Weekly SSRN Tax Article Review And Roundup: Kim Reviews Falcão's Carbon Tax Policy And The EU Green Deal

This week, Young Ran (Christine) Kim (Cardozo; Google Scholar) reviews a new work by Tatiana Falcão (international tax consultant), Updating Carbon Tax Policy Is Crucial to the EU Green Deal, 103 Tax Notes Int'l 485 (July 26, 2021).

The 2022 Congress of the International Fiscal Association (IFA) was held in Berlin, Germany, earlier this month after the two virtual Congresses in 2020 and 2021. In this long-awaited in-person event, the OECD's tax head Pascal Saint-Amans, who led the base erosion and profit shifting (BEPS) project and brokered the two-pillar global tax deal, announced his departure. Although the successful implementation of the global tax deal is still uncertain, it is hard to deny that Saint-Amans has been at the center of the efforts to update the international tax system. Personally, I appreciate his making the international tax a more exciting and dynamic subject, not only because he led the BEPS project and the global tax deal but also because he contributed to establishing the automatic exchange of tax information systems and building the inclusive framework on BEPS. It is indeed the end of a chapter in the international tax discourse.

While many international tax policymakers and practitioners at the IFA Berlin Congress digested the news on Saint-Amans in various ways, I wondered what emerging issues in the next chapter of the international tax policy would be. I thought that an ESG-related tax policy would be one of them, and sure enough, this year's IFA Congress offered a fascinating session on carbon climate change taxation, chaired by Tatiana Falcão (international tax consultant). In this week's review, I would like to briefly introduce that session as well as the chair Falcão's Statement, Updating Carbon Tax Policy Is Crucial to the EU Green Deal, presented in front of the European Parliament FISC Committee on July 12, 2021 (reprinted in 103 Tax Notes Int'l 485 (2021)) [hereinafter, the Statement].  

Greenhouse gas (GHG) mitigation policy approaches are diverse, ranging from regulatory approaches (e.g., emission standards and bans of toxic substances) to market-based instruments. The latter includes the Pigouvian environmental taxes, such as fuel excise taxes and carbon taxes, and the emission trading scheme (ETS). (Note: An ETS is an explicit carbon pricing instrument that limits or caps the allowed amount of GHG emissions and lets market forces disclose the carbon price through emitters trading emissions allowances.) The total cost resulting from environmental taxes and ETS is called the carbon price, measured as the effective carbon rate (ECR) by dividing the carbon price by the ton of CO₂.

Carbon prices can vary across countries. Thus, domestic businesses in a high carbon price jurisdiction have incentives to relocate to another country offering a low carbon price. In order to avoid this so-called "carbon leakage" phenomenon, countries may want to lower their carbon prices or carbon taxes and mitigate the emission regulations. However, those responses do not help the fight against global climate change. The carbon border adjustment mechanism (CBAM) is a constructive alternative for preventing carbon leakage. For example, a high carbon price country would apply a border carbon adjustment charge on imported goods from a low carbon price country based on embodied carbon in the imported goods. Rebates for embodied carbon in exports can also match this measure. The CBAM would prevent carbon leakage because domestic businesses would lose incentives to relocate to a low carbon price country.

Falcão emphasizes in her Statement the importance of introducing a carbon tax component in the EU green tax policy, or converting the EU energy taxation directive into a carbon tax. Energy taxes are mostly excise taxes on fuels and electricity, whereas a carbon tax is imposed on the volume of carbon dioxide emitted on combustion of certain fossil fuel products. The application of a carbon tax provides an explicit signal to carbon prices for importers, producers, manufacturers, and consumers alike. In contrast, energy taxes only give an indirect signal to carbon prices. That is because a carbon tax provides for an exact correlation between the carbon content of a fuel type and the carbon emissions it generates. Therefore, the carbon tax rate expressed by volume or weight units (such as a gallon of petrol or a ton of coal) will automatically inflict a higher price on the most carbon-intensive fossil fuel by-product, thereby providing an economic incentive for the consumer to purchase the least carbon-intensive product which is also the cheapest product. To illustrate, a carbon tax on fossil fuels would automatically create a price differentiation among diesel, gasoline, and natural gas, because diesel is more carbon-intensive than gasoline, and gasoline is more carbon-intensive than natural gas. Hence, a carbon tax of $10 per ton would automatically affect diesel more than natural gas, creating a price incentive for consumers to purchase natural-gas-based products. Falcão also explains that introducing a carbon tax can simplify the administration of other market-based environmental pricing systems, such as CBAM. A carbon tax would also be compatible with the WTO rules under the public policy exception of the General Agreement on Trade and Tariffs because it would be a measure to protect human, animal, and plant life or health. For an in-depth discussion on the administrability of a carbon tax and trade law discussion, I recommend reading the Statement.

Climate change is a global problem, so globally coordinated measures would be the most efficient. However, there is a diverse range of greenhouse gas mitigation policies, from pricing over technology support to regulation. Moreover, countries have not fully coordinated their approach. The lack of credible metrics to draw comparisons creates a growing risk of negative spillovers, such as trade distortions and related tensions, competitiveness implications, and carbon leakage. In response to these challenges, the OECD launched the Inclusive Forum on Carbon Mitigation Approaches in June 2022 for an initial period of 5 years, perhaps one of the last projects of Saint-Amans at the OECD before his departure. Over the next decade, I anticipate that a variety of new puzzles regarding tax policy and carbon climate change will arise, and I encourage readers to pay attention to the activities of the Inclusive Forum on Carbon Mitigation Approaches and their proposals to resolve these puzzles. I also believe that the author Tatiana Falcão will play an essential role in this area.

Here’s the rest of this week’s SSRN Tax Roundup:

• Doron Narotzki (Akron) & Melanie McCoskey (Akron), The Application of the SRLY and DCL Rules on MNCs, 41 Va. Tax Rev. 391 (2022)
• David I. Walker (Boston University), Donor-Advised Funds in the Wake of the Tax Cuts and Jobs Act, Boston Univ. School of Law Research Paper No. 22-27 (2022)
• Erin Adele Scharff (Arizona State), Local Budgets, Local Decisions: The Home Rule for the 21st Century Project's State Support for Local Democracy Provisions, 100 N.C. L. Rev. 1505 (2022)
• Philip Hackney (Pittsburgh), Public Good Through Charter Schools?, Georgia State Univ. L. Rev., Forthcoming
• Alex Raskolnikov (Columbia), Should Only the Richest Pay More? (2022)
• Ayla Delso (Oklahoma), Taxing the First Amendment: What Ohio's Lamar Advantage GP Co. v. Cincinnati Means for Selective Taxes on Billboards Across the Country (2022)
• Fabio B. Gaertner (University of Wisconsin – Madison), Jeffrey L. Hoopes (North Carolina),  Stacie Kelley Laplante (University of Wisconsin – Madison) & Max Pflitsch (Cologne), Investor Perceptions of the Book Minimum Tax (2022)
• John Gallemore (North Carolina) & Martin Jacob (WHU), Federal Corporate Tax Enforcement and Local Business Activity (2022)
• Fadi Shaheen (Rutgers), Whirlpool: Law or Policy?, 176 Tax Notes Federal 959 (2022)
• Erin Adele Scharff (Arizona State) &  Darien Shanske (UC Davis), The Surprisingly Strong Case for Local Income Taxes in the Era of Increased Remote Work, Hastings L.J., Forthcoming
• Kathleen DeLaney Thomas (North Carolina) & Erin Adele Scharff (Arizona State), Fake News and the Tax Law, Washington and Lee Law Review, Forthcoming
• Fred B. Brown (Baltimore), Should the Federal Government Help States and Local Governments Pay for Police Misconduct Through Tax-Exempt Bonds?, Va. Tax Rev., Forthcoming
• Jeri K. Seidman (Virginia), Roshan K. Sinha (Indiana) & Bridget Stomberg (Indiana), The Effect of Tax Authorities on Corporate Tax Planning: Insights from Tax Executives (2022)
• Walter Melnik (Marquette) & Andrew Smyth (Marquette), R&D Tax Credits and Innovation (2022)
• Alexander Edwards (Toronto), Adrian Kubata (IESEG School of Management) & Terry J. Shevlin (UC Irvine), Why Do Loss Firms Pay Taxes? (2022)
• Melanie McCoskey (Akron) & Doron Narotzki (Akron), Planning Around Excess Basis in Corporate Formation Transfers, 176 Tax Notes Fed. 1209 (2022)
• Qianqian Huang (City University of Hong Kong), Stephen Teng Sun (City University of Hong Kong) & Tao Yuan (Nanjing), Not All Corporate Tax Cuts Are Created Equal: Evidence from Bonus Depreciation and M&A (2022)
• Vasiliki Koukoulioti (Queen Mary University of London) & Chris Reed (Queen Mary University of London), International Tax Implications of Cloud Computing (2022)
• Joachim Englisch (Muenster), VAT Goes Virtual: Security Tokens, EC Tax Review (2022)
• Kathryn James (Melbourne) & Karoline Spies, VAT and Transfer Pricing, in Virtues and Fallacies of the Value-Added Tax: An Evaluation After 50 Years (Robert van Brederode ed., Kluwer Law International, 2021)
• Kathryn James (Melbourne) & Karoline Spies, Value-Added Tax Adjustments, in Virtues and Fallacies of the Value-Added Tax: An Evaluation After 50 Years (Robert van Brederode ed., Kluwer Law International, 2021)
• Chinyere Onyeneke (Benin) & Bright Elolue (Benin), Taxation of Non-Resident Companies Under the Finance Act 2021: Challenges and Opportunities (2022)