From (non-)existing regulation to daily practice and opportunitiesFocus on compliance
The introduction of the EU Emissions Trading Scheme (EU ETS or Scheme) on 1 January 2005 marked the start of the carbon constrained economy. Over the last sixteen months, a market for carbon has been established trading volumes have grown steadily and the price of carbon has exceeded the expectations of many. Notwithstanding some delays in establishing the administrative and regulatory structures to implement the Scheme in a number of Member States, the overall progress represents a significant achievement.
Given the very rapid timetable for the introduction of the Scheme and the additional complexities caused by EU enlargement, the architects of the Scheme could be forgiven if they were found pausing for a breath. For companies with installations covered by the EU ETS, however, there is no time for complancency. The first few months of 2006 see some very real compliance deadlines, as well as a number of important strategic milestones ahead, with the process of negotiation over Phase 2 National Allocation plans already well advanced.
Finance directors, tax managers and others involved in overseeing the financial implications of the EU ETS will want to ensure that their companies are on top of these compliance and process issues, as well as anticipating new challenges and opportunities presented by the Scheme.
PricewaterhouseCoopers guide to taxation of emissions trading
In November 2004, tax specialists within the PricewaterhouseCoopers Climate Change Network prepared the first authoritative guide on the tax consequences of the EU ETS, on a country by country basis. Eighteen months later, the legislation has evolved and new issues have arisen. We have, therefore, decided to update our analysis and insights and we are pleased to present you with our revised report.
Key findings
Following the withdrawal of international guidelines on accounting for emissions trading in June 2005, there is currently no authoritative guidance on carbon accounting at the international level. Market analysts and commentators are watching this area with interes. Early indications suggest that diverse and inconsistent accounting practices are likely to emerge as companies complete their end-of-year requirements.
This situation may give rise to uncertainties over the treatment of profits and losses with respect to emissions trading for income tax purposes in many countries across the EU. There are also a number of differences between countries, for example regarding tax qualifications and the tax deductibility of penalties. The treatment of emissions trading for VAT purposes seems much clearer, following preliminary agreement at the EU VAT Committee. However, again, there are differences in the detailed rules between countries. For example, the VAT treatment of the initial allocation of EAUs is not subject to VAT in most countries, whereas in some countries it is.
The last eighteen months have also witnessed growing interest in the market for project based-credits from Clean Development Mechanism (CDM) and Joint Implementation (JI), which can be used for EU ETS compliance (subject to certain restrictions) through the provisions of the Linking Directive. In this report, we provide a brief overview of the present status of legislation with respect to project-based credits, as well as the tax consequences of using these mechanisms. Whilst many countries have introduced legislation to allow CDM and JI credits to be used, a number of other countries have not. A number of important tax issues also remain unanswered, particularly in relation to cross-border project development (rather than simple purchase and sale of credits). Since, by definition, these projects involve multiple countries, these uncertainties also present tax planning challenges and opportunities for companies involved in project development.
This report summarizes our tax specialists' current views on how emissions trading should be treated from a corporate income tax and VAT perspective. It is not intended to be a comprehensive guide or handbook. It is based on an analysis of existing sources such as case law, rights with which Emissions Allowance Units (EAU) may be compared and discussions with the authorities. It should be emphasised that, in the absence of legislation, the authorities may well take differing positions on the issues addressed in this report in specific situations. We urge you, therefore, to seek up-to-date, local advise when you are considering any transactions.
Contacting our specialists
The information contained in this report has been provided by VAT and corporate income tax specialists in the PricewaterhouseCoopers climate change network. You will find their names and contact details in the summary for each jurisdiction. Please do not hesitate to contact us for further information on tax or other issues associated with emissions trading in the EU. The specialists in our global climate change team can also help you with other important issues regarding emissions trading, including:
- Strategy and risk management
- Carbon finance and transactions
- CDM and JI project design and development
- GHG data management, reporting, and verification
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