Accelerating Industrial Decarbonisation. The Role of Tax Incentives

This discussion note examines how tax incentives can support industrial decarbonisation. Achieving net-zero targets in industrial sectors will require substantial investment in low-carbon technologies, especially in “hard-to-abate” industries such as steel, cement, and petrochemicals. In this context, tax incentives have emerged as a useful policy instrument, in combination with carbon pricing, regulation and further measures.

Countries are already deploying a wide range of targeted tax incentives to accelerate the adoption of low-carbon electricity. Examples include investment tax credits for clean energy equipment (e.g., France) and accelerated depreciation for investments into renewables (e.g., Canada).

Tax incentives are also a core pillar of decarbonisation efforts in the transport sector – including accelerated uptake of electric vehicles. Many countries support electric vehicles (EVs) with measures spanning from production tax credits (e.g., Japan) to consumer tax incentives (e.g., United States).

A similar wave of incentives is emerging to advance green hydrogen and lower-carbon technologies in steel, cement and petrochemicals. Many governments are supporting businesses investing to produce green hydrogen with tax credits and corporate income tax exemptions (e.g., Egypt). Several countries have introduced incentives for lower-carbon steel production including abatement via CCUS (e.g., Malaysia). Similar incentives pertain to green cement and petrochemicals (e.g., Finland).

Overall, tax incentives supporting industrial decarbonisation can open the door to a faster low-carbon transition. They can help in reaching the necessary production scale of new technologies to reduce costs. They can support the adoption of new products and services to trigger positive network effects. And they can reduce uncertainty around technological trajectories and related hurdles for investments.

To that end, clear objectives, effective design and robust evaluation frameworks are critical. Tax incentives can lead to high fiscal costs. They may trigger premature technology choices. When supporting demand, such as for electric vehicles and other consumer goods, they can exacerbate inequality. Transparency on goals, clear eligibility criteria, robust monitoring and evaluation, as well as sunset clauses are essential to address these challenges.

Alignment with broader industrial and decarbonisation strategies is also key. Tax incentives should not be used as stand-alone instruments, but rather as key components of broader policy packages for industrial decarbonisation. They are complements, not substitutes, for other measures, such as carbon pricing, phasing out fossil fuel subsidies, and direct investment in infrastructure

When deployed in that manner, tax incentives can be a critical catalyst to accelerate industrial decarbonisation.

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