Enabling a just transition — why taxation has a vital role to play

A blend of policies, including taxation, is key to achieving a just green transition.

We are delighted to announce the release of our latest global climate report, ‘Enabling a Just Transition – Why Taxation Has a Vital Role to Play’. This report draws on PwC’s experience advising thousands of companies and explains that while tax policy is only one aspect of just transition strategies, it can offer compensatory mechanisms for those most impacted by the green transition. The publication of this report coincides with the recent Irish Government announcement of the establishment of Ireland’s newly formed Just Transition Commission.

The role of taxation in a just transition

The global transition to net zero will bring considerable social and economic transformation. As the world shifts from fossil fuels, people and businesses must adapt to a new economy. Tax policy can facilitate this transition by ensuring stakeholder support.

To limit global warming and meet the Paris Agreement targets, economies worldwide need to accelerate their efforts. Decarbonisation initiatives must be sustainable and gain real societal buy-in to succeed.

Tax policy tools that assign economic value to environmental pollution, such as carbon prices and taxes on greenhouse gas emissions, are key for modifying behaviour. However, these tools can impose asymmetrical costs on certain parts of society or geographical areas, making societal buy-in harder to achieve.

Ensuring a just transition requires creating an energy transition that is fair, inclusive and beneficial. This includes compensating affected people and communities and ensuring long-term societal support.

Our latest global report identifies the role that tax policy can play in delivering this just transition. It incentivises emissions abatement while cushioning the economic impact on affected parties.

Central to these tax policies are revenue recycling mechanisms that mitigate the negative impacts of the energy transition. Our research highlights three key mechanisms: lump-sum transfers, targeted transfers and reductions in labour or capital taxes.

While each mechanism involves trade-offs between redistributive goals and economic efficiency, they can play a crucial role in reducing the negative impacts of the energy transition. This makes progress towards net zero as equitable as possible.

Optimal approaches may entail a mix of direct transfers and cuts in pre-existing distortionary taxes. It is clear that there are policy choices available that enable the tax system to support a just transition.

We are here to help you

No matter where you are on your net zero journey – whether you’re a policymaker or a sustainability leader – our research and experience can support you in mapping out processes and strategies for achieving the energy transition. Contact us today.