IFA 2022: Carbon pricing is the next big project akin to BEPS

OECD delegates Pascal Saint-Amans (director of the centre for tax policy and administration) and Kurt van Dender (head of the tax and environment unit) said during an IFA panel that carbon pricing policies, including carbon taxes, are set to be the next project on a scale equal to the BEPS actions plan.

An emissions trading system, excise taxes, and fossil fuel taxes are all instruments that provide clear pricing indicators. Carbon prices have doubled since the COVID-19 pandemic started, but pricing variations across countries are large, according to van Dender.

The panel had a bigger public turnout than some of the other IFA sessions because many countries are setting zero-carbon emissions goals based on the Paris Agreement, which are translating into tax obligations in the mid- to long-term scenarios for large businesses.

Most attendees are in favour of a carbon price. Almost 86% of the audience agreed that a widely accepted international standard is required at this late stage of climate change.

Other panellists at the carbon pricing session, held on Wednesday, September 7, include Tatiana Falcão, international tax lawyer and coordinator at the coalition for climate action at the World Bank in Brazil; Ian Parry, environmental fiscal policy and climate change expert at the IMF in Washington, D.C.; and David Boublil, deputy head of the indirect tax unit at the European Commission in Brussels.

All said the international challenge is designing a wider standard for carbon pricing. Panellists covered what it means to price carbon, the constitutive elements of a carbon price, border adjustment mechanisms to manage local carbon prices, and the types of multilateral approaches to coordinate the pricing of carbon internationally.

Carbon pricing plays a role in climate change mitigation policy, and the basic design details are critical. Carbon taxes are a natural pricing instrument, and trading systems can set a price floor alongside other regulatory measures.

Countries have taken different approaches to address the risks of climate change via tax policy. Taiwan adopted a carbon tax, the EU has an emissions trading system, and the US has a separate regulatory system.

Other carbon pricing approaches are being developed and implemented in Europe and North and South America. Panellists said the most readily available mechanisms across countries are carbon taxes, emissions trading systems, and carbon border adjustment mechanisms.

The various carbon pricing approaches have affected the trade of cement, iron and steel, fertilisers, and electric power for several large companies, from Apple to Deere. Industries focusing on the trade of these resources have a high risk of carbon leakage in their supply chains.

So far, however, regulations have not been strong enough to stem carbon leakage, as companies can still shift production to countries with low carbon options that also allow refundable credits to offset costs. Subsidies, rate reduction, exemptions, special regimes, and tradable performance standards all lower the cost of carbon pricing.

Carbon leakage is the biggest motivator for border adjustment mechanisms.

Carbon prices rose in countries where they were already high in recent months, such as Canada, France, and the UK, but not much in other G20 countries. Argentina, Indonesia, and the US are outliers as low performers. Alongside this trend, the price shock of the Russia-Ukraine also affected carbon pricing progress in most countries, and price support fell after the event.

To achieve more multilateral carbon pricing, Germany and other countries are creating climate clubs – bloc efforts to align carbon pricing adjustment mechanisms with each other.

The OECD’s efforts to lead and enhance policymaking on such climate change actions are slower than delegates expected, but more resources will go to international carbon pricing after the organisation finishes its work on the two-pillar solution to address tax challenges in the digital economy.

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