Taxing the way to a greener future

2 mins read

Denise Hatem, Regulatory Counsel at Sovos, explores what manufacturers need to know about new EU climate policies

In recent years, sustainability and environmental concerns have been surfacing in board-level conversations and have become a high priority for governments, manufacturers and corporations alike. Taking the matter seriously means integrating conscious decisions into policy-making, and there’s movement on this across Europe.

The European Commission has devised a European Green Deal aiming for all member states to be carbon neutral by 2050 – an ambitious target, but achievable by creating a sustainable economy. Lofty goals like these reflect the urgency of developing trade processes that account for emissions reductions, and legislation is a great way to enforce this change in thinking from the top down. The question is, what does this mean for manufacturers engaged in cross-border trade?

Going green

Before examining the specifics of cross-border taxation, it is worth contextualising this within the wider conversation. A set of proposals have been launched under what’s called the European Green Deal, outlining tangible steps in EU trade becoming more sustainable and meeting the global climate objectives of the Paris Agreement. A CBAM (carbon border adjustment mechanism) tax reform has been underscored as a key priority, so it is crucial internationally operating manufacturers are aware of this drive to incentivise sustainable behaviour.

It’s clear there will be far-reaching adjustments beyond the carbon tax, though. The deal has the scope to change current rules, allowing governments to flexibly apply reduced VAT rates on more goods and services. By maintaining only a fixed list of items (alcohol, tobacco etc.) under standard rates, governments have greater freedom to apply reduced rates to a broader selection of products and services. This means increased flexibility, as a reduced rate can be applied to anything outside the standardised list, open to interpretation. Arguably, this loosened approach will encourage more sustainable trade, supporting distribution of perishable goods or time-sensitive manufacturing supply chains as just two examples.

Reducing carbon leakage

As of July 2020, the European Commission opened a public consultation on a CBAM to maximise the impact of tax in meeting the EU’s climate goals. In practice, a CBAM would reduce the risk of carbon leakage, which occurs when production is shifted to countries with less robust climate policies, by ensuring import prices reflect carbon content. This initial proposal is intended to maximise the impact of tax in achieving climate policies by preventing businesses from relocating production to countries with less ambitious targets.

That said, there are a few options currently under consideration. One is the aforementioned carbon tax (e.g. excise or VAT type) at consumption level on a selection of products whose production is in sectors that are at risk of carbon leakage.

It could also take on other forms such as:

  • A new border tax
  • Customs duty on certain carbon intensive products
  • An extension of the EU Emissions Trading System (ETS) to imports
  • An obligation to purchase carbon allowances from a specific pool outside the ETS dedicated to imports

With a lengthy consultation expected, and any rules needing to comply with existing World Trade Organisation (WTO) rules, a definitive approach might not be in sight just yet. However, proactivity is needed to futureproof against eventual legislation changes. A complete overhaul could be on the horizon, so firms must build this into their planning.

The neutral ambition

Compliance is front of mind and should stay that way when it comes to trade. With policy changes on the horizon, equipping your business with a transparent evidence trail will spare any audit nightmares further down the line and make best use of tax benefits that may be implemented. The pandemic has inadvertently presented an opportunity for us to reconstruct our economies in a way that reduces our carbon footprint and drives us towards a more sustainable future of commerce. Infrastructures are changing to support this paradigm shift.

The ambition is clear. As conversations progress, impact assessments of any changes will be performed and green legislation will increasingly come into focus.