Who Pays for Climate Action?

If average global temperature rises are to be limited to 1.5 degrees Celsius above preindustrial levels (in line with the 2015 Paris Agreement), climate finance globally will need to increase to about $9 trillion a year globally by 2030, up from just under $1.3 trillion in 2021-22.

According to the International Energy Agency, 30 percent of climate finance globally needed—around $2.7 trillion—will have to come from the public sector, with the remaining 70 percent coming from the private sector.

This is the scale of the world’s climate finance needs. However, when viewed in the context of governments’ other spending priorities, $2.7 trillion in public money is achievable. Indeed, in 2022 governments spent $7 trillion on fossil fuel subsidies alone.

A large portion of that $2.7 trillion must flow to developing countries in the form of grants and concessional loans. Official development assistance (ODA), provided by traditional donors in the Organization for Economic Cooperation and Development (OECD), will not get us there alone. ODA hit a record high of $287 billion in 2022 but only because developed countries shifted resources to aid in Ukraine’s defense; in previous years, it hovered around just $236 billion. A surge of right-wing politics in the United States and Europe has forced budgets down, and even Emmanuel Macron’s liberal government in France has reneged on previous aid commitments.

For all but a few emerging economies, developing countries’ greatest climate challenge is not solely a lack of private finance for mitigation projects but a lack of low- or no-cost public finance for adaptation and loss and damage efforts. Despite their social returns, adaptation projects such as infrastructure upgrades and sea walls do not deliver immediate financial returns to investors and are notoriously difficult to scale for the private sector.

Both developed and developing countries have been vocal about the need for new forms of public climate finance beyond ODA, and they are considering different options under the rubric of “innovative finance.” The recognition has been particularly important in discussions on the newly created Loss and Damage Fund. At last year’s U.N. Climate Change Conference in Dubai, or COP28, countries pledged around $700 million to capitalize the fund—including an unexpected $100 million from the United Arab Emirates—but it will need billions of dollars to respond to more than one country crisis. This is why the fund’s bylaws encourage its capitalization through a “wide variety of sources, including innovative sources” inside and outside the Paris Agreement.

There is no single agreed definition of innovative finance, but it generally refers to any financing mechanism or arrangement that mobilizes, governs, or distributes resources beyond ODA. Most innovative finance mechanisms, such as “blue bonds” or the International Monetary Fund’s Special Drawing Rights, still depend on loans and the largesse of rich countries, whose leaders also face tough inflation and consequential elections. These are just two reasons why such initiatives have stalled or failed to live up to expectations.

On the resource mobilization side, many countries have come out in favor of new global taxes to fund climate needs in developing countries. Here, as in other areas of climate, small island states and low-income countries are providing essential leadership. They are also finding allies in the global north. Taxes on shipping, fossil fuel production and subsidies, air travel, financial transactions, and extreme wealth feature prominently in agendas to reform the international financial architecture, such as Barbados’s Bridgetown 2.0 and African leaders’ Nairobi Declaration, and in the recent Paris Pact for People and the Planet. These calls have been taken up by a new International Tax Task Force, launched by France and Kenya at COP28, to deliver a verdict on the options available.

Beautiful ideas and big numbers abound, but the real challenge is more direct: Who pays? Industries will always pass the tax on to the consumer—but which consumers, where? There is also a question of equity and justice: Why should consumers in developing countries be taxed to pay for a problem they did not create?

It’s possible to create taxes that incorporate such concerns. Founded in 2006 by Brazil, Chile, France, Norway, and the United Kingdom and hosted by the World Health Organization, Unitaid is a successful global health program for low- and middle-income countries that receives over half its funding from air passenger levies. The levies—introduced as low as 1 euro for economy seats on flights within Europe and up to 40 euros for business seats on long-haul flights—are collected and earmarked for Unitaid by governments in 10 developed and developing countries. By 2012, the levies were raising between 162 million and 175 million euros per year, totaling 1 billion euros since its creation. According to an assessment by the French government in 2009, “The introduction of the levy had no apparent effect on the volume of air traffic passing through French airports nor on the volume of air traffic affecting France.”

But finding examples of similar financing success is hard, especially on a global scale. Many options have been proposed, such as taxes on shipping, aviation, fossil fuel production or exchange, financial transactions, and extreme wealth, but only shipping has made serious institutional progress. Last year, countries in the International Maritime Organization (IMO) agreed on a decarbonization strategy for the shipping industry that depends on the introduction of a global tax. This would make a tax on shipping, responsible for 3-4 percent of global emissions, the first global carbon tax. According to estimates from the World Bank, such a tax could raise $40 billion to $60 billion per year.

That is the upside. The downside is that the shipping industry and many countries with shipping interests are willing to agree chiefly because they expect the revenues to flow back into the shipping industry to fund their push for ships and ports running on accessible, but still expensive, hydrogen and ammonia fuels. It is difficult to achieve a global tax; it is more difficult still to retain the revenues. As of the last IMO meeting in March, a proposal spearheaded by a group of Pacific small island developing states that would allocate the majority of the revenue to broader climate objectives is one of several options being considered as the economic measure to deliver the decarbonization strategy.

A number of countries have expressed interest in establishing international climate solidarity levies, or ICSLs, to pay for addressing loss and damage, but the campaign is still waiting for a developed-country champion. Should one emerge, ICSLs at the national or city level could raise substantial and predictable additional revenues for the Loss and Damage Fund. Oxford Climate Policy’s Benito Müller, a leader in the current campaign for ICSLs, estimates that a 5 euro air levy on all air tickets across the European Union would have raised around 1 billion euros in 2019, while—following the proposal by the IMO’s Emission Reduction Scheme—a levy of 10 euros per maritime container across the same jurisdictions would in 2021 have generated 924 million euros.

In the end, taxes and levies are a question not of economy per se but of political economy. This is the challenge before the International Tax Task Force: to evaluate and advance proposals based on political feasibility as well as projected impact.

Consider one prominent idea, for a global tax on extreme wealth where billionaires are charged some small portion of their net worth every year. Gabriel Zucman, a top French economist, has championed the idea, as has French Finance Minister Bruno Le Maire, who said in April: “This is exactly what we did with minimum taxation on corporate tax. … It would be the same on the international taxation for the wealthiest individuals.”

Just days after Le Maire’s endorsement, finance ministers from Brazil, Germany, South Africa, and Spain endorsed the idea of a 2 percent minimum global tax on billionaires. In a co-written Guardian article, the ministers declared that such a tax would “boost social justice and increase trust” as well as generate more than $250 billion in revenues for governments to invest in public goods. The ministers also urged the G-20 to take up the idea on its agenda at its July meeting, in Brazil. While this is encouraging, U.S. Treasury Secretary Janet Yellen dismissed the “notion of some common global arrangement for taxing billionaires with proceeds redistributed in some way. … That’s something we can’t sign on to.” The wealth tax may move forward despite Washington’s concerns, but it is unlike to involve any formal mechanism for redistributing revenues across countries.

Innovative finance is not a silver bullet, nor is it a substitute for developed countries’ existing climate and development obligations. The majority of public funding for climate finance will still have to come from direct government outlays. This requires strong and empowered public sectors in developed and developing countries alike. Recent gains in international tax reform suggest a way forward. More than 140 countries have agreed to impose a minimum effective rate of 15% on corporate profits, a policy launched by OECD countries in 2021. Tax reform efforts in the UN have also picked up speed. Following a historic breakthrough at the UN General Assembly in November 2023, the UN has started the negotiation of the terms of reference for a new Framework Convention on International Tax Cooperation.

Despite the obstacles, we are at an inflection point in the long battle for new global taxes for climate. In addition to the leadership of developed-country and emerging-economy first movers, the continued leadership of small island states is essential. Small island states are champions of ambition by necessity. They sounded the alarm early and led the campaigns for adaptation and loss and damage finance, including in ambitious, practical, and yes, innovative, forms. Today, the world is closer than it has ever been to implementing a global carbon tax—thanks not to the great powers but to the small island states that found a way forward.