A Global Fossil Products Climate Tax as a Contribution to Climate Justice

After the debacle of the COP 29 Conference in Baku and after the start of the new presidency of Donald Trump in the USA, we need a restart for fighting climate change.

We therefore should evaluate what works and what does not work.

First of all, the game of naming and blaming does not work. The idea behind is the “polluter pays principle”. This may work on a national level where the State authorities could punish companies or individuals guilty of a specific offense. It does not work on an international level because there is no effective executive power.

Moreover, the “polluter pays principle” is not clear enough when dealing with States. Do we talk about CO² emissions today or in history? If in history, industry countries should pay a price. If at present, we should not forget that more than 50% of CO² emissions in 2024 have been emitted by three countries: USA, China, India. And here the controversial debate starts: China and India are relative newcomers as players with a heavy CO² emission. And while China has a per capita output of more than 8 tons per person (2022), India just shows 1,9 tons per capita. This means that the absolute number of CO² emissions is a result of their population. On the other hand, a small country such as Luxemburg has more than 12 tons per capita but as it is small, it is not in the spot light of international attention.

A second approach used to be a UN social and ecological funds. The idea is perfect, the funding is of limited success. We do have the Joint SDG Funds which until the end of 2.024 achieved an overall funding of 214 million USD. This is close to negligible considering the world’s needs.

The challenges for a really global UN social and ecological funds for the mitigation of the effects of climate change can be summarized as follows:

  1. We need a stable source of financing
  2. We need principles of assigning funds following good governance practices
  3. We need a corruption free administration and distribution of funds
  4. We need a significant volume of financing far beyond voluntary contributions

Until today, it never has been possible to find a common contributing mechanism for the international community. Voluntary contributions by individual States or from the private sector have proven not to be sufficient. The initiative for a global minimum taxation has not made significant progress. And while desirable, a financial markets transaction tax has been widely discussed but not broadly realized nor assigned to climate mitigation activities.

In an increasingly multipolar world, it is easy to give way to frustration or helplessness. This is not proficient, and we should rather prepare for pragmatic ideas in a world coming back to multi-lateral co-operation. We cannot be satisfied with parallel egoisms of individual States. In the sense of a thought experiment, and having in mind the COP 29 Conference in Baku, I therefore tried to imagine under which conditions the oil producing States and namely the OPEC would accept a contribution to such a social and ecological funds.

As a consequence, I tried to change my perspective gliding into the shoes of a petroil minister defending national interests. The underlying consumption of course was an attitude where OPEC States can continue to do business and would pay nothing or near to nothing for climate-friendly solutions, in a world where we actually consume 100 million barrels of oil every day.

Let us switch to a rough calculation:

– 100 million barrels per day at 80 USD result in a global daily petrol-based income of 8000 million USD.

– This results in 2.880 billion USD per year (compared to 110.000 billion global GDP).

If we consider the success of CO² taxation for certain countries such as Sweden with approximately 4 tons p.c. of yearly emissions as compared to nearly 8t p.c. for a similar country such as Germany, we could have a look to a mechanism connected to real consumption.

This is the case for a global fossil products climate tax to be paid along with selling the product from the source.

But how would it work, and why would the OPEC probably would be in the condition to accept it?

Consider the example of an additional 5 USD per barrel oil. The current price is 80 USD per barrel. As we need 1,3 kg oil for 1 l of petroil, one barrel of 159l equals to 122 litres of petroil. With additional 5 USD per barrel, the petroil cost will increase by 4 cent. For consumers, this is bearable even if we have to consider additional tax burdens for each liter of petroil sold in gas stations in each State.

For oil exporting States as organized in the OPEC, there is no reason to object. They simply do not pay the bill because the consumer does so!  If PEC States act together, they can collect the money from the buyers such as Shell and other petroil distributors. They can use the money for funding an UN ecological and social funds and even earn a little margin for the administration of collecting that money. The effect is huge: 5 USD for each of the 100 million barrels daily equals to 500 million USD per day, 180 billion USD per year.

As in every initiative, we have to deal with objections and practicality traps. What happens if some States such as e.g. Russia do not agree? First of all, we should not underestimate the attractiveness of a fair solution, so I could imagine that Russia (which here simply is an example) would contribute.

If, however,  a State offers petroil without the fossil climate tax, this is cheaper for the buyer. In most of the democratic States in the EU, this probably will not happen. On the contrary: these States would eventually introduce “climate compensation customs”. This means that fossil products can be imported only if they are subject to the fossil climate tax. Otherwise, the importer has to pay customs by the same amount. Most States would like the idea because the alternative to the fossil climate tax is more money for the State, due to those climate compensation customs.

There may be some States which will not apply the Fossil Products Climate Tax when petroil is being sold in their own country such as e.g. in Saudi Arabia, Venezuela, Mexico. If this is the case, the funding amount will be lower, and some populations may have an unfair advantage. As most of such countries, however, will be OPEC members, they rapidly will learn about the advantages of the Fossil Products Climate Tax and not object principally.

Furthermore, oil reserves are not unlimited. If we consider the peak oil production point in the late 2020 or early 2030 years, the competitive edge of renewable energies, as a matter of fact, will be higher with the burden of a fossil products climate tax. Considering market economy, such incentives will have an effect on investments. In such a way, a global fossil products climate tax is an effective lever for the necessary ecological transformation of the global economy.

Another objection may be the distribution of the funds by the UN. It is clear that there will be a considerable effort in finding a fair composition of the distributing funds. Moreover, we need efficient anti-corruption mechanisms (with an UN Anti-Corruption Agency in the long term).

Beyond, the international community needs an effective governance structure for distributing the money. One of the basic ideas could be a distribution focused on countries with less than 3 t of CO² emissions p.c. per year. Another point is the urgency of need and the effectiveness of measures. Finally, it would be wise to add a score concerning good governance in a country. If good governance eases the path for climate mitigation funding, this is a strong incentive for politicians to build trust and to fight against corruption. As in large corporations, there should be a permanent audit committee for the monitoring of the use of funds, and for the proposal of eventual penalties in case of misuse.

Distribution of funds could follow a scoring model using the dimensions as mentioned above:

  1. Urgency of need
  2. Efficiency of measures
  3. Low CO² emission country (<3 t p.c. per year)
  4. Good governance
  5. Monitoring process in place.

The UN Social and Ecological Fund therefore will be a contribution to global justice. This is especially important in case of climate change as typically the suffering from climate change is not at all connected to the production or consumption of CO². And we do know that we have to solve ecological and social issues together, in order to avoid strong conflicts. Nevertheless, the UN Social and Ecological Fund should maintain a type of discretionary judgment having in view populations, not governments. Just for sake of an example: The population of island States such as Tuvalu or Vanuatu as well as people living in permafrost zones need help, regardless of the type of government they may happen to have.

The implementation of the Fossil Products Climate tax, as a matter of fact, could be extended to gas products, in a second step. It would be a strong signal for the operational superiority of co-operation instead of stand-alone and rather nationalistic agenda.

In the very end, we have only one planet. It is worth while to contribute to a world less affected by the nightmare of stronger and stronger climate change.

Ulrich Hemel, Director, Institute of Social Strategy

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