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What will Budget 2022 mean for climate action?

27 September, 2021

Budget 2022 presents an opportunity to allocate resources and funding to support Ireland achieve its ambitious green targets.

Given the scale of decarbonisation required, and the significant action being taken at an EU and domestic level with various key climate action reports, we hope to see a variety of measures introduced. These include measures to support a progressive tax regime for the renewable energy sector, additional tax incentives to encourage positive corporate and individual decision making in the areas of capital investment, retrofit, electric vehicles and mobility. Finally, enhancing Ireland's reputation as a 'Green Finance Hub' and building on its existing reputation as a leading global international financial centre will be key in Budget 2022.

A landscape photo of wind turbines dotted across the horizon with contrails streaked across a semi-cloudy sky.

Key ideas for a more sustainable future:

  • Consideration should be given to the investment and divestment landscape for the renewable energy sector including, but not limited to, relief for investment or divestment, interest relief on debt, R&D tax credits and capital allowances.
  • At the corporate level, in order to help maximise cash flow and support further renewable energy projects areas such as VAT, RCT and pre-trading expenditure should be enhanced to support the wider decarbonisation journey required.
  • A review of the regime for Accelerated Capital Allowances would ensure a greater take up of the relief and there are a number of ways in which the relief can be easily enhanced.
  • Introduction of incentives to encourage homeowners to invest in improving the energy efficiency of their homes such as relief for retrofit costs, CGT relief and reduced stamp duty for properties with reduced BER ratings.
  • A continued focus on support to encourage the transition to electric vehicles (and hybrid vehicles in the interim) and electric bikes would be welcomed given the scale of change required here is substantial.
  • Finally, tax measures relating to the use of public transport which complement the change in working to a hybrid model for companies and individuals would positively contribute to our decarbonisation journey.

With the backdrop of the 'Fit for 55' release and the upcoming UN Climate Change Conference of the Parties (COP26) in Glasgow in November, Ireland will be required to intensify its focus on decarbonising its economy and decoupling emissions growth from economic growth as we recover from the COVID-19 pandemic. The reality of climate change is increasingly visible and is clearly set out in the findings of the August United Nations Intergovernmental Panel on Climate Change (IPCC) report which outlines the grim reality of what we face globally.

Budget 2022 is the first key and instrumental step that the Government will need to take in order to achieve its commitments under the recently enacted Climate Action and Low Carbon Development Act 2021. The next number of years will require carefully balanced tax and policy measures which support our decarbonisation journey while at the same time ensuring a just transition and supporting continued economic growth. Specifically;

  • The Government's commitment to increase carbon tax to €100 per tonne by 2030 will need to be tempered with measures to ensure it does not result in increased levels of fuel poverty.
  • The Government will be under increased pressure to be transparent regarding the use of funds collected through carbon tax to show the monies are being ring-fenced and reinvested in decarbonising the economy, to achieve the so-called 'double dividend' effect.
  • A suite of policy and legislative measures are required for Ireland to fully develop its renewable energy sector, particularly in the underdeveloped areas of offshore wind and green hydrogen.
  • A balancing act also will be required in managing calls for increased investment in housing and retrofitting older buildings given the shortage of qualified workers in the industry as highlighted by the Climate Change Advisory Council.

Strong focus and support on specific areas like the renewable energy sector, retrofit sector, sustainable agriculture, in addition to public transport, broadband and EV infrastructure, amongst others, will pave the way to a net zero future. It is critical we invest in these areas now to support this transition.

Our pre-budget submission outlined a broad range of tax measures where tax can be a key lever in our decarbonisation journey. While there are a variety of tax measures that could be implemented, no single Budget will implement the required changes. However, over the next number of years, we can expect to see an increased focus on green tax measures and funding of green initiatives from tax revenues.

Some key tax measures worth highlighting which we hope will feature in Budget 2022 are:

  • Tax measures which positively support the investment and divestment landscape for the renewable energy sector including, relief for investment or divestment, interest relief on debt, and capital allowances.
  • An extension of the scope of the R&D tax credit to include innovation in the area of sustainability, or clarification through existing guidance on the inclusion of sustainability R&D, would be welcomed. Significant investment is required to help 'seed' innovation in the areas of offshore wind and green hydrogen for example. Such innovation should qualify for relief via the R&D credit and/or intangible capital allowances.
  • In order to maximise cash flow for the renewable sector:
    • Timing of VAT returns or reclaims and a temporary zero rating of VAT on inputs for companies in the development or construction stage;
    • The easing of RCT administration for new entrants; and
    • The extension of the time period relating to pre-trading expenditure and ability to monetise losses.
  • A review of the regime for Accelerated Capital Allowances including widening the scope of qualifying assets and simplifying the current scheme.
  • The introduction of incentives to encourage individuals to invest in improving the energy efficiency of their homes such as a 'help to insulate' regime, tax credit for retrofit costs, CGT relief and reduced stamp duty for properties with improved BER ratings.
  • A continued focus on initiatives to encourage the transition to electric vehicles (and hybrid vehicles in the interim) and electric bikes would be welcomed as the scale of change needed here is substantial.
  • Finally, tax measures relating to the use of public transport which complement the change to a hybrid working model would contribute to our decarbonisation journey.

While we don't expect substantial changes with regard to promoting Ireland as a 'Green Finance Hub', it is another key economic pillar for Ireland given our reputation as a leading global international financial centre. By incorporating changes into our domestic tax regime and future tax legislation (notably the ATAD Interest Limitation Rules), Ireland can continue to attract key talent and boost its image as a centre of excellence for sustainable finance.

Overall, we hope to see extensive green tax measures and associated funding in Budget 2022 as we all work towards a green recovery and a more sustainable future.

We are here to help you

PwC's energy and sustainability tax team have many more ideas applicable to everyone from renewable energy developers, investors, large multinationals to the individual homeowner.

We are here to help and support you in your sustainability efforts. Contact us today.

Contact us

Marie Coady

Partner, PwC Ireland (Republic of)

Tel: +353 1 792 6810

Colm O'Callaghan

Partner, PwC Ireland (Republic of)

Tel: +353 1 792 6126

Rebecca Greene

Director, PwC Ireland (Republic of)

Tel: +353 1 792 5059

Catherine Murray

Senior Manager, PwC Ireland (Republic of)

Tel: +353 87 146 8489

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