Current climate finance efforts fall short of what the world needs. However, recent international tax processes have made significant steps towards redressing these shortfalls. This short blog from CESR offers a few concrete tax policies to power an equitable, green climate transition.
By Matt Forgette, CESR Fellow
“The world needs long-term money…choosing between people and the planet is a false choice. The world has enough funds,” stated Prime Minister Mia Mottley of Barbados on December 2, 2023, speaking on behalf of climate-vulnerable states. Her statement succinctly captured the urgent need for climate crisis finance and highlighted the critical message that sufficient resources exist to address both human and environmental needs.
Indeed, the most recent estimates indicate that $5.4 trillion annually will be needed to meet the United Nations Sustainable Development Goals Yet in 2022, there was a $3 trillion shortfall. While that figure may seem daunting, states already possess the necessary financial resources. Consider that annual world military expenditure exceeds $2.2 trillion, while annual fossil fuel subsidies surpass an astonishing $7 trillion. Unfortunately, high-income countries have been far too slow to mobilize sufficient funds towards their climate commitments, only in the past year fulfilling their promise of transferring $100 billion to emerging markets by 2021. But even if high-income countries claim to have inadequate political and financial bandwidth to address the climate crisis, there are plenty of options to raise and mobilize this essential funding.
Recent global political processes, such as the Brazilian G20 presidency and the UN Tax Convention (UNTC) negotiations, have demonstrated a robust will amongst the international community for effective tax policies to solve the climate crisis. Brazil has presented proposals to tax ultra-rich individuals, while the UNTC has dedicated protocols within its terms of reference towards “tax cooperation on environmental challenges.” These international developments are critical given that climate change and inequality are both global problems that require a unified global approach. As noted by Nobel Prize-winning economist Joseph Stiglitz, “We need to establish new norms where the very wealthy contribute their fair share. You cannot squeeze money out of the poor, and the bottom fifty percent do not have any money.” Given this reality, it is helpful to explore specific tax proposals targeted toward the wealthy to redress global issues such as inequality and climate change.
Here, we analyze and advocate for several of these options. It identifies and explores three tax policies that could help finance a green climate transition while upholding human rights standards. These proposals can be seen as models for implementing future international tax processes, such as the UNTC protocols or G20 wealth taxes. The blog concludes that financing the global green energy transition and redressing inequality are far from impossible. In fact, transition costs can be fully offset by changes to our international tax system that currently hinder low-income countries from collecting public funding.
Cap and share carbon tax
One ambitious new climate finance tax model is known as “cap and share”. The measure creates a price on carbon emissions that corporations must pay in order to operate. In this way, it is similar to the EU’s recently established carbon border adjustment mechanism (CBAM). The CBAM is a tariff ostensibly designed to prevent carbon leakage, the rise in carbon emissions resulting from corporations moving their operations to regions with less stringent regulations. Unfortunately, the tariff was passed without any protections or exceptions for low-income countries and could lead to African countries losing billions as a result Furthermore, the measure was passed without any input from the ten countries on which it will have the greatest impact, completely abandoning notions of inclusivity and representation within the process.
The unique and innovative feature of the “cap and share” method for carbon taxation comes in how its resources are allocated after collection. The tax revenues raised would land in an international fund rather than an individual state’s government coffers. They would then be re-distributed based on need to climate-vulnerable, low-polluting nations in the Global South. This arrangement makes sense, as low-income Global South countries are the worst affected by tax avoidance and illicit financial flows and often also suffer from destructive climate catastrophes. This model could also serve as an inspiration for other international tax efforts due to its unique approach towards collective funding.
Climate damage tax
Another more traditional method for securing climate funding is a climate damages tax. As in the cap and share system, this technique is logical, as it would place the burden of redressing climate damages directly on those responsible for pollution of the environment. The current proposal would charge fossil fuel companies for the extraction of each ton of coal, calculated at a consistent rate globally based on how much climate pollution is embedded within the fossil fuel. It recommends that the tax be introduced at a low initial rate of $5 per ton of coal, increasing by $5 per ton each year until 2030 to $50 a ton. If implemented as recommended, the tax would raise in the region of $210 billion in its first year alone, with that figure quadrupling by 2035. Unlike cap-and-share, however, these revenues would go directly to national governments rather than an international pot.
With the advantage of targeting those that benefit the most from the extraction of fossil fuels, a climate damages tax would have the added benefit of incentivizing oil consumers to lessen their carbon outputs and has been identified by various human rights organizations as a financing mechanism compliant with human rights. As explained by Tipping Point UK, “[A climate damages tax] is a way of establishing accountability and responsibility…It opens up a conversation about how polluters can provide vulnerable countries with enough funding to adapt to the climate threats they are facing.”
Windfall and wealth taxes
The way to raise the greatest amount of revenue for the climate crisis is also the most straightforward. According to a recent report commissioned by the G20 Brazil presidency, a global minimum tax equal to 2% of the wealth of billionaires would raise $200-$250 billion per year globally from about 3,000 taxpayers; $100-$140 billion more could be mobilized if the tax was extended to those with more than $100 million. This amounts to about half of the money needed for developing countries to address climate challenges. The justification for this type of tax is also straightforward. A recent report found that from 1990 to 2019, the wealthiest 10% of individuals were responsible for producing more than half of global carbon emissions. Similarly, windfall taxes target those most responsible for fueling the climate crisis. The United Kingdom recently instituted such a tax on fossil fuel companies after energy companies’ profits soared post-Covid. The “Energy Profits Levy” yielded $5 billion in its first year in the UK alone.
Ultimately, opponents of taking essential efforts to combat the climate crisis have suffered from a lack of imagination and political will. A reluctance to accept responsibility for environmental pollution and a lack of urgency around the issue have led to a shortfall in funding for the most pressing issue facing our planet. Nevertheless, as demonstrated above, solutions for raising revenues and mobilizing resources towards the climate crisis exist. Intersectional climate justice will require advocating for policies like these which work towards an equitable green transition.
Central to this effort is the concept of climate reparations, which emphasizes the need to address the historical injustices faced by marginalized communities disproportionately affected by environmental degradation. Advocating for intersectional climate justice means championing policies that not only tackle the urgent climate crisis but also rectify past harms through reparative measures. By embracing these strategies, we can foster a just and sustainable transition, ensuring that all communities have a voice in shaping a resilient future. In doing so, we take a critical step toward healing the planet and achieving true equity for those most affected by the climate emergency.