Part 3 | Tax and Carbon: Carrot or stick? Virtual roundtable
Context:
As the race to respond to the climate emergency and fund the green transition intensifies, the US' Inflation Reduction Act (IRA) and the EU's Carbon Border Adjustment Mechanism (CBAM) have emerged as significant pieces of legislation, generating global debate. As multinational companies navigate these twin policy landscapes, new challenges, tensions and opportunities are emerging for them as well as governments and civil society actors.
KPMG International hosted this roundtable discussion, to explore the different policy approaches to carbon taxes taken by the United States and Europe – and their implications for the Global South. If a country wants to increase decarbonization aspirations, what approach is likely to be more effective – the carrot of incentives or the stick carbon pricing? Perhaps regulation or perhaps a combination? How will low-income or vulnerable economies be impacted by these policy developments?
The conversation was held under the Chatham House Rule and was attended by ten expert participants (see below for a list of attendees). The write-up below summarizes the personal views of participants and does not necessarily reflect the view of any particular organization, including KPMG.
Two previous roundtables focused on US and European perspectives and perspectives from Asia and Europe.
Executive Summary:
Participants underscored the necessity for localized approaches to address environmental concerns and climate impacts in the Global South. Policies should align with the diverse needs of each country, avoiding reliance solely on Global North-centric approaches.
The disparity in historical and current emissions contribution from sub-Saharan Africa versus developed regions highlights the need for recalibrating environmental policies.
Urgent economic crises in the Global South require equal attention to pressing climate change and environmental issues. Fiscal constraints and unsustainable debt burdens already undermining climate action and the implementation of effective incentives for green transition necessitating innovative financing solutions that consider the continent's economic realities.
Concerns over climate and environment-based unilateral actions, policies and taxes impacting African exports and trade prompt the need for equitable climate measures.
Broadening the scope of taxation beyond carbon taxes could generate funds for climate-related initiatives. Participants raised a series of proposals, including wealth taxes, aviation taxes, maritime taxes and leveraging commodities trading and financial markets for climate finance.
Participants called for a holistic approach to climate finance, integrating global financial architecture with trade rules to avoid conflicts between climate, industrial and trade policies.
Ensuring fair distribution of carbon finance and avoiding penalties on exports are crucial for a green and just transition.
Participants raised the issue of colonialism and ongoing injustice between the Global North and South and the dangers of exacerbating inequalities between them through any new measures.
What are the Inflation Reduction Act (IRA) and the Carbon Border Adjustment Mechanism (CBAM) potential impact on the Global South?
The need for localized and tailored approaches and consideration of fiscal constraints
Participants raised critical questions regarding the spillover effects of these existing frameworks and emphasized the need for localized approaches to best address environmental concerns in the Global South.
One participant, drawing from experiences collaborating with tax administrators across Africa, shed light on the disparity in emissions contribution from sub-Saharan Africa compared to developed regions. Despite the region's low emissions, it remains under pressure to introduce carbon taxation, in particular in response to border carbon adjustment mechanisms. However, in many countries, there are more important local environmental and climate challenges such as water and waste management, pollution and deforestation. This disparity underscores the necessity for a recalibration of environmental and climate policies with a focus on the unique needs of the Global South.
The conversation also raised geopolitical considerations, highlighting the urgent economic crises faced by many nations in the Global South. While international relations dominate the discourse, the pressing environmental and climate issues within these regions demand equal attention. Participants emphasised the relatively low emissions from Africa and stressed the importance of tailoring carbon taxation discussions to reflect this reality. However, fiscal constraints and high debt burdens hinder the implementation of effective national climate action and the transition to renewable energy.
Uncertainty looms over the recognition of equivalent measures and the fairness of carbon pricing, particularly concerning historical emissions. In South Africa, the development of carbon taxation faced challenges in navigating the dynamics of its mineral-led economy, resulting in less-than-ideal legislation. Amidst these complexities, participants questioned the suitability of carbon taxation as a priority for many countries in the Global South and proposed alternative approaches, such as focusing on preventing deforestation.
Participants stressed the importance of redirecting focus towards addressing local environmental issues, such as waste management, which directly impact communities in the Global South. Other examples, such as the introduction of electric vehicles, were suggested as ways to contribute to localized decarbonization strategies tailored to the unique needs of communities in the Global South.
By prioritizing localized approaches and addressing fiscal constraints, nations can embark on sustainable paths towards decarbonization.
Mitigating negative consequences felt by the Global South
Avoiding unintended consequences, retaining the benefits of a green transition within the Global South and prioritizing the region's development goals
Participants expressed concerns over climate and environmental unilateral actions. Policies and taxes and their impacts on African exports and trade. Participants questioned whether initiatives like the Inflation Reduction Act (IRA) and the Carbon Border Adjustment Mechanism (CBAM) genuinely prioritize climate action or also serve as protectionism and trade measures. There was a concern that African exports to the EU impacted by CBAM would suffer a competitive disadvantage even though Africa as a continent is responsible for a very limited amount of CO2 in the atmosphere. The projected annual cost of EU CBAM to Africa further fuelled scepticism about the initiative's true intentions. Also, there were concerns that African countries would not be able to compete with the US for investment given the large subsidies under IRA.
While it was accepted that some green investment is going into Africa, a potential, counterintuitive, result was noted. Highlighting examples such as Namibia's green industrial zone supported by Germany[1] and Mauritania's production of green steel for export to the EU[2], participants raised concerns about the potential economic entrapment of African leaving them at the bottom of the supply chain. The concern is that only the production of basic raw products – e.g. iron, steel and aluminium – would be left in Africa with the manufacturing and use of products being located in Europe. This would perpetuate Africa’s role as a supplier for the EU without addressing the need for green economic growth.
The need for a just energy transition was also raised. A significant percentage of people in Africa do not have access to electricity or an adequate energy supply and there are concerns that carbon taxes would exacerbate that situation. One participant noted another counterintuitive example imposing or increasing carbon taxes could inadvertently incentivize a greater use of biomass fuels, especially for cooking. However, that could in turn exacerbate deforestation. The potential consequence of driving energy production towards biomass markets instead of modern alternatives raises concerns about the unintended environmental ramifications.
Participants stressed the importance of ensuring that climate measures are just, equitable and beneficial for the Global South. It was suggested that countries can navigate forthcoming measures while safeguarding their interests by advocating for policies that prioritize the region's development goals and address its unique challenges.
What are some alternatives to fund decarbonization?
Exploring wealth taxes, commodity taxes and commodities trading
Participants proposed exploring alternative forms of taxation, such as wealth taxes and aviation taxes, as well as leveraging commodities trading and financial markets to increase revenues needed to address the climate crisis, particularly in the Global South.
Drawing attention to the significant role of commodities trading in global financial markets, particularly in African minerals, oil, and gas, participants emphasized the need to tap into these markets for climate finance. They noted that while commodities predominantly flow through financial hubs like London, New York, and Chicago, the enormous trading volumes present an untapped resource for financing climate initiatives. Despite concerns about speculative trading in commodities markets, participants argued that the sheer scale of financial transactions demonstrates the availability of capital to address climate change.
Participants advocated for exploring alternative taxation methods and leveraging financial markets to mobilize resources for climate finance, particularly in regions disproportionately affected by climate change, like the Global South. By tapping into existing financial mechanisms and redirecting profits from commodities trading, countries can access the necessary funds to address the urgent challenges posed by climate change.
For the Global South it’s not about carrots or sticks… addressing the wider issues
Decolonization, reversing the flow of wealth and resources from South to North, differentiated responsibilities and historic emissions
Participants highlighted the need to reconsider environmental and climate taxation policies, emphasizing their social benefits and the potential of discouraging increased investment in fossil fuels, over revenue generation. They argued that historical emitters should bear the primary responsibility for carbon mitigation efforts, while developing nations should have space to prioritize addressing domestic environmental challenges.
Addressing the critical question of decarbonization in a world still grappling with colonial legacies, participants raised the need for differentiated responsibilities to be embedded in tax policy mechanisms. They highlighted the importance of directing adequate financing towards the Global South to address its disproportionate climate impact as tax revenues will never raise all the amounts needed to fund a green transition.
Some participants urged caution against exacerbating the debt crisis in many African countries, citing examples such as Malawi's failed hydropower project[3], which further burdened the nation with debt.
Participants stressed the need to prioritize energy access and sovereignty in Africa and condemned the historical exploitation of the continent's energy resources for export. They called for a holistic approach to climate finance, integrating global tax architecture with trade rules to avoid conflicts between climate and trade policies.
Participants stressed the importance of implementing frameworks that ensure fair distribution of carbon finance and avoid penalizing exports that could otherwise benefit domestic economies.
Participants urged a re-evaluation of environmental policies and climate finance distribution to align with the diverse needs of each country, prioritizing a green and just transition that benefits both the economy and the environment. They highlighted the importance of local and national perspectives in shaping policies, rather than relying solely on Global North-centric approaches.
The discussion was attended by:
Keval Bharadia, Global Financial Transaction Tax (FTT)
Joab Bwire Okanda, Senior advisor, Christian Aid
Erinah Chipumho, Economist, Zimbabwe Economic Policy Analysis and Research Unit (ZEPARI)
Becky Holloway, Partner, Jericho
Jodie Keane, Senior Research Fellow, with the International Economic Development Group, Overseas Development Institute
Sameera Khan, Head of Unit: Country Programs, African Tax Administration Forum (ATAF)
Neal Lawson, Partner, Jericho
Chris Morgan, Head of the KPMG Global Responsible Tax Project, KPMG International
Giovanni Occhiali, Research Fellow, International Centre for Tax and Development
Grant Wardell-Johnson, Global Tax Policy Leader, KPMG International
The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International.
Footnotes
[1] https://www.ft.com/content/e7f18e53-0509-47d1-a780-e06dcbbd5cf4
[2] https://www.hydrogeninsight.com/industrial/make-green-iron-and-steel-from-hydrogen-and-export-them-to-europe-eu-president-tells-mauritania/2-1-1596440
[3] https://www.theguardian.com/world/2017/dec/08/malawi-blackouts-drought-hydro-power
