Carbon tax for global justice: ‘cap and share’ as a progressive alternative for taxing fossil fuels

In mid June 2022, farmers across Pakistan gazed out across thriving fields of rice, maize and mung beans, looking forward to bringing in the harvest in a few months’ time. Then the floods began: nearly half of the country’s crops were washed away, obliterating the entire annual income of many farming families. Scientists assess that climate change made flooding of this scale significantly more likely, and that poverty could turn this weather event into a human disaster. 

What, if anything, does this have to do with the tax justice movement? Is there more that could be done with taxation to address international climate injustice of this kind? Until now, the tax justice and climate justice movements have tended to operate in isolation from each other, despite having many common goals and objectives. This is the second in a series of blogs by the Tax Justice Network examining issues at the intersection of these movements. (The first blog looked at beneficial ownership and fossil fuels, alongside a more detailed report on delivering climate justice using the principles of tax justice.)

In this piece we explore a radical new model known as ‘cap and share’ that Equal Right have developed alongside international collaborators. It bears little resemblance to ‘cap and trade’ – the emissions trading system used in the EU. In cap and trade, companies – rather than democratic bodies – set the carbon price, and money flows mainly between these companies, rather than to the people or to the Global South. Emphatically not ‘cap and trade’, the model cap and share instead centres around an international carbon tax on fossil fuel extraction. This tax is coupled with a fast-falling extraction cap and the revenues are used to fund global green investment and worldwide cash dividends. The system is designed with global and social justice at its core, and seeks to up-end the key problems inherent in many other carbon taxing and pricing proposals. 

The trouble with national carbon taxes: ‘polluter wins’

A defining feature of cap and share is that the tax revenues would land first in an international fund rather than in the national budgets of each country. This is key for climate justice and for global justice, as it would redistribute money from Global North to South and reverse the usual ‘polluter wins’ conundrum inherent in national carbon taxation. 

This conundrum arises because the most-polluting countries, by definition, have the biggest carbon tax base, so they secure billion dollar carbon tax revenues for national public spending. Low polluting nations – predominantly in the Global South – see the opposite impact: they would receive practically nothing from the same rate of carbon tax, in fact often being hardest hit by a carbon tax, even though they are often also suffering the worst effects of the climate emergency. 

This new concept of cap and share would allow us to tax fossil fuels at source, with the money going directly into an international fund, and the cost passed on automatically down supply chains, landing mostly with big fossil fuel consumers in wealthy nations. This would ensure that polluters pay, but it is the international community – in fact, the people of the world directly – that would benefit financially, rather than the polluting nations’ national governments.

Making carbon tax progressive

These direct financial benefits for the world’s people are key for generating this system’s progressive effects, both at the macro level to reduce inequality between Global North and South, and at the micro level to support households through the transition. 

The ‘share’ element of cap and share consists of two key components:

• Climate grants for the Global South, to facilitate debt-free spending on loss and damage recovery, adaptation and mitigation in lower-income nations.
• Universal cash dividends for people in every participating country, to pump carbon tax money back into the world economy at the global grassroots.

Both of these are of vital importance in making the impacts of this system progressive. 

(This proposal opens up multiple questions. Which body would collect international carbon taxes? How would they be enforced? How much would be raised? Does it need to be global, or could a few countries act together to get it started? And what would all of this do for the climate? We have ventured some answers to these questions in our discussion paper ‘Climate Justice Without Borders: Cap and share as a mitigation and climate finance solution’. However, this is only a beginning.)

Climate grants for the Global South (and for other most affected people and groups such as indigenous communities in higher income nations) could shift around a trillion dollars per year to lower-income nations, directly reducing global inequality. Further monetary transfers from Global North to South would also occur via the ‘national allowances’ element of the system. This is part of the ‘cap’ side of the equation. It  requires countries that exceed their fair per capita share of fossil fuels to negotiate for temporary use of low consuming countries’ spare national allowance. 

The economic effects of these two kinds of transfers would be substantial, bringing annual gains of nearly $600 per capita for lower-middle income countries, and $800 for low income countries. In some nations this is more than current per capita GNI, so these transfers would effectively double national wealth.

Meanwhile, cash dividends are essential for making the system progressive at a micro level. It is more or less inevitable that carbon taxation will increase the price of fossil fuels. As a result, the price of energy, transport and other goods will increase until renewables provide the bulk of the energy mix. Without dividends, people would have to cover these price increases from their own pockets, and as lower income households tend to spend a greater proportion of their incomes on necessities, the impacts of carbon taxes can become regressive.

Cash dividends are therefore key because they offset much or all of this extra spending. For low consuming households (most of whom are lower income households) the dividends substantially overshoot these extra costs, so providing a significant cash boost to their monthly household budgets. 

As shown in our modelling, the effects vary progressively according to income group. In the first year of the system, people on average incomes in high income countries would see some, but not all, of their extra energy costs offset. They would be down $50 per person per month with dividends, versus $81 down without dividends. People on low incomes in high income countries would see smaller losses of $13 with dividends, versus $44 without. 

These losses assume people continue to consume fossil fuels at the same rate as they do today – which may be unlikely once these price nudges come into play. Nevertheless, governments of high income countries should be pressed to act to support their low and middle income earners through this transition, with proposals such as free basic energy and free public transport potentially becoming important in securing standards of living once carbon taxes are in place. 

The picture looks different in the rest of the world, where fossil fuel use and therefore carbon tax spend is much lower, leading to net gains for most households from the cap and share system. 

In upper middle income countries, dividends would broadly offset people’s extra energy costs, with small $3 losses for those on average incomes, and $12 gains for those on low incomes. Lower middle income countries would see net gains for both average and low income earners, of $10 and $20 per month respectively for every adult and child. In low income countries, most people would see net gains of $23 to $27 per month, likely to be enough to raise everyone from their current consumption level to above the extreme poverty line ($66 per month).

International taxation: the next big thing in tax justice?

These progressive and global justice-supporting effects are only possible because the carbon tax at the heart of cap and share is international. Cap and share therefore represents a radical rethink in what might be possible in tax justice. To date, the movement has focused on taxation at the national level – and for good reason, as no infrastructure yet exists at the international level for collecting or redistributing tax. However the five R’s of tax justice currently also only happens within borders. Tax redistributes wealth inside countries but not between countries, and the international democratic process – including the UNFCCC process – remains sorely lacking in terms of grassroots representation.

The climate crisis should change everything. There are no borders in the atmosphere, and my pollution here can destroy your life over there. Furthermore, the relevance of money and tax in the climate emergency cannot be overstated: poverty makes one immensely more vulnerable to suffering when crisis strikes. So securing people’s incomes should be considered a top priority for climate action. This becomes yet more important when we consider the injustices which have created both poverty and climate change: extractivism, colonialism and exploitation, all perpetrated predominantly by the countries and corporations of the North against the nations and peoples of the South. If ever there were a time to accelerate our ambitions on tax justice, and consider taxation without borders, this is it. 

Building the movement: tax justice activists needed

The cap and share movement is being built by a global network of activists, working together via the Cap and Share Climate Alliance to explore the potential of these ideas and campaign for their introduction. As these partnerships expand worldwide, new priorities are incorporated into our cap and share proposals, co-creating a more holistic system for climate justice. 

The tax justice movement should become a key player in this development. With decades of experience in fighting for justice, and of winning real gains for the people of the world on the international stage, the movement has a huge amount to contribute in developing international carbon taxation and, more broadly, for cap and share. Winning this will be far from easy: many more shoulders are needed at the wheel, and the tax justice movement is likely to be one of the most important partners of all to help make this campaign succeed.

The time is now

Will it succeed? We can only try. Imagine, though, if it did. Cap and share is a system that could provide for us all, by taxing fossil fuel extractors and major consumers and redistributing that money worldwide. For the first time, it proposes a taxation system that operates beyond the nation-state, harnessing the power of tax to address global inequality and injustice directly, which is key for climate justice, and is in many other ways long overdue. 

As the tax justice movement knuckles down on the idea of carbon tax, cap and share is a call to think beyond borders. And it asks the difficult but essential questions: “If not now, then when?” and “If not us, then who?”

Equal Right is a global justice organisation working for economic justice without borders. Find out more at www.equalright.org