Climbing towards a sustainable future

The cornerstone of the New Zealand Government’s 2025 Budget was the Investment Boost tax incentive. While it has been developed to stimulate investment and economic growth, could it also be an enabler for New Zealand businesses to enhance their profitability and productivity while also achieving sustainable outcomes? The answer is yes, however, there are risks.

First with the ’yes’

At its core, Investment Boost is designed to motivate businesses to invest in innovative technologies and productive assets, ultimately leading to better economic outcomes. So how could it also lead to lower emissions and greater resilience against a warming planet? There are a few ways both of those things could happen.

1. Driving sustainable practices through investment: By allowing businesses to deduct 20% of the cost of new assets from their taxable income, Investment Boost could encourage the adoption of advanced machinery and tools. This financial incentive would not only lower tax liabilities but also empower companies to invest in environmentally friendly technologies.

• Picture a textile manufacturing company looking to upgrade its production line. The firm decides to invest in energy-efficient weaving machines that significantly reduce electricity consumption and material waste. These machines are not only cutting-edge but also designed to operate with greater efficiency, reducing the environmental footprint of the manufacturing process.
• By taking advantage of Investment Boost, the company can deduct 20% of the cost of these new machines from its taxable income in the year of purchase. This deduction, coupled with standard depreciation, results in a lower tax bill, freeing up capital to further reinvest in sustainable practices. The immediate financial benefit makes it feasible for the company to adopt eco-friendly technologies that otherwise might have been cost-prohibitive.
• This investment does more than just cut costs; it positions the company as a leader in sustainable manufacturing. It achieves higher productivity with less energy use, reduces emissions, and aligns business operations with global sustainability standards. In doing so, the company not only benefits financially but also contributes positively to New Zealand's broader climate objectives by reducing its carbon footprint and promoting eco-friendly industry practices.

2. Economic growth and climate adaptation funding: The anticipated economic growth from Investment Boost projects a 1% increase in GDP and a 1.5% rise in wages over the next two decades. This growth translates into increased government revenues, which could be redirected towards essential climate adaptation projects. Such investments are critical for enhancing infrastructure resilience and developing effective strategies to combat climate challenges.

3. Investing in climate change resilience: Investment Boost provides real-life scenarios where businesses could leverage this incentive to bolster their sustainability efforts and their resilience to climate change. For instance, investments in improvements to agricultural land - such as predator control, fencing and planting trees - could qualify for deductions. These types of projects not only benefit the environment, but they also make the land more resilient to floods and severe weather events and enhance operational efficiency and productivity.

4. Long-term implication for New Zealand’s climate objectives: By fostering a culture of investment in sustainable practices, Investment Boost could play a pivotal role in shaping New Zealand's long-term climate goals. As businesses increasingly focus on reducing their carbon footprints through innovative solutions, Aotearoa New Zealand could strengthen our position as a leader in sustainability. This strategy not only meets our immediate economic needs but also ensures a healthier environment for future generations.

The Investment Boost tax incentive is more than just a financial advantage; it is a strategic move towards a sustainable future. By encouraging businesses to invest in new technologies and practices, New Zealand is taking significant steps to improve both its economy and its commitment to environmental stewardship.

However

This initiative is intended for all types of investments, not just investments that have positive environmental and social outcomes. While Investment Boost is designed to encourage investment in productive assets and improve economic growth, there are ways it could inadvertently lead to increased greenhouse gas emissions and increased costs for our economy and our communities around how we adapt to a warming planet.

There are some real challenges that could result from this policy:

Economic growth: Investment Boost provides businesses with a financial advantage by allowing them to deduct 20% of the cost of new assets and activities from taxable income. This could make investments in fossil fuel technology more financially attractive, potentially driving growth in sectors related to fossil fuels. It also may incentivise activities which result in poor environmental outcomes and increased emissions, such as the draining of wetlands.

Environmental sustainability: Investments in fossil fuel production will lead to increased greenhouse gas emissions, counteracting efforts to achieve environmental sustainability. While the incentive boosts economic activity, it may inadvertently encourage businesses to expand or upgrade fossil fuel operations, thereby increasing carbon outputs and contributing to global warming. This misalignment with climate goals could hinder New Zealand's progress in reducing emissions and transitioning to renewable energy sources. There could be significant impacts on our trade relationships and reputation in, and access to, key markets.

Long-term implications: If businesses focus on fossil fuel investments due to the immediate financial benefits, they might miss opportunities to innovate in cleaner technologies. This could lock industries into carbon-intensive practices that are unsustainable in the long run, impacting New Zealand's climate objectives negatively and delaying the shift towards greener alternatives.

Increased production capacity: If businesses invest in new machinery to increase production capacity without considering energy efficiency, their overall energy consumption and emissions could rise. The incentive focuses on the financial viability of investments, not necessarily their environmental impact.

Short-term focus: Businesses might prioritise immediate tax benefits over long-term sustainability, choosing cheaper, less efficient technologies that still qualify for the deduction. This could lead to higher emissions if these assets are not optimised for low energy consumption.

The Investment Boost tax incentive presents a promising opportunity for economic growth and sustainability by encouraging investments in advanced, sustainable technologies. However, careful consideration is required to mitigate the risk of inadvertently promoting investments that could increase emissions, reduce resilience and adaptation and counteract our environmental goals.