Tax incentives and sustainable development

My website has a tag “sustainable thinking in tax” and I’ve published a blog about what I mean by this phrase. I was struck at the Chatham House launch of “Resources Future” on June 3, by some comments by HSBC on tax incentives.

The question posed was why do we continue to maintain tax incentives which do not complement policies for sustainable growth and development? Now this is a very profound question.  For some time I (and others) have argued that tax policy should be a facilitator of growth and that the design of tax systems should be judged by this criteria.  I would now argue that this needs to be refined and redefined: tax policy should be a facilitator of sustainable economic growth and this means growth in an economy which values environmental costs and which is transitioning to a low carbon and resource efficient economy. I’m very grateful that Theo Keijzer at ICC has recognised this and given me responsibility for Environmental Tax and Sustainable Development on the ICC Tax Commission. A key part of this role will involve the interface with the United Nations Environmental Programme (UNEP).

Now the scale of the transition to a low carbon resource efficient economy is very large and is compounded by the challenges posed by growth in Asian and Southern economies,so considerable thought has to be given to the form and the pace of transition. However, to continue with tax incentives which actively work against this trajectory makes no sense. Here, I am not talking about subsidies for fossil fuels specifically but more broadly.

Tax incentives for investing in pensions and tax favoured saving schemes are a good example. Governments “spend” large sums each year by providing this tax relief (in giving up tax revenues). In their various forms these are tax incentives, but they do not align with sustainable development as the incentive allows investment in sustainable and non-sustainable activities.
There are plenty of other examples. The OECD has catalogued subsidies for fossil fuels, I would suggest that if it is serious about the transition to a low carbon, sustainable economy it needs to cast its net wider in its review of tax incentives or subsidies and focus on their complementarity to sustainable development and growth.

The word transition is key. We need a long term plan with well thought out transitional measures to avoid dislocation (particularly if the transition is not under a global plan – which looks unlikely) and which is cognisant of the competitive effects. That need for thought means this is an urgent process, rather than a process which requires urgent action with the risk of un-intended consequences.

I manage a small wood in Wiltshire in southern England. At a Forestry Commission seminar last week, they focused on climate change impacts on choice of trees to plant. Given that a tree takes 50 years to mature, they mapped what the climate of Wiltshire would be in 2050, the government prognosis was that it would be the equivalent to Southern Italy today, in 2080 northern Greece! As a result one needs to think about which tree species will flourish in those circumstances. Part of my wood was planted in 1800 and has survived to date using native UK species, the prospects going forward are more challenging.

What forestry focuses on is long timescales. For the wider economy, sustainable development and growth is going to pose some major challenges over long timescales. Business as usual will not be enough. Tax incentives should not be immune from the changes we face, we need to recast them in line with sustainable development goals.

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