Fossil fuels, planes, ships and shares – What will be taxed for climate funds?

A range of options for funding climate programmes will be discussed at the New Global Financing Pact summit in Paris tomorrow

Tyler Bryant stands in front of his trailer home in Placida, Florida, which was destroyed by category 4 Hurricane Ian. (Photo: Julie Dermansky/Greenpeace)


Tomorrow, world leaders meet at a summit in Paris to drink coffee and discuss whether they can develop a new global financing pact that works better for people and the environment. 

Franklin Steves, senior policy adviser at E3G, said the summit is “first and foremost” about trying to heal the rift between developed and developing countries that started with the Covid-19 pandemic. This gulf “has widened since then over perceptions that the rich world has failed to deliver on its commitments on climate, development, poverty and debt”, he said.

But it is also an opportunity to make tangible progress on filling the glaring gap in climate finance. 

Bridgetown initiative

Although the summit will be hosted by French president Emmanuel Macron, the key figure behind these talks is Barbados’ prime minister Mia Mottley. The leader of the climate-vulnerable nation has been working hard to build a global coalition of nations committed to overhauling the financial system and unleashing trillions of dollars of investments to the climate frontlines.  

Mottley’s finance adviser Avinash Persaud told Climate Home that Macron has been “quite excited” by this agenda.  

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Persaud would like to see a huge increase in money lent by development banks for projects to help improve resilience to climate change and to help adapt to climate change. 

To achieve this, the major change currently on the cards at the World Bank is to slightly lower the equity-to-loan ratio of its biggest subsidiary bank (IBRD) from 20% to 19%.

This would free up cash for climate financing, although Persaud and some campaigners think the ratio could be tilted further. Others want rich governments to give the bank more money, rather than focusing on accounting tweaks.

Fossil fuel tax

Civil society is keen to advance some form of fossil fuel tax at the Paris talks. There are many disparate ideas for how this could be done, including taxing exports or production, or even a levy offsetting drops in fuel pricing.   

Researchers recently mooted the concept of a climate reparations scheme for big polluters, putting a price tag for the first time on damages owed by leading fossil fuel firms.  

But experts do not see enough traction behind any of these yet, and the subject is unlikely to be top of the discussion list in Paris.  

An idea elevated by United Nations secretary general António Guterres is for developed economies to tax the windfall profits of oil and gas companies and redirect some of the revenues to help nations affected by climate disasters recover. 

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A number of countries have imposed some form of windfall tax in recent years, often in response to the cost of living crises.

But the money returns to the state and does not provide the steady streams of revenue required to tackle the climate crisis, particularly the growing problem of loss and damage, in the years to come. 

‘Moral case’

Tessa Khan, founder and executive director of Uplift, believes there was a “strong moral case” to link windfall taxes with loss and damage funding.

But ultimately she would like to see a permanent change in the tax regime for fossil fuel companies that allocates a proportion of the receipts for international climate finance. 

Also likely to be discussed in Paris is an idea to “modernise” the existing International Oil Pollution Compensation Funds to levy a tax on exports of oil and coal, with a proportion going to fund loss and damage.   

“This already exists and would build on existing international cooperation,” said Persaud. He said the idea has also had “a lot of interest”, although he recognises that big oil producers and consumers might be hesitant to back it.   

Financial transaction tax

Another solution could be a financial transaction tax, which takes a tiny sum each time a company’s share is bought or sold in stock markets.

Many countries have such taxes but so far only France earmarks part of the proceeds for climate and development, said Global Citizen’s Friederike Roder.

Her organisation is pushing for more states to take up the baton, and either implement a new tax or reform existing ones to apportion some for social purposes. But it is not prescriptive about what states should spend the money on. 

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Roder suggests such a tax is easy to implement, would raise a lot of revenue and is “painless” because each individual sum is tiny and taxed at source.

Previous attempts to institute it at EU level faltered. But Roder remains optimistic that it will garner some support in Paris ahead of Cop28 in the winter. 

Shipping levy

The most advanced tax proposal under discussion in Paris is imposing a levy on the shipping industry.   

Last year, the International Maritime Organisation (IMO) agreed that some form of climate action was needed. It said this would include a market-based economic element, such as a levy, emissions cap and trade scheme or a reward system, and a technical element, most likely a global fuel standard.  

A decision on a shipping levy is expected at IMO talks in London. Photo: JoachimKohlerBremen

Ana Laranjeira, shipping manager for NGO Opportunity Green, said there is growing support for a universal greenhouse levy among IMO members.

A number of African States, including Angola, Gambia, Ghana, Kenya, Liberia, Namibia and Sierra Leone, have cited its importance in meeting the Paris Agreement goals.   

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Laranjeira said there was also rising support for the idea among the shipping industry, including big players such as Denmark’s Maersk.  

Persaud believes a shipping levy could “breathe life” into the international carbon credit market.   

Divisions over funds destination

However, governments and companies do not agree on what the levy should look like or what level it should be set at. The issue of how it will affect remote states that rely more heavily on shipping also remains to be addressed.   

Nor is there yet consensus on what the money should be spent on.   

Tristan Smith, reader in energy and shipping at UCL, said some countries still do not want revenues collected at all, while others are split between preferring the money to be spent on decarbonising ships themselves – for example by allowing them to run on cleaner fuels – decarbonising the wider shipping industry or broader spending on climate mitigation, adaptation and loss and damage.   

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Analysis by the World Bank found that using revenues from a shipping levy to support developing countries would be a much fairer use of the money.    

Laranjeira agrees. “While the main aim of such a regulation will be to reduce shipping emissions, the distribution of part of the revenues for supporting developing countries is crucial for our collective climate and sustainable development goals.” 

While the topic will be on the table at the Paris summit, however, the decisions will be made at the IMO meeting in London next week.

Plane tax

A parallel idea under discussion is for an aviation tax. Campaigners have long called for the aviation industry to be taxed more fairly.

And they and academics have suggested introducing a frequent flyer levy to bring down demand in an equitable way, potential through a reform to the existing air passenger duty.  

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Alethea Warrington, senior campaigner at NGO Possible, said there are nascent discussions about a kerosene tax at the EU to address the fact that aviation fuel has been untaxed for decades and to help shift it to cleaner fuels. She argues that this should be accompanied by a progressive tax like a frequent flyer levy to avoid penalising poorer people who only fly occasionally.  

A paper by the International Council on Clean Transportation Funding explored how the proceeds of a frequent flyer levy could support alternative fuels, while others have suggested using a portion to fund loss and damage.   

But in general, the idea of taxing aviation is nowhere near being implemented at an international level. “Policymakers are focused on technological solutions to try to avoid demand management policies,” said Warrington.   

Tackling currency risk

Another idea being floated is for an exchange guarantee within the multilateral development banks, which would allow private investors to hedge the risk of foreign currency fluctuations.  

Persaud said this would provide a lifeline for emissions-cutting projects that can make money, such as solar farms, given the scarcity of available grant funding and to avoid governments piling on new debt. He is cautiously hopeful that it will receive an endorsement from some parties in Paris.

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The trickiest aspect of climate financing remains loss and damage. There are no revenues to be made through this and no likely savings. And, if financing for emissions cutting and adapting to climate change remains inadequate, the sums required for loss and damage will only grow. 

Steves said there are a number of proposals under consideration to implement global levies on carbon-intensive economic activities.   

Disaster debt clauses

Another idea is to extend the use of natural disaster clauses in debt agreements. This idea has been pioneered in the Caribbean, with Barbados now entitled to defer repayments due for two years after an earthquake, tropical cyclone or heavy rainfall.  

Flooded village in Haiti following the passage of Hurricane Tomas. Photo: DVIDSHUB

Persaud said this “not sexy but powerful” idea has garnered a lot of support and expects to see a number of countries endorsing it in Paris. “No other instrument comes close in terms of the amount of liquidity this provides for countries facing disaster.”   

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Whatever innovative options are advanced, however, experts warn that it should not replace public funding.  

Egyptian climate negotiator Mohamed Nasr, who is on the loss and damage transitional committee and was a key part of the Cop27 presidency, told a press conference at the recent climate talks in Bonn that the core obligations of loss and damage remain on developed governments.  

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“We must also understand that all those very good ideas – fossil fuel, aviation, whatever – has a very long process that is behind it that is based on countries’ local and national regulations.”   

Nasr said the focus should remain on getting the loss and damage fund up and running and ensuring developed country governments stump up the cash.  

“I’m not against any of the innovative ideas on sources,” said Nasr. “But we must always.. focus on the main source which is contributions by those who cause the problem where we are now – complemented by industries, innovation.”

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A study recently published in Nature calculated that wealthy nations will owe developing countries a sum of US$192 trillion for appropriating their “fair shares” of atmospheric emissions in the years leading up to 2050.  

Developed countries will face pressure in Paris to increase their climate finance and particularly to set out how they will meet their promise to reallocate $100 billion in special drawing rights, the IMF reserve asset issued as relief during the pandemic, to lower income countries. 

E3G’s Steves said it was vital the summit reflects and reinforces the level of ambition in the Bridgetown Initiative but remains concerned that it will end up as just another talking shop. “In which case it would only end up worsening, rather than addressing, the distrust across the developing world,” he said.  

But Persaud is optimistic about what the event can achieve, saying campaigners and developing country advocates now have a clearer idea of how money is really needed and what it should be used for. “I think there is more progress today than before as there’s greater convergence around the fact that we need to do it, can do it and we’re making the ask as reasonable as possible.”  

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