Tax policy is essential for carving out a green future post-COVID-19. Peter Reilly outlines four key areas where tax policies can really make a sustainable difference.

Climate change is one of the greatest challenges of our generation, requiring wholescale transformation of every sector of our economy, unprecedented innovation and committed leadership. Tax policy will play a major role in not only influencing behaviour towards a sustainable economy, but also encouraging investment and creating jobs in the right areas while boosting a green COVID-19 recovery. There are four key areas where tax policy can play a critical role in Ireland’s decarbonisation journey:

1. Supporting renewable energy adoption, particularly an underdeveloped offshore sector 

   The Climate Action and Low Carbon Development Bill 2021, once ratified, will put targets including 70% renewable electricity by 2030 and a net zero emissions economy by 2050 on a statutory footing. This target may be further increased to 80%. Offshore wind in Ireland, in particular, is underdeveloped and presents huge potential, including the opportunity for additional capacity to be exported. This, in turn, would directly and positively impact Ireland’s economic prosperity.

   A range of potential tax measures would support the adoption and deployment of renewable energy projects, such as the introduction of capital allowances on grid connection costs. Opportunities are abundant in the areas of investment and divestment of projects, reviewing the R&D tax credit, as well as the cash flow considerations within the VAT and relevant contracts tax regime.   

2. Environmental taxes and incentives 

   Environmental taxes, such as excise taxation, act as a key deterrent to behaviours that are contrary to our climate action goals. On the other hand, environmental tax incentives, such as accelerated capital allowances for energy efficient equipment, are a very valuable cash flow benefit for businesses. 

   Building on the progress made in Budget 2021, the further expansion of existing regimes to support a reduction in greenhouse gas emissions and promote investment in energy efficient equipment by businesses could be a smart initiative. For example, Government could consider extending the Biofuels Obligation Scheme to other sectors where mineral oils are utilised, e.g. to the heating sector where the use of fossil fuels is high.

3. Promoting Ireland as a ‘green finance hub’

   An environmental, social and governance (ESG) focus is propelling growth in the financial services sector. For example, 100% of global asset managers with operations in Ireland (confirmed in a PwC Ireland hosted webcast) that ESG investing will change the global economy in the next three to five years. With over 37,000 people in financial services in Ireland, the sector has the people with the skillset, initiative and drive to position Ireland as the leading international centre for ESG products and investments – a ‘green finance hub’.  

   There are a range of tax measures that could positively impact the establishment of ESG funds in Ireland in addition to measures that would encourage investment from both Irish and international investors in these Irish-based ESG funds. These measures would be subtle, but would be impactful in positioning Ireland as a centre of excellence for ESG innovation.

4. Incentivising positive housing and mobility consumer behaviour
   Despite retrofit grants available, there are many reasons why households in Ireland may be deferring improving their home’s energy efficiency, not least due to the high upfront costs. A focused approach to retrofitting homes (including associated upskilling) would not only stimulate economic activity, but would also help provide for much more healthy, ergonomic and energy efficient workspaces for the new wave of remote workers. Ireland’s approach to retrofitting should be reviewed to include a ‘Help to Insulate’ scheme to incentivise retrofitting properties. 

Further, more specific measures and expansion of existing measures in the areas of tax relief for public transport costs, taxation of hybrids and electric vehicles as well introducing a tax deduction for commuting expenses and reintroducing tax relief for investment in park and ride facilities must be strongly considered by Government.

Peter Reilly is a Tax Policy Leader at PwC. This highlights PwC Ireland’s Green Pre-Budget Submission.