How tax can tackle the climate emergency
George Bull, senior tax partner at RSM, believes the tax system can be used to change the behaviour of individuals and businesses in ways that would help preserve this planet instead of destroying it.
George Bull spoke to AccountingWEB’s consulting tax editor Rebecca Cave about his climate change concerns and how tweaking existing tax rules could make a real difference.
Rebecca Cave (RC): Why are you so passionate about the issue of climate change?
George Bull (GB): I have always been interested in how our planet was formed and how it continues to change. I studied geology at university, but somehow my career diverted into the intellectually challenging world of finance and tax.
Now my two interests are coming together. In April 2019, bank CEOs were questioned at the House Financial Services Committee in Washington DC. They were asked whether they believed climate change is a serious risk to the financial system, not only the planet. I whole-heartedly agree with James Gorman, CEO of Morgan Stanley, who replied: “if we don’t have a planet, we are not going to have a very good financial system”.
RC: So how should governments go about changing the tax system to help tackle climate change?
GB: There needs to be a shift in the basis of some taxes, from taxing money to taxing carbon. This is was highlighted in the OECD report published for the UN Climate Summit, which said too many energy users do not pay the energy and carbon taxes needed to curb dangerous climate change. The evidence shows that tax structures are poorly aligned with the pollution profile of energy sources.
The OECD also notes that well-designed systems of energy taxation do encourage citizens and investors to favour clean over polluting energy sources. Fuel duties and carbon taxes are simple and cost-effective tools to limit climate change, but the politics of carbon-pricing often prove challenging. Taxes on energy use can also contribute to reducing health damage from pollution.
RC: Fine words, but what can actually be done in the UK?
GB: We need to start with taxes on-road fuel. The government has frozen fuel duty since March 2011, when it could have been using the potential of this duty to reduce CO2 emissions and harmful NOx emissions.
If the Chancellor of the Exchequer reduces fuel duty in his forthcoming Budget this would be a dire warning that the UK government is not serious about the climate emergency. It would also willfully disregard the fact that using taxes for climate action does raise revenues – unlike most other climate policy decisions.
RC: Road-fuel taxes are very politically sensitive, are there other things the government could do without upsetting voters?
GB: Yes, only 15% of energy-related CO2 emissions in the world are from road traffic. Emissions from international aviation and maritime transport are not taxed at all. The UK could act in these areas, but it would be more effective if there was an international approach. While the UK is a member of the EU it participates in the EU Emissions Trading System, but much more could be done.
RC: Electric cars are often held up as a way in which individuals can do their bit to help reduce emissions, but is that really true if most electricity they use is generated by burning coal?
GB: The key tax tool here is VAT. Currently, two different rates of VAT are charged on the consumption of electricity: 5% for domestic and charity use, and 20% for business use. The VAT charge applies whether the electricity is generated by the burning of fossil fuels, by hydro, wind, solar or nuclear.
If lower rates of VAT are applied to electricity generated from renewable sources, this would effectively put a surcharge on the use of fossil fuels and would help direct private and public resources towards the development of new clean technologies.
RC: I love that idea but hasn’t there recently been a change in the VAT law which actively discourages the installation of solar panels and wind turbines?
GB: You are correct. For years, the UK has applied VAT at the reduced rate of 5% on the installation of domestic energy-saving materials including solar panels and wind turbines. However, from 1 October 2019, the VAT rate on the installation of wind turbines and water turbines for domestic use is to be increased from 5% to 20% as a result of a European court decision. The VAT rate chargeable on the installation of solar panels will also rise to 20% in most cases.
Once the UK has left the EU the Treasury will be free to reduce the applicable VAT rate to 5% or less as the EU legislation limiting the VAT rate will no longer apply in the UK.
RC: What are the chances of such tax changes being made?
GB: It is totally possible for the government to use the tax system as one of the most powerful tools at its disposal to change behaviours, and thereby reducing greenhouse gas emissions as part of its commitment to address the climate emergency. It is also not possible for the Treasury to argue that it will all cost too much.
It all boils down to political willpower and courage.