Achieving net-zero climate goals requires significant private sector investment in clean technologies. Corporate income tax (CIT) design affects private sector investment and thus warrants consideration in the context of climate policy. This paper presents a conceptual framework outlining key channels through which CIT influences clean investment decisions and broader factors that mediate this relationship. It also identifies policy implications and potential policy options to enhance the alignment of CIT with climate policy objectives.
The challenge of climate change demands rapid and substantial reductions in greenhouse gas (GHG) emissions to achieve net-zero targets. A significant portion of these reductions relies on the widespread adoption of emissions-reducing technologies, necessitating substantial investments. The energy sector, responsible for approximately three-quarters of global GHG emissions, is central to this transition. It is estimated that global annual energy investments must increase from 2.5% to 4.5% of GDP by 2030, reaching USD 5 trillion annually, to meet net-zero emissions by 2050. While the public sector plays a vital role, the majority of this investment must come from the private sector. These investments span a wide array of technologies, from efficient lighting and solar photovoltaics to large-scale industrial projects like green hydrogen plants and electric arc furnaces.
The industrial sector also plays a crucial role, with manufacturing and construction accounting for 38.0% of global CO2 emissions in 2021. Emissions intensity varies significantly among firms, even within the same industries and countries. For instance, the emissions intensities of firms in the top 10% of their country and industry distribution are six times those in the bottom 10%. In steelmaking, emissions intensity can vary by a factor of fifteen across plants. These disparities highlight the need for targeted strategies to decarbonize various industrial activities.
The transportation sector is another key contributor to global CO2 emissions, accounting for 23.4% in 2021. Efforts to decarbonize energy generation include the electrification of transport and heating systems. Additionally, residential buildings accounted for 17.6% of global CO2 emissions in 2021, emphasizing the need for energy efficiency investments across all sectors.
Achieving these ambitious climate goals necessitates a thorough understanding of the factors that influence clean investment. Corporate income tax (CIT) systems play a crucial role in shaping investment decisions, including those related to climate change mitigation.
CIT can affect clean investment in both intended and unintended ways. Baseline CIT provisions can influence private investment in clean technologies, and the impact of CIT can vary across different clean investment projects due to differences in asset and firm characteristics. Factors such as profitability and access to tax incentives can lead to variations in effective tax rates for different firms and projects.
Many countries employ corporate tax incentives to stimulate investments in climate change mitigation. These incentives can take various forms, including income-based incentives like reduced tax rates or exemptions, and expenditure-based incentives such as deductions for capital costs, accelerated depreciation, and tax credits. While tax incentives can be effective in attracting investment, their success depends on careful design and implementation. Poorly designed incentives can lead to limited effectiveness, windfall gains for projects that would have occurred anyway, reduced revenue, economic distortions, and increased administrative costs.
The interplay between CIT and climate policy is multifaceted. Effectively aligning CIT with climate policy objectives requires careful consideration of several factors:
Screening CIT for obstacles to clean investment: This involves identifying and removing factors that discourage clean investment, such as distortions within baseline CIT systems and tax incentives that favor emissions-intensive activities.
Evaluating the role of baseline CIT reform in climate change mitigation: Reforming CIT systems to incentivize investment can boost clean technology investment while minimizing economic distortions and administrative costs, particularly in the presence of strong climate policies.
Carefully considering CIT incentives for clean investment: While these incentives may be justified, policymakers must weigh the trade-offs, complexities, potential risks, and costs, ensuring regular review and reform.
The design of corporate income tax has a significant impact on private sector decisions to invest in clean technologies.
 systems impact private sector investment in clean technologies critical for achieving net-zero goals. It explores policy options and reforms to better align CIT with climate policy objectives.){kind=link}