The OECD has released a working paper titled Corporate income tax, investment, and the Net-Zero Transition: Issues for consideration on 20 March 2025.
Achieving net-zero climate goals requires significant private-sector investment in clean technologies. Corporate income tax (CIT) design affects private sector investment and thus warrants consideration in the context of climate policy.
The paper describes how the effect of CIT is heterogeneous across investment projects: asset and firm characteristics can lead to differential tax treatment and tax responsiveness across otherwise similar projects, complicating generalised assessments of the relationship between CIT and clean investment.
Among clean investment projects, technologies with high capital cost shares, long working lives and high investment risk, and those undertaken by firms that are smaller, newer, and domestic, can be particularly exposed to baseline CIT provisions. More generally, contextual factors, including the national macroeconomic and policy context, interest rates, inflation, and co-existing climate policies, can affect the relationship between CIT and clean investment.
The paper proposes three potential tracks along which to investigate and possibly improve the alignment of CIT with climate policy objectives:
- Screen CIT for obstacles to clean investment and rationalise support for fossil fuels. This involves identifying factors discouraging clean investment, including distortions within baseline CIT systems (e.g., related to the treatment of financing costs or tax losses) and tax incentives for emissions-intensive production or consumption. The role of CIT should also be seen in the context of the many other factors that influence or inhibit clean investment.
- Evaluate the degree to which reforms to the baseline CIT system can play a role in climate change mitigation. Modifying baseline CIT systems to incentivise investment may boost investment in clean technology while minimising economic distortions and administration costs, particularly where strong climate policies are in place. Achieving net zero objectives in the required timeframe may point towards additional policies, however, including within the CIT system.
- CIT incentives for clean investment may be justified but require considering trade-offs and complexities. Where governments wish to use targeted tax support via CIT to overcome existing obstacles and incentivise clean investments, policy design, monitoring, and evaluation should consider the potential risks and costs they carry, ensuring scope for review and reform over time.
