Tax policy is a critical lever available to the Government in our fight against climate change. Tax incentives to encourage investment in particular areas or the imposition of taxes to discourage certain behaviours and fund a just transition for all are critical aspects of tax policy in this context.
Against a backdrop of high inflation and the rapidly increasing cost of living, the Government has the challenging task in Budget 2023 of balancing our commitment to climate action with the requirement to allocate funding elsewhere in the economy.
However, critically, the impact of climate change on humanity will eclipse everything that has come before it so it must therefore remain at the top of the agenda.
In the period since Budget 2022, there has been a variety of positive developments that have either turned Ireland's commitment to decarbonisation into action or signed Ireland up to international commitments and agreements, such as those entered into as part of COP26. While the strategies and pathways are set for our 2030 targets, the implementation and action of these plans will ultimately determine our success or failure.
Following on from our detailed pre-Budget submission last year, this document highlights ideas the Government could add to its suite of potential tax measures, supports and/or funding to further support Ireland's decarbonisation journey.
Developing infrastructure across transport, housing, energy and electric vehicle (EV) charging, in addition to encouraging green corporate and consumer behaviour, will be crucial to Ireland's transition to a more sustainable economy.
Public finance will not be sufficient to enable Ireland to meet its climate targets by 2030. Private investment plays a critical role in financing the transition to a green economy and the EU sustainable finance agenda ensures that it plays a central role in meeting our climate goals. We focus on two key sectors; offshore wind and ClimateTech/green technology.
Each of which forms an economic pillar for our future green economy and requires substantial private investment and/or will be driven by entrepreneurs.
While climate change poses significant risks and challenges, there are also many opportunities. The Irish financial services sector is well-placed to be a key enabler in the net zero transition and to drive the change needed to deliver a more sustainable future. It is vital that Ireland continues to develop an environment that fosters the growth of sustainable finance and puts Ireland on course to be a leading centre for sustainable finance by 2025 (as set out in Ireland's Sustainable Finance Roadmap).
Environmental taxes can act as a key deterrent and carbon tax is Ireland's most substantial environmental tax. It is legislated for up to 2030, when it will reach €100 per tonne. The application of these revenues is critical to a Just Transition. More broadly, the adoption of measures introduced at an EU level, namely the Carbon Border Adjustment Mechanism (CBAM) and the revisions to the Energy Taxation Directive, will provide much-needed certainty to impacted businesses. There also continue to be opportunities for improvements or extensions to the accelerated capital allowances regime.
The aviation industry has committed to achieving net zero by 2050 through the International Air Transport Association (IATA). Ireland, as the 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. The scale of change and innovation required to arrive at commercially viable solutions to achieve net zero is arguably the industry's biggest challenge. With the right support in place, Ireland is well-positioned to play a significant role both on a domestic and global scale.
Ireland is set to receive up to €84.5 million from the EU Just Transition Fund between 2021–2027. The Government will complement this funding with Exchequer resources. As carbon tax is on an upward trajectory until 2030, revenues generated will continue to be reinvested in ensuring a Just Transition. In response to the Russia/Ukraine war and the resulting energy crisis, the Government recently introduced a suite of targeted and universal supports focused on fuel poverty, which are welcome and needed at this time. Several areas continue to require attention to ensure a Just Transition.
Tax measures to encourage positive corporate and consumer behaviour in the areas of transport, housing and the transition to EVs could include:
The offshore wind sector and ClimateTech/green technology sector will be key pillars for our transition to a green economy. It is critical that we unlock our potential in these areas:
As a hub for global green/sustainable financing, Ireland is uniquely placed to help drive the flow of private capital towards greener and more sustainable projects on a global scale. To further boost Ireland's position as a centre of excellence for sustainable finance, Ireland should consider the following:
The 'Fit for 55' package has resulted in significant changes in the approach to environmental taxes, namely CBAM and changes to the Energy Taxation Directive:
Consideration could also be given to expanding the scope of corporate tax deductions to cover carbon offsets in the voluntary sector. 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.
As the leading centre for aircraft leasing globally and home to Europe's largest airline, Ireland has the opportunity to take a leading role in the aviation sector's journey to net zero. Aviation is a hard-to-abate industry, meaning that the transition to carbon neutrality is critically dependent on actions taken today. Sustainable aviation fuel (SAF) is expected to be one core driver of the aviation sector's decarbonisation journey.
In pursuing a just transition, some areas we expect or hope the Government to address in Budget 2023 include:
Our energy and sustainability advisory and tax practices are here to assist you with any aspect of your journey towards a more sustainable and decarbonised future. Contact us today.