Once you embark on your climate journey, you’re likely to wonder how much tax you’ll have to pay when purchasing carbon credits and whether these intangible purchases qualify as deductible expenses. On the flip side, project developers and suppliers may want to know what carbon tax credits and benefits they may be eligible for. These tax concerns are legitimate, but the answers may not be as straightforward. What you can claim depends on where your organization operates, so the best way to understand the tax implications of carbon credits is to look at each region individually.
This article is intended as a general guide and does not constitute financial advice. For more information, speak to your financial advisor.
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A brief primer on voluntary and compliance markets
There are two types of carbon markets in the world:
• Voluntary carbon markets are markets where companies, organizations, and individuals can voluntarily purchase carbon credits to negate their carbon footprint and contribute to projects designed to mitigate the worst effects of climate change.
•Compliance carbon markets are established by governments and designed to reduce the total greenhouse gas emissions in a particular region. They’re mandatory for certain companies or industries and typically operate on a cap-and-trade basis. Some well-known compliance markets include the EU’s ETS and California’s Cap-and-Trade Program.
The credits traded on these two marketplaces can have different tax implications. In this article, we’ll focus on voluntary carbon credits (the kind you’ll find on Cloverly). But if your organization is subject to a compliance carbon market, speak with your tax or financial advisor.
Are carbon credits tax deductible?
The deductibility of your carbon credit status depends on where your company trades. Let’s look at a few regions to see if they can be deducted in your country.
Are carbon credits tax deductible in the USA?
The taxation status of voluntary carbon credits across the USA isn’t entirely straightforward. Broadly speaking, voluntary carbon credits might be considered tax deductible (under Sec. 162 of the Internal Revenue Code) if they can be defined as a current ordinary and necessary expense. Alternatively, they might be considered capitalizable under Sec. 263 (and other regulations), if they are considered to provide a long-term benefit.
Are carbon credits tax deductible in the UK?
To put it simply, whether or not you can claim a tax deduction for carbon credits in the UK depends on whether the purchase was “wholly and exclusively for the purposes of the trade.” If you use your carbon credits to drive sales and appeal to consumers, that counts as trade purposes and make your carbon credit purchases tax deductible. Though not for carbon credits, there are also certain capital allowances for UK businesses buying energy-efficient technology.
Are carbon credits tax deductible in Australia?
Generally, purchasing Australian carbon credit units (ACCUs) is a tax-deductible expense, although the deduction is deferred until the ACCU is sold or surrendered. ACCUs are also not subject to the Goods and Services Tax (GST). If the ACCU is issued under Australia’s Carbon Farming Initiative (CFI) Act, standard income tax provisions (rather than ACCU-specific provisions) typically apply. The Australian Tax Office (ATO) also states that companies can claim a deduction for “expenses incurred in establishing trees in a carbon sink forest,” provided certain conditions are met.
Do I have to pay sales tax or VAT on carbon credits?
Sales tax on carbon credits in the USA
It’s unlikely that you’ll pay sales tax on your carbon credit purchase. Sales tax is applied to the sale and purchase of tangible goods, like a piece of furniture, or services, like cleaning services. Since carbon credits don’t fall into either category (they’re intangible assets), you probably won’t pay sales tax.
Sales tax on carbon credits in the UK
Just like in the USA, there is no sales tax (VAT) on carbon credit purchases in the UK, since it is neither a good nor a service.
Sales tax on carbon credits in the EU
For companies required to comply with the EU’s Emissions Trading Scheme (ETS — a compliance market), emission credits do come with VAT. For voluntary credits, tax status will likely vary by country, but it’s unlikely that you’ll need to pay VAT.
Are carbon tax credits available to carbon credit project developers?
Carbon tax credits for project developers in the USA
There are also tax credits available to project developers who generate carbon credits, such as the Section 45Q tax credit for carbon capture and storage, or for using carbon dioxide and carbon oxide in certain ways.
Carbon tax credits for project developers in the UK
There may be tax credits available for carbon credit developers in the UK as part of Research and Development (R&D) tax reliefs. If a carbon project meets certain threshold criteria, it may be eligible for R&D relief.
Carbon tax credits for project developers in Australia
There are several tax concessions available for carbon credit projects selling ACCUs and biodiversity certificates.
Do I have to disclose information about my carbon credit purchases?
Do I need to disclose information about my carbon credit purchases in the USA?
USA: Many organizations trading in the USA have questions about what the SEC’s proposed climate disclosure rule and will mean for their carbon credit purchases. So far, information on taxation is limited, but the SEC has explicitly stated that the new rule would require disclosure of a company’s use of carbon credits, including the amount of carbon reduction they represent and the source of the credit.
California: The state of California has also released a new disclosure rule AB1305 for both buyers and sellers of carbon credits in the state.
Do I need to disclose information about my carbon credit purchases in the EU?
The EU Green Claims Directive, which is expected to come into force by 2026, lays out specific disclosure requirements for environmental claims, including use of carbon credits as part of such claims. Moreover, with stricter regulations unfolding in the EU around ESG disclosure (such as TCFD/IFRS, CSRD, and SFDR), companies will need to become more transparent about their investments in carbon credits, including project type, quality, and volume.
Disclosing carbon credits under TCFD/IFRS
The Task Force on Climate-Related Disclosures (TCFD) was disbanded in October 2023, and all TCFD guidance is now integrated into the International Financial Reporting Standards (IFRS). Companies can still disclose climate data under TCFD recommendations, and, in some cases, may be required to do so. That includes their use of carbon credits and how they contribute to climate targets and risk management. The TCFD guidelines explain: “Disclosures of target should be supported by contextual, narrative information in items such as organizational boundaries, methodologies, and underlying data and assumptions, including those around the use of offsets.” Under TCFD, companies should indicate the % of their climate targets they plan to achieve through the use of carbon credits and provide a source that details the type of credits and the offset provider.
Companies that apply the IFRS standards will meet the TCFD recommendations. To help companies understand the difference, the IFRS Foundation has published a comparison of the requirements in IFRS S2 and the TCFD recommendations.
Disclosing carbon credits under ISSB IFRS
The International Sustainability Standards Board (ISSB) is developing a set of global disclosure standards that companies can use to report sustainability information to financial markets. A draft of the proposed ISSB disclosure standard IFRS S2 indicates that companies will likely be required to disclose their reliance on carbon offsets for achieving their climate targets. That includes how the offsets are generated, their credibility, integrity, and permanence (based on third-party verification or certification scheme), and the type of offsets (nature-based or technology-based, removal or avoidance). Refer to the IFRS S2 page for the latest guidance.
Disclosing carbon credits under the EU CSRD
The draft European Sustainability Reporting Standards (ESRS), invoked by the Corporate Sustainability Reporting Directive (CSRD), set out disclosure requirements for carbon credits generated both within and outside of the company’s supply chain. For external carbon credits, companies need to provide an understanding of the extent and quality of the carbon credits purchased and canceled within the reporting period and those that plan to be canceled in the future based on existing contracts. These credits must be verified against recognized national or international quality standards.
A final word on carbon credits and tax
Determining the tax status of carbon credits can be difficult, but this will hopefully improve as voluntary carbon markets mature. Each geography is taking a different approach to carbon credits, and this will evolve as policy and reporting considerations evolve. In the meantime, err on the side of caution and always speak with your financial advisor.
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Last updated Dec 2023