Tax is the Answer for Climate Financing

The United Nations Climate Change Conference 2009 in Copenhagen (COP15) has a 'global levy on financial transactions' is on the conference document. Such a tax, as we have argued before, would be equitable, and urgently needed.

Currently the COP15 summit is deadlocked on the question of long-term financing:

"Poor countries want a minimum of $400bn (£242bn) a year by 2020 to help them adapt, but rich countries have proposed only €110bn (£100bn) a year."

José Manuel Barroso, the president of the European Commission agrees, he is quoted in the Guardian that the scale of the sums is so huge that it is beyond the scope of traditional national budgets: ‘You need to look at innovative financing. This is an issue of global governance’. Barroso is spot on.

The most prominent of these 'innovative financing mechanisms' is now the global levy on financial transactions, as it is called in Copenhagen, or the financial transactions tax (FTT) as we have called it before. Depending on the rates applied, and the scope of the countries participating, it could raise anything between a modest US$ 20 to a whopping US$ 690 billion a rate of 0.005-0.05 per cent.

Such a levy would be minimal to the financial markets, which now have the volume of trillions of dollars, on the currency transaction market already has the daily volume of about US$ 4 trillion, while currency derivates trading had a daily volume of US$ 2.54 trillion, meanwhile share trading had a daily turnover of US$ 450 billion both also in 2007. Indeed as market trading volumes are so vastly different, it would be efficient to tax share trading at a higher rate than currencies. Also as volumes are likely to decrease as a tax is applied, revenues will actually be somewhat lower than the headline figures.

The second tax being proposed is a Carbon Tax, and a simple of basing it per tonne of emmited emissions would be the simplest way to implement it. Concerns, however, exist on how equitable it would be. Some studies exist in the US for the year 2005, and France for 2009 (in French only) show that the tax burden would be skewed on the top quintile (over 25 per cent), the bottom two would pay less than a quarter of the tax. No studies on the equitability of carbon taxes exist for developing nations.

The Carbon Tax Centre in the USA proposes a flat rate of $50.00 per ton of carbon. This rate is entirely feasible as Finland already taxes carbon at 66.2€ per ton (about US$ 96.8), Sweden at a higher rate of 108€ per tonne, and France has proposed at 32€ per tonne by the Rocard Comission, but to be implemented first at half the rate at 17€ per tonne tax from January 2010. Most of the existing and proposed plans, however, exempt energy production either fully or partially from the tax.

Applied globally and at a flat rate to the 8,230 million metric tonnes of carbon put into the air (2006 estimate), we have between €139 billion €888 billion in revenue (assuming again emissions would not decrease, which we hope they would as a result). The Swedish case demonstrates its feasibility as in 2008, they raised €1.4 billion in revenues -- even while energy production had exemptions.

The problem in each one of the calculations, however, is that the majority of taxes levied would be in the rich nations plus India and China as major emerging economies (and thus major carbon polluters), while it is the poor nations who need to additional financing. Do we really believe all carbon taxes and financial transaction taxes would be given as aid to poor countries?

Pigs must be flying in Copenhagen if we believe that, so better assume only a part would be redistributed, as both a proposed US carbon tax legislation, and the agreed French one both state that the Carbon Tax would be 'revenue neutral', i.e. be compensated by a reduction in the income tax. So no new financing for development there.

The solution, as we have said before, is to allow poor nations to capture their revenue potential, estimated at $160 billion in lost taxes due to trade mispricing, via international tax co-operation.