Review of some climate-related tax changes announced for 2023 -Part 1

As you may know, the taxation world is trying to do its part in the general mobilization of multilateral and state efforts to prevent the planet from overheating.

The following article is a review of tax-related measures announces by governments and economic sectors in the coming year of 2023: Starting with the European Union, which is currently the most active in taxation measures related to climate.  In this first part, we present the updates for the countries that are part of the G7.

The G-20 related measures and the developing countries will be presented in other parts of this series. In 2022, the feared Russia-Ukraine conflict has seriously affected the works of the G-20. For the developing However, the Climate summit COP 27 in Egypt has included in its conclusions a financial mechanism by which the developing countries with low emissions victims of the climate crisis can expect a compensation or indemnification funding, whose implementation is still pending.

The rise in the cost of living in many countries has certainly delayed the public action on climate in some countries, but the worsening of the climate conditions creates a clear tension between the long-term bold measures needed and the urgent needs of the countries trying to recover from the pandemic.

EU Legislation: European Green deal and Energy Tax Directive (ETD)

The European Union has set a binding target of achieving carbon neutrality by 2050. In this sense, the European commission has released the “FIT for 55 packages”. Fit for 55 refers to the EU’s target of reducing net greenhouse gas emissions by at least 55% by 2030​. The proposed package aims to bring EU legislation in line with the 2030 goal.

As part of the Fit for 55 Package, the European Commission has proposed to revise the Energy Tax Directive (ETD) to better align the Directive with EU climate action goals. The main points of the revision are the following:

  • Minimum rates based on energy content and environmental performance rather than volume.
  • Fossil fuel subsidies are to be phased out over a ten-year period from 2023 – 2033.
  • The tax base will be broadened via the inclusion of new fuels such as biofuels and hydrogen.

Carbon border adjustment Mechanism (CBAM)

This week of December 12, 2022, the Council and the European Parliament have reached an agreement that needs to be confirmed by member states before it is final. It is designed to address the greenhouse gas emissions embedded in certain goods when imported into the customs territory of the Union. It seeks to encourage the trade partners in the world to join the EU’s climate efforts. It will cover products in the most carbon-intensive sectors such as iron, steel, cement, electricity and will begin to operate in October 2023.

Initially, it will apply only with reporting obligation. It will gradually replace the existing EU mechanism to address the risk of carbon leakage. (Carbon leakage occurs when there is an increase in greenhouse gas emissions in one country because of an emissions reduction by a second country with a stricter climate policy).

The EU- ETS (European Union Emission Trading Scheme), is still operating, starting its phase 4. In 2022, its carbon price per ton has decreased from an average of 90 euros/ton to an average of 70 euros, because of the war in Ukraine [1]

Main Source: Press release on EU Climate Action and CBAM,

Canada

Updated federal carbon price, reaching $170 in 2030

Carbon pricing in Canada is implemented either as a regulatory fee or tax levied on the carbon content of fuels. Provinces and territories of Canada are allowed to create their own system of carbon pricing if they comply with the minimum requirements set by the federal government; individual provinces and territories thus may have a higher tax than the federally mandated one but not a lower one. Currently, all provinces and territories are subject to a carbon pricing mechanism, either by an in-province program or by one of two federal programs

In December 2020, the federal government released an updated plan with a $15 /t per year increase in the carbon pricing, reaching $95 /t in 2025 and $170 /t in 2030

For the year 2023, the minimum carbon pollution price will be $65/ton, and $80 in 2024 [2]

From these figures, we can notice that the Canadian prices and the European prices are broadly at the same levels.

United States:

There is no federal carbon-pricing system in the USA, but in August 2022, the successful approval of Inflation Reduction Act includes important climate-related policies that may help to achieve important reduction in the U.S. carbon emissions. It will invest $391 billion in provisions relating to energy security and climate change. This includes $270 billion in tax incentives and $27 billion for a green bank created by amending the Clean Air Act. The summary provided by Senate Democrats identifies primary goals as driving down consumer energy costs, increasing energy security, and reducing greenhouse gas emissions.[3]

The largest allocation areas are: $128 billion for renewable energy and grid energy storage, $30 billion for nuclear power, $13 billion for electric vehicle incentives, $14 billion for home energy efficiency upgrades, $22 billion for home energy supply improvements, and $37 billion for advanced manufacturing. Additional measures includes investments in rural economies, racial justice in farming, forestlands and coastal habitats, tax incentives for installing carbon capture and storage at existing power plants, electrifying the USPS fleet,   investments in sustainable aviation fuel, grants for high voltage electric power transmission and decarbonization of port equipment, garbage trucks, and requirements that the government reduce embedded emissions in its procurement process.

 According to the Climate Tracker[4], this program “sets the country’s emissions on a trajectory toward meeting its climate commitment to cut greenhouse gases (GHG) emissions in half by 2030, below 2005 levels, but more action is required to get there. The IRA marks a radical shift in US climate action and, by putting emissions firmly on a downward trajectory, it sends a global signal that the world’s largest historical emitter is now beginning to meet its responsibilities”.

Japan

As the sole Asian member of the G7, Japan’s has an opportunity to provide pivotal direction for the supply of climate finance and access to future-proof technology to support the transition efforts that are underway in the region. However, currently Japan is delaying plans to revise how it taxes carbon, the Nikkei newspaper reported, potentially slowing efforts to wean itself off fossil fuels.

The government will postpone the introduction of a new carbon tax that was planned for the fiscal year starting April 2023. Policy makers decided it would add to already surging living costs, it said.

According to the Climate action tracker, one new policy that may contribute to significant additional reductions, though its effects would only take place in the long-term, is the revision of building standards by which all new houses and buildings will need to comply with upgraded energy efficiency standards from 2025 onwards. Additionally, the Tokyo Metropolitan Government plans to mandate majority of new houses and buildings in Tokyo to install solar panels from 2025. [5]


[1] Source: Press release on EU Climate Action and CBAM,

[2] Source:  https://www.canada.ca/en/environment-climate-change/services/climate-change/pricing-pollution-how-it-will-work/carbon-pollution-pricing-federal-benchmark-information/federal-benchmark-2023-2030.html

[3] Source: https://www.crfb.org/blogs/cbo-scores-ira-238-billion-deficit-reduction

[4] Climate Tracker: https://climateactiontracker.org/countries/usa/

[5] https://asia.nikkei.com/Spotlight/Environment/Climate-Change/Japan-shelves-carbon-tax-as-energy-prices-soar

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Disclaimer. Readers are informed that the views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author's employer, organization, committee or other group the author might be associated with, nor to the Executive Secretariat of CIAT. The author is also responsible for the precision and accuracy of data and sources.

1 comment

  1. John Woodworth Reply

    China and India??

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