(Note: This is the first in a series of FACT blogs directly connecting our tax justice and anti-corruption work to the climate crisis.)
The 2021 United Nations Climate Change Conference (COP26) is only three weeks away, but it could not come soon enough. As the first five-year check in since the Paris Climate Accords, COP26 will be a singular opportunity for countries to up their emissions reduction commitments especially in light of how the disastrous effects of climate change have come to life with record breaking flooding, wildfires, and heat since the 2015 agreement.
As governments around the world, including the U.S., look for funds to fuel needed climate related investments, climate activists might consider rallying around and seeking to improve recent developments at the Organization for Economic Cooperation and Development (OECD) and in Congress. Just last week, the OECD moved one step closer to finalizing an agreement to create a global minimum corporate tax. Likewise, lawmakers in Congress continue to close in on a reconciliation package that presents an opportunity to reform U.S. international tax law. This is a prime opportunity for climate and tax activists to work together at the domestic and international level to further tax reform to equitably raise funds for domestic and global climate investments, to reduce incentives for pollution offshoring, and to support emission reductions around the world.
Raising Revenue and Ending the Offshoring of Pollution
Undoubtedly, the need for national-level investments to address climate change is stark. To meet the Paris Climate Accord’s goals of limiting climate change to 2 degrees Celsius above pre-industrial levels, most countries will likely need to achieve net zero emissions by no later than the middle of the century. Here in the U.S., President Biden has set out an intermediary goal of dropping emissions 50% by 2030, but even this will require a massive investment in clean energy. A shift to 100% renewable energy in the U.S., one large piece of the climate puzzle, could cost upwards of $4.5 trillion dollars.
As FACT has pointed out before, there’s a huge potential for revenue at stake in international tax reform. As the U.S. plans to invest in its future through President Biden’s Build Back Better plan, the international tax reform components of the Build Back Better tax plan could raise well over $1 trillion dollars — a hefty down payment for a habitable earth. The current Build Back Better Act draft only raises $330 billion by doing the bare minimum to match ongoing reforms at the OECD, leaving significant space for Congress to enlarge their climate investments by enacting stronger U.S. international tax reform.
These reforms would not only raise revenue, though. Reducing the tax deductions multinational companies receive on foreign profits from 50% to 25% and removing or reducing other incentives to offshore, as the President’s plan would do, would also minimize incentives for offshoring production. Offshoring of manufacturing keys into the global climate fight because where production goes, pollution often follows. Still worse, when U.S. multinationals move production abroad, it’s all too likely that it moves to jurisdictions where environmental rules lag behind the U.S. The result is less revenue, fewer jobs, and more pollution.
Supporting the Global Fight against Climate Change at the OECD
Just as climate change does not stop at the border, the response cannot either. The Organization for Economic Cooperation and Development has estimated that $6.9 trillion will be needed in global annual investments to stay within the goals of the 2015 Paris Climate Agreement.
Passing U.S. international tax reform could compel ongoing OECD negotiations around a global minimum tax towards the finish line. The plan, currently estimated to raise $150 billion in annual global revenue and to reallocate taxing rights for another $100 billion in profits, would give all countries more capacity to take on climate commitments.
These commitments could include both contributions towards the OECD-prescribed trillion-dollar investments in clean energy and emissions reductions as well as efforts to enforce climate regulations. As the recent Pandora Papers have reaffirmed, kings, kleptocrats, multinational companies, and transnational criminals currently play by a different set of rules in global financial markets. In addition to directly reducing government coffers, global tax competition fuels and legitimizes the “offshore” systems of financial secrecy that create a wild west for these tax-dodging companies and bad actors. As governments move to clamp down on environmental plundering or to invest in climate infrastructure, attention should be paid to comprehensive reform that is necessary to combat financially secretive systems that enable profiting from polluting or corrupting activities. International tax reform can make secrecy and corruption less profitable and less politically viable.
Equity Taxes and Climate Change
Fighting climate change requires more than just raising revenue — it requires that we raise revenue more equitably. COP26 has estimated that the world will need to make $3.5 trillion in investments annually just to decarbonize energy production, which accounts for the majority, but not all, of carbon emissions. Of that, 70% will need to be invested in developing countries. Likewise, developing countries are often disproportionately burdened with the effects of climate change which wealthier countries have disproportionately fueled.
The OECD negotiations offer a historic opportunity to raise revenue more equitably. Pillar 1 of the two-part deal would help reallocate taxing rights around multinational enterprises, giving many governments the ability to tax the economic activity happening in their own country. Furthermore, given the importance of corporate taxes for the budgets of many developing economies, the global minimum corporate tax rate could be a boon for developing countries, giving them more space to further raise rates (or maintain their tax base) while lowering tax competitiveness concerns. The OECD agreement is a monumental achievement, and it inspires hope for continued improvement of the agreement to help address inherently related challenges, such as climate change.
As both FACT and Global South activists such as the Global Alliance for Tax Justice have stated, however, the deal would likely be more politically viable over a longer duration if the minimum rate were increased above 15% and if market jurisdictions and developing countries are afforded larger allocable shares of revenue or more flexibility in shoring up local tax bases. As it currently stands, the Pillar 1 tax only applies to the world’s largest corporations, and the small portion of profits allocated under Pillar 1 results in more limited benefits to developing nations. Further, the global minimum corporate tax initially structurally primarily benefits headquarter countries of multinational companies; however, over the long-term dismantling a system of global tax competition is likely to lift all nations. Nonetheless, improving the ability for developing nations to raise increased revenue under the source-based taxing rights within Pillar 1 and Pillar 2, may further the political viability of the two-pillar approach over the long-term, as well as our collective responses to global challenges.
Failing to continuously build global tax deals and international tax reform in the U.S. is a problem not just for global equity but for our shared climate survival. If the U.S. puts forward a strong minimum corporate tax rate that is consistent with ongoing international reform efforts, that could bolster developing countries’ calls for a higher rate in the future, leading to a more politically and ecologically sustainable tax deal.
With COP26 right around the corner and the destructive impacts of climate change growing more apparent by the day, the U.S. must waste no time in signaling its commitment to a global reduction in emissions. Just as climate change will continue to impact every element of our lives, tax policy undergirds every act of government. Now is the time to bring these two fights together in recognition of their shared broad-reaching importance. Passing strong international tax reform through the U.S. budget reconciliation process and subsequently seeing the OECD through to the finish line are key to building capacity for climate investments and reducing incentives to offshore pollution. Given that the challenges of climate change are likely to only grow, victories at the OECD and in Congress would lay the groundwork for continual improvements–greater investments in clean energy, stricter emissions reductions, and more equitable international tax reforms. Congress and the Administration must work in tandem to advance these reforms and make needed investments.