The global reach of carbon pricing and tax regimes is likely to be extended in the coming years, creating a complex tax landscape that could prove challenging for some businesses to navigate.
That is the central conclusion of a new report from tax specialists at consultancy giant KPMG, which argues that carbon taxes can help accelerate the transition to net zero emissions, but could also result in a complex patchwork of different approaches in different jurisdictions.
Titled Business consequences of tax driving net zero ambitions, the report argues that despite geopolitical instability and economic headwinds it remains possible that carbon prices will continue to rise and the reach of carbon taxation regimes will continue to expand.
The report notes that carbon prices are at record highs in many jurisdictions, with the price of allowances in the EU's carbon market currently standing at €66 a tonne having hit highs of nearly €100 a tonne this summer that have further strengthened the business case for investing in clean technologies and energy efficiency measures.
However, with only four per cent of global emissions priced at a level required to meet 2030 targets, the report argues that the coverage of carbon pricing regimes may be expanded and prices increased.
The bullish outlook for global carbon pricing is fuelled by both the introduction of new carbon markets in China and other emerging markets and the EU's proposals for new carbon border adjustment mechanisms (CBAM), which could impose tariffs on imports from countries without sufficiently robust carbon pricing regimes in place.
Proposals for a CBAM are likely to be branded as protectionism in some quarters, but they are also expected to ramp up pressure on more countries to adopt their own carbon pricing policies.
Meanwhile, alternative proposals for a 'carbon club' of like-minded countries with ambitious climate policies that could negate the need for carbon tariffs are being advanced by diplomats in a bid to accelerate global decarbonisation efforts without sparking a trade war.
KPMG's new report, which was developed by its Responsible Tax Projects, argues that businesses will need to keep abreast of a carbon tax landscape that is likely to become more complex and varied.
"A potentially difficult period of transition awaits as different countries and regions adopt varying measures," said Grant Wardell-Johnson, head of global tax policy group at KPMG International. "Businesses should prepare for a multifaceted approach. It may look different across jurisdictions, and business leaders will need to keep up to date with newly implemented and upcoming regulations. They may also have to accelerate any planned business model changes as governments implement policies to transition to a low carbon economy."
Chris Morgan, head of the Global Responsible Tax Project at KPMG International, said the onus was on governments to deliver measures that can accelerate the transition to net zero while maintaining a stable and predictable tax environment.
"Whatever approaches are decided, businesses in both developed and developing jurisdictions will be looking for certainty and measures which do not disrupt trade," he said. "Navigating this complex tax terrain is about negotiated settlements between different perspectives, attitudes, and interests."