Climate Action Pre-Budget Submission calls for innovative tax measures to support decarbonisation

11 July, 2022

  • Climate action needs to remain on top of the agenda in face of economic uncertainties.

  • Funding, support and education continue to be critical ensuring a Just Transition.

  • Submission sets out the role of private investment and entrepreneurship in funding climate change as part of a collaborative approach.

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The Environmental Protection Agency (EPA) feedback is that Ireland is falling critically short of its emissions reduction target of 51% by 2030. Ireland, along with many countries, has vowed to make significant commitments to achieve net zero carbon emissions by 2050. These efforts need to continue in face of the current uncertainties.

Climate change remains one of the biggest challenges of our generation and needs to be tackled head-on alongside mounting economic risks and a cost of living crisis. Public finances are a critical aspect for funding our National Development, ensuring a Just Transition and stimulus funding of specific projects which support a sustainable future. However, aspects of climate change mitigation will need to be funded by private investment and entrepreneurs that will stimulate activity and develop the green economy. There will also be opportunities for collaboration through public and private partnerships.   

Against this background, PwC today launches its 2023 Climate Action Pre-budget Submission “Keeping the climate challenge in focus” reflecting on progress since last year's Budget and proposing a suite of tax policy measures to keep the climate challenge in focus during unprecedented times. Key proposals are in the areas of infrastructure, investment and entrepreneurship - to help fund climate action - supporting decarbonisation and the environmental taxes and incentives regime. In addition, the Submission sets out key considerations to ensure a Just Transition, focusing on the allocation of carbon tax revenues.  

Launching the Submission, Peter Reilly, Tax Policy Leader, PwC Ireland, stated: “Against a backdrop of a highly uncertain near-term fiscal outlook, high inflation and rapidly increasing cost of living, the overall Budget 2023 package set out in last weeks Summer Economic Statement of  €6.7bn is welcome. However, Government will still have the challenging task on 27 September of balancing the commitment to climate action with the requirement to allocate funding towards cost of living and a myriad of other social, business and economic priorities.

“At the same time, tax policy is a critical lever available to the Government in our fight against climate change. From tax incentives to encouraging investment in particular areas or the imposition of taxes to discourage certain behaviours and fund a just transition for all, a positive change can be influenced throughout society and business. 

“While the impact of COVID-19 and the war in Ukraine have resulted in unprecedented challenges, in light of the impact of climate change on humanity, it must remain at the top of the agenda.

Top ideas

Below are the top ideas in 6 key areas raised in PwC’s 2023 Climate Change Pre-Budget Submission which the Government could add to its selection of measures based on impact and implementation:

Private investment and entrepreneurship in sustainability initiatives

Private investment plays a critical role in financing the transition to a green economy and showing how private finance can fund climate action is a critical part of this Submission.  PwC’s Climate Action Submission focuses on two key sectors - offshore wind and ClimateTech/green technology - requiring substantial private investment and/or will be driven by entrepreneurs:

  • Certainty for investors in and developers of renewable energy in the taxation of investment and divestment.

  • Capital allowances for enhancing our port infrastructure.

  • Improving the R&D tax credit regime to support green innovation and ClimateTech development.

Infrastructure and sustainable living

Tax measures to encourage positive corporate and consumer behaviour in the areas of transport, housing and the transition to Electric Vehicles (EVs):

  • Tax saver scheme for the hybrid worker.

  • Tax relief for financing costs associated with retrofit.

  • Extension of help to buy scheme to include ‘help to insulate’.

A holistic environmental tax and incentive system

The ‘Fit for 55’ package has resulted in significant changes in the approach to environmental taxes, namely the Carbon Border Adjustment Mechanism (CBAM) and changes to the Energy Taxation Directive:  

  • Guidance on the CBAM and the Energy Taxation Directive and their introduction for businesses are urgently needed. 

Establishing Ireland as a ‘green finance hub’

Continue to develop Ireland as an attractive investment location that fosters the growth of sustainable finance and put Ireland on course to be a leading centre for sustainable finance by 2025: 

  • Introduce a preferential rate of income / corporation tax for returns generated from sustainable investment products by Irish tax resident investors.

  • Extend the accelerated capital allowances regime to qualifying expenditure on investment in technology software solutions for ESG data management and reporting.

Decarbonising the Irish aviation industry

Ireland, as a leading centre for aircraft leasing globally and home to Europe’s largest airline, has the opportunity to take a leading role in the aviation sector's journey to net zero:

  • Tax relief for investment into projects working on the development of new Sustainable Aviation Fuel (SAF) technologies.  

  • Extend the accelerated capital allowances regime to apply to energy efficient / sustainable fuel type aircraft.

Ensuring a just transition

Several other areas continue to require attention to ensure a just transition through the allocation of carbon tax revenues and allocation of funding to key vulnerable parts of the economy and society including:

  • Continued focus on the retrofit of social housing and those in danger of fuel poverty.

  • A comprehensive suite of funding and tax measures to support the transition of the agricultural sector. 

  • Continued focus on upskilling and reskilling our workforce to ensure we can support and contribute to the development of the green economy from a labour perspective. 

Rebecca Greene, Energy Tax Policy Leader, PwC Ireland, concluded: “Climate action is not the sole responsibility of any individual or particular group. A collective effort to fundamentally transform our economy and society is needed which also ensures a Just Transition for those most vulnerable. 

“A key plank of our 2023 Climate Action Pre-Budget Submission is to ensure that Ireland is considered a prime location for inward investment while fostering a strong indigenous business sector that is focused on decarbonisation. The key pillars we have highlighted are in the areas of our offshore wind potential, leveraging our wider technology ecosystem, becoming a hub for the development of ClimateTech/Green Tech solutions and promoting Ireland as a hub for sustainable finance.”

“The tax policy measures proposed take a holistic view of the variety of measures that Government could introduce to encourage and incentivise a wide range of businesses, investors and individuals to adopt a more sustainable approach that is aligned with our climate goals and supports a transition to a green economy.”

Please refer below for more details on the specific proposals.

Notes to editors

Details on the proposed measures are set out below:

Infrastructure and sustainable living

  • A more flexible Tax Saver scheme, or a tax credit for employers who buy transport tickets for employees.

  • Tax relief for interest on retrofit loans, incentivising landlords to retrofit rental properties, introducing a ‘help to insulate’ scheme, and stamp duty relief where the retrofit occurs shortly after purchase.

  • Tax relief for interest on EV loans, tax relief for home charging points, and trade-in policies for vehicles in exchange for electric bikes.

Private investment and entrepreneurship

  • Certainty for developers of offshore wind is critical for securing inward investment to Ireland and allowing us to build our infrastructure. The areas in need of focus are the qualifying nature of grid connection costs, the application of participation exemption to pre-trading scenarios, a reintroduction of s468C TCA 97 and the expansion of the exemption for infrastructure projects under the interest limitation provisions. Furthermore, reducing the administrative burden of relevant contracts tax (RCT) and facilitating quicker value-added tax (VAT) refunds would be welcome developments.

  • Ireland is a prime location for the development of ClimateTech companies and we must continue to invest in incentives to support and attract such companies to Ireland. The research and development (R&D) tax credit is one of the most valuable tax reliefs available to this sector alongside the Employment Incentive Investment Scheme (EIIS), which gives tax relief for investment in Irish indigenous businesses.

Establishing Ireland as ‘Green Finance Hub’

  • The introduction of a preferential rate of income / corporation tax for returns generated from sustainable investment products by Irish tax resident investors and reducing the rate of investment undertaking tax (“IUT”) for Article 9 funds. The Irish financial services sector could benefit from significant positive publicity in promoting such initiatives with potentially very little loss of overall revenue to the Irish economy.

  • The introduction of a territorial system of taxation would simplify Ireland’s tax code and ultimately enhance the country’s attractiveness as a destination for investment and as a location for global green / sustainable financing activities.

  • There is an urgent need in the market for the development of software and data gathering systems which support the collection of reliable ESG data. As such, Ireland should consider the extension of the accelerated capital allowances regime to qualifying expenditure incurred by companies on investment in technology software solutions for ESG data management and reporting. 

  • Attracting and retaining local and international senior people with the requisite experience and skills is a necessary step in developing Ireland as a hub for global sustainable financing. In this regard, a new form of tax relief designed to incentivise senior employees of private investment companies to remain in Ireland or come to Ireland is required.

Holistic environmental tax and incentive system  

  • The introduction of CBAM will equalise the cost of carbon between goods produced within the EU and those imported through the purchase of carbon certificates to help pave the way for a low-carbon economy. Guidance on CBAM and its introduction for businesses is needed as soon as possible, so that businesses have sufficient time to assess how they will report the emissions embedded within their products at the beginning of 2023.

  • The Energy Taxation Directive is currently being updated. The proposed recast introduces a new tax rate structure to reflect the energy content and environmental impact of fuels and electricity.

  • Expand the scope of corporate tax deductions to cover carbon offsets in the voluntary sector in line with the definition of carbon offsets in Section 110 TCA 1997. This would limit the relief for the purchase of voluntary carbon credits to those sponsored by the State or other inter-governmental institutions or regulated commercial enterprises. It would also require recognised independent periodic verification, monitoring and reporting. Linking a corporate tax deduction to a requirement to report and reduce GHG emissions should encourage companies to measure GHG emissions in the entirety of their value chain and encourage a change in behaviour which is a critical step in Ireland's decarbonisation journey.

Decarbonising the Irish aviation industry

  • Sustainable Aviation Fuel (“SAF”) is expected to be one core driver of the aviation sector's decarbonisation journey. We propose that tax relief under Section 486B be considered for investment into projects working on the development of new SAF technologies as well as for SAF manufacturing / production projects.

  • In order to ensure that Ireland maximises the opportunity to become an innovation hub for the development of SAF enabling technologies, it is important that Ireland’s holding company regime is equally as efficient as those of our European counterparts.

  • Currently one of the most significant barriers to the use of SAF is cost.  In order to bridge this gap, we propose that a tax credit be provided to Irish distributors / manufacturers of SAF which would be linked to predefined targets (such as GHG intensity reductions), with a higher credit for higher emissions reductions. 

  • In order to support Ireland’s position as a global aircraft leasing hub, we propose extending the accelerated capital allowances regime under Section 285A to apply to energy efficient / sustainable fuel type aircraft.

Ensuring a just transition

  • The National Retrofit Plan is a key element of the Government’s plans for economic recovery. The significant budgets now provided for retrofit will help stimulate the creation of high-quality jobs and support the development of supply chains for associated products and services.

  • We expect this area to receive substantial funding to support the transition as employment and upskilling are critical in meeting our emissions targets and moving to a green economy. Small- and medium-sized enterprises (SMEs) are the backbone of the Irish economy and key enablers of climate action in Ireland.

  • The transition for the agricultural sector is a critical aspect of Ireland’s transition due to our reliance on the sector for economic, societal and cultural reasons. A comprehensive suite of funding and tax measures are needed to support and manage this transition.

  • Ensuring the greatest possible levels of community ownership in all future renewable energy projects by encouraging communities to develop their own projects and requiring that developer-led projects make share offers to communities to encourage greater local involvement and ownership.

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