Fuel taxes and climate change
The double-bind stopping us from saving the planet
A UN Committee debates how to bring the Yellow Vests onboard
Yellow Vests (les gilets jaunes) couldn't help but make their presence felt at the United Nations in Geneva in mid-October. Not physically. Not in the UN itself. But they were on several people's minds when a UN expert committee on taxes assembled for a four-day meeting including a debate about the Sustainable Development Goals (SDGs) set to be achieved by UN member states by 2030.
Navid Hanif, Director of the UN Financing for Sustainable Development Office, said a high-level UN dialogue in New York a few weeks before had concluded "the largest source of financing needed to implement the Sustainable Development Goals must come from tax revenues."
Since the Yellow Vests came onto the streets in opposition to plans to impose a swingeing tax in France on auto fuel prices, the Committee of Experts on International Cooperation in Tax Matters would have had to be deaf, dumb and blind not to understand what the protestors were about.
The easiest way is the least popular
Tax riots elsewhere have been also in the news, one of the experts pointed out. Yet all the specialists agree that fuel price increases through increased taxes are the easiest ways to bring down carbon emissions and stop global warming — and this is a universal challenge we have to meet if we are to have any hopes of achieving the SDGs, particularly SDG13 on controlling the climate crisis.
To quote the International Monetary Fund (IMF) on the 2015 Paris climate control agreement (the one President Trump wants to pull out of): "If fuel prices had been set at fully efficient levels in 2015, estimated global CO2 emissions would have been 28% lower, fossil fuel air pollution deaths 46% lower, tax revenues higher by 3.8% of global GDP, and net economic benefits (environmental benefits less economic costs) would have amounted to 1.7% of global GDP."
The problem is, the easiest way is also the least popular with the poor, because it is likely to take the biggest bite out of their earnings. So we know we have to do it, but we ask for trouble if we try to push such taxes through.
Getting the nitty-gritty
The fall meeting of the 25-member Committee of Experts on International Cooperation in Tax Matters, a subsidiary of the Economic and Social Council (ECOSOC), was formally closed except to people with UN badges and registered attendees. That's how I got in with my media accreditation.
Most of its work is done in sub-committees and lots of its documentation is still no more than discussion notes. But I've found that's often the best way to get a handle on the problems and opinions bubbling on the surface, before the obfuscations of diplomatic language and political compromises have buried all expressions of dissent.
Taxes mean exemptions, subsidies and differences
What the documents befoe the committee showed was that there's a smorgasbord, not to say dog's dinner, of opinions, laws. subsidies and exemptions, covering taxes on fuel, for example, that the tax specialists have to try to sort out by 2021. Good luck with that.
They all agree taxation of fuel use is the answer. The problem is, many of the measures hit the poor and most vulnerable worst. For example, taxes on diesel used to power public buses penalize those who don't have cars, and that means these charges hit women harder than men. Obvious.
But if governments are not transparent and coherent in their approach, they lose support of their citizens, as Committee members pointed out. Enter the yellow vests.
Tax fuels, but which ones?
To quote the Committee paper on environmental taxes:
"Iceland only taxes petrol, diesel and heating gas oil. India and the Philippines only tax coal, while Mexico taxes coal and petroleum products (not natural gas) and Costa Rica levies tax on all fossil hydrocarbons. On the other hand, natural gas as motor fuel and coal are exempted from the carbon tax coverage in Colombia. The carbon tax in Argentina covers all major fossil fuels used in motor fuels or for heating purposes with the exemption of natural gas and liquified petroleum gas used for heating purposes."
Who's right? The Committee is trying to produce a handbook on carbon taxation with answers.
Worries are 'legitimate and important'
As for the gilet jaunes, the Committee note agrees: "It is clear that concerns over e.g. distributional impacts, social justice and equity implications of a carbon tax in many cases are not only legitimate and important to address as such, but also require the attention of policy makers in order to secure the success of the tax."
The Committee experts add: "Taxation of vehicle fuels has been found to be neutral or even progressive [i.e. taxing the rich more than the poor] in several middle and lower-income countries. [...] However, households may be affected by a carbon tax not only through having to pay for their own emissions (e.g. from the burning of fuels for transport or heating). In addition, they may also face increased overall costs for their consumption [because] taxation of emissions that arise in the production of goods and services gets passed through to consumer prices. These indirect costs to households are sometimes less tangible and hence more difficult to measure."
Evidence not conclusive
But the evidence for such taxes increasing innovation and competitiveness among businesses, "is not conclusive". The note added: "While regulation indeed seems to spur innovation, it is less clear to what extent stricter regulation also enhances business performance".
One participant from a Zurich economic think-thank objected. Politicians, he suggested, were likely to seize on any reason NOT to tax CO2 emissions. So the Committee should not give them any encouragement, he argued.
A uniform carbon tax is ideal
In any case, the note said economic theory "suggests a uniform carbon tax with a wide base in terms of its coverage to be the most efficient design."
But concerns about the competitiveness of domestic industries — especially energy-intensive and firms exposed to competition from companies based elsewhere with different taxes — mean charges "deviate a theoretically ideal carbon tax".
However, the specialists will have to square this with Costa Rica's straightforward practice.
Costa Rica a pioneer
As they admit: "Costa Rica is the Latin American pioneer in carbon taxation.[...] The country has had such a tax since 1997. The Costa Rican tax base is fossil hydrocarbons[...] However, the carbon tax rate is not related to the fossil carbon content of the hydrocarbons nor based on the measurement of emissions, but rather by a percentage (currently 3.5) of the market price of the hydrocarbons."
You can get an idea of the problems from the situation in the European Union, which has a "harmonized framework" for taxing fuels.
"The EU Member States that have introduced a carbon tax have generally added it to an already existing general excise tax, either as part of the general excise duty (e.g. in France) or as a separate tax (e.g. in Denmark, Finland, Norway and Sweden). In some cases, the introduction of a carbon tax was combined with a reduction in the pre-existing excise tax covering the same fuels. Excise taxes reduce energy use and hence carbon emissions."
Excise taxes reduce energy use but not cost-effectively
So far, so good. "However, they do not usually do so in a cost-effective way, because they are not aligned with the carbon content or the broader pollution profile of the taxed fuels," the UN Committee drafters point out. Tney add, bitingly:
"If an excise tax, on the other hand, is designed in proportion to carbon content it steers towards a low-carbon energy mix. This means that a carbon tax in this respect tends to outperform an excise tax where the tax rates are laid down without no specific logic and rather based solely on political deliberations."
The variations in taxes are huge. "The carbon tax base in Iceland consists of petrol, diesel and heating gas oil, as these are the only fossil fuels available on the market in that country."
"Outside Europe, some countries, for instance India, Mexico, the Philippines and Zimbabwe, have chosen to tax only a few fuels. In the case of India and the Philippines only coal is being taxed, while Mexico taxes coal and petroleum products. The Colombian carbon tax base consists of natural gas and other petroleum products.
"Although not specifically designed as a carbon tax, an example of a country having introduced a tax only on certain fuels is Zimbabwe, where only petrol and diesel are taxed. The carbon tax in Argentina covers all major fossil fuels used as motor fuels or for heating purposes with the exemption of natural gas and liquified petroleum gas used for heating purposes."
Consider alternatives to exemptions
The Committee declares: "It is crucial for policymakers to consider alternatives to exemptions."
Watch this space -- and hope things become clearer. The Committee meets again in spring, this time in New York.
Fuel taxes weren't the only concern in Geneva, however. Also on the Committee's plate over the five days were the next update of the UN Nations Model Double Taxation Convention between Developed and Developing Countries, on the development of a UN Handbook on Tax Dispute Avoidance and Resolution, the Environmental Handbook, the next update of the UN Transfer Pricing Manual and the UN Extractive Industries Handbook.
General topics included the tax consequences of the digitalized economy, the tax treatment of official development assistance projects and capacity-building, as well as tax and the SDGs.
Illicit financial flows
One major headache was illicit financial flows out of developing (and developed) countries, described as "still depleting to a large extent the resources available to countries to implement the SDGs".
Another was was is known as the informal sector, largely unregistered small-scale businesses such as street trading and individual services, that make up a large part of developing country economies. In Jamaica, for example, it has been estimated at 43%. What to do about them fiscally, and how to tax them?
A third issue the tax specialists raised was strengthening tax administrations, not just tax laws, so that they could raise "the morale of taxpayers and encourage trust in governments" as well as bring wealthy individuals and businesses into the fiscal net.
"Cross-border business, including digital," should consider the revenue implications for all countries and their impact on sustainable development activities," members also said.
Border tax adjustments
Border tax adjustments (BTAs) might seem to a good way of handling the discrepancies between regimes, but one Committee member warned this was likely to prove a "big sticking point" in relation to the open-trade principles of the World Trade Organization.
"We can learn from the experience we have had with VAT," he suggested, pointing to the fierce debate over whether Value Added Taxes are regressive (favouring the rich over the poor because of their relatively equivalent consumption patterns for most goods).
This experience suggests tax policymakers need to look closely at the impact of BTAs on the least developed countries, it was proposed, and researchers should take a life-cycle view of the distribution effects of goods rather than static analysis of the way goods are used (i.e. how goods get passed on and disposed of rather than simply looking at their retail history).
The Intergovernmental Group of Experts on Financing for Development organized their third session in Geneva on 4-6 November 2019.
This April 2019 report (208 pages) covers SDGs 4 (quality education), 8 (decent work and economic growth), 10 (reduced inequalities), 13 (climate action) and 16 (peace, justice and strong institutions).
Its message: "Investments that are critical to achieving the Sustainable Development Goals (SDGs) remain underfunded and parts of the multilateral system are under strain."
There's a 12-page overview. You can download chapters separately.
Remove means testing
Chapter 3, Domestic Public Resources, covers taxes. It says (page 31):
Removing means testing for access to social protection would help remove barriers to participation in the formal economy, while also providing benefits to participation. More effective taxation of large businesses, including multinational enterprises (MNEs), can boost revenue." (surprise!)
The changing tax scene
The international tax environment looks remarkably different than it did just ten years ago. Norm-setting is more inclusive and more information is now available on financial accounts and corporate activity, although profit shifting remains a challenge. Efforts at strengthening international tax cooperation have brought important benefits in enforcement of tax rules.
Tell that to the small island developing states that say rich countries' new "anti-terrorism and anti-moneylaundering" rules that mean they cannot find corresponding banks to underwrite their operations, though very few accounts are implicated.
What ODA ignores
Official development assistance (ODA) in support of domestic revenue mobilization remains small. Donors should continue to increase their contributions to revenue mobilization capacity-building.
Emissions trading schemes (ETS)
Prices are relatively low, at around $5 to $25 per ton of CO2. Overly permissive exemptions, typically on transportation and heating fuels, and insufficient ratcheting down of emissions caps have reduced the effectiveness of some of these systems.
Direction carbon taxation
As of 2018, 21 Governments had introduced carbon taxes with several more scheduling implementation for 2019, although typically with partial coverage (e.g., some exempt natural gas). For Group of Twenty (G20) countries as a whole, research suggests that a carbon price of $35 to $40 per ton in 2030 is about sufficient to meet mitigation pledges — with lower prices estimated for developing countries, and higher prices, often above $70 per ton, estimated for developed economies.
Where the taxes have gone
To date, 44 per cent of carbon tax revenues have been used for lowering other taxes, 28 per cent for general funds, and 15 per cent for environmental spending globally. ETS have been more targeted, with 70 per cent of revenues used for environmental spending, 21 per cent for general funds, and 9 per cent for lowering other taxes. Excise taxes on polluting goods have tended to be more frequently used for general funds.
Carbon taxes as a 'sin' tax
As with other "sin taxes", a carbon tax — if introduced effectively — will, over decades, reduce its own tax base and thus requires proper planning of long-term revenue strategies.
Financing disaster risk reduction
This is a particular problem for SIDS.
Financing strategies can use a risk-layered approach, planning differently for frequent, smallscale disasters (e.g., seasonal localized flooding and landslides), for which investment in risk reduction may be cost-efficient, than for less frequent largescale disasters, for which risk reduction may need to be accompanied by risk financing. Risk reduction strategies should also be gender responsive, drawing upon comprehensive gender analysis and recognizing women's contributions.
Thousands of UK's richest people exploiting tax loophole. The Guardian, 5 November 2019. (LINK)
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