implementing various tax regimes and levies targeted at activities deemed harmful to the environment, such as burning fossil fuels or producing new plastic packaging. Alongside this, incentives are introduced to encourage investment in green technologies and products.
Whilst energy-intensive industries such as manufacturing are likely to face greater financial impact from green taxes, we consider some of the measures specifically affecting those businesses in the Consumer sector.
- Retail, food and hospitality businesses rely heavily on the transportation of goods, which comes with the cost of transport. Fuel duties and low emission zone charges in cities are a significant source of revenue for many countries and play a crucial role in environmental policy. Many governments are increasing fuel duties to discourage the use of fossil fuels and reduce greenhouse gas emissions. However, the tax base is under pressure through fleet electrification and the taxation of fuel duties can involve finely balanced considerations, as some governments are committed to phase out the manufacture of combustion engines. Fuel duties can be unpredictable year on year making it difficult for businesses to accurately plan for their cost of sales. Many businesses are seeing the benefit of electric vehicle incentives, both as a source of tax relief from sales or corporate taxes and reducing exposure to excise fuel duty.
- A report published by the OECD, Pricing Greenhouse Gas Emissions 2024 acknowledges that progress in carbon pricing and transforming energy taxation slowed down or even regressed amidst the global energy crisis (which caused countries to increase support measures), a number of jurisdictions are now preparing for progressing carbon pricing with a view to achieving their climate goals.
- A deposit return scheme (DRS) is a system designed to encourage consumers to recycle their beverage containers by offering a refundable deposit when they return the containers. The schemes have gained popularity as a way to combat plastic pollution and promote recycling efforts. Germany's "pfrand" system is one of the most successful schemes globally, achieving a return rate of 98% for beverage containers. The UK has kicked the DRS proverbial ‘can’ down the road and for England, Scotland and Northern Ireland, a scheme is now expected to be implemented in October 2027. Scotland had been paving the way for the rest of the UK but the scheme faced a number of challenges and delays. Those businesses who operate, or who will shortly operate, a deposit return scheme need to be aware of a number of considerations including the VAT and accounting treatment of deposits, and operate systems accordingly.
- In addition to extended producer responsibility obligations, several jurisdictions have introduced a tax on plastic packaging with the aim of reducing plastic waste and encouraging the use of recycled materials. It forms part of the European Union's circular economy action plan and is an area that is likely to see further proliferation globally. Existing regimes will be tweaked to further governments' global environmental commitments. In the UK, the Government has confirmed that businesses will be allowed to adopt a "mass balance" approach to determine the proportion of recycled plastic for the purposes of the tax. This method will enable businesses to track and count plastics recycled chemically rather than just by the traditional mechanical method. This approach has the potential to increase plastic recycling rates, as it allows for more types of plastic to be recycled and to a higher grade, which can be used in food contact packaging, for example.
- We are also seeing the introduction of Carbon Border Adjustment Mechanisms (CBAM, aimed at preventing ‘carbon leakage’ by ensuring the carbon price of imports is equivalent to the carbon price of domestic production. The EU introduced a CBAM from October 2023 and the UK is introducing a UK CBAM to apply from 1 January 2027.
As governments look to tax to help implement environmental change, businesses can do the same. Environmental policy has an increasing role in businesses plans. It is time to consider embedding and aligning tax strategy within business and environmental strategies, which can both bring financial reward and contribute to a business' environmental targets.
If you have any questions or would like to discuss any of these topics and what they mean for you and your business, please get in touch with our Consumer sector and Tax experts.
