Exploring the Potential of Taxation in the Climate Change Transition

Oil production USA

FILE – Pumpjacks work in a field near Lovington, NM in this April 24, 2015 file photo. The United States may have regained the title of world’s largest oil producer sooner than expected. Credit – Charlie Riedel – AP

Last week, a group of Democratic lawmakers known for their pro-climate action rallied outside the US Capitol to call for a new tax on the huge profits made by oil and gas companies since Russia invaded Ukraine last year have achieved. ExxonMobil, Shell and Chevron alone made more than $130 billion in profits in 2022 thanks to high prices, and lawmakers argued the US should tax them and pass any cut on to consumers.

“We truthfully know how much money they’ve made exploiting consumers,” said Sheldon Whitehouse, a Democratic senator from Rhode Island who has pushed for action to address climate change in the past. “We’re working on taking that back.”

Taxes have always played a central role in climate policy. For decades, climate advocates have pushed for a carbon tax to punish emissions. When that didn’t catch on, they switched gears and instead championed tax incentives to encourage clean energy. These two tax policies have dominated the debate on taxation and climate change. A new tranche of policies has now come onto the market. Politicians in Washington are pushing unexpected profit taxes. European leaders have called for levies on high-emission industries like aviation and shipping. Even the most ordinary of taxes – think income tax and corporate income tax – are now being linked to climate change in political discussions in new and perhaps surprising ways.

For now, at least, the idea of ​​a windfall tax is dead by the time it gets through to Congress, where Republicans control the House of Representatives. But elsewhere, including some conservative-led countries, politics is making headway. That means it could eventually become one of several new tax tools to fund the green energy transition in the US as well, as countries compete for the technologies of the future. “Contrary to what people might think, taxes have good days ahead,” says Lucas Chancel, an economist at the Paris School of Economics’ World Inequality Lab, who studies environmental politics and inequality. “They are necessary tools and solutions to the climate crisis.”

Understanding Linking climate policy and taxation begins with the CO2 tax. Carbon taxes, long regarded by economists as the most popular climate policy tool, require polluters to pay for the CO2 they emit, urging big companies to decarbonize while raising money that can be used for anything , from building clean energy projects to helping workers adapt to the transition .

But despite years of effort and some promising pioneer countries, the carbon tax failed to gain widespread acceptance. Positive incentives for renewable energies, on the other hand, were easier to implement. The US has cycled on and off piecemeal renewable tax credits since the 1990s, so it makes sense that tax credits played a central role in the Inflation Reduction Act (IRA), the Biden administration’s landmark climate law. The IRA contains more than $200 billion in tax credits that provide incentives for everything from nuclear power to electric vehicles. Analysis by Princeton University’s REPEAT project shows that annual wind capacity additions could more than double by 2025, while solar capacity additions could quintuple. But for all of the IRA’s climate strengths, it has failed to address several key carbon tax goals, namely penalizing emissions and boosting revenue from bad climate actors.

Almost like clockwork, as prospects for a global carbon tax dimmed, other levies entered the political debate. In the US, Democrats have called for a windfall profits tax for the oil and gas industry, saying companies are using high energy prices to enrich shareholders. Current proposals focus on redistributing profits to taxpayers, but other versions could exempt profits reinvested in clean energy and incentivize behavior change.

While windfall tax proposals don’t stand a chance in the current US Congress because Republicans control the House of Representatives, ideas have picked up speed on the other side of the Atlantic. The Conservative government in the UK introduced a windfall tax on energy companies last year, which is expected to bring in around $80 billion. Frans Timmermans, executive vice-president of the European Commission, the executive body of the European Union, suggested at COP27, last year’s United Nations climate change conference, that taxes on fossil fuels could be coupled with taxes on aviation and shipping to increase revenue increase. “We should work with the Secretary-General of the United Nations to find solutions to innovative sources of funding, including taxes on aviation, shipping and fossil fuels,” he told colleagues at the conference.

Introducing these taxes on a global scale can seem far-fetched. But proposals to tax oil companies are fundamentally different from failed carbon taxes: they are easy to explain and politically popular. A poll for the League of Conservation Voters, conducted by Hart Researchers last year, found that 87% of Americans support a “crackdown” on oil companies. Even polls conducted by neutral parties suggest that Americans are broadly negative about oil and gas companies.

It’s not just politics that hints at the longevity of these new talks at the intersection of climate and taxation. Sooner or later, governments will likely need to generate more revenue to fund energy transition efforts. The International Energy Agency projects that the energy transition will require $4 trillion in clean energy investments annually through 2030. A large chunk of that will come from the private sector, but analysts say government funding will play a crucial role in laying the foundations for the private sector.

To raise that money, some climate clouds have suggested simply relying on the most common taxes: personal income tax and corporate income tax. In fact, the Anti-Inflation Act requires large corporations to pay a minimum corporate tax rate of 15%, the most important provision for increasing revenue. On Jan. 31, the World Inequality Lab, the research group of famed economist Thomas Pikkety, released a report arguing that such action is critical to funding climate efforts, particularly helping developing countries tackle climate change.

An obvious place for these discussions is amidst the ongoing global discussions about a minimum corporate tax. The report argues that these talks can reflect on how taxation can be used to fund developing countries’ climate needs. “The deal was about a multinational tax rate of 15%,” says Chancel. “How about adding a few percentage points to that tax rate and earmarking that for climate finance and climate adaptation in the Global South?”

The report also argued that developing countries should consider an income tax on their wealthiest citizens to fund their own climate change mitigation efforts. Much like the rest of the discussion about future climate-based taxes, it’s easy to reject this proposal. Obvious challenges have historically prevented developing countries from implementing such policies, including difficulties in data collection and enforcement, and corruption, among others. But Chancel does not hesitate to address these questions. “In the early 20th century, there was no such thing as progressive income taxation in the US, France or Western countries, and opponents of progressive income taxation were saying exactly the same thing,” he says.

Indeed, it’s easy to roll your eyes at the burgeoning discussion about the link between climate and taxation. But politics can change quickly, and the talks that are taking place now may lay the groundwork for a new, climate-conscious tax system.

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