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Taxing natural resources

Author: Stuart Lisle

Published: 12 Jan 2023

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ICAEW TAXline tax environmental green landscape damn water

Stuart Lisle questions whether we should think beyond greenhouse gases when considering using taxes to protect our environment.

Low-carbon economies, net zero and global warming are a noble focus, but there are many other activities that are damaging our fragile planet – some of which are linked to our carbon reduction efforts. ICAEW’s Tax Faculty has published a number of articles over the past year focused on how tax policy can be used to support the net-zero agenda. Is this the only environmental issue where taxes could support environmentally-friendly behaviours?

We continue to exploit the earth’s natural resources at an alarming rate. Not just oil and gas reserves, but also other rare-earth metals such as lithium and platinum (not to mention the continuing mining of coal, silver, and gold). In 2021, a total of 100,000 tonnes of lithium was mined – almost four times the amount in 2010. Our insatiable appetite for batteries in phones, cars, etc, means the global demand is expected to more than quadruple over the next 10 years. There is some good news though, as the technology to recycle batteries has developed. A significant amount of lithium-ion is now being recycled across the globe. 

The question for us is how can we use tax policy to attempt to control the use of these resources and encourage potentially greener solutions?

Lithium is needed for ‘clean’ electric vehicles, so this lithium production is good for the global environment, right? Well, the lithium extraction process uses a lot of water – more than 2,000 litres per tonne of lithium. In the main region for lithium production in South America, the lithium mines used 65% of the region’s water, leaving local communities needing to get water from elsewhere. It also leads to huge environmental damage from chemicals such as hydrochloric acid leaching into local water courses, huge mountains of discarded salts from the process and other chemicals left in the environment.

I have used the example of lithium above to demonstrate the wider environmental impact of our use of the earth’s wider natural resources. The question for us, therefore, is how can we use tax policy to attempt to control the use of these resources and encourage potentially greener solutions?

The tax choices

When it comes down to changing choices regarding the source of materials, the only path open to government would be through indirect taxes (ie, VAT and customs duty). 

If we consider customs duties first, the current system, overseen by the World Customs Organisation (WCO) consists of a complex system of classifications and tariffs that have grown up over hundreds of years. Individual countries set tariffs to either protect domestic industries or encourage imports of items they cannot produce. There is no other real structure to them, other than the agreement mechanisms that are in place.

With more than 200 member countries of the WCO it would be challenging to overhaul the global duty system, but we could try. If duty tariffs were set based on the carbon footprint of the goods, or whether they contained freshly mined rare earth metals rather than recycled material, we could quickly change buying habits as environmentally friendly products would be cheaper. 

The question of a complete global overhaul of duty rates is vexing to say the least. But each country is free to flex their duty tariffs. The UK could build an environmentally-friendly tariff regime, rather than one based on old trade disputes and protections that are out of date.

A carbon border adjustment mechanism (CBAM) applies a carbon price at the border to imports of certain products, based on their embedded emissions or carbon footprint, equivalent to the carbon price borne on those products by domestic producers. The UK government is expected to launch a consultation on implementing a CBAM and product standards to address carbon leakage. Could this encompass other environmental factors?

Add to this VAT rates that reflected the environmental impact of the goods, consumer behaviours could be changed quite quickly. However, we struggle to decide on the correct rate of VAT to be charged when the choice is between two rates. Is food hot because it has to be, or just heated and can be eaten cold, or put in the right takeaway container? Adding new VAT rates based on environmental impact could be a whole new Jaffa Cake. However, it could be an effective tool in driving consumers to choose green, earth-friendly products.

Taxes that reflect the environmental cost

In conclusion, indirect taxes could be key to supporting the use of more sustainably sourced materials and therefore protecting the environment in the widest possible sense. But there are some significant, fundamental challenges to such radical changes. Would any politician choose to make mobile phones, computers and electric cars more expensive because they contain freshly mined rare earth metals or decimate regional water supplies, or contain timber from rainforests?

Indirect taxes could be key to supporting the use of more sustainably sourced materials

We need a system whereby these decisions are taken with a long-term view. Then there are massive contradictions: 

  • the leading lithium recycling plants might be in locations with human rights issues and the use of slave labour; and
  • electric vehicles are the backbone of many governments’ green agenda (rightly or wrongly), yet account for the environmental destruction caused by the lithium mines.

I have used lithium as one example, but there are many others. As always, there are significant counter arguments, but we cannot ignore these issues and need to find ways to protect this fragile earth. I am convinced that tax (whether profit-based taxes or indirect taxes) has a major role to play in this journey.

Stuart Lisle, Tax Partner, BDO, Tax Faculty Deputy Chair and Chair of the Business Tax Committee