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How the UK Government should use tax reform to achieve the targets set in the COP 26 Conference

The United Nations global climate summit COP26 in Glasgow this year ended with an agreement among nearly 200 nations to accelerate the fight against the climate crisis and to commit to tougher climate pledges going forward.

One month after COP 26, Partner Alex Altmann reflects on the outcome of the international conference and how the UK Government should use tax reform to incentivise green and sustainable spending.

The United Nations global climate summit COP26 in Glasgow this year ended with an agreement among nearly 200 nations to accelerate the fight against the climate crisis and to commit to tougher climate pledges going forward.

The two week conference in November concluded with some significant accomplishments, including new pledges on methane gas pollution, deforestation, coal financing, as well as completion of long-awaited rules on carbon trading. The summit also closed with calls on governments to return in 2022 with stronger pledges to slash greenhouse gas emissions and to provide more available funding for nations most vulnerable to a changing climate.

However, the real measure of success after COP26 will be if and when countries turn their promises into action.

A missed opportunity

COP26 succeeded with an agreement between 197 nations under the UK’s leadership to further cut greenhouse gas emissions aimed to limit global temperature rise to below 2 degrees Celsius, which deserves respect. However, a historic chance to fundamentally rebuild economies after the pandemic promoting sustainable investments and sanctioning high polluting industries has unfortunately been missed.

International agreements usually contain enforcement and sanctioning procedures setting out rules for non-compliance. Effective mechanisms for not upholding the agreement’s goals are crucial to achieve the overall goal of a zero-carbon global economy.

The COP26 agreement falls short of such an enforcement mechanism and the focus of COP27 in Egypt next year should be to introduce such measures.

Business innovation

We also expected that the agreement would put more weight on business innovation. The introduction and acceleration of clean technology is key to deliver zero-carbon economies around the globe. Setting tight emission rules for economies is important, but this must come together with a manifesto for funding and promoting green technology, a drive for business innovation and incentives for sustainable investment. It is disappointing that the COP26 agreement does not deliver on the same scale for businesses. Again, COP27 must centre around business innovation to achieve these tight emissions targets.

Building CO2 emissions

The International Energy Agency (IEA) reported in 2019 that buildings were responsible for 28% of energy-related CO2 emissions. If looking at global energy consumption, demand from the built environment and for building construction account for over a third of global final energy consumption—the majority consumed by residential buildings of which most is used to heat space and water.

Space cooling and heating requirements, increased use of appliances (leading to higher electric ‘plug-loads’), reliance on fossil-fuel based heat and power provision, and insufficient regulation of sustainability and energy efficiency requirements, have all contributed. As a result, buildings offer huge potential for improvement and a consequent reduction in emissions. Simple policies such as the phase out of incandescent lamps and, more recently, halogen lamps in favour of LED lighting, can drive efficiency improvements.

More significant strides can be made through improvements in ‘building envelopes’ – the components of a building’s structure such as insulation, window materials and air sealing – and this is where the largest element of energy-related investment in buildings is being directed.

In terms of emissions reductions, buildings’ reliance on fossil fuel-based heating technologies will be a key area of focus. Moving away from natural gas boiler systems in favour of heat pumps (which can also provide a cooling function) is a good example.

Incentivising green technologies

But in order to achieve a shift to a greener and more sustainable economy the Government needs to create an environment to incentivise investment in innovative clean technologies and disincentivise spending in old high-polluting alternatives.

One simple way of creating a greener economy is to introduce a tax system that promotes sustainable spending. We had the chance to build back greener after shutting down our economy in 2020. COP26 was an opportunity for the UK Government to lead by example on rebuilding an economy by fundamentally overhauling our financial system and tax code. The Government repeatedly said that the departure from the European Union has made it simpler to introduce change. However, none of the Budgets Announcements in 2020 and 2021 provided that change and an historic chance has been missed.

We have developed 10 proposals of how the UK tax system can incentivise green and sustainable spending for businesses that will not only drive down carbon emissions immediately but also, over the long-term, won’t cost the Government a penny. A smart green business tax reform is what we need now.

You can find these proposals on our COP 26 Hub here.

Check the impact of the Spring Budget Statement with our Tax Calculator Visit our Spring Budget Hub