Tackling climate change is a key issue. This has become more pressing than ever with the fuel price increases and growing uncertainty caused by the Russian invasion of Ukraine.

There are many questions to address:

How fast will changes be made?

To what extent will tax be used as a stick or a carrot?

What impact will taxes or regulation have on business? How will these interact with each other?

This article looks at some of the measures that governments might introduce – in particular, tax-related ones – and the potential impact on business.

Carbon pricing (whether by a tax or an emissions trading system) is likely to be one of the key instruments used by many governments to address climate change.

Governments will likely also use other instruments – including incentives, regulations, and targets – and different countries may rely, to very differing degrees, on each of these levers.

The Russian invasion of Ukraine and the energy crisis may initially slightly slow decarbonisation and alter the pathway to net zero but is creating an even greater sense of urgency and, in the medium to long term, is likely to accelerate progress.

A significant increase in a country’s carbon price will likely drive concerns about carbon leakage and increase calls for carbon border adjustment mechanisms (CBAMs).

CBAMs raise many issues of complexity, WTO compliance, and trade distortion. Hence the suggestion by some for a ‘carbon club’, which could take account of the differing policy options and pathways chosen by individual countries.

Governments have many levers at their disposal to influence how businesses and citizens respond to climate change. Each lever brings its own implications and knock-on effects for behaviours, the economy, and society more broadly. More information can be found by downloading the report on which this article is based.

The ability of tax costs to drive behaviour is one reason why carbon pricing has been used as a key way to promote businesses’ transition to green energy alternatives. By putting an economic cost on the carbon emissions embedded in a product or service, businesses and consumers are incentivised to shift from fossil fuels (where, historically, the total cost of environmental externalities has not been borne) toward low-carbon alternatives. More information is available here.

The clean energy transition is critical, but some jurisdictions might also take measures to support the move to a circular economy more broadly. In these jurisdictions, businesses may have to develop more circular business models based on repair, resale, and retaining value; processes that can be knowledge-intensive and take time, energy, and innovative thinking to develop. More information is available here.