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Environmental Taxation and ESG: Silent Partners

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Sustainable Finances and the Law

Part of the book series: Economic Analysis of Law in European Legal Scholarship ((EALELS,volume 16))

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Abstract

Environmental, social and governance (ESG) perspectives have rapidly gathered speed and global reach over the past several years. Although often motivated by the desire to improve investor decision-making, ESG perspectives can also represent a broader ethic and understanding of the need for societal changes. This chapter focuses on the “E,” or environmental, pillar of ESG. It explores the relationship between environmental taxation and the ESG environmental pillar. In working toward environmental protection, both share common characteristics. As environmental protection policies, they operate alongside but outside of traditional, environmental command-and-control regulations. They both send a strong educational signal that can influence behaviour in environmentally positive ways. At the same time, they play very different but symbiotic roles. For example, environmental taxation instruments that effectively change behaviour allow the private sector to show more positive results when they disclose ESG data on a voluntary or compulsory basis. Conversely, ESG programs may help policymakers develop stronger environmental taxation policies and build support for market-based environmental protection instruments. Drawing on selected current ESG developments in the United States and European Union, the chapter presents the relationship between environmental taxation and ESG as a silent partnership. The public ESG spotlight often places disclosures centre front, but the more nuanced relationship between environmental taxation and ESG principles works quietly in the background. The chapter considers how this potential relationship—the silent partnership—may have the capacity to improve environmental protection.

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Notes

  1. 1.

    United Nations Environment Programme, Emissions Gap Report 2022: The Closing Window – Climate crisis calls for rapid transformation of societies (Nairobi 2022), XVI, https://www.unep.og/emissions-gap-report-2022.

  2. 2.

    Id. at XXIV, Table ES.3.

  3. 3.

    Id. at XVI.

  4. 4.

    See generally United Nations Environment Programme, Adaptation Gap Report 2022: Too Little, Too Slow—Climate adaptation failure puts world at risk (Nairobi 2022), https://www.unep.org/adaptation-gap-report-2022.

  5. 5.

    Id. at IV.

  6. 6.

    See, e.g., OECD (1989).

  7. 7.

    See generally Milne and Andersen (2012), pp. 15–29.

  8. 8.

    See, e.g., Krupnik and Parry (2012), pp. 1–21. Other taxes on fossil fuels, such as taxes on gasoline, can operate as implicit carbon taxes. The tax rate is not explicitly calibrated to the greenhouse gas emissions, but fuel taxes increase the cost of fossil fuels, and their tax rate can be translated into the cost per tonne of CO2-e emissions. See generally OECD (2021a).

  9. 9.

    See United Nations (2021), pp. 79–99.

  10. 10.

    See generally the World Bank (2022).

  11. 11.

    World Bank (2022), p. 15.

  12. 12.

    World Bank (2022), p. 22.

  13. 13.

    See generally Surrey (1973), pp. 6–7, 126–154.

  14. 14.

    US Department of the Treasury, Fact Sheet: Treasury, IRS Open Public Comment on Implementing the Inflation Reduction Act’s Clean Energy Tax Incentives, Oct. 5, 2022, 1, https://home.treasury.gov/system/files/136/FactSheet-Implementing-IRA-Climate-CleanEnergy-TaxIncentives.pdf.

  15. 15.

    See generally European Environment Agency (2022); European Court of Auditors (2022).

  16. 16.

    Congressional Budget Office (2020), p. 85.

  17. 17.

    Duff (2008).

  18. 18.

    European Environment Agency (2022).

  19. 19.

    OECD and IEA Support for fossil fuels almost doubled in 2021, slowing progress toward international climate change, according to new analysis from OECD and IEA, www.oecd.org/newsroom/support-for-fossil-fuels-almost-doubled-in-2021-slowing-progress-toward-international-climate-goals-according-to-new-analysis-from-oecd-and-iea.htm, visited Sept. 2, 2022.

  20. 20.

    See, e.g. Sharm el-Sheikh Implementation Plan, Decision -/CP.27, paragraph 13, Advanced Unedited Version; G20 Bali Leaders’ Declaration, Bali, Indonesia, Nov. 15–16, 2022, https://www.whitehouse.gov/briefing-room/statements-releases/2022/11/16/g20-bali-leaders-declaration/, visited Nov. 17, 2022; Report of the Conference of the Parties serving as the Meeting of the Parties to the Paris Agreement on the third session, held in Glasgow from 31 October to 13 November 2021, Decision I/CMA.3, Glasgow Climate Pact, paragraph 36 (March 8, 2022). The first major statement occurred at the 2009 meeting of the G20. G20 Leaders’ Statement, The Pittsburgh Summit, Sept. 24–25, 2009, paragraphs 24, 29, 30.

  21. 21.

    See, e.g., G20, G20 Sustainable Finance Roadmap (G20 Italia 2021, Oct. 7, 2021); Boffo and Patalano (2020).

  22. 22.

    See generally Boffo and Patalano (2020); OECD (2021b, 2022).

  23. 23.

    See Taskforce on Nature-related Financial Disclosures, The TNDF Nature-related Risk and Opportunity Management and Disclosure Framework Summary (Framework forthcoming September 2023).

  24. 24.

    The description does not delve into precisely which entities are subject to the disclosure requirements and which are exempted, but the US and EU measures have a broad reach into the corporate world and investment funds.

  25. 25.

    At the closing of the comment period, over 10,000 comments had been filed in response to the notice of proposed rulemaking for the Company Climate Disclosure Rule. US Securities and Exchange Commission, Comments for Enhancement and Standardization of Climate-Related Disclosures for Investors, https://www.sec.gov/comments/s7-10-22/s71022.htm (visited Sept. 6, 2022).

  26. 26.

    Securities and Exchange Commission, The Enhancement and Standardization of Climate-Related Disclosures for Investors, 87 Federal Register 21334 (April 11, 2022), 21349.

  27. 27.

    Securities and Exchange Commission, The Enhancement and Standardization of Climate-Related Disclosures for Investors, 87 Federal Register 21334 (April 11, 2022), 21349–51.

  28. 28.

    Id. at 21354–56.

  29. 29.

    Id. at 21362 (including imposition of a carbon tax).

  30. 30.

    Id. at 21365–68 (including changes in revenue or costs as a result of “emissions pricing”).

  31. 31.

    Securities and Exchange Commission, Enhanced Disclosure by Certain Investment Advisors and Investment Companies About Environmental, Social, and Governance Investment Practices, 87 Federal Register 36654 (June 17, 2022).

  32. 32.

    Securities and Exchange Commission, Enhanced Disclosure by Certain Investment Advisors and Investment Companies About Environmental, Social, and Governance Investment Practices, 87 Federal Register 36654, 36655 (June 17, 2022).

  33. 33.

    Id. at 36657.

  34. 34.

    Id. at 36657.

  35. 35.

    European Commission, Communication from the Commission to the European Parliament, the European Council, the Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions, Action Plan: Financing Sustainable Growth, COM(2018) 97 final, March 8, 2018.

  36. 36.

    Id. at 1.

  37. 37.

    Id. at 2 (internal footnotes omitted). The “environment more broadly” is defined as “air and water pollution, resource depletion, and biodiversity loss”. Id. at 2 n. 7.

  38. 38.

    Id. at 9–10 (“Action 9”).

  39. 39.

    Id. at 8–9 (“Action 7”).

  40. 40.

    Id. at 7 (“Action 5”).

  41. 41.

    Id. at 4 (“Action 1”).

  42. 42.

    Directive 2014/95/EU of the European Parliament and the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups, Official Journal L 330/1, Nov. 15, 2014.

  43. 43.

    European Commission, Communication from the Commission, Guidelines on non-financial reporting: Supplement on reporting climate-related information, C(2019) 4490 final, 17 June 2019.

  44. 44.

    European Commission, Proposal for a Directive of the European Parliament and of the Council amending Directive 2013/34/EU, Directive 2004/109/EC, Directive 2006/43/EC and Regulation (EU) No. 537/2014, as regards corporate sustainability reporting, COM(2021) 189 final, 2021/0104( COD), April 21, 2021. See generally European Commission, Communication from the Commission to the European Parliament, the Council, The European Economic and Social Committee and the Committee of the Regions, EU Taxonomy, Corporate Sustainability Reporting, Sustainability Preferences and Fiduciary Duties: Directing finance towards the European Green Deal, COM(2021) 188 final (April 21, 2021).

  45. 45.

    Id. paragraphs 8–14, 23–25.

  46. 46.

    Id. paragraph 7, 23.

  47. 47.

    Proposal for a Directive of the European Parliament and of the Council amending Directive 2013/34/EU, Directive 2004/109/EC, Directive 2006/43/EC and Regulation (EU) 537/2014, as regards corporate sustainability reporting, 10835/22 (30 June 2022); Council of the EU, Press Release, New rules on corporate sustainability reporting: Provisional political agreement between the Council and the European Parliament, updated June 30, 2022, https://www.consilium.europa.eu/en/press/press-releases/2022/06/21/new-rules-on-sustainability-disclosure-provisional-agreement-between-council-and-european-parliament/ (last visited 16 December 2022).

  48. 48.

    European Commission, Communication from the Commission, Guidelines on non-financial reporting: Supplement on reporting climate-related information, Official Journal C209/1, June 20, 2019, Section 2.2, 209/4.

  49. 49.

    Id. Section 2.3, C209/6.

  50. 50.

    Id. Section 2.2, 8, Section 2.2, 209/5.

  51. 51.

    Proposal for a Directive of the European Parliament and of the Council amending Directive 2013/34/EU, Directive 2004/109/EC, Directive 2006/43/EC and Regulation (EU) No 537/2014, as regards corporate sustainability reporting, 10835/22 (30 June 2022), paragraphs 25–27, 20–22, Art. 1(3).1-2, 58–60.

  52. 52.

    Id., Art. 1(3).2(e), 60.

  53. 53.

    Id., Art. 1(7b).1, 77–82). Recognizing the value of natural capital accounting methods, the CSRD interestingly recommends that sustainability reporting standards should include, when necessary, monetized values of companies’ impacts on the environment. Id. paragraph 38, 31. This recommendation implicitly endorses concepts such as the social cost of carbon.

  54. 54.

    Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the financial services sector, Official Journal L 317/1.

  55. 55.

    Id., Arts. 2–9, 317/7-317/12.

  56. 56.

    Id., Arts. 8, 9, 11, 317/11-317/14.

  57. 57.

    Regulation (EU) 2019/2089 of the European Parliament and of the Council of 27 November 2019 amending Regulation (EU) 2016/1011 as regards EU Climate Transition Benchmarks, EU Paris-aligned Benchmarks and sustainability-related disclosures for benchmarks, Official Journal L317/17, Art. 1, 317/20-317/22.

  58. 58.

    Id., Art. 1, 317/20-22.

  59. 59.

    Commission Delegated Regulation (EU) 2020/1816 of 17 July 2020 supplementing Regulation (EU) 2016/2011 of the European Parliament and of the Council as regards the explanation in the benchmark statement of how environmental, social and governance factors are reflected in each benchmark provided and published, Official Journal L 406/1, December 3, 2020; Commission Delegated Regulation (EU) 2020/1817 of 17 July 2020 supplementing Regulation (EU) 2016/1011 of the European Parliament and of the Council as regards the minimum content of the explanation on how environmental, social and governance factors are reflected in the benchmark methodology, Official Journal, Vol. 63 L 406/12, 3 December 2020; Commission Delegated Regulation (EU) 2020/1818 of 17 July 2020 supplementing Regulation (EU) 2016/1011 of the European Parliament and of the Council as regards minimum standards for EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks, Official Journal, Vol. 63 L 406/17, 3 December 2020.

  60. 60.

    Commission Delegated Regulation (EU) 2020/1818 of 17 July 2020 supplementing Regulation (EU) 2016/1011 of the European Parliament and of the Council as regards minimum standards for EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks, Official Journal, Vol. 63 L 406/17, 3 December 2020.

  61. 61.

    Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088, Official Journal Vol. 63, L198/13, Vol. 63, June 22, 2020 (the “Taxonomy Regulation”).

  62. 62.

    Id. at Chapter II, Art. 3, Art. 9 (pages L 198/27, 198/29).

  63. 63.

    Id. at Chapter II, Art. 10, Art. 11 (pages L 198/29–31). Regulations relating to the other environmental objectives will be forthcoming.

  64. 64.

    Commission Delegated Regulation (EU) 2021/2139 of 4 June 2021 supplementing Regulation (EU) 2020/852 of the European Parliament and of the Council by establishing the technical screening criteria for determining the conditions under which an economic activity qualifies as contributing substantially to climate change mitigation or climate change adaptation and for determining whether that activity causes no substantial harm to any of the other environmental objectives, Official Journal Vol. 64, L 442, December 9, 2021.

  65. 65.

    European Commission, Communication from the Commission, Guidelines on non-financial reporting: Supplement on reporting climate-related information, C(2019) 4490 final, 17 June 2019, Section 2.3, Table 2, 10.

  66. 66.

    Commission Delegated Regulation (EU) 2021/2178 of 6 July 2021 supplementing Regulation (EU) 2020/852 of the European Parliament and of the Council by specifying content and presentation of information to be disclosed by undertakings subject to Articles 19a or 29b of Directive 2013/34/EU concerning environmentally sustainable activities, and specifying the methodology to comply with that disclosure, Official Journal, Vol. 64 L 443/9, Dec. 10, 2021.

  67. 67.

    Proposal for a Directive of the European Parliament and of the Council amending Directive 2013/34/EU, Directive 2004/109/EC, Directive 2006/43/EC and Regulation (EU) No 537/2014, as regards corporate sustainability reporting, 10835/22 (30 June 2022), Art. 1(7b)(1), 78, Art. 1(7)(b)(3), 83–84.

  68. 68.

    Voluntary disclosures and ratings may put less emphasis on greenhouse gas emissions. See OECD (2022), pp. 13, 33.

  69. 69.

    Securities and Exchange Commission, The Enhancement and Standardization of Climate-Related Disclosures for Investors, 87 Federal Register 21334 (April 11, 2022).

  70. 70.

    Securities and Exchange Commission, The Enhancement and Standardization of Climate-Related Disclosures for Investors, 87 Federal Register 21334, 21373-81 (April 11, 2022). The proposed rule exempts small companies. Id. at 21390.

  71. 71.

    Id. at 21382–21383.

  72. 72.

    Securities and Exchange Commission, Enhanced Disclosure by Certain Investment Advisors and Investment Companies About Environmental, Social, and Governance Investment Practices, 87 Federal Register 36654, 36661 (June 17, 2022). The notice of the proposed rule requests comment on whether to require quantitative information about emissions and possible emissions metrics. Note that the proposed rule also details where and when the disclosures are made within the array of SEC filings, which is a topic that is not discussed in this chapter, information about emissions, and possible emissions metrics. The proposed rule also details where and when the disclosures are made within the array of SEC filings which is also a topic that is not discussed in this chapter. Id.

  73. 73.

    Id.

  74. 74.

    Id. at 36676–36679. The proposal treats Impact Funds as a subset of ESG-Focused Funds. Id. at 36662.

  75. 75.

    Id. at 36667 & No. 155.

  76. 76.

    Id. at 36681.

  77. 77.

    Id. at 36682.

  78. 78.

    Id. at 36662, 36668.

  79. 79.

    European Commission, Communication from the Commission, Guidelines on non-financial reporting: Supplement on reporting climate-related information, (2019C), Official Journal June 20, 2019, C209/1, Section 2.2 and Section 2.3, C 209/4-209/7.

  80. 80.

    Id., Section 3.5, C 209/12-209/14.

  81. 81.

    EU Technical Expert Group on Sustainable Finance, Report on Benchmarks (September 2019), 8–10, 38–39.

  82. 82.

    Commission Delegated Regulation (EU) 2020/1818 of 17 July 2020 supplementing Regulation (EU) 2016/1011 of the European Parliament and of the Council as regards minimum standards for EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks, Official Journal, Vol. 63 L 406/17, 3 December 2020, Article 9, Article 11, L 406/22–23.

  83. 83.

    Commission Delegated Regulation (EU) 2020/1818 of 17 July 2020 supplementing Regulation (EU) 2016/1011 of the European Parliament and of the Council as regards minimum standards for EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks, Official Journal, Vol. 63 L 406/17, 3 December 2020.

  84. 84.

    OECD (2022), pp. 13, 33.

  85. 85.

    Securities and Exchange Commission, The Enhancement and Standardization of Climate-Related Disclosures for Investors, 87 Federal Register 21334, 21379 (April 11, 2022); European Commission, Communication from the Commission, Guidelines on non-financial reporting: Supplement on reporting climate-related information, C(2019) Official Journal, June 20, 2019, Section 3.2, C 209/6.

  86. 86.

    An unanticipated, abrupt change in carbon pricing could significantly affect the financial markets’ carbon-intensive industries that might be left with stranded assets in the transition to a low-carbon economy, but the transition to greener technologies can also generate “creative disruption”. OECD (2020), pp. 46–47.

  87. 87.

    European Commission, Guidelines on State aid for climate, environmental protection and energy 2022 (2022/C 80/01) Official Journal February 18, 2022 C 80/1.

  88. 88.

    Commission Delegated Regulation (EU) 2021/2178 of 6 July 2021 supplementing Regulation (EU) 2020/852 of the European Parliament and of the Council by specifying content and presentation of information to be disclosed by undertakings subject to Articles 19a or 29b of Directive 2013/34/EU concerning environmentally sustainable activities, and specifying the methodology to comply with that disclosure, Official Journal, Vol. 64 L 443/9, Dec. 10, 2021.

  89. 89.

    European Court of Auditors (2021).

  90. 90.

    European Court of Auditors (2021), pp. 13, 15, 16.

  91. 91.

    European Court of Auditors (2021), pp. 5, 48.

  92. 92.

    European Court of Auditors (2021), p. 18.

  93. 93.

    European Court of Auditors (2021), p. 50.

  94. 94.

    The European Commission’s proposed CSRD includes the premise that disclosures can raise companies’ awareness of risks and opportunities. European Commission, Proposal for a Directive of the European Parliament and of the Council amending Directive 2013/34/EU, Directive 2004/109/EC, Directive 2006/43/EC and Regulation (EU) 537/2014, as regards corporate sustainability reporting, COM(2021) 189 final, 2021/0104( COD), April 21, 2021, paragraph 10, 24.

  95. 95.

    Securities and Exchange Commission, The Enhancement and Standardization of Climate-Related Disclosures for Investors, 87 Federal Register 21334, 21361 (April 11, 2022).

  96. 96.

    European Commission, Communication from the Commission, Guidelines on non-financial reporting: Supplement on reporting climate-related information, Official Journal C209/1, June 20, 2019, Section 3.1, 209/9.

  97. 97.

    Securities and Exchange Commission, The Enhancement and Standardization of Climate-Related Disclosures for Investors, 87 Federal Register 21334, 21362 (April 11, 2022).

  98. 98.

    Id. at 21367.

  99. 99.

    Id. at 21362.

  100. 100.

    Id. at 21359–21360.

  101. 101.

    European Commission, Communication from the Commission, Guidelines on non-financial reporting: Supplement on reporting climate-related information, Official Journal C209/1, June 20, 2019, Section 3.2, 209/9-209/10.

  102. 102.

    The CSRD recognizes, in general terms, that ESG disclosures can inform policymakers and public policy. Proposal for a Directive of the European Parliament and of the Council amending Directive 2013/34/EU, Directive 2004/109/EC, Directive 2006/43/EC and Regulation (EU) 537/2014, as regards corporate sustainability reporting, 10835/22 (30 June 2022), paragraph 8, 8.

  103. 103.

    See generally Keen et al. (2021).

  104. 104.

    European Commission, A proposal for a Regulation of the European Parliament and of the Council establishing a carbon border adjustment mechanism, COM (2021) 564 final, 2021/0214 (COD), 14 July 2021.

  105. 105.

    A full analysis would also inquire into the compatibility with World Trade Organization rules.

  106. 106.

    See, e.g., European Commission, Questions and Answers, Guidelines on State Aid for Climate, Environmental Protection and Energy 2022, January 27, 2022 (discussing the link between the State Aid Guidelines and the Taxonomy).

  107. 107.

    The proposed US Company Rule and the European Commission both identify internal carbon pricing as an emissions-reduction strategy that should be disclosed. Securities and Exchange Commission, The Enhancement and Standardization of Climate-Related Disclosures for Investors, 87 Federal Register 21334, 21355–21356 (April 11, 2022); European Commission, Communication from the Commission, Guidelines on non-financial reporting: Supplement on reporting climate-related information, Official Journal C209/1, June 20, 2019, Section 3.4, 209/12.

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Milne, J.E. (2024). Environmental Taxation and ESG: Silent Partners. In: Saraiva, R., Pardal, P.A. (eds) Sustainable Finances and the Law. Economic Analysis of Law in European Legal Scholarship, vol 16. Springer, Cham. https://doi.org/10.1007/978-3-031-49460-4_11

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