Enabling a just transition: the vital role of tax policy

Tax policy plays a pivotal role in fostering a just and sustainable energy transition. Drawing on empirical evidence and practical insights, in two reports we describe how the strategic use of tax measures can aid communities and enterprises in embracing the change.

Enabling a just transition - Why tax policy has a vital role to play

Based on empirical evidence and independent research, this paper explains how revenue recycling mechanisms – incorporated into tax policies – are key to achieving a just transition.

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Four keys to tax policies that gain support from business for a just transition

Drawing on PwC’s experience advising thousands of companies, we provide practical insights on tax policies that will encourage companies to fully engage in a just energy transition.

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The global transition to net zero will result in considerable social and economic transformation. As the world shifts from fossil fuels, people and businesses will have to navigate to a different economy. Tax policy can help facilitate that transition by ensuring stakeholder support.

If we’re to limit global warming to meet the targets set by the Paris Agreement, economies around the world need to accelerate their efforts. But to succeed, decarbonisation initiatives worldwide will have to be sustainable, with real societal buy-in.

Tax policy tools that assign economic value to environmental pollution and emissions such as carbon prices, including taxes on greenhouse gas emissions, are key for modifying behaviour. But because they can impose asymmetrical costs on particular parts of society and/or geographical areas, they can make this societal buy-in harder to achieve.

Ensuring a ‘just transition’ requires taking action to create an energy transition that is fair, inclusive and beneficial – compensating affected people and communities and ensuring the long-term support of society as a whole.

So how can this be achieved?

Drawing on empirical evidence and extensive, independent academic research, we’ve identified the role that tax policy can play in delivering this just transition – one that incentivises emissions abatement as well as cushioning the economic impact on affected parties.

Central to these tax policies would be revenue recycling mechanisms that mitigate the negative impacts of the energy transition. Our research points to three key mechanisms:

(i) Lump-sum transfers
(ii) Targeted transfers and
(iii) Reductions in labour/capital taxes.

The good news is that each of these three mechanisms is available, tested and ready to be applied. How this happens in individual countries/regions will, of course, depend on the priorities of policymakers and the challenges they face.

Across the world, governments are developing and enacting tax policies designed to encourage companies to support a just transition to a lower-carbon economy. Through PwC’s work advising thousands of companies, we have gained deep insight into how business leaders across the world are responding to these policies. We interviewed 40 PwC tax partners and experts on six continents to explore how tax policies are affecting decision-making in boardrooms.

We identified four keys to effective policies. They should:

1. Create a business case for action
2. Offer certainty
3. Be built on collaboration and
4. Compliance needs to be achievable and worthwhile.

In our report, we explore each of these four key attributes in turn, offering numerous examples of policies from across the world.

No matter where you might be on your net-zero journey – whether you’re a policymaker or a sustainability leader – we hope our research and experience can support you as you map out processes and strategies for achieving the energy transition.