Could firms (and the planet) profit from tax-breaks?

With profit-hungry global companies seeking year-on-year productivity gains, the outlook for the environment looks pretty bleak. Despite the threat of global warming, most industries show little sign of reducing their energy consumption.

Even the threat of dwindling energy supplies is failing to slow down sectors such as the aviation industry. In the developed world, 89% of new power generation capacity feeding companies and consumers will be based on the use of fossil fuels, according to figures released in 2004 by the International Energy Agency, an arm of the Organisation for Economic Co-operation and Development.

The action plan on energy efficiency released by the European Commission last week (19 October) recognises that drastic action is needed to move the business world on to cleaner and more efficient technologies. Industry-focused initiatives will play a big part if the EU is to achieve its aim of reducing energy consumption by 20% by 2020.

The search is on for good incentives to offer industry that will induce them to consume less energy. Among the Commission’s industry-related priorities are the drafting of a green paper on indirect taxation planned for next year and a review of the energy tax directive in 2008. Plans for a tax credit system for companies manufacturing and/or using efficient technologies have already been mentioned.

Mahi Sideridou, energy policy director at environmentalist group Greenpeace, believes that the current situation can only get better. The Commission needs to update guidelines on making manufacturing processes as efficient as possible, she says, providing tax incentives to companies. "They have to be guided," she adds.

Business will resist some elements of the Commission’s tax reforms. Paul Skehan, deputy secretary general of Eurochambres, the association representing chambers of commerce throughout the EU is particularly worried about plans to punish polluters. "We can see the value of tax incentives being created for companies who are genuinely doing well and who have adopted energy-saving equipment, but we don’t want to see tax penalties," he says, pointing out that it is easier to calculate what companies are doing than what they are not doing.

In many cases, investments in energy saving machinery and equipment do not provide immediate benefits, making it difficult to sort efficient companies from the energy guzzlers in the short- to medium-term.

Skehan would like to seek subsidies for companies investing in efficient technology. He says this would, if employed by governments alongside fiscal incentives, increase the take-up rate of new technologies and hence drive innovation. "Tax relief wouldn’t have the impact of a subsidy for technology that might take two, three or four years to bring benefits," he says.

But getting fiscal incentives in place could be a struggle. Given how possessive member states are about national tax systems, the Commission may have difficulty introducing reforms.

Member states are likely to use their national vetoes to block new proposals next year, placing a significant roadblock in the way of Energy Commissioner Andris Piebalgs’ plans.

With profit-hungry global companies seeking year-on-year productivity gains, the outlook for the environment looks pretty bleak. Despite the threat of global warming, most industries show little sign of reducing their energy consumption.