Unfair taxation in the name of climate action

Source: The post is based on the article “Unfair taxation in the name of climate action” published in Business Standard on 14^th July 2023.

Syllabus: GS 3 – Environment – Climate Change

Relevance: concerns associated with levying emission related taxes

News: Rich countries have proposed global tax and tariff to mobilize finance for climate change. These taxes will harm the developing countries.

What are some of the taxation measures being adopted by rich countries?

Carbon Border Adjustment Mechanism (CBAM): There are many flaws with CBAM –

• In the short run, this will generate more revenue for the EU and/or force exporters to squeeze their profit margins and wages to reduce costs.
• A tariff on an externality only alleviates if it is applied at the source of the externality, but the tariff in this case is imposed at the point of sale.
• The data needed to accurately assess and compare emissions is also contentious.
• CBAM mainly targets raw materials rather than finished goods. It will disproportionately affect countries in Africa and the European neighborhood that are not significant historical or present-day polluters.

A proposed tax on Carbon Emissions from Shipping: It is based on the argument that shipping services are underpriced as no account is taken of their carbon emissions. Therefore, the tax can reduce emissions either by reducing shipping movements or by promoting switching to alternative low-carbon shipping technologies.

However, the immediate impact of the tax will depend on the demand elasticity for shipping.

If demand is inelastic, there will be no significant short-term reduction in emissions. Instead, it will increase the cost of shipping goods, and the burden of this tax will be passed on to consumers.

Moreover, the tax will discriminate against island states and importers of bulk goods, including fuels, agricultural goods, and essential minerals. It will also discriminate against countries seeking to industrialize through export-led growth.

The tax revenues will primarily only benefit the top 10 shipping countries, which are predominantly high-income economies.

What measures are being adopted by rich countries to mitigate the effect of such taxes on developing countries?

First, rich countries have proposed measures of giving developing countries some of the money raised from these taxes.

However, it is the poorer countries themselves that will bear the burden of these taxes as well as be part of financing such transfers.

Second, the other proposal adopted by rich countries involves subsidizing the transition of these countries to lower carbon technologies.

However, if this transition were fully supported through grant finance, there would be no need for these tariffs.

What can be the way ahead?

Rich countries are neither willing to take retroactive responsibility for carbon emissions nor provide grant and concessional finance in substantial measure to tackle the problem in contemporary times.

Hence, by adopting such taxation measures they only tend to hinder the development of poor countries.