The government needs to review tax policy to encourage investment in net zero projects, including specific tax breaks and capital allowances
The independent review of net zero, the Mission Zero report, is calling on the Treasury to review by the end of 2023 how tax policy incentivises investment in decarbonisation, including via the tax system and capital allowances.
The Department for Business (BEIS) and the Treasury also need to review how to incentivise greater research and development (R&D) for net zero, including considering the role of clarity on research priorities and government support, tax credits, greater ring-fencing of R&D spend, and enabling regulations.
The report also said that the Treasury should consider a successor to the super-deduction tax relief with a focus on increasing investment in low-carbon technologies as the super-deduction is due to end in March 2023.
The review criticised the approach of levying policy costs and taxes onto electricity bills keeps the price of electricity artificially high and can stifle the signal for the use of low-carbon technologies.
The 2023 consultation on the long-term tax treatment of the North Sea must include an option to create a hypothecated net zero fund.
Dependent on the response to the consultation, by the end of 2026, the Treasury should set out a long-term plan for replacing the energy profits levy with a ‘Net Zero Fund’ that clearly ringfences revenue for investment into clean offshore technologies and/or energy efficiency improvements.
‘The government should target easy to access, high leverage financial incentives: for example, tax relief for businesses using low carbon technologies in operations. Unlike R&D tax reliefs, the focus would be on the application of low carbon technologies that advance the net zero transition,’ said University of Derby Business School.
In the UK, some tax measures are already in place to support the decarbonisation journey to net zero by influencing business and consumer decisions. These currently target the power sector via carbon price support, broader business energy efficiency via the climate change levy and climate change agreement joint incentives, and the waste sector via the plastic packaging tax, landfill tax and aggregates levy. A net zero tax audit would help to ensure that the taxes not defined as ‘environmental’ also support the transition.
Chair of the Net Zero Review, Chris Skidmore MP, said: ‘We should be proud of the lead the UK has taken in tackling climate change, having exceeded expectations so far in our race to net zero emissions by 2050. As essential as that is environmentally, it also puts us at an economic advantage globally.
‘In developing this report, we have engaged with communities, economists and climate experts from across the country through more than 50 roundtables and 1,800 submissions – all of which have led to the Mission Zero findings.’
The Mission Zero proposals include:
- backing business – reviewing incentives for investment in decarbonisation, including via the tax system, and launching a Help to Grow Green campaign offering information and advice to small businesses so they can plan ahead;
- backing local action – reforming the planning system to put net zero at its heart nationally and locally, and backing at least one Trailblazer Net Zero City, local authority and community that can work towards reaching net zero by 2030;
- delivering energy efficient homes – including legislating for the Future Homes Standard so that no new homes will be built with a gas boiler from 2025, adopting a 10-year mission to make heat pumps a widespread technology in the UK; and
- using infrastructure to unlock net zero – including developing a cross-sectoral infrastructure strategy by 2025 to support the building and adaptation for new green energy sources such as hydrogen to support the green economy.
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