Tax Carbon Not Income and Reform Markets – part 2 of a #RealGreenRevolution

This is the 2nd in a 7-part essay on the type of policy innovations that would respond to the truth of the environmental predicament and, also, why most environmental professionals ignore such ideas to promote limited and limiting ideas instead. These ideas on a #RealGreenRevolution provide a contrast to current agendas, with the aim of encouraging a global environmental movement as a rights-based political force.  In this essay I focus on that sexy topic of taxation, and how to transform it to provide the price signals and funds to radically alter behaviours in fair ways.

To receive each part of the essay, subscribe to my blog, using the box on the right. To engage with other people who are responding to these ideas, either engage on the Deep Adaptation Leadership group on LinkedIn (where I will check in) or the Deep Adaptation group on Facebook, or by following the hashtag #RealGreenRevolution on twitter. The introductory Part 1 provides context.

Global Carbon Energy Tax Treaty

In 1997 one of the key ideas being discussed for how to help the whole planet reduce its carbon emissions was a taxation on carbon emissions. Using taxes to influence behaviours through market systems was something most governments had experience of and could be trialled quite easily. However, under the then US Vice President Al Gore, the delegation from the United States stopped that initiative and instead advanced the idea of creating markets for carbon permits. The resultant Kyoto Protocol started that process whereby we have witnessed polluters being given permits which they could then sell. Many environmental experts regurgitated the arguments of corporate public relations, that a cap-and-trade system would be better for the climate by identifying specific limits. Such carbon pie in our overheating sky was gobbled up by financial elites. The cap-and-trade systems have done little to nothing on carbon emissions, which have continued to rise ever faster around the world. I mention this history, as it is an example of how the mundane everyday influence of people working for corporations and governments focused on corporate interests can produce results that are ‘omnicidal’. That word means the killing of all life, and I use it because 1997 was the last chance humanity had to create a framework that could have slowed climate change sufficiently to avoid a manmade catastrophe for life on Earth. I don’t blame you Al, but the fact you are quoted with respect and excitement by environmentalists today suggests how ill informed, uncritical, timid and sycophantic to power the green movement and sector has become.

A global carbon tax on energy still makes sense today, not only for emissions reductions. It will need to be applied at the point of fuel production or energy generation for commercial distribution, to keep the administration of the tax as efficient as possible and not oblige end users to have additional bureaucratic costs. Instead the fuel and energy producers would pass the costs through the value chain. Such a tax needs to be agreed at an intergovernmental level in order to apply globally. That is because such a tax must be set at a level that will affect organisational practices and profits to bring down carbon emissions. Unless it is applied everywhere then there would be unfair competition, and investment gravitating to jurisdictions that did not apply it. That means the best place to agree an intergovernmental global carbon tax on energy is at the World Trade Organisation. They have a system for adjudicating on noncompliance and enabling enforcement. Exports of either goods and services from non-compliant countries would be regarded as carbon dumping on the world market and countries could impose tariffs accordingly. The next question is what levels of carbon tax would be appropriate. There would need to be an agreed formula for different levels of carbon taxation in countries that would vary depending on the levels of poverty in countries. In addition, there would need to be agreements on what levels of direct or indirect subsidy of carbon emitting energy could be allowed before phase out. Such a tax would not cover non-energy sources of carbon emissions, but would be a major aid in decarbonising energy. There would need to be agreements on international standards for measuring carbon emissions and various other aspects of the operation of this tax.

For the tax not to lead to social backlash and countries subsequently dropping out of the system, there would need to be primary attention to the social implications. Whereas that could be decided at country level, a treaty will need to gain commitment from every country that their revenues from a carbon tax would be largely targeted at the low income in their countries in order for them to adjust successfully. There would also need to be an intergovernmental reporting and complaints system regarding performance on that. Without it being agreed globally, fairly, and without clear channelling of revenues to low-income people, then the backlashes to carbon taxes already experienced in some countries will prevent it from achieving the intended impact. To help with that, ideally this tax could be combined with wider tax reform which I explain below.

Before moving on, I want to make clear why this tax proposal is better than the ideas being floated by some environmental experts today. This proposal also avoids creating intrusive surveillance of individuals that would be required by a carbon quota system, and avoids the counter-productive idea that the source of the problem is the individual, rather than the systems which provide the options and price signals to them. In addition, it offers a meaningful alternative to the flaws of a campaign for divestment from fossil fuels. The campaign to get large pension funds, amongst other financial funds, to divest from fossil fuel companies has picked up in recent years and had some successes. As there is a lot of finance available around the world, that has nothing to do with countries where divestment campaigns occur, while there is also ongoing demand for the fossil fuels, any decline in share price of oil companies will simply lead to new sources of capital. If the share prices fall enough for firms like Shell and BP, then companies or investment funds from countries like China, India and Malaysia will take them over, and perhaps even take them private. The fossil fuels will continue to be extracted and years of western activist attention will have been wasted, while also propping up the story that ethical investment works to address major public issues beyond piecemeal changes in individual corporate practices – which decades of evidence now shows it doesn’t. Instead, a helpful move from coalitions of investors would be to call for – and fund work towards – a global carbon energy tax treaty. Whereas it would be difficult for individual nations to adopt carbon taxes at a level that would significantly change behaviours, various policies could be adopted to remove corporate pushbacks on other countries supporting the policy, which I explore in a subsequent section on investor regulation.

Not only is this policy relevant for cutting carbon emissions, it might also increase the incentives for shortening and simplifying supply chains, which will promote more localisation of production and consumption systems, which offers some resilience against future disruption to global trade networks.

Taxation Transformation

One argument for why carbon taxes have failed in some countries is because they have not been linked to a major new overhaul in the tax system in ways that reduce the overall tax burden for the working poor and small businesses. A transformation of the tax system is required that would remove any impediments for people being hired, while discouraging wastefulness of natural resources. This needs to be done in a bold way that can cut through to the general public, and avoid defeat by the public relations campaigns of negatively affected businesses. Therefore, I recommend a complete abolishing of income tax and replacing tax revenues by taxes on income from financial assets, financial speculation, natural resource extraction (not including recycled), the carbon energy tax described above, and other taxes on large-scale carbon-emitting land uses, such as livestock farming. Such a shift in taxation would help both mitigation and, by disincentivising natural resource depletion, could help ecological regeneration. In addition, to help communities become more self-reliant through better internal cooperation, all taxes could be abolished on used consumer goods (e.g. that have had a prior owner for at least a year), the hire of consumer goods, and on any items swapped or lent through any community owned exchange platform (so long as a fungible currency is not used i.e. not one that can be spent outside the exchanges).

While these measures can be done nationally, they would best be part of an international effort towards a global taxation treaty that explicitly notes our planetary predicament and the need to redirect markets accordingly. Such a treaty should set minimum tax rates for internet corporations and other providers of global services, including financial institutions, and end various tax management or avoidance practices, such as transfer pricing within multinational corporations. Such a treaty will help restore government finances to be able to afford bold policy measures on the whole #ClimatePlus agenda (described in Part 1 of this essay).

Trade Rules Reform

Currently international trade agreements mean that it is difficult for a government to pass a law restricting importation of something from another WTO-member country due to the way it was made. Instead, any regulation must focus on the qualities of the product itself. There are a few cases where a country manages to exclude imports that were made illegally, such as timber. However, the general approach is to remove any ‘barriers to trade’. This measure must be removed from the WTO agreements and countries encouraged to regulate imports on the basis of methods of production, so long as they reference relevant international standards when doing so. Doing so will reduce the pressure for companies to externalise their costs onto the workforce, supply chain, society and the environment as they seek to compete internationally. That will help companies to contribute to climate mitigation and ecological regeneration in particular. It also provides a context within which workers and small business owners may be able to seek better conditions, and this will help them adapt to increasing disruptions in future.

Corporate Reform

The laws governing the incorporation and operation of firms differs greatly around the world. However, a typical feature is limiting the liability of the directors and shareholders for any losses or damages associated with a company. The nature of that limited liability must be changed, so that if there is a certain level of harm caused to people or the environment, then the directors can be more easily prosecuted. That could help reduce the extremes of negative corporate practice and enable ecological regeneration. In addition, a new principle of ‘capital accountability’ should be introduced into the law, in ways that would make the accountability of corporations, and the management of private property generally, to any significantly affected community, a requirement in order to retain one’s property rights for that asset. That would mean that a landowner would need to demonstrate systems of accountability to significantly affected communities as part of maintaining their ongoing property right. Likewise, any shareholder in a corporation would have a requirement to ensure that the corporation has processes to enable its activities to be accountable to any significantly affected stakeholders. In practice, such a requirement would be incorporated into the auditing function of a corporation and become part of the fiduciary duty of fund managers. Each country would have its own methods for understanding credible and meaningful methods for promoting this accountability to significantly affected communities, and the courts would decide about breaches of this duty. In serious cases, where corrective actions are not taken, then a landowner or shareholder could lose the right to own their asset, with the affected communities being the beneficiary. More on this reworking of the concept of – and responsibilities associated with – property rights in the commercial sector is in the introduction to my 2014 book Healing Capitalism (pdf download).  

These changes in the concept of – and law on – property rights, and shareholding in corporations, would make consideration for affected persons a starting point rather than an afterthought. It would enable a systematic reduction of cost and risk externalisation onto others and nature. Therefore, it would structurally incentivise corporations to be more involved in their own ways with emissions reductions, carbon drawdown, adaptation, environmental regeneration and perhaps even climate restoration initiatives.

Investor and Insurance Reform

Investors of all kinds, including large institutional investors and hedge funds, need significant new regulations to make capital more patient, and be directed into what is needed for the #ClimatePlus agenda. The reform of corporate law will help to a degree. But specific practices within the financial sector need urgent attention, as we seek to send the right signals to the real economy, and prevent a syphoning of wealth into activities which provide no social value.

Therefore, one immediate policy would be to ban high frequency trading, due to its drain on useful economic activity. That should cover all stocks, foreign exchange, and other financial instruments. In addition, the ‘short selling’ of stocks should be regulated so as to make it simply a ‘hedge’ against risk rather than a profit-centre that, when widespread, provides incentives for volatility. All financial institutions should be required to audit their public policy influence of any kind, anywhere, and actively seek to align it with the foreign policy positions of the government they are headquartered in, or explain why not, in a public report.

The insurance industry also plays a key role in enabling business activities, and reducing the risks and costs of doing certain projects. The insurance industry could be given the requirement that they cannot offer cover for any corporation larger than an SME (small to medium sized business) without requiring them to have an environmental management plan that is publicly available (or the insurance policy would be invalidated), and which must include exclusions of certain activities that are particularly damaging.

Unless the corporate and financial worlds are retooled to support business activities that externalise less costs and risks onto society, the #ClimatePlus agenda will never be systematically engaged with. Instead, we will continue to be told to marvel at – and draw hope from – individual corporations and entrepreneurs doing better on some aspects of sustainability, while our collective situation gets worse. As I said at every conference I went to on corporate sustainability in the first decade of this century: it is going to be pointless to say “our company is the greenest” when the whole town is going underwater – changes have to become routine, through changing the incentives and requirements on people in all organisations. Tomorrow, in the next part of this essay I will explore the banking and monetary systems, and what transformations are needed there to complement these policy changes.

To receive each part of the essay, subscribe to my blog, using the box on the right. To engage with other people who are responding to these ideas, either engage on the Deep Adaptation Leadership group on LinkedIn (where I will check in) or the Deep Adaptation group on Facebook, or by following the hashtag #RealGreenRevolution on twitter. The introductory Part 1 provides context.