This week, the world’s leaders descend on Paris to “build a new consensus on a more inclusive international finance system.” The agenda includes a range of worthy options to make the most of the money going into the international system, but to fundamentally change incentives and resourcing levels for international climate and development outcomes, the summit should put greenhouse gas taxes back on the table with some or all of the proceeds going to help those most affected by climate change.
In this blog, we look at why taxes and levies offer major advantages over other economic tools to tackle climate change and examine different taxes and levies that could reduce emissions while also ensuring that those responsible for climate change are paying for some of the damage they do.
Scope of the summit
French President Emmanuel Macron has said that the summit will consider “all the means and ways of increasing financial solidarity with the South.” One of the four workstreams for the summit is “Developing the innovative solutions to provide additional resources in support of countries vulnerable to climate change.” This focuses on how to unlock new sources of finance to assist those countries most exposed to climate change, and is co-chaired by France and Barbados. There are two new and useful papers from French think tank FERDI on aviation taxes, and a background paper from IDDRI, another French think tank, on taxes and levies to finance loss and damage (the negative repercussions of climate change).
In recent days, France has given its support to developing a maritime levy. This is a major and positive shift: as an industry, maritime shipping is a significant contributor to climate change, yet it is essentially untaxed. France’s intervention offers a strong starting point. An international tax on maritime shipping emissions has been discussed for some time but will need widespread support. Beyond shipping, there should also be serious consideration given to other options. Before we look at these other possibilities, we consider why taxation must be part of the answer to climate change.
Greenhouse gas taxes: An essential tool for net zero
Economists have long argued that taxes on greenhouse gas emissions, along with avoiding subsidies on fossil fuels, are the best way to tackle climate change and accelerate innovation. This isn’t just an abstract liberal economic principle—the broad policy options on the table are to regulate or ban, subsidise (spend), tax, or supply information.
It’s clear information is not enough; regulation or bans, for their part, are clumsy. Subsidies certainly have their place, not least on research and development and supporting innovation, but as we’re seeing from the US Inflation Reduction Act, encouraging green activity is expensive and is liable to lead to trade disputes (even with allies like the EU). We can’t subsidise the whole world away from emissions. Greenhouse gases are pollution, and the best-designed economic instrument to tackle pollution is to ensure thatthe polluter pays. This means we need a tax.
International carbon taxes are a key but under-developed tool in the fight against climate change. While commitments on subsidies for clean technology and regulation of polluting materials have a role to play, taxation is the best available economic tool for incentivising progress and raising the revenues needed. Given the clear risk of leakage, and the need for international coordination, a coherent and reliable system will be necessary. The recent Organisation for Economic Co-operation (OECD)-brokered agreement on a minimum corporate tax level shows that it is possible.
IMF staff have recommended an agreed minimum price on carbon. Importantly, this would vary according to a country’s income level, ensuring that it is equitable. It would also need to be enforced through international coordination, preventing dirty activity simply “leaking” into countries with lower standards.
A commitment on loss and damage
The proceeds from an international carbon tax would be an ideal way to fulfil commitments to provide promised resources to lower-income countries dealing with climate change’s worst effects.
Carbon taxation was originally seen as a key way to meet climate finance goals. In 2009, industrialised states made a commitment to provide $100bn a year in climate finance by 2020.This target was not met, and work is currently underway to develop a New Collective Quantified Goal. In 2010, immediately following the agreement on the $100bn target, a report commissioned by then-UN Secretary-General Ban Ki-moon suggested carbon pricing would be a “key element” to meeting the target, and could contribute over a quarter of the total pledged. But fiscal measures contributed nothing, and the target was missed by, coincidentally, around that amount.
At the last UN climate conference (COP27), countries also agrees to provide funding for “loss and damage” to help deal with the adverse effects of climate change. But without dedicated additional funding, this fund could just divert existing finance from other development purposes, rather than provide new support.
A new tax/levy instrument, then, would make a major political statement on both these areas and could be a catalyst to real commitments in national emissions reductions. Most country plans for emissions reduction, set out in Nationally Determined Contributions (NDCs), currently offer limited ambition. If the world is to avoid catastrophic climate change, new and bolder approaches must be found.
Overview of international carbon tax proposals (see full table at annex)
Annual revenue (USD)
Incentives, examples, and notes
International aviation emissions are currently largely unregulated. If international aviation were a country, it would be the 8th largest emitter (2018 data). An existing levy has previously been enacted in nine countries to fund the UNITAID drug-purchasing facility.
Maritime shipping is currently untaxed despite being highly polluting. The sector is governed by the International Maritime Organisation (IMO), which has overseen negotiations.
Fossil fuel extraction levy
Strong alignment to the ‘polluter pays’ principle; and potential for extractors to be compensated with some revenue to support a just transition.A precedent has been set by the International Oil Pollution Compensation Funds, which charge fossil fuel companies for damages caused by spilt oil. “Micro-levies” (see full table) could provide a starting point
Financial transaction tax (FTT)
An FTT doesn’t have any useful incentives for emissions reduction, but has been repeatedly proposed on the basis that it could be easy to operationalise for loss and damage funding. FTTs are already in use for domestic revenue raising in numerous states.
This list is illustrative rather than exhaustive, and other possibilities are under discussion too: in late 2022, the UN Secretary-General called in late 2022 for a windfall tax to be levied against energy companies; and suggestions have been in made in the European Parliament that revenue for Carbon Border Adjustment Mechanismsshould be shared with developing countries. The much-discussed Bridgetown Agenda, a plan from a group led by the Prime Minister of Barbados to reform the global financial architecture, has detailed proposals that include a “reverse levy” which would rise as energy prices fall.
This table above demonstrates that there are a number of options that would substantially increase our chances of meeting climate goals, while also ensuring polluters pay those most affected by the damage they create.
While many of these options will be politically difficult, there is merit in taking forward work on each of these, and looking at how each, or a combination, could be developed. Such work can consider the design and practicalities, as well as the incentives that could be included to encourage governments to sign up to a global agreement (much in the same way that the OECD agreement on minimum corporate taxes allows countries to introduce a ‘top-up’ tax on companies who are paying less the minimum in other jurisdictions, creating an incentive for all jurisdictions to sign up).
A taskforce for solidarity taxes
The world cannot avoid the worst impacts of climate change without making use of taxation. Equally, those unjustly facing the worst impacts now and in the years to come need new climate change support that doesn’t come at the expense of existing development funding. The need to raise more and additional revenue for international climate finance at a time when fiscal budgets are strained points to the opportunity of new fiscal instruments.
At Macron’s summit, political leaders should create a coalition in favour of the principle of shared levies and respond to calls for a taskforce to explore international solidarity taxes by the 2024 G20.