While carbon taxes and heat pump purchase incentives help – we could be doing so much more – and by pairing receipts from higher taxes on some (bad) items with funding incentives for purchasers to do other (good) things, we could accelerate climate action in a revenue neutral way that purchasers could readily understand.

At the present time, federal policies don’t differentiate in the treatment of a highly energy efficient dishwasher versus an inefficient one – nor between a push lawn mower and a gas-powered lawn mower. 

Manufacturers or importers of inefficient products are free to do as they please – and super-efficient products are usually better made but cost more.  And with a payback measured over many years, purchasers are often incentivized to pick the lowest cost option – while the added health cost to society of a two-stroke gas powered lawn mower for example is born by taxpayers (and often children increasingly exposed to their inhalable-particle heavy exhaust who develop asthma) – while product users and manufacturers escape the burden they impose on all of us.   

Herewith, some options we’d like to propose as making a lot more sense!

Using VAT and Incentives as Fiscal Policy Tools to Incentivize Purchasers to Make the Best Choices for the Environment

Over the course of this past 2025 Clean50 Award cycle, the brilliant Clean50 Analyst team took a regular break from researching Clean50 nominees, and instead turned their attention to figuring out what actually works in driving purchasing behavior around the world, with the guidance of long-time climate-action legend Antony Marcil.

Sadly, despite our rising carbon tax, Canada is graded poorly in various studies comparing various nations’ performance – we are viewed, at best, as “middle of the road”. 

Inexplicably, the governing Liberals had a mandate from voters twice to do a lot more – but have failed to leverage it, choosing instead to abandon their base and pander to foreign owned oil companies and bankers looking for bigger returns, while failing to effectively sell the carbon tax to voters. 

There are, however, taxpayer-friendly ways of motivating and incentivizing better outcomes Canada ought to consider – given that other nations have consistently proven they can drive favourable outcomes – without alienating voters in the same way – or being so easy to campaign against (apparently unopposed) with empty slogans such as “Axe the Tax”.

A number of OECD and United Nations studies have considered the most effective means of motivating purchasers to make the best decisions for the environment, and one particularly powerful study listed the most effective tools policy makers have deployed around the world while dismissing numerous others as failing to move the needle.

This article highlights a summary of some of the most effective (see a list of resources that follows to dig deeper).

These have been loosely lumped into two categories: “sticks” and “carrots”.  The sticks come in the form of higher taxes on things bad for the environment / human health / society  – and the carrots are usually government funded payments that result in savings, rebates or reduced taxes– decreasing or offsetting completely the cost of making better choices. 

Of course higher costs or taxes of any sort are usually unpopular.  So governments need to pick and choose both what to incentivize via taxes or subsidies – and also make sure that taxes are seen a revenue neutral.  So for example, increased taxes on one item are offset by either decreased taxes on other items – or decreased income taxes.  Or have the increased taxes pay for the incentives.    What this suggests is that governments should only apply either when there are choices for purchasers: both things bad for the environment (i.e. gas-powered things ) competing for purchaser dollars with things that are good for the environment (i.e. electric things). 

STICKS:  VAT / Sales / Usage Tax Examples

China

• The standard VAT rate is 13%, but an up to 56% consumption tax applies to prescribed nonessential and luxury or resource-intensive goods (including fuel oil, motorcycles, motor vehicles, petrol, yachts, disposable wood chopsticks), and it mainly affects companies involved in producing or importing these goods.
  • Public transit (ferry, bus passenger, subway, urban light rail, taxi, long-distance passenger transportation, and shuttle bus) have a reduced VAT of 3%.

EU

• France’s reduced VAT for renovations: property owners pay VAT at 20% for new building work, 10% for renovations, and 5.5% for energy-efficient renovations (2023).
  • Clean energy technology VAT:
• In the UK, reduced VAT rates (5%) are applied to a range of specific goods and services such as energy-saving materials (insulation, solar panels, heat pumps, and wind turbines) installed in residential properties.
• UK’s energy-saving materials and heating equipment VAT relief (VAT Notice 708/6): heat pumps from 20% down to 0%; electricity – temporarily down from 20% to 5% (2022, 2023-2028).
• A previous iteration of the program in the UK saw the cumulative energy capacity of home solar projects rise from near-zero to greater than their single largest power station over a 10-year period, generated by over one million solar PV installations.
• Belgium’s VAT relief scheme for residential clean energy technologies and electricity: from 21% down to 6% for solar panels and other clean energy technologies (2022-2023).
• Estonia’s VAT on heat pumps: from 20% down to 5% on heat pumps, though electricity remains at 20%. To qualify for the lower rate, certain requirements must be met (maximum heating capacity of 70kW, energy efficiency rating of at least A+, and the building which has the heat pump must be primarily used for residential purposes).
• Greece’s VAT on heat pumps: down from 24% to 6% on heat pumps and (temporarily) on electricity.
• EV drivers are exempt from road tax (or charged the minimum rate in some regions) in Belgium, Poland, the Netherlands, Italy, and others. Many also waive registration taxes. In Germany, EV drivers are exempt from road tax for up to 10 years, valid for all vehicles registered before 2026.
  • Spain’s elimination of VAT on public transport tickets and increase on vehicle tax led to an increase in ridership.
  • Norway, Netherlands, Lithuania, Hungary, etc.: no VAT on EVs (source).
  • [commercial] Austria offers VAT deduction and exemption for zero-emission passenger and combination cars used for business purposes. VAT deduction applies according to gross purchase value (including 20% VAT and pollution tax) (source).

United States

• Several US States have implemented reduced or eliminated sales tax rates on certain environmentally friendly products. Some notable examples include:
• California: The state exempts certain clean energy products from sales tax, such as solar panels and other renewable energy generation equipment.
• New York: offers sales tax exemptions on Energy Star appliances, which are designed to be more energy efficient (e.g., refrigerators, washers, and lighting).
• Florida and Maryland: run periodic “sales tax holidays” that exempt only energy-efficient appliances and products from sales tax. During these events, products like energy-efficient refrigerators, air conditioners, and more are sold tax-free.

Challenges and Solutions for the Stick Approach: HST Deductibility for Businesses, Implementation, Retailer Objections

Deductibility for Businesses:

Businesses charge GST (5%) or HST (13% or varies by province) on all sales and must remit the invoiced GST / HST amount to the Government. But they also pay GST / HST to other suppliers on all taxable purchases. The latter amounts (“input tax credits”) can be deducted from the amounts payable, leaving companies with a net payable amount. 

So an equation: GST Taxes Collected minus GST Taxes Paid = GST Taxes Due.

How to Implement:

On a graduated timeline, depending upon industry readiness.  But first consider: telling industry “there will now be added costs to purchasers of your polluting products” and giving them time to adjust will do what it has always done the world over: Manufacturers would immediately start to transition to products that avoided the worst outcomes – and prioritize innovation in areas most impacted.  This proved to be the case when CFCs were banned a few decades ago in air conditioners and refrigerators. The industry shrieked, moaned, demanded more time – but somehow by the deadline, non-harmful alternative refrigerants had been developed and the industry adapted more or less instantly and seamlessly with new solutions. 

Some items are already well understood to have higher or lower GHG footprints.  Energy Star ratings currently serve as a guideline for purchasers of appliances.  And so a graduated timeline could be imposed giving some industries virtually no time to respond and others more time.  Essentially Energy Star type ratings would need to be developed for every product being sold

To be effective – any higher than usual GST / HST rate charged to businesses to disincentivize “bad” purchases would need to limit the deductibility of the tax to be the maximum of the usual base rate.  For example, if a landscape company purchased a gas-powered leaf blower for $300 at a premium rate of GST – say 25% (adding $75 to the purchase price) – then the usual 5% would remain deductible ($15.00) , but the “excess” 20%  (i.e. $60 in our example) would need to be non-deductible.  Otherwise businesses would be able to avoid the impacts of choosing “bad-for-the-environment” purchases, and remain able to buy low efficiency / polluting products, deduct the full amount from their GST taxes payable, and thus pollute with no financial consequences.

Challenges: Retailer Revolt? A False Flag!

While retailers would potentially object – the reality is that all of their challenges (as at present) would be downloaded to suppliers, with little blowback.  If suppliers of – for example – leaf blowers – wanted Home Depot and Rona to continue selling their products, they would either need to create new, electric alternatives – or their barcode would flag the higher rate. 

Most Point-of-Sale (POS) cash registers and software systems are sold worldwide – and so already accommodate a wide variety of tax rates.  In Canada, virtually every province already has different items that are zero rated and a wide variety of tax rates from 5% total in AB to 13% total in Ontario, and a wide range in between.  Even in Ontario, where a 13% combined tax is in place, some items (i.e. female’s hygiene products, children’s shoes below $30 and children’s clothing) atre taxed at just the GST (5%).   So retailers already fine tune zero-rated goods in one province that vary from another as when different provinces agreed to implement harmonized taxes with the federal government, different policy priorities mandated that different items would receive special treatment. Implementing this idea would be no different – and after a timely implementation process would be essentially cost free.  But the bonus for retailers is that the change would actually benefit them, as they would get to hold on to net higher HST received amounts in their bank accounts for between 15 and 45 days, interest free!  This incentive helped persuade them to collect and report on “Extended Producer Responsibility” fees / taxes imposed on purchasers of TVs, PCs and other electronic goods at the register.

The Carrots that Work: Incentives

China

• In China, an Environmental Protection Tax (EPT) applies different tax rates depending on the level of pollution, which means that heavy polluters will have to pay more than light polluters. Companies can benefit from a whopping 50 percent income tax reduction if the firm polluted at least 50 percent less than the local standard for their industry, or a 25% percent reduction if polluting 30 to 49 percent less than the standard.
• Many studies have shown that EPT can directly influence companies’ environmental behavior and guide them to reduce pollution emissions
• These deductions only apply for as long as early adopters maintain their 50% margin – incentivizing innovators to keep on innovating – and driving others paying the full tax to follow suit and adopt proven methods of harm reduction sooner than they might otherwise do.

EU

• Within the EU, EVs are 100% tax-exempt from all relevant federal taxes, except VAT, across the board.  Some countries extend to VAT as well.
• Austria: EVs are subsidized with up to €5,000  (€2,000 + €3,000; importer bonus and federal bonus) until 2025 (with a range of ≥ 60km and gross list price of ≤ €60,000). Home infrastructure grants are also available (source). EVs are also exempt from standard consumption tax, motor-related insurance tax & benefit in kind tax.
• Lithuania: Purchase incentives (bonus) for individuals =  €2,500 for a used EV with primary registration after April 2016, or model year 2016 or newer; €5,000 for a new EV; additional €1,000 for scrapping used diesel or petrol cars, owned for at least 12 months, and with a valid MOT (source).
• Germany: since 2020, Germany has allowed homeowners to deduct 33% of the cost of their energy efficiency retrofits, up to €40,000, from their taxes. 20% in Year 1, 7%  in year 2, and 6% in year 3.  They can also deduct 50% of the costs of a certified energy consultant.
• [commercial] Finland: Tax deduction of €170 per month from taxable value (income tax) for BEVs (2021-2025), and €85 per month for cars with 1-100g CO2/km (2022-2025). Electric vehicle charging at the workplace is exempt from income tax (2021-2025) (source).
• [commercial] France’s tax credit for investments in green industries: a €2.9 billion scheme for supporting investment in green industries. Credits range from 20% to 60% of the eligible investments, depending on their location and the size of the investing entity and may not exceed a specified amount, ranging from €150 million to €350 million.  France disproportionally has more companies listed on the CleanTech100 list than they should based on population / industrial base. 

United States

• Green Roof Property Tax Abatement, New York City: Citywide $10/sq ft foot abatement program, or $15/sq ft in priority zones, with a total program cap of $4 million. Significant updates for 2024 aim to address low uptake.
• Pittsburgh Zoning Performance Points: A point system designed to incentivize affordable housing, green building applications, and retention of existing structures that represent the city’s built heritage. Points can be used for additional height (in both districts) or to build closer to the river (Riverfront Zoning District). For each performance point, up to an additional 15 ft building height is earned above usual zoning limits.
• Energy-Efficient Buildings Tax Credit Program in Montgomery County, Maryland: a two-tiered property tax credit incentive for energy-efficient buildings, where owners receive up to a 100% property tax credit against County taxes for two years following major energy efficiency improvements.

United States, Federal Inflation Reduction Act tax credits:

• The HOMES (Home Owner Managing Energy Savings) Rebate Program offers rebate funds for households making upgrades to improve home energy efficiency. Includes heat pumps, electric stoves and ovens, electric wiring, insulation and more (ranging 50-80% of retrofit costs, maxing out at anywhere from $2000 to $400,000.
• Credits for New Electric Vehicles Purchased in 2023 and After – a credit of up to $7,500 for consumers to purchase a new plug-in electric vehicle (EV) or fuel cell electric vehicle (FCV).
• [commercial] Clean Vehicle Credit: Businesses and tax-exempt organizations can access a credit of up to $40,000 (depending on gross vehicle weight ratings) for the purchase of a qualified commercial clean vehicle, including electric school buses. To be deemed a “clean vehicle” it must be a plug-in electric vehicle or a fuel cell motor vehicle.
• New York State: The Drive Clean Rebate offers electric vehicle (EV) buyers up to $2,000 off the purchase or lease of 60+ new EV models. Combined with a federal tax credit of up to $7,500, it’s an opportunity for significant savings.
• Property Assessed Clean Energy (PACE) financing in numerous states is a program that allows property owners to borrow money to make energy and water efficiency improvements to their property. These programs enable property owners to voluntarily join an assessment district and enter into a contract with a PACE financing provider to – for example – add solar to their rooftop or replace little or old insulation with spray foam – or upgrade doors and windows. The property owner then pays back the assessment over time through their property tax bill – while enjoying much lower utility bills – ultimately coming out ahead.  The amount financed stays with the home itself – not the owner – so becomes payable by the new owner after a sale.

Canada

• [commercial] Clean Technology (CT) Investment Tax Credit (ITC): The CT ITC is a refundable tax credit for capital invested in the adoption and operation of new clean technology (CT) property (up to 30% of the capital cost of property that is acquired).
  • Toronto’s leadership in green roof policy began in 2006 with the City Council’s adoption of a Green Roof Strategy that encouraged the construction of green roofs on City- and privately-owned buildings through incentives, public education and the streamlined development approval process. This led to the adoption of the City’s Green Roof Bylaw and the Eco-Roof Incentive Program in 2009.
• Green Roof Incentives (up to $ 100,000) at $100/m2 installed, and up to $1000 for a structural assessment
• 220 tonnes CO2e /yr. 627 eco-roof projects completed and over 1.14 million m2 of eco-roof space created since 2009
• There are other limited provincial tax incentives to encourage green building in Canada. One example is: BC’s Clean Buildings Tax Credit, which is a refundable income tax credit for qualifying retrofits that improve the energy efficiency of eligible commercial and multi-unit residential buildings (5% of qualifying expenditures paid on the retrofit).
• Heat pumps and home-owner solar incentives have proven extremely successful in driving adoption of both

Disincentives

• French residents pay the household waste collection tax/fee according to the weight of waste produced by the household
  • Similarly, they pay a water pollution fee in euros/m3 of water consumption in the household
  • Tourism climate resilience tax: as of 01 January 2024, the Ministry of Tourism in Greece has applied an Environmental Tax upon all accommodations per room /per night. All hotels in Greece are required to implement this environmental fee defined as the Climate Crisis Resilience Fee (Environmental Tax) (€1,00 – 10,00/room/night)
  • In Hungary, the Extended Producer Responsibility (EPR) mechanism makes producers and manufacturers responsible for the waste management costs of specific products at $0.81 CAD/kg (2023)
  • Ireland introduced a EUR 0.15 plastic bag levy in 2002, levied on consumers. It applies to bags made wholly or partly of plastic, sold at any sales outlet. The government set the tax at this level following a survey indicating that average consumer willingness to pay for plastic bags hovered around EUR 0.024. The price signal was thus set at EUR 0.15, more than 6 times higher than the average maximum willingness to pay. This led to an immediate 90% reduction in the use of plastic bags. As consumption of single-use plastic carrier bags started increasing again in 2006, the tax was increased from EUR 0.15 to EUR 0.22 per bag.
  • Germany’s plastic tax, effective 2025: In the 2024 federal budget debate, the German government decided to implement the plastic tax, shifting the burden of the EU plastic tax over to businesses or consumers (single-use containers, packaging and wrappings made of flexible material containing foodstuffs intended for immediate consumption; beverage containers with a capacity of up to three liters; cups for beverages, including lids; lightweight plastic bags, etc.)

Examples of Reverse Incentives in Canada

• Companies can deduct from their income (and avoid taxes) on amounts paid to employees for use of their cars – and for parking – but cannot provide bikes or subsidies for bike purchases or use of public transit to employees without declaring it as employee taxable income
• Companies investing in technology to improve productivity or environmental performance can only deduct a small portion of that investment from income in the first few years – which disincentivizes the investment. 
• For example if a company earns $1 million in profit in a year, and invests half of it in new technology expected to last twenty years, the company can only deduct  1/20^th of the invested amount in the first year of its operation.   Meaning even though the company has retained only $500,000 of the profits, as they can only deduct $25,000 of the 500K purchase, They have to pay taxes on $975,000. in profits     This perversely incentivizes companies to only invest in efficiencies that have an ROI (or a payback)  in three or four years or less – a much higher burden to meet the reduces investment in efficiencies of all sorts, energy and otherwise.