P e r s p e c t i v e s on ta x l a w & p o l i c y

Editor: Jeffrey Trossman Volume 2, Number 2, June 2021

Perspectives on Tax Law & Policy aims to provide a variety of perspectives on important policy-related issues in the tax system, with the goal of fostering informed, accessible commentary that bridges the gap between tax professionals, policy makers, and the general public. The views expressed in the articles in this newsletter by any particular author are solely the personal views of that author. They should not under any circumstances be construed as reflecting in any way the views of the organization with which such author is affiliated or of any other person or entity.

interests of a wide array of stakeholders—not only sharehold- The Intersection of Tax and ESG ers but also employees, retirees and pensioners, creditors, Nadine de Gannes, Ivey Business School, Western University consumers, governments, and the environment. Indeed, this concept is now embedded in section 122 of This issue of Perspectives focuses on the intersection of tax law the Canada Business Corporations Act, which authorizes the and policy in the emerging phenomenon of “environmental, directors and officers of a corporation to consider these vari- social, and governance” (ESG). ous interests in the course of acting in the best interests of The past year witnessed the once-in-a-century COVID-19 the corporation. pandemic—a threat to lives and livelihoods—along with dev- The ESG phenomenon is by no means confined to Canada. astating floods, wildfires, droughts, and civil unrest. As these In 2019, the Business Roundtable, an association of chief exec- events dominated the landscape, investors and policy makers utive officers of leading US companies, revised its statement sharpened their focus on the planet’s urgent environmental on “the purpose of a corporation” to include the interests of all and social crises. The interest in ESG is not new, but its prom- stakeholders: a corporation should serve not only shareholders inence on investors’ and regulators’ agendas in many OECD but also customers, employees, suppliers, and communities. countries is evidence of a paradigm shift. Previous versions of this purpose statement “[had] endorsed In what follows, I provide some background to the ESG principles of shareholder primacy—that corporations exist prin- movement and discuss the role that tax policy has played, and cipally to serve shareholders.” could play, in the movement. These shifts from shareholder capitalism to stakeholder Background: The Rise of “Stakeholder capitalism represent a sea change in corporate thinking. ESG, which has long been an element in stakeholder capitalism, is Capitalism” now finding broad appeal. Although the term “ESG” was pop- Very broadly speaking, the concept underlying ESG is the idea ularized only in 2004, the notions of ethical, social, or value- of “stakeholder capitalism.” There is a growing consensus that based investing have existed for centuries. The authors of a businesses, rather than narrowly pursuing maximum profits 2008 article observed that ethical investing has origins in to the exclusion of all other objectives, should consider the Jewish, Christian, and Islamic traditions. In these different traditions, investments have been appraised on the basis of In This Issue religious laws and beliefs, giving rise to exclusionary screen- ing and the divesting of “sin stocks.” In the 1970s, as I have The Intersection of Tax and ESG 1 described elsewhere, socially responsible investing (SRI) arose ESG and Executive Compensation in Canada 4 in opposition to the Vietnam War and to apartheid in South Behavioural Responses to Sin Taxes: The UK Experience Africa. In the 1980s, several disasters—the Bhopal gas tragedy, of Environmental Levies 7 the Chernobyl nuclear disaster, and the Exxon Valdez spill— The Importance of Integrating ESG Factors in Tax brought environmental concerns to the forefront of investors’ Strategy: An Institutional Investor’s Perspective 9 minds. By the beginning of the 21st century, climate change We Are Already Taxing the Environment—Just Not in was widely identified as responsible for the dramatic increase the Right Direction 11 in the frequency and severity of floods, droughts, heat waves, Convergence of Tax and ESG 14 and windstorms. The global financial crisis of 2008-9 was also Canada and ESG: A High-Level Overview of What Is significant in shaping ESG discourse, especially as it related to in Store for 2021 and Beyond 16 board oversight, internal controls, and enterprise risk manage- ment—all of which are systems that support corporate gov- ernance. Most recently, the COVID-19 pandemic and the social justice movements triggered by the killing of George Floyd have shifted the discourse on “the social.” Corporations and

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society are now grappling with the racial, social, and health linked loans (SLLs) totalled US $143 billion, up from just inequities that have been exposed over the past year. It is US $5 billion in 2017, and the number of ESG-linked loan against this backdrop that the ESG movement has rapidly as- lenders grew significantly, from 8 lenders in 2017 to 265 lend- sumed a prominent role in capital markets, government pol- ers in 2020. icies, and business school curricula. Green Bonds What Is ESG? By October 2020, “green bonds”—that is, debt obligations There is no single, universally accepted definition of ESG. whose proceeds must be invested in projects aimed at en- The basic concept is that individuals, businesses, and govern- vironmental protection or positive environmental impact— ments should pursue objectives that improve the environment achieved a milestone: US $1 trillion in issuance. In both the (by addressing climate change, for example), promote social United States and Canada, green bond deals are growing ever justice (by reducing economic inequality, for example), and more popular, with most major banks providing structuring better the governance of businesses (including through the services. In the 2021 federal budget, the Canadian government pursuit of broader stakeholder objectives, as outlined above). said that it intends to publish a “green bond framework” in This third objective may affect the way a business pursues its the coming months in advance of issuing its inaugural federal tax planning. In addition, investors’ intensifying search for green bond in 2021-22, with an issuance target of Cdn $5 bil- opportunities to pursue these objectives may motivate busi- lion, subject to market conditions. This is intended to be nesses to appear at least to be trying to achieve these goals so the “first of many” green bond issuances. Interestingly, no as to minimize their own cost of capital. corresponding tax measures—such as favourable treatment It is common for media articles, reports, and corporate for investors holding such bonds or other measures to nudge briefings to describe ESG in relation to “responsible,” “sus- private issuers into issuing these kinds of obligations—were tainable,” or “social” investing. BlackRock, for example, in its announced. Such measures could increase demand for green account of ESG, considers sustainable investing to be the um- bonds and might be worth pursuing in the future. Other brella term and ESG to be a data toolkit for identifying sus- countries are experimenting with, or considering, such tax tainable investing solutions. ESG Global Advisors, a Canadian incentives. consulting firm, describes ESG as a “subset of financially ma- In 2020, Brazil’s federal government introduced regula- terial CSR [corporate social responsibility] factors that are of tions intended to encourage the issuance of “climate bond interest to capital market participants, including shareholders, certified” green bonds through capital market tax incentives. bondholders, lenders, insurers, proxy advisors, rating agen- (See the commentary from Englobally and Fatin.) The program cies and financial regulators.” Although ESG usually appears is focused on funding green infrastructure bonds and is set as a subset of sustainability, the US Secur­ities and Exchange to include income tax exemptions for individual and non- Commission (SEC) recently announced the appointment of resident investors. China is also considering tax incentives. a “Senior Policy Advisor for Climate and ESG”—language Since its first issuance of green bonds in 2015, China has that likely reflects the trend in the discourse. As John Coates, grown to be the second-largest green bond market globally. At acting director of the SEC’s Division of Corporation Finance, the same time, green bonds constitute less than 1 percent noted in a March 2021 speech, the fact “[t]hat ESG no longer of the Chinese debt market. With a view to meeting its carbon- needs to be explained illustrates how important these issues neutrality pledge (net zero emissions by 2060), the Chinese have become to today’s investors, public companies and cap- government is particularly keen to grow this market; however, ital markets.” investors currently lack incentives. Obstacles to development In 2020, so-called responsible investment assets in the include investors’ relative unfamiliarity with green bonds and largest global markets climbed to US $40.5 trillion, up from a lack of awareness of what makes green bonds unique—a US $30.7 trillion in 2018. In Canada, as was noted in a report result of the fact that the reporting and verification infrastruc- from the Responsible Investment Association, “responsible” ture for these bonds is not adequately developed. investments grew from Cdn $459.5 billion in 2006 to Cdn $3.2 trillion by the end of 2019, and they now represent 61.8 per- Carbon Tax cent of Canada’s investment industry. ESG indices and data Another instrument of interest to tax policy makers is the services are also on the rise. For MSCI, a leading provider of carbon-pricing regime. In Canada, British Columbians have financial market indices and data, approximately $200 million had such a regime for over a decade. When the province of its US $1.695 billion in annual revenue is tied to ESG and introduced North America’s first broad-based carbon tax in climate, and that amount is growing rapidly. ESG-linked debt, 2008, some international commentators celebrated the model, including ESG bonds and loans, is also on the rise. According though it was fiercely debated locally. It has also become the to a 2020 Bloomberg article, the volume of sustainability- touchstone for the design of federal carbon tax policy. In

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December 2020, Canada’s federal government released its sive tax realities of such regimes will continue. The key lesson, climate plan and delivered the Canadian Net-Zero Emissions perhaps, is that environmental justice cannot be implemented Accountability Act. The goal: net-zero carbon emissions by without due recognition of the need for social justice. 2050. As one Obama-era policy maker (and academic) noted in Other Tax Initiatives 2019, an “ambitious carbon tax could promote broad and deep In Canada’s recent federal budget, selected tax measures were economy-wide emission reductions . . . and the far-reaching proposed with a view to advancing ESG goals. One temporary innovation necessary to transform the energy foundation of measure was a proposal to apply one-half of the otherwise the U.S. economy.” But such a tax is not without contention prevailing corporate income tax rate to taxable income derived or controversy. When president of France Emmanuel Macron from qualifying zero-emission technology manufacturing ac- introduced a carbon tax in 2018, for example, it was seen as tivities for the years 2022-2028. Of course, the effectiveness of disproportionately affecting the middle and working classes, even this timid measure hinges on whether these businesses and the nationwide protests of the populist gilets jaunes, trig- actually turn a profit during this period. Alsointroduced in the gered by the fuel tax, nearly destabilized Macron’s government. 2021 budget were accelerated rates of capital cost allowance Australia’s short-lived efforts to institutionalize a carbon tax, (CCA) for investments in specified equipment related to clean according to a 2017 case study from the Centre for Public energy generation and energy conservation. Accelerated CCA Impact, have been the source of public and political ire for over can increase the after-tax return on these investments, thereby a decade. (More detail on the Australian experience appears providing incentives for increased levels of investment. elsewhere in this issue of Perspectives.) It is estimated that Canada’s federal carbon tax (or, more Integrating ESG into Executive Compensation accurately, carbon-pricing scheme) will account for one-third Incentive contracts offer immense potential when it comes to of emissions reductions over the coming decade. The tax, the implementing of ESG corporate agendas. Compensation which started as a $20-per-tonne levy in 2019, is scheduled to incentives, like tax incentives, are coercive and persuasive increase to $50 next year and to $170 by 2030. The carbon tax in nature. Large, publicly listed companies are increasingly has been a source of contention, with three provinces oppos- integrating ESG metrics into the design of executive com- ing its implementation. In March 2021, the Supreme Court pensation. For example, TD’s 2021 annual bonus plan for its of Canada ruled the carbon tax constitutional. In the reasons senior executive team introduced new ESG metrics related to for judgment, Chief Justice Richard Wagner, writing for the climate change, diversity and inclusion (D & I), and employee majority, described climate change as “a threat of the highest engagement. Barrick Gold increased its ESG weighting from order to the country, and indeed to the world . . . [that] cannot 15 percent to 25 percent of its executives’ long-term incentive be ignored.” plan. Barrick’s ESG scorecard tracks executive performance The threat of climate change is indeed indisputable, but against the company’s goals with respect to safety, social and that knowledge provides scant comfort to those provinces and economic development, human rights, the environment, and citizens that stand to be negatively affected by Canada’s transi- compliance. tion to a green economy. As Mark Carney noted in a recent Compensation consultants have started collecting data to panel discussion at Ivey Business School, “There are 600,000 assess the extent to which ESG is being integrated into incen- people in the energy sector, principally in Western Canada”; tive contracts. Compensation Governance Partners, a Toronto- the task of ensuring that these individuals are not left behind based consultant, found that 61 percent of TSX 200 companies is not to be underestimated. Skills training and government disclosed the use of ESG metrics in executive incentive con- tax incentives will no doubt be crucial. tracts in 2018. Of the 200 companies, 2.5 percent integrated It is possible that the Biden administration will propose ESG metrics into their long-term incentive plans (LTIPs). In a carbon tax at some point. In April 2021, Biden committed 2019, Willis Towers Watson found that 51 percent of S & P 500 to halving greenhouse gas emissions by 2030 and achieving companies integrated ESG metrics into their compensation net-zero emissions by 2050. Officials in the administration plans, with only 4 percent integrating ESG into LTIPs. have indicated that a “carbon border adjustment” is being While incentives can play a significant role in the imple- considered—that is, a carbon tax that could be levied against mentation of ESG corporate agendas, executive pay packages imports from countries that do not have similar commitments have also been implicated in widening economic inequality. to emissions reduction. Governments have sought to respond in a variety of ways to Carbon-pricing schemes will remain a key feature of cli- public censure in this regard. In the wake of the global finan- mate plans the world over, but there is increasing attention cial crisis, for example, the United Kingdom (as reported in being given to the impacts of such schemes on low-income a 2009 New York Times article) introduced a one-time tax of households. The debates over the regressive versus progres- 50 percent on bonuses over £25,000 for executives at all banks

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operating in the United Kingdom. France followed suit, with a similar one-off tax rate. Regulation and remuneration gov- ESG and Executive Compensation ernance codes followed in its wake. in Canada More recently, when loan guarantees and state-backed sup- Dov Begun, Osler Hoskin & Harcourt LLP port programs were administered in response to COVID-19, Christopher Chen, Compensation Governance Partners a range of bonus and dividend moratoriums and restrictions were put in place by some countries, according to Bloom- As the momentum for environmental, social, and governance berg. In Canada, however, the legislation implementing the (ESG) initiatives accelerates, Canadian corporations increas- Canada emergency wage subsidy (CEWS) does not include ingly seek deferred compensation tools that align executive stipulations with respect to dividend payouts or executive priorities with ESG objectives. Well-designed tax policies on compensation. The federal government was criticized for executive compensation arrangements can reinforce sustain- this by some commentators when a few public companies, able change, as ESG initiatives move from trend to traction. while receiving the subsidy, increased their common share In this article, we outline this crucial conversation and add dividends and also their compensation for high-profile exec- our voices to it. utives. In an about-face, the 2021 federal budget, in an effort We believe that the adoption of ESG objectives by the pri- to address these criticisms, proposed a new (though clumsily vate sector will determine the pace at which these objectives structured) CEWS-linked condition for subsidy payments for are met. In a 2017 report published by Ceres, a non-profit periods after June 5, 2021. organization, it was noted that a formal process for manag- ing sustainability risks would help “capitalize on the market ESG Reporting opportunity created by tackling sustainability challenges.” And Capital markets rely on comparable corporate disclosures in yet, according to a CTV news report, a majority of shareholders their decision making. ESG reporting, however, has been a at a recent shareholders’ meeting of a major Canadian finan- source of frustration. The crux of the problem is the absence cial institution rejected a proposal that the company adopt of a single agreed-on method of measuring ESG compliance. broad, “company-wide, quantitative, time-bound targets for Frameworks and standards include those proposed by the Sus- reducing greenhouse gas emissions”—despite senior man- tainability Accounting Standards Board (SASB), the Taskforce agement’s calling climate change an “existential threat” and for Climate-Related Financial Disclosures (TCFD), the Inter- “the most pressing issue of our time.” Although promises national Integrated Reporting Council (IIRC), the Climate were made to boost sustainable financing by 2025 and reach Disclosure Standards Board (CDSB), and the CDP (formerly net-zero emissions by 2050, obstacles remain to shareholders’ the Carbon Disclosure Project). and executives’ fully embracing the integration of ESG targets The European Union is several years ahead of North into compensation metrics. Given this hesitancy, governments America in this respect. The Non-Financial Reporting Dir- have an opportunity to intervene and encourage ESG participa- ective (NFRD) provides rules for the following: disclosure of tion, particularly through tax policy initiatives. environmental protection; social responsibility and treatment of employees; respect for human rights; anti-corruption and ESG Impact of Tax Rules Limiting Deferral bribery; and diversity on company boards. As agreed in 2014, of Employment Income large public-interest entities with more than 500 employees Governments have shown increasing willingness to rely on started reporting in 2018. In 2020, the NFRD began reviewing business tax measures and income tax incentives to achieve the directive. In its public consultation, 84 percent of “users” ESG objectives and promote desired behaviour through the responding to the survey agreed that the limited comparability imposition of duties, carbon taxes, and other measures. (See of information is a problem. Survey respondents identified 50 Deborah L. Jarvie, “A Primer on the Federal Carbon Tax: additional non-financial matters for which they desired more Policy Review and Analysis,” in 2018 Prairie Provinces Tax disclosure; tax ranked fifth in this list. Conference; and a 2021 UK parliamentary committee report In the balance of this newsletter, contributors present their titled “Tax After Coronavirus,” which directly addresses the diverse perspectives on the intersection of tax and ESG. These role of tax in promoting decarbonization.) include articles from authors based in Canada, the United Canada’s Income Tax Act provides certain ESG-related tax States, the United Kingdom, and Australia. n benefits, such as accelerated depreciation for zero-emission vehicles and investments in clean energy, and it allows flowthrough shares to be used by companies engaged in clean energy and conservation. The 2021 federal budget introduced (1) additional measures to encourage investment in clean technology incentives through reductions in the corporate

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taxes applicable to eligible zero-emission-technology manu- • ESG metrics were significantly more prevalent in short- facturing, and (2) initiatives for expanding the availability of a term incentive plans—out of 282 disclosed metrics/ preferred capital cost allowance (CCA) regime for clean energy goals, only 9 (3 percent) were part of a long-term equipment. incentive plan; In addition, portfolio managers and research analysts face • sustainability, when used as a weighted component, growing calls from both activists and industry groups to in- typically represented no more than 10 percent of total corporate ESG factors into their analyses and their investment compensation; and decision making. Prominent in this effort is the world’s largest • only 1 percent of companies weighed sustainability at private money manager, BlackRock. In its January 2020 share- over 20 percent of their incentive plan payout. holder annual report, BlackRock’s founder, Larry Fink, called Clearly, there is a disconnect between, on one hand, the on all companies (public and private) to follow the reporting inherently long-term nature of ESG goals and, on the other recommendations of the Task Force on Climate-Related Fi- hand, the tendency to use ESG metrics mainly in short-term nancial Disclosures (TCFD) and the Sustainability Accounting plans. From a compensation perspective, the philosophy be- Standards Board (SASB). By these organizations’ count, there hind incentive design is neatly summarized in the executive was a 363 percent increase in SASB disclosures, and more compensation principles of the Canadian Coalition for Good than 1,700 organizations expressed support for the TCFD. Governance (CCGG), particularly in principle 2, which focuses To further facilitate measurement, these organizations are on pay for performance: “ ‘Performance’ should be based on advising governments to agree on a common set of reporting key business metrics that are aligned with corporate strategy rules for sustainability in order to deter corporate issuers from and the period during which risks are being assumed.” shopping for jurisdictions with less stringent enforcement. It is crucial to match the performance period (and the cor- In the United States, BlackRock asks companies to disclose responding incentive payouts) with the risk being taken, and the diversity of their workforce, including demographics such LTIs should be aligned with long-term business objectives. But as race, gender, and ethnicity. From June 2019 to July 2020, this principle begs the question: Do current tax rules (such BlackRock voted against 55 directors or director-related items as the “three-year rule” discussed below) allow an appropriate on climate-related issues. time period for measuring performance in improving ESG The direct integration of ESG metrics (such as emissions, metrics, particularly given that ESG returns may take signifi- diversity targets, and employee engagement, to name a few) cantly longer to materialize? into the design of executive compensation arrangements may Canadian tax rules provide limited scope for deferring exec- be another opportunity to further emphasize sustainable utive compensation. These longstanding rules generally do change. not align with efforts to integrate ESG measures into executive compensation. Employment income is generally taxed upon ESG and Executive Compensation receipt. Under a broad anti-deferral rule, “deferred amounts” The familiar adage that “what gets measured gets managed” under a salary deferral arrangement (SDA) may be taxed prior remains especially relevant when applied to executive com- to receipt. An SDA is broadly defined to include any arrange- pensation. Senior executives derive a significant portion of ment under which any person has a right, in a particular year, their compensation from incentive pay, with executives in to receive an amount after the year if it is reasonable to con- large organizations earning nearly 70 percent of their total sider that “one of the main purposes” of the right’s creation pay from annual incentive and long-term incentive (LTI) pay- or existence is to postpone tax on salary or wages for services ments rather than from base salary. The metrics selected and rendered in the particular year or an earlier year. calibrated within these incentive plans are typically linked One widely used exception to the SDA rules applies to cer- to the business strategy approved by the board of directors. tain time-limited bonus plans. Specifically, under subsection In theory, at least, businesses have the capacity to tie a sig- 248(1), a plan is not an SDA if it is a “plan or arrangement nificant portion of their executives’ incentive payouts to ESG under which a taxpayer has a right to receive a bonus or simi- performance. lar payment in respect of services rendered by the taxpayer In practice, the implementation of ESG metrics in exec- in a taxation year to be paid within 3 years following the end utive pay has been less than optimal. According to recent of the year” (the aforementioned “three-year rule”). A preva- statistics, only 9 percent of the 2,684 companies listed in the lent LTI vehicle is a restricted share unit (RSU), which is ef- FTSE All World Index tied executive pay to ESG in 2020. In fectively a phantom unit tracking the underlying value of a Canada, a 2019 Compensation Governance Partners survey of share. Because the Canada Revenue Agency (CRA) considers proxy circulars of 196 companies in the S & P/TSX revealed RSUs to be referable to a particular bonus paid in respect of that 61 percent of the companies measured sustainability met- a particular year, the three-year rule requires that the RSUs rics in their incentives. The survey also found that referable to the particular bonus be paid out no later than

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December 31 of the third calendar year following the year in could be permitted to be rolled over and extended for an addi- which the services were rendered. If, for example, a right to tional three years if predetermined ESG developments are an amount arises in respect of a service provided by the em- becoming evident at the end of the initial three-year period. ployee in 2021, the deferred amount must be fully paid out This would encourage a longer-term trajectory for sustainable by no later than December 31, 2024—that date being no later change through executive innovation and determination with- than the end of the third year following the year of service for out veering too far from the existing deferred compensation which the award is made. regime. Alternatively, the three-year deferral could simply be Although it is clear from the legislation that the three-year extended to five years in situations where the metrics of the period must be counted from the year in which the services payout are based on industry-specific sustainability objectives. have been rendered by the taxpayer, the Canadian tax au- Another approach could be to focus on vesting conditions to thorities have historically taken a restrictive view of how to better align ESG metrics with executive incentives. Linking the determine the service year. In a recent technical interpretation vesting conditions of performance-based LTI awards, such as (CRA document no. 2020-0864831I 7, November 13, 2020), the stock options or performance share units, to the organization’s CRA considered a plan in which the units were granted “early” achievement of certain measurable and relevant ESG metrics in the first year. The CRA concluded that if the units have (for example, average fatality rates, employment engagement positive value at the time of grant, it is likely that they would scores, and diversity targets as opposed to the more commonly relate to past services rendered to the company prior to the seen internal rate of return [IRR] or other return metrics) may year of grant, thereby accelerating the mandatory payout date allow for the integration of ESG into executive compensation to three years after that prior year. In effect, the CRA adopts without requiring material changes to the existing deferred a rebuttable presumption that awards made early in the year compensation regime. must relate to employee service provided in the prior year. The 2021 federal budget confirmed the coming into force This interpretation effectively shortens the deferral period to of certain previously announced changes to the stock option less than three years after the year of grant. rules. These changes, targeting the disproportionate benefit In addition, the “three-year” exception applies only to a accruing to a small number of wealthy individuals, are intended “bonus or similar payment”; ordinary salary, as opposed to to reduce the attractiveness of stock options to highly com- a bonus, generally cannot be deferred. Furthermore, other pensated individuals at large, well-established companies. In types of remuneration, such as directors’ fees, are not eligible accordance with the stated public policy rationale for afford- for deferral under the three-year rule. ing preferential tax treatment of employee stock options to The CRA has also adopted a broad reading of the require- support young and growing Canadian businesses, the rules ment in the SDA definition that “one of the main purposes” were specifically drafted not to apply to Canadian-controlled of the right is to postpone or defer tax (for example, see CRA private corporations or to companies with revenues under a document no. 2020-0841961I 7, July 10, 2020). It should be specified threshold. reasonable to conclude that compensation awards that have A modification to these new stock option rules, such that their performance metrics tied to measurable ESG goals and corporations that achieve measurable and predetermined ESG that defer for periods longer than three years do not have the metrics would be included in the subset of corporations ex- postponement or deferral of tax as a “main purpose,” but this empt from these rules, could be an effective method of giving conclusion remains unduly uncertain. The government could both employees and executives an incentive to think creatively clarify the situation—and thereby foster the adoption of ESG- about maximizing their contributions to ESG. linked compensation—through amendments or guidance. Even without these reforms, some organizations are already committing to a change in executive behaviour, priorities, Suggested Reforms and, ultimately, corporate culture. Each of Canada’s six largest As explained above, current Canadian tax policies impede the banks has added ESG components to their CEOs’ compensa- effective integration of ESG objectives into executive compensa- tion frameworks, and each bank has committed to increasing tion arrangements. Reforms to address this shortcoming could the diversity of employees throughout its organization, from include (1) clarifying that arrangements to defer employment student internships to executive appointments. Practically income that are linked primarily to achieving ESG objectives speaking, this commitment signals to public markets and will generally not be considered to have tax deferral as one executives that the board and shareholders expect and value of the main purposes of the arrangement, and (2) adopting a change. more balanced approach to the application of the three-year The effectiveness of increasing the diversity of employees rule in cases where arrangements have an ESG component. at the summer-student or junior-employee levels may be dir- A more ambitious reform would be to add a new excep- ectly measurable in the very short term, but the limits imposed tion to the SDA definition for compensation plans that are by the three-year rule are an obstacle to the implementation linked to ESG metrics. The conventional three-year deferral of effective metrics for measuring whether these initial hires

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increase the diversity of employees and executives in the long convince their citizens to abandon established, environment- term. While we applaud initiatives that promote diversity and ally harmful behaviours and take up behaviours that may inclusion, we anticipate that sustainable change involving ultimately save the world. This challenge raises another ques- talent development and the retention of new hires requires tion for governments: Why do people need to be convinced to more than three years to measure in terms of medium- and change harmful behaviours? long-term social objectives. Knowledge that a continuation of the status quo is likely to Moreover, the identification of “measurable and relevant” lead to grave consequences for human health and happiness ESG metrics for every industry is not a simple matter. That (not to mention the full-scale extinction of other species) does said, best practices and standards—SASB’s “materiality map,” not seem, so far, to have convinced people to change their for example, which indicates sustainability issues that are behaviour. This is partly because of the well-known human likely to “affect the financial condition or operating perform- tendency to “free ride”: so long as actor A can piggyback off ance of companies within an industry”—continue to develop actor B’s environmental efforts, actor A is unlikely to change rapidly. These guides may provide a starting point from which his behaviour and actor B quickly loses the incentive to perse- material metrics for most industries can be selected for use vere with hers. This free riding then translates into a “tragedy in LTIs. of the commons”-style market failure: no single actor has sufficient incentive to modify its behaviour, and the public Conclusion good in question (here, an inhabitable earth) continues to Achieving critical objectives that have a global and societal deteriorate. impact—for example, goals related to social change and cli- A common policy response to such problems is tax. Tax is mate—will require innovative approaches in every corporate one way to alter the incentive structure behind actors’ deci- boardroom. Canadians should demand that governments, too, sions in order to mitigate the market failures outlined above. be committed to innovation and agility in the achievement of The underlying logic assumes a fairly straightforward cause- these objectives, in order to help investors, directors, and exec- effect relationship: increase the price, decrease the prevalence. utives clear the initial hurdles to a sustainable and equitable This is often but not always right. The manner in which be- future. We need discussion across industry, academia, and havioural change actually results from the introduction or government about how Canada’s programs, and the tax rules modification of a tax may be more nuanced. applicable to them, could be better designed to meet current ESG challenges and generate future opportunities. n Environmental Taxes in the United Kingdom Since 2012, the UK government’s interpretation of an “environ- mental tax” has been fairly narrow. Such a tax must meet three Behavioural Responses to Sin Taxes: criteria to qualify. It must have The UK Experience of Environmental • an explicit link to the government’s environmental Levies objectives; • a primary objective of encouraging environmentally Lucy Urwin and Gregory Price, Macfarlanes LLP positive behavioural change; and In this article, we review tax-based solutions to environmental • a structure related to environmental objectives. challenges (using examples from our home jurisdiction, the According to this definition, the United Kingdom currently United Kingdom) and examine some of the broader policy levies four environmental taxes: (1) the carbon price floor considerations that arise when tax is being considered as a (broadly speaking, a carbon tax that was introduced in 2005 mechanism for changing behaviour. to support the EU emissions trading system and whose post- Brexit future is unclear); (2) the climate change levy (a tax on Tax as a Policy Lever commercial ­energy usage); (3) the landfill tax (a tax on waste Tax is a well-known weapon in the arsenal of policy makers sent to landfill); and (4) the aggregates levy (a tax on the com- trying to effect behavioural change, including change that mercial exploitation of aggregates such as sand and gravel). might help in the battle against global warming. Human ac- A fifth measure was announced last year, in the form of the tivities are responsible for a large portion of the greenhouse “plastic packaging tax.” This measure, due to come into force gas (GHG) emissions that it is increasingly critical to reduce. in April 2022, aims to increase by about 40 percent the use An important consideration, as we face this problem, is that of recycled plastic in packaging and to preclude thousands of human beings are creatures of habit. Industry and individuals tonnes of carbon emissions. have become used to doing things in a certain way in order to The parameters imposed on the United Kingdom’s def- maintain 21st-century living standards. Governments around inition of an “environmental tax” mean that other taxes are the world thus face a common challenge—namely, how to expressly excluded from the definition even if they may in fact

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deliver environmental benefits. The fuel duty (a tax on retail ures. One of these failures is the unchecked deterioration of gasoline and diesel), for example, is described as a measure public goods, discussed above. Another is the “overproduc- that—although it may have a secondary effect of deterring pol- tion” of goods that results from a failure of the market price lution by reducing private vehicle use—was introduced as a to reflect the true overall cost of the transaction. Transactions revenue raiser. For the same reasons, the vehicle excise duty in these goods produce negative externalities—or spillover and air passenger duty also fail to make the cut. effects—with the result that third parties not party to the ori- One explanation for such a narrow (unduly narrow, accord- ginal exchange suffer harmful effects. ing to some) definition of “environmental tax” is the desire In these cases, governments may introduce so-called to distinguish between taxes with different success metrics. Pigouvian­ taxes (named after the economist Arthur Pigou) There is an element of mutual exclusivity between, on the one to try and capture the external cost that the market fails to hand, aiming to raise revenue from behaviour and, on the capture on its own. (For more on Pigouvian taxes, see this other hand, trying to deter that behaviour: if you successfully article in the Economist.) The resulting price increase is then encourage people to do less of a taxable activity, that activity is supposed to act as a brake on the demand for—and therefore likely to raise less tax. Clarity regarding which taxes are meant the supply of—the good. Detrimental levels of pollution are a to provide a source of government income is particularly de- classic example of a negative externality market failure. This sirable in the light of urgent pandemic-related fiscal needs. may account for the international proliferation of carbon taxes in recent years. Do Sin Taxes Work? The UK landfill tax can also be viewed through this lens: One question that policy makers should address when consid- the rates were originally designed to match the marginal ex- ering tax as a tool to combat climate-unfriendly behaviours is ternal cost of landfill per tonne, as estimated by the then UK how tax drives behavioural change in the first place. One way Department of the Environment. That said, this tax could also to frame the answer is to consider the concept of a “sin tax.” be viewed as following the traditional sin tax (as opposed to the These taxes, which are arguably paternalistic in origin, aim sugar tax) model: although the tax is borne in the first instance to deter our consumption of goods or services in cases where by the operator of the landfill site, the cost is expected to be we are insufficiently rational to take their harmful effects (on passed on to the final user as part of the overall landfill fee. either individuals or society) into account ourselves. A UK success story in this respect is the soft drinks indus- Taxing Problems try levy (or “sugar tax”), which has been in force since 2018. For all of the potential efficacy of taxes imposed on either of This tax—rather than being levied directly on consumers, in the bases identified above, it is also important to reflect on a crude attempt to price them out of prior levels of consump- the potential weaknesses of a tax-based approach to changing tion—was primarily targeted at the behaviour of manufactur- behaviour. ers, which were subject to a levy of up to 24 pence per litre One area of difficulty is accurate pricing, particularly in the of drink depending on its sugar content. It appears to have environmental context. For example, how does one determine had an impact. Although the volume of targeted soft drinks the marginal external cost to the environment of each addi- purchased by households changed little after the introduction tional tonne of CO2 sent into the atmosphere? The difficulty of of the measure, the levy has resulted in a reduction of around this question may explain why there is such a range in carbon 10 percent in the sugar content of those same drinks. tax rates globally; in Europe, at least, the rate ranges from Activities that produce GHG emissions can likewise be Ukraine’s low rate (less than €1 per metric tonne of carbon characterized as modern “sins,” overindulgence in which emissions) to Sweden’s much higher rate (over €100 per metric could be addressed through a financial deterrent. The policy tonne). The lack of consistency is perhaps less surprising challenge is to find the right point in the supply chain at which when one considers that each emission, in an extreme view, to impose the sanction. represents a step closer to the end of the world. What formula Sin taxes have the potential to be regressive: a flat tax is do we use to put a price on that? Cost of annihilation over likely to take up a larger proportion of the spending of those number of emitting events? with lower incomes. But the success of the sugar tax shows At least one person has attempted the numerator here. that taxes similar to flat taxes can be introduced in a way Richard Posner—economist, catastrophe theorist, and retired that does not necessarily hit the final consumer. Such taxes judge—has made a case for undertaking quantified cost-benefit can be used, instead, to encourage producers to change their analyses of actions that have potentially calamitous conse- behaviour. An equivalent, in the environmental context, may quences. A particularly noteworthy application of this analysis be a levy on manufacturers whose products surpass a given involved consideration of whether to proceed with research in- threshold of carbon emissions. volving a particle accelerator. Although the possible scientific Another way of framing the behavioural rationale behind advances to be obtained through this accelerator were great, tax is to observe that it can address a variety of market fail- a minimal but actual possibility existed that the accelerator’s

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activity would cause a subatomic chain reaction that could ant to support governments’ efforts to protect their tax base, lead to the end of the world (and possibly beyond). In order which underpins their ability to invest in social or economic to undertake the cost-benefit analysis, Posner concluded that stimulus initiatives for the benefit of all. a reasonable cost to place on the extinction of the human The abusive use of low-tax jurisdictions and aggressive tax race was around $600 trillion. So perhaps this calculation is planning has an adverse impact on public finances for gov- possible after all. ernments worldwide and on their ability to meet the needs of An argument could also be made that tax, as the effective their citizens. Institutional investors can advance this social imposition of a fine or an attempt to correct a market failure, issue by helping to put a damper on these abusive practices. can only do so much if market solutions ultimately miss the This is a position that the Caisse de dépôt et placement du point. Philosopher Michael Sandel has argued that “fines” on Québec (CDPQ) has adopted in recent years and that influ- behaviour that a society wants to castigate can be counter­ ences our approach to international investing. productive if actors start to treat such fines as “fees” for the cost of doing business. Where this happens, these fines can OECD Recommendations and Recent actually increase the behaviour they are supposed to avert; Legislative Proposals actors, after being fined, feel that they have paid their dues, The ongoing work at the Organisation for Economic Co- and the very stigma we need to attach to the behaviour is operation and Development (OECD), in line with its base removed. This is by no means an inevitable consequence of erosion and profit shifting (BEPS) initiative, will support the fining certain behaviours, but it is something to bear in mind. protection of government tax bases. This work aims to trans- From the examples considered above, we may draw two form the international tax system to meet the challenges of the conclusions. First, tax can be a valuable mechanism for digital economy (commonly referred to as “BEPS 2.0”). Pillar 1 achieving environmental policy aims. Second, policy makers of the initiative seeks to establish new rules for where taxes need a clear view of how tax measures fit into the broader should be paid by proposing a new method of sharing taxing economic and conceptual landscape, in order to ensure that rights among countries. Its objective is to ensure that multi- when a tax is selected as the weapon of choice, it hits the national enterprises (MNEs) pay taxes where they generate n intended target. their income and conduct sustained and significant business. Pillar 2 aims to introduce a global minimum tax to address The Importance of Integrating remaining cases of profit shifting using countries with tax ESG Factors in Tax Strategy: An rates deemed too low. To implement these proposals, OECD member countries Institutional Investor’s Perspective must first agree on the principles and then legislate within their jurisdictions. Until recently, it was difficult to reach Steve Bossé and Paulina Kallas, Caisse de dépôt et placement an agreement among the parties because the United States, du Québec, Montreal which felt that the proposals disproportionately targeted its The mission of institutional investors is to grow the money large MNEs, was disinclined to participate. The change in US entrusted to them by their clients. Since they serve primarily administration could be a pivotal moment for the BEPS initia- long-term investors, their investment decisions must take tive as a whole and provide momentum toward finding com- environmental, social, and governance (ESG) factors into ac- mon ground on pillar 2, since the Biden administration needs count to ensure that assets are being managed in a sound and additional tax revenue to fund its economic stimulus package. sustainable manner. In addition to increasing the general corporate tax rate, Citizens, governments, and investors worldwide are in- the US tax reform proposals include a new minimum tax of creasingly paying attention to ESG factors, and taxation plays 15 percent on the book income of US MNEs reporting net an integral role. In addition to tax incentives to encourage en- income of $2 billion or more. At the same time, the Biden vironmental initiatives (the “E” factor) and governance-related administration wants to see an equivalent minimum tax intro- incentives that can mitigate risks (the “G” factor), taxation is a duced globally. At present, the proposed US minimum tax rate key component of the social factor (the “S” factor). for US MNEs is significantly higher than the 10-12.5 percent Taxes enable governments to fund the social and economic rate discussed by OECD member countries to date, in con- programs required to keep society running smoothly. Gov- nection with their work on pillar 2. The Biden administration ernments provide a safety net for citizens, who expect tax hopes to garner the support of the G 20 at its next summit in revenues to be used for the common good. Several economic 2021, which would be a major step forward in international assistance programs were introduced during the pandemic tax collaboration among countries and could give BEPS 2.0 the to help businesses and employees in industries particularly momentum it has lacked to transform the tax rules govern- affected by public health measures. Accordingly, it is import- ing MNEs.

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Clarifying Expectations the erosion of the tax base through the use of leverage by introducing restrictions on interest deductibility. Financing Through its work, CDPQ is an active participant in the move- investments with internal debt aimed at increasing intercom- ment to change international tax practices. Institutional invest- pany interest deductions or generating tax-exempt income ors like us, who want to take action and change practices, can results in tax base erosion in many countries. The Canadian take a number of concrete actions to clarify our expectations federal budget tabled on April 19, 2021 proposes to adopt a of portfolio companies and business partners. Some institu- new “earnings-stripping” rule. This rule will limit the amount tional investors are developing socially responsible guidelines of interest that may be deducted for tax purposes to a speci- and engaging with portfolio companies or external managers fied maximum percentage of earnings before interest, taxes, to influence their practices. In certain cases, these institu- depreciation, and amortization (EBITDA), starting in 2023. In tional investors have divested portfolio companies that failed addition, action 6 aims to prevent the granting of tax treaty to live up to expectations. benefits in inappropriate circumstances. Investment struc- A public commitment through a statement setting out tures that use intermediary jurisdictions where they have no their opposition to all forms of tax evasion and supporting significant business or activities, thereby deriving an undue the fight against aggressive tax planning is an additional way tax benefit, deprive countries of tax revenue. for investors to take a clear stand on this issue. For instance, Investment funds with hundreds of international invest- institutional investors can commit to structuring investments ors are often created in low-tax jurisdictions. The analysis of consistently within the letter and spirit of tax legislation and such structures should show legitimate business reasons for OECD recommendations in connection with the BEPS initia- creating them, including their use to support the relationship tive. This is precisely what CDPQ did this year by renewing and structure among investors, rather than for tax-avoidance its commitment to international taxation. purposes. In principle, the companies in which the fund in- Analytical Criteria To Be Considered vests pay income tax where they operate, while investors in the fund pay income tax on their returns in their jurisdiction In addition to making public commitments, institutional in- of domicile. vestors can use internal tools to ensure that their investments When an investment fund has many co-investors, institu- meet their commitments. Through reliance on best practices tional investors generally have very little individual influence that are seen and discussed in the industry—along with state- on the choice of jurisdiction where the fund is created. Since ments by governments and international organizations, such the underlying companies pay tax on their trading profits as the OECD—objective, rigorous, and robust criteria can be and the investors pay tax on their returns in their country of developed and applied during due diligence and structuring domicile, these structures should not be considered abusive. work to detect any type of aggressive tax planning. The imple- The application of clear analytical criteria is all the more mentation of a rigorous analytical process makes it possible to relevant because there is currently no global consensus on the assess the proposed transaction structure and influence our definition of a low-tax jurisdiction. That is why there continue partners to avoid using low-tax jurisdictions when there is no to be significant differences among the reference lists made legitimate business or legal reason to do so, and to ensure that public by various organizations and governments worldwide. no undue tax benefits are derived. Until a consensus on a reference list is reached, institutional A range of analytical criteria can be integrated into the in- investors must define their own criteria and address aggres- vestment process to allow managers to follow a structured ap- sive tax planning more broadly, rather than relying on a list proach. One example of a criterion that could be implemented of countries to ensure that assets are being managed in a is to ensure that investments are subject to a reasonable min- sustainable manner. imum consolidated tax rate, no matter where the investment At the same time, it must be recognized that a list of coun- is made. Considering the OECD’s work on pillar 2 and the new tries is not an end in itself. Certain companies domiciled in US position, the 15 percent rate proposed by the United States countries that could be considered low-tax jurisdictions pay could very well become the generally accepted benchmark. income taxes, while other companies domiciled in countries CDPQ applies this criterion to listed companies by using not on these lists may pay very little tax. published information, such as the tax note in their annual report. For private direct investments, a more in-depth review may allow institutional investors to obtain the information Institutional Investors Can Be Part of they require to ensure compliance with this criterion as part the Solution of due diligence. The issue of the abusive use of low-tax jurisdictions and ag- An investment structure or partnership between invest- gressive tax planning is important to many public and private ors that complies with the guidance in actions 4 and 6 of the sector stakeholders and requires considerable collaboration. BEPS initiative may also be relevant. Action 4 aims to limit Taking a public stand, implementing an investment process

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that includes best practices, and using their influence to sup- a carbon-pricing mechanism requires political support. New port international efforts are all opportunities for institutional taxes tend to be difficult to introduce, and carbon pricing is investors to assume a proactive leadership role in changing a particularly contentious topic, as Canada’s recent constitu- international tax practices. In so doing, they can help ensure tional controversy over the Greenhouse Gas Pollution Pricing that governments have adequate funding to fulfill their eco- Act illustrates. Mitigation strategies require political support nomic and social missions. n in order to be lasting, as the Australian experience shows. In the Clean Energy Act 2011, under a Labor government, Australia introduced a short-lived cap-and-trade scheme: the We Are Already Taxing the carbon pollution reduction scheme (CPRS). The scheme set Environment—Just Not in a carbon pollution cap on the sum of total auctioned carbon units and total issued free carbon units. The scheme required the Right Direction that producers surrender one eligible emissions unit for each Maria Sandoval-Guzman, Curtin University tonne of carbon dioxide equivalence of the greenhouse gas Miranda Stewart, University of Melbourne Law School (GHG) emissions from their activity. The obligation to buy carbon units, initially at a set price, operated like a carbon tax. The tax system is one of the most powerful drivers of the Producers with insufficient carbon units would be required to economy, with the potential to alter the everyday decisions pay a unit shortfall charge. of producers, consumers, and investors. Government pol­ Under the CPRS, revenue from the sale of emissions units icies, by deciding what to tax and what to exempt (and thereby would be used to create incentives for households and busi- changing the prices of goods and services), may encourage nesses to move toward an economy with lower pollution, great- or discourage certain behaviours, thus influencing market er energy efficiency, and more sustainable energy sources. For preferences. These price signals may have negative economic emissions-intensive trade-exposed activities, free carbon units effects. Depending on their design, they may also promote (or were issued under a jobs-and-competitiveness program. Free impede) the desirable environmental and social consequences carbon units were also issued to coal-fired electricity genera- of production, consumption, and investment choices that have tors, since coal is still the main source of electricity gen- the potential to impose costs on future generations. eration in Australia (DISER 2020). Tax and non-tax measures In this article, we describe how tax policies can promote the were enacted to assist industry and low- and middle-income global goal of sustainable environmental outcomes. We dis- households, with a 2009 government report advising that cuss three important issues: carbon emissions; green transport these measures should ideally be transitional and eventually and electric vehicles; and sustainable land use. We illustrate phased out. our discussion with examples of tax provisions in Australia’s The CPRS was intended as Australia’s main strategy in the tax laws, and we consider how these provisions may support country’s effort to reduce GHG emissions, in line with the Kyoto or deter environmentally sustainable investment. (Further agreement. It operated for three years before being repealed by analysis may be found in some recent publications of ours, the subsequent Liberal government through the Clean Energy available here.) Legislation (Carbon Tax Repeal) Act 2014. Since then, nei- ther major party has expressed an intention to reintroduce a Emissions and the Price of Carbon carbon-pricing mechanism or emissions-trading scheme. Cur- The most appropriate way to achieve sustainability remains a rently, a “safeguard mechanism” requires Australia’s largest price on carbon or a cap-and-trade system. This is particularly emitters to keep emissions within baseline levels. Because the relevant for countries such as Australia and Canada, which are mechanism is based on crediting and purchasing elements to responsible for some of the highest CO2 emissions per capita lower the country’s emissions (funding businesses to under- in the world, according to World Bank data. take productivity-enhancing projects), it could be building According to the International Monetary Fund (2020), the toward a larger cap-and-trade scheme. Organisation for Economic Co-operation and Development Carbon pricing remains an important tool that Australia (OECD), and the Economists’ Statement on Carbon Dividends could use to achieve reductions in GHG emissions. Unfortu- (the largest public statement from economists in history), nately, the failure to implement these or other measures in- carbon pricing represents one of the most effective, least cost- tended to achieve stronger carbon emissions goals leaves the ly ways of reducing emissions at the scale and speed currently country increasingly isolated. Indeed, President Biden recently necessary. When supported by the appropriate transition pol- criticized Australia’s climate change policies as “insufficient.” icies and green investment, carbon pricing is also compatible with growth and job creation. Greener Transport Although broad consensus exists among experts regarding Transportation is a major source of GHG emissions. Aus- the benefits of carbon pricing, the effective implementation of tralia’s current tax system lacks the measures required to

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encourage businesses to shift toward renewable options. example, hydropower accounts for 99 percent of power genera- Statistics show that private households are responsible for tion. Norway is also a leader in the adoption of battery-powered about 12.5 percent of direct GHG emissions but currently pay vehicles, with a market share above 50 percent in 2020, ac- 40 percent of environment-related taxes in respect of energy cording to one commentary. In Canada, where 67 percent of and transport. Vehicles and fuel, whether used for business or electricity comes from renewable sources and 82 percent from personal purposes, are often subject to taxes and other charges. non-GHG-emitting sources, sales figures show the market Accordingly, the tax system could be refocused in a variety share of zero-emission vehicles lagging at under 4 percent. of ways to support the public adoption of greener modes of Both Australia and Canada face the challenge of a large ter- transportation, such as energy-efficient or electric vehicles. ritory, a sparse population, and substantial travel distances— In fact, some transport-related tax policies impede Aus- national features that may increase the cost and impact of the tralia’s ability to reduce GHG emissions. By granting fuel tax charging infrastructure needed for electric vehicles. However, credits, for example, the federal government provides sub- with both populations mostly concentrated in urban areas, the stantial rebates of excise taxes paid on fossil fuels used by cities and the highways connecting these areas are well placed businesses. This measure distorts prices in favour of unsus- for the installation of charging infrastructure. A positive de- tainable fuel options and is inconsistent with environmental velopment in Australia is the large expansion of home solar goals. The policy argument for the fuel tax credit is that it generation. More than 20 percent of homes in the state of Vic- improves business productivity by removing a tax on busi- toria generate energy through solar panels, which can provide ness inputs, especially for remote resource extraction and renewable car charging for private consumers. The adoption agricultural activities that require heavy transport over long of solar energy was initially driven by generous subsidies to distances. But the credit leaves these businesses without an consumers for feed-in to the grid and, of course, by Australia’s incentive to invest in renewable energy to support their indus- high sunshine quotient. The subsidies are now being wound trial and transport needs, and it comes at a high fiscal cost, at a back and the grid is struggling to cope with the influx of power, time when many of Australia’s resource industries are making giving rise to suggestions that the future may hold a feed-in large profits. One leading economist has made an argument charge for consumers. Still, Australians’ adoption of home for replacing the credit with a road-user charge, a congestion solar panels, along with home batteries, is likely to continue. tax, and a carbon tax. In Australia, in contrast to other countries, public policy In the context of consumers and urban businesses, Aus- to date has done little to support electric vehicles. Some state tralia’s fringe benefits tax gives concessions to vehicle and governments apply lower registration fees for energy-efficient car-parking benefits included in employees’ remuneration or hybrid vehicles. Unlike Canada, Australia no longer has packages. These measures are out of date and should be abol- a car-manufacturing industry; the last factories closed years ished, and the incremental government revenues should be ago, after the termination of costly subsidies. The government invested in improved public transport and cycling infrastruc- might consider tax policies to subsidize the domestic assembly ture. Alternatively, the subsidy should be refocused on electric or manufacture of electric vehicles. The design of such meas- vehicles, or dedicated to supporting non-polluting transport ures would need to be carefully considered, but they could options for employees. enhance both domestic production and employment while contributing to the reduction of GHG emissions. The Challenge of Electric Vehicles Currently, the federal government levies a luxury car tax on An interesting issue is whether and how to support the adop- imported vehicles above a certain price threshold, and there tion of electric vehicles in Australia. These vehicles account are also limits on the tax depreciation of these cars. A small for only 0.7 percent of new vehicle sales in Australia’s consum- concession applies to hybrid or electric vehicles. The luxury er or business market. Wind and solar are increasingly im- car tax could be eliminated for electric vehicles and retained, portant in Australia’s national grid, but government data show or even increased, for conventional vehicle imports. that nearly 80 percent of electricity is generated through fossil As experience elsewhere in the world has shown, a signifi- fuels. Thus, even a more widespread adoption of electric ve- cant consumer price subsidy (combined with improvements hicles would have a limited impact on GHG emissions. There in charging infrastructure) is required to shift demand toward remains a compelling argument for increasing incentives for electric vehicles. The state government of Victoria has just the adoption of renewable energy sources in general. Given announced a subsidy of up to Aus $3,000 for the purchase of the continued prevalence of fossil-fuel-generated electricity a new electric vehicle under Aus $69,000, to be implemented in Australia, a comprehensive energy strategy that addresses in the 2021-22 budget. It has been reported that the govern- both consumption and production is required. ment’s goal is to dramatically increase, by 2030, the adoption Australia’s situation contrasts with those of other countries of affordable electric vehicles, but it is not clear whether this that have strongly supported electric vehicles. In Norway, for subsidy will be enough to change consumers’ behaviour. In

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Canada, tax policies such as a consumer rebate of up to $5,000, land in its natural state, restoring it with native vegetation, or promoted by Transport Canada, have so far had limited suc- planting trees without the purpose of forestry for sale. cess. Such subsidies, or a luxury car tax exemption, would also Australia’s income tax law (the Income Tax Assessment be regressive, although limited by the price cap. Act 1997) provides deductions and capital allowances for land Meanwhile, in a seemingly contradictory policy, the state clearing, commercial exploration, and development. The feder- governments of Victoria and New South Wales have announced al income tax and state land taxes exempt principal residences a road tax on electric vehicles, which do not pay fuel taxes to from tax, thus failing to capture revenue from one of the main fund roads. The new tax has been criticized as the “worst contributors to household wealth (and inequality) in Australia. electric vehicle policy in the world,” but this is hyperbole. If For landlords, there is little incentive to install solar panels Australia’s state governments keep their promise to expand in- or improve the energy efficiency of rental properties, where vestment in charging stations, the delivery of consumer price the cost of electricity is borne by tenants and the inefficient subsidies and a low, standardized road-user charge may help systems now in use can be repaired rather than replaced. to reset transport policy on a sustainable pathway in future. On the other hand, some income tax rules support car- bon sink forests—along with land care, pollution cleanup, Restoration and Protection of Land and rehabilitation—by allowing a deduction for the capital Land is a major part of the economic and environmental wealth expenditures of a taxpayer that is carrying on a business, if of both Australia and Canada, with their large territories; it also the expenditure is incurred to establish trees that meet the forms an important part of the tax base. In Australia, land taxes requirements for carbon sequestration. No subsidy is provided are levied at state and local levels, and can be an important for taxpayers not engaged in a business. source of revenue for those governments. In 2016-17, taxes Some not-for-profit organizations or charities that own land on property (stamp duty, land tax, and resource royalties) ac- for habitat protection or restoration may be eligible for a tax counted for over 40 percent of state-level tax revenue. exemption. The income tax law also provides a deduction for Tax policies that fail to recognize the different ways in which entering into conservation covenants and other permanent land is valuable risk creating tension between emissions- protection instruments. A conservation covenant, legally de- generating productive activities, such as agriculture, and en- fined, is a promise contained in a deed to land or real estate vironmental conservation, which, according to government that is binding on the current owner and all future owners, projections, can offset emissions with “carbon sinks” from defining the limitations, conditions, or restrictions on the regrowing forests. Such tensions can arise when the tax and use of the land for conservation. It is a voluntary agreement regulatory land-valuation regime considers land clearing or made between a landholder and an authorized body, such as development to be an improvement, thereby discouraging the a “covenant scheme provider” (usually a not-for-profit organ- planting of native forests or the restoration of habitat. ization, government agency, or local council), that aims to In most of Australia’s state land-tax regimes, land used for protect and enhance the natural, cultural, or scientific values primary production is exempt, even though such land would of certain land. Covenants that are entered into as gifts are be “improved” and otherwise taxable under the general rule. eligible, but the tax benefit is denied if there is a payment in The primary production land (PPL) tax exemption in the state return for the covenant. One commentator has recommended of Victoria, for instance, may be claimed when land is used a split-receipting approach, or the establishment of an addi- for primary production (or is being prepared for such use, tional capital gains exemption, to give Australian taxpayers with a reasonable expectation of profit). “Primary production” incentive to undertake conservation activities—an approach includes activities such as cultivating crops for sale; maintain- modelled on Canadian measures such as the tax treatment of ing animals for the purpose of selling them, their offspring, certain gifts of ecologically sensitive land. or their bodily produce; and commercial fishing, beekeeping, and plant propagation. Taxes Can—and Do—Make a Difference These land-tax exemptions give landowners an incentive Tax policies can promote or hinder the ability of countries to use the land in ways that require water, clearing, and other such as Australia and Canada to achieve their international interventions. These activities contribute to environmental commitments to reducing GHG emissions. The tax policies problems such as drought; land degradation and erosion; loss of and options described above (non-exhaustively) show the ways wildlife and habitat; and climate emissions. Yet climate change in which the tax system can be used to promote good (or bad) poses particular challenges for precisely those sectors—agri- outcomes for the economy, society, and the environment. culture, forestry, and fisheries, for example—that are depend- The best way for tax reform to support the environment is ent on natural resources and may not (as economists have to adopt carbon-pricing schemes. In addition, current measures noted) be able to adapt quickly to the changing climate. There that have the effect of encouraging pollution and unsustainable is no land-tax exemption for maintaining rural or semi-rural economic choices should be eliminated. Land taxes are a key

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tool for promoting the value of nature beyond its use for eco- stakeholders. These stakeholders include employees, custom- nomic production. Tax concessions favouring vehicles that ers, suppliers, governments, and the communities in which a pollute should be replaced with measures that raise govern- business operates. Although the BRT did not specifically refer ment revenues while better promoting environmental and to tax, the trend toward stakeholder capitalism is (1) increas- social policy goals. To encourage the adoption of renewable ing the focus on responsible tax principles, (2) establishing tax energy generation and electric vehicles, both supply and de- as a component of business sustainability, and (3) contribut- mand subsidies are needed; alternatively, heavy taxes and regu- ing to the convergence of tax with the broader corporate ESG lation should be imposed on unsustainable options. agenda. All of these measures will produce losers as well as win- ners, but a more sustainable tax policy would be good for us What Is ESG? all. A major challenge for governments is to generate a broad ESG stands for three dimensions of corporate activity: “en- consensus in favour of policies that foster better outcomes. n vironmental, social, and governance.” The environmental di- mension concerns corporate practices that affect climate and Convergence of Tax and ESG the environment. The social dimension concerns the impact of corporations on various social areas, including (1) labour Manal Corwin, Matt McNeill, and Brett Weaver, practices and (2) diversity, equity, and inclusion (DE & I). The KPMG LLP (US) governance dimension focuses on a business’s internal gov- Over the last few years, several forces have converged to focus ernance processes and operational controls. As investors have public and political attention on corporate tax behaviour. To sought to mitigate ESG-related risks and to advance ESG- begin with, the 2008 financial crisis fuelled the public percep- specific policy goals through investment decisions, an eco- tion that corporations were not paying their “fair share” of system of ESG standard setters, rating agencies, and indices tax. The abuses exposed in the Panama papers, the Paradise has developed to assist stakeholders with their assessments papers, and Luxleaks sharpened this perception. Over time, and decisions. tax administrations’ growing dissatisfaction with the inability of longstanding international tax rules and standards to ade- How Does Tax Intersect with ESG? quately tax corporations or to fairly allocate tax revenue among Tax intersects with all three of the ESG dimensions in two dis- jurisdictions in a technology-enabled economy gave rise to tinct ways. First, tax policies are often used as carrots or sticks significant global tax reform initiatives, led by the Organis- to achieve desirable ESG outcomes. In the environmental ation for Economic Co-operation and Development (OECD). dimension, for example, tax incentives such as renewable en- In 2013, the OECD launched the base erosion and profit ergy credits have been used as carrots and carbon taxes have shifting (BEPS) project to revise the global tax framework. The been used as sticks to achieve climate-related goals. Similarly, first phase of the BEPS initiative led to an action plan that in- deductions for charitable contributions, qualified opportunity cluded minimum standards and recommendations for global zones, and employee retention credits and similar subsidies tax reforms, many of which have been widely adopted by OECD (some of which were enacted during the pandemic) are ex- member countries. This work continues today, with over 130 amples of tax incentives intended to further social objectives. countries participating in the “Inclusive Framework,” which The second way in which tax can be seen to intersect with is striving to address the challenges posed by the digitalized ESG is in the intensified scrutiny of corporate tax practices, economy and to reach agreement on a global minimum tax, which serve as a measure of sustainability. Here, the connec- with the goal of achieving at least a political consensus by tion is first to the social dimension (that is, a consideration of mid-2021. Pressure to meet this deadline has escalated; many the overall amount of tax paid as a measure of corporate social countries, including Canada, are pursuing unilateral, revenue- responsibility); and, second, to the governance dimension (an based digital services taxes. Since early 2020, the COVID-19 expectation that corporations will undertake responsibly the pandemic has placed additional pressure on governments to adoption of a tax strategy, code of conduct, or other policies fund stimulus and recovery efforts. Governments’ focus on and principles governing tax choices and will provide suffi- the taxation of technology-oriented businesses has increased cient transparency for stakeholders to verify such behaviour). further in response to the growing public perception that It is this second context that has been of particular interest many of these businesses prospered during the pandemic. to investors and broader sets of stakeholders, as is shown by Alongside the increased scrutiny of corporate behaviour the growing demands for greater transparency concerning has been the rising tide of “stakeholder capitalism.” In 2019, corporate tax governance and tax payments. As the public the Business Roundtable (BRT), which had long held that interest in corporate tax behaviour grows, institutional invest- corporations exist principally to serve shareholders, changed ors have become increasingly interested in metrics that reflect course in expressing a commitment to a broader group of corporate tax behaviour. Many rating agencies have obliged by

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incorporating tax into their sustainability analyses and ESG- ing requests from investors for detailed information about rating methodologies. their tax strategies and governance policies. One prominent With respect to the social dimension, rating agencies gen- example is the “expectation document” published by Norges erally focus on a quantitative analysis of the business’s effect- Bank, which lays out the bank’s expectations with respect to ive income tax rate and how that rate compares with the rates the tax transparency of the companies in which it invests. of other companies (similarly situated or peer companies) and As with the governance dimension, investors use standard with global or industry averages. This comparison of global setters’ guidelines to exert pressure on companies to share effective tax rates is fraught with technical tax-accounting more information about (1) the location of their revenues, complications, but it may, for some investors, serve as a proxy (2) their profits, and (3) their tax payments. The World Eco- for qualitative analysis in cases where a company is insuffi- nomic Forum (WEF) and the Global Reporting Initiative (GRI) ciently transparent with respect to the governance dimension. have each published guidelines on the public reporting of tax In other words, an investor that lacks insight into a company’s and financial data. GRI standards require the public reporting tax policies and practices may look instead to measurements of detailed country-by-country tax and financial data for each related to variances in tax contribution as the next best indica- relevant jurisdiction. The required data include the following tor of sustainability. categories: revenue, profit/loss, head count, tax paid on a cash To measure qualitative transparency with respect to the gov- basis, and tax accrued by jurisdiction. ernance dimension, rating agencies consider the company’s The more recent WEF standards were developed alongside approach to tax matters, focusing on tax strategy, governance, the International Business Council, with input from the Big and controls. S & P Global, for example, as part of its corporate Four accounting firms. WEF looks to a “total tax paid” metric sustainability assessment (which is the key selection criterion to reflect the corporation’s full contribution to public finances. for the Dow Jones sustainability index), seeks to understand WEF includes total tax paid by tax type (corporate income tax, (among other things) property tax, value-added tax, sales taxes, and employer-paid payroll taxes) as a core metric. • whether the board has approved the corporation’s tax The standards for the reporting of country-level data or tax strategy; payments by tax type reflect investors’ expectations. These • whether the corporation commits to compliance with requests effectively call for businesses to go beyond simply the spirit as well as with the letter of relevant tax laws; complying with applicable law. • whether the company commits to not transferring Governments, too, have focused on increasing tax trans- valuable assets to low-tax jurisdictions without suffi- parency and information sharing, as substantial global cient corresponding substance in those jurisdictions; develop­ments have shown. In particular, the global adoption • whether tax structures are intended to be used for tax of the OECD country-by-country reporting mechanism and avoidance; the intergovernmental exchange of information, along with the • the company’s approach to transfer pricing; and associated peer-review processes, have dramatically increased • the company’s use of so-called tax havens. global cooperation and transparency on tax matters between Typically, rating agencies perform their analyses on the governmental agencies. These efforts are focused on ensur- basis of publicly available data. This often leaves investors ing companies’ tax compliance with domestic tax laws and with incomplete information regarding the tax profile of a with agreed-on international rules and standards. In addition, particular company. Businesses sometimes become frustrated governments have continued to rely on tax policies to attract with rating agency scores that do not, in their view, accurately investment and to advance social and environmental policy reflect the businesses’ real tax strategy, governance, and con- objectives. trols. At the same time, investors may be dissatisfied with the These dual objectives can present some unique challenges adequacy of information available from companies and rating for multinational enterprises (MNEs) that are seeking to satisfy agencies. As a result, investors are increasingly going beyond not only global government stakeholders but also the investor the rating agencies’ assessments. community, along with government policy makers eager to achieve particular policy outcomes. Some of the specific issues Beyond Ratings: Evolving Investor and are the following: Regulatory Interest in Tax Governance • How should businesses handle tax rules that are and Transparency designed to provide incentives for certain behaviours (in Increasingly, companies are finding that the demands of in- many instances, the very investments in environmental vestors go beyond the scoring metrics of rating agencies and and social initiatives and goals that the investor com- call for the responsible tax guidelines published by various munity seeks to encourage) but that result in a lower standard setters. In some instances, companies are receiv- effective corporate income tax rate for the company?

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• Could investors’ and the public’s perception of a “fair disclosure of either total taxes paid (globally, regionally, or, in share” of tax conflict with tax laws and policies that are certain cases, by country) or total economic contribution. The in effect and undermine the effectiveness of govern- right approach for each company requires a skilled balancing ment policies? of financial and tax risks with respect to ESG. As investors, and the public at large, seek greater transpar- Conclusion ency regarding businesses’ tax matters, an inevitable tension arises between (on one hand) the role and goals of tax law The risks and opportunities for businesses operating in this and policy and (on the other hand) the public perception of new environment are clear, but the relationships between tax whether businesses are “paying their fair share”—particu- strategy, transparency, and diverse stakeholder interests can larly in light of the complexity and multifaceted policy object- be murky. Public and investor demand for tax transparency ives of domestic and international tax rules. Specifically, how is likely to continue to accelerate, as the public increasingly will “fair share” be defined, and who will define it? This tension judges the perceived adequacy of a corporation’s tax contribu- must be resolved so that stakeholders do not work at cross- tion. This trend may pose a challenge to governments’ capacity purposes. to use tax incentives to attract investment or to achieve other desirable ESG objectives. To reconcile stakeholder interests The Corporate Response: Practical and achieve public trust, it will be critical that all stakehold- Considerations and Policy Choices ers—including the public, investors, business, and govern- ment policy makers—understand the nuanced and complex With the increased focus on business practices globally, the interaction between tax and ESG, and adopt a balanced and importance of doing business in a sustainable manner has constructive way forward. n never held greater weight than it does now. More companies are developing sustainable business practices, and investors increasingly place a premium on those that do. Canada and ESG: A High-Level Like the standards for sustainable business practices, the standards for sustainable tax practices vary according to several Overview of What Is in Store for criteria—sector, geography, and the unique position of each 2021 and Beyond individual company. Significantly more European companies Deborah Jarvie, University of Lethbridge than US companies have made their tax affairs public. With respect to sector, the extractive industry publishes extensive The 21st century to date has seen much attention paid to information on where its businesses pay taxes, in part to satisfy the issues of greenhouse gas (GHG) emissions and climate regulatory requirements. The 2013 EU accounting directive change and to their effects on water and food security. These (2013/34/EU) required member states to enact public country- concerns have led to numerous global, national, and local by-country tax reporting for the extractive industry. As a con- mitigation initiatives, such as the targets set out in the Paris sequence, under pre-Brexit UK legislation, mining, gas, and agreement, and the Canadian government’s establishment of oil companies registered in the United Kingdom are required the pan-Canadian framework on clean growth and climate to report on payments made to governments in all countries change (described here). These initiatives strive to balance where they operate. (For details, see this article by Jason the needs of the economy with those of the environment by Gorringe.) addressing the many issues now often referred to, collectively, Tax transparency is about reassuring stakeholders that a as environmental, social, and governance (ESG). company’s tax affairs are managed in a responsible and sus- The notion of pricing negative externalities has been delib- tainable manner. The focus is both on tax governance and erated for many decades (for example, with Pigouvian taxes), on the location and amount of tax paid. Because of factors but 2021 may be a turning point toward practical action. Gov- unique to each company, the spectrum of tax transparency is ernments now appear more determined than ever to address wide—from minimally transparent to public, country-by- these issues by using a variety of tools—not only regulation country reporting. A relatively low-risk form of disclosure but also tax policies designed to affect both the demand side that many companies are considering is the publication of (through carbon pricing, for example) and the supply side a company’s tax strategy (a policy statement articulating the (through, among other measures, incentives for businesses to company’s attitude and approach to tax). Such a disclosure can invest in clean-energy equipment and zero-emission vehicle be enhanced by more detail about the company’s risk toler- manufacturing). In this article, I describe the complex topics ance and how it manages tax risk. Further transparency can of ESG reporting and measurement, the federal carbon-pricing be achieved by full disclosure of the company’s tax governance law, Canada’s GHG-pricing model, the newly proposed net- system and its key tax operational controls. The most tax- zero accelerator, and an assortment of other ESG incentives transparent companies combine this openness with the public in the Canadian tax system.

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ESG Reporting and Measurement of the policy—the potential for imposing a disproportionate burden on some low-income households, and issues related ESG reporting and measurement is a rapidly developing area to global competition for industry. In addition, because not of concern not only for governments but also for businesses, all countries will impose on their businesses equally onerous stakeholders, and society. This has increased the need to pro- (or, for that matter, any) carbon taxes or equivalent measures, vide, as CPA Canada has said, “consistent, comparable, and the imposition of such a tax on Canadian businesses raises reliable” disclosure of ESG issues. From a tax perspective, competitive issues, especially for energy-intensive enterprises the measures currently in place in the Income Tax Act (and that compete with foreign businesses. Recognizing the issues those proposed in the 2021 budget) for ESG mitigation offer with carbon pricing, the 2021 budget announced an upcoming several tools for helping with quantifiable reporting and meas- consultation process to address carbon border adjustments, urements. For example, Canada and other countries have with a view to protecting the competitive and natural environ- implemented a price on carbon emissions in an attempt to ments by taxing the carbon footprint of imports. The mech- reduce GHG emissions. Though the design details vary across anisms behind carbon border adjustments are complex and countries and even (in the case of Canada) across provinces are not without controversy or concerns with respect to global and territories, the objectives remain relatively consistent. competition and fair-trade policies. But they are worthy of at- And although there is not unanimous agreement that pricing tention, within the big picture of ESG policy design, if they can carbon (via what many refer to as a tax or levy or charge) is the be implemented with these apprehensions in mind. best alternative to pollution prevention, there is clear support To address some of the more local concerns of carbon pri- for clean air and water and well-being for society. This arti- cing under the federal carbon-pollution-pricing system, “direct cle, accordingly, is not about the debate concerning preferred proceeds from pollution pricing” may be returned to govern- instruments; rather, it addresses the many mechanisms avail- ments in jurisdictions that have implemented the federal able in Canada to address ESG issues. carbon plan. These governments then administer the funds Canada’s GHG Pricing through various mechanisms. In provinces where the backstop plan has been introduced (Alberta, Saskatchewan, Manitoba, In March 2021, the federal carbon-pricing law was ruled con- and Ontario), the funds are instead returned to households stitutional by a majority of justices on the Supreme Court of (90 percent) through a federal rebate on fuel charges in the Canada. In a rarely applied doctrine, the ruling described the form of climate incentives, and the remaining revenues objectives of the law as matters of “national concern.” Indeed, (10 percent) are intended to support certain municipalities the question addressed by the court was “[w]hether greenhouse and other groups. But while households are typically expected gas pricing is a matter of national concern falling within Parlia- to receive more than they pay even after provincial and sales ment’s power to legislate in respect of peace, order and good taxes on fuel are considered, many small businesses (which government of Canada—Constitution Act, 1867, s. 91.” are a portion of the 10 percent) are concerned about the finan- Canadian GHG pricing was originally initiated as a carbon- cial impacts of carbon pricing because of (1) the inability to pricing backstop, allowing provinces and territories to de- pass on much if any of the costs to consumers, and (2) the velop either explicit pricing systems, output-based systems, low rebate rate. or combinations thereof, or cap-and-trade systems to meet specified targets, with a backstop in place for those jurisdic- tions that require stronger measures in order to meet the Other ESG Incentives in the Canadian federal standard. Accordingly, the carbon-pricing law applies Tax System where jurisdictions do not have sufficiently stringent policies In addition to the mandatory carbon price, the Canadian tax in place to meet emission reduction targets. The language in system also provides a number of incentives, such as acceler- the recent Supreme Court decision upholding this legislation ated capital cost allowance (ACCA) for clean energy equipment clearly stated that carbon pricing is a mechanism for giving (first introduced in 2018), Canadian renewable and conserva- GHG emitters (both businesses and individuals) an incentive tion expenses (CRCE), and flowthrough shares, to encourage to find innovative ways to reduce their GHG output; it is not a investment in renewable infrastructure. The 2021 budget also tax on emissions within the constitutional context of taxation. proposed updates to the longstanding eligibility requirements The carbon-pricing mechanism, embedded in the Greenhouse of a long list of clean energy equipment in classes 43.1 and Gas Pollution Pricing Act (GGPPA) of 2018, will surely in- 43.2 of schedule II of the Income Tax Regulations; the up- crease its presence in the enhanced reporting-and-disclosure dated requirements would (1) include previously excluded requirements, as ESG gains a stronger foothold in the future. assets such as “pumped hydroelectric storage equipment” and The International Monetary Fund sees Canada’s move to “equipment used to dispense hydrogen for use in hydrogen- establish carbon pricing by law as a model for other large powered automotive equipment and vehicles,” and (2) exclude GHG-emitting countries, but it also points out drawbacks a list of previous inclusions related to fossil fuels.

17 Volume 2, Number 2 June 2021 The editor of Perspectives on Tax Law & Canadian Tax Foundation P e r s p e c t i v e s on ta x l aw & p o l i c y Policy welcomes submissions of ideas or 145 Wellington Street West, Suite 1400 of written material that has not been Toronto, Ontario M5J 1H8 published or submitted elsewhere. Telephone: 416-599-0283 Please write to Jeffrey Trossman at Facsimile: 416-599-9283 [email protected]. Internet: http://www.ctf.ca In addition, immediate expensing was added for manufac- Published quarterly. turing and processing and “specified clean energy generation equipment” in 2018. The 2021 budget also proposed immedi- framework may assist in (1) identifying leverage points for ate expensing for several other asset classes (excluding “prop- implementation and change; (2) evaluating the interactions erty included in CCA classes 1 to 6, 14.1, 17, 47, 49 and 51, and outcomes of regulatory instruments; and (3) resolving, which are generally long-lived assets”) for Canadian-controlled through a broader systemic lens, concerns with issues such private corporations (CCPCs) within prescribed guidelines. as carbon leakage and local and international competition. n In addition, Canada’s scientific research and experiment- al development (SR & ED) tax program offers significant tax advantages to those that qualify for the expenditures and tax credits. Although significant changes to SR & ED in the 2013 budget disallowed further capital expenditures, it will be interesting to see whether the introduction of immediate expensing in 2018 and again in the 2021 budget will produce an uptick in qualifying capital purchases by the clean-tech industries that were, owing to their capital-intensive nature, affected by the 2013 changes. Only time (and more research) will tell whether these asset acquisitions will be linked in some way to green initiatives. Finally, the 2021 budget also outlined plans for a net-zero accelerator (NZA)—an initiative for enhanced innovation in the move toward a 2050 net-zero transformation. In the budget, the government proposed to make an $8 billion in- vestment in Canada’s strategic innovation fund over seven years in order to support the net-zero initiatives of for-profit corporations of all sizes. This is not a tax measure, but it will be interesting to watch (1) the interactions of these initiatives with the tax instruments of ACCA, immediate expensing, and SR & ED; and (2) the overall impact of these initiatives on in- novations and on reductions in GHG emissions. Conclusion Many policy tools are available to governments to promote ESG objectives, and the trend toward the deployment of these tools is accelerating. Although this trend is encouraging, the extensive incentives come at a significant fiscal cost to future federal budgets. Success may require significant tax reforms, especially in an era when the erosion of the income tax base is a key concern of governments. And one must not overlook the fact that the specifics of several of these ESG mechanisms (for example, carbon-pricing plans and incentives) depend largely on future politics: each political party, if elected, has its own platform from which to proceed. From an overall policy perspective, perhaps a systems approach, built on the foundations of spatial and temporal scales for both short-term and long-term results, would allow ©2021, Canadian Tax Foundation. In publishing Perspectives on Tax Law and Policy, for greater integration and understanding of these complex All rights reserved. Permission to the Canadian Tax Foundation and Jeffrey reproduce or to copy, in any form Trossman are not engaged in rendering any matters, to assist in the monitoring, reporting, and evaluation or by any means, any part of this professional service or advice. The comments of ESG issues and outcomes for Canada and the world, as we publication for distribution must be presented herein represent the opinions of the move further into the 2020s. An approach of this kind would obtained in writing from the Canadian individual writers and are not necessarily Tax Foundation, Suite 1400, 145 endorsed by the Canadian Tax Foundation or offer an opportunity to examine all of the ESG policy mech- Wellington Street West, Toronto, ON its members. Readers are urged to consult their anisms, including those discussed here. This “big picture” M5J 1H8; e-mail: [email protected]. professional advisers before taking any action on the basis of information in this publication.

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