The OECD and Climate Change

Not even the most optimistic American climate activists would say that the billions of dollars of green energy spending in 2022’s Inflation Reduction Act were enough to solve the climate change problem.

The all-carrot, no-stick approach to reducing carbon emissions isn’t enough unless you do it continually–and even then, it probably isn’t enough.

It wasn’t the end of the climate change issue. But this is something we’ve been debating for longer than I’ve been alive. For Americans the IRA seems like it could be, as Winston Churchill memorably put it, the end of the beginning.

For the rest of the world, maybe this looks like the U.S. finally catching up. But not by that much. It seems that we’ve finally left the all-talk, no action phase to a phase where there’s still a lot of talk, but a little bit of action.

The 2015 Paris Agreement was signed by 195 countries, and while the U.S. briefly withdrew, it’s now proudly back in. All participating nations have or are implementing plans to reduce carbon emissions by future target dates. The United Nations, the World Trade Organization, and many other international coalitions have taken the lead in coordinating policy developments. The European Union is also planning a carbon border adjustment in the coming years.

And the Organization for Economic Cooperation and Development, fresh off its wins (sorta) in global taxes, just indicated its interest in joining the fray. In February it hosted the first meeting of its newly created Inclusive Forum on Carbon Mitigation Approaches, modeled on the Inclusive Framework for Base Erosion and Profit Shifting–a group larger than the OECD itself and aiming to include most or all of the nations on Earth. At the first meeting of the carbon mitigation forum (IFCMA), 101 countries were represented, representing 85% of global carbon emissions, according to the OECD. Appearing either digitally or in person were heads of state and finance ministers from around the world, including U.S. Treasury Secretary Janet Yellen, as well as World Trade Organization Secretary-General Ngozi Okonjo-Iweala.

This is hardly my area of expertise. But I’ve been trying, slowly, to change that. For international tax specialists, the future is hazy–but when it comes to BEPS issues, it’s possible that we’re staring at the beginning of the end. The plethora of policy fixes enacted by national and global authorities, however imperfect, may make elaborate tax planning too much of a hassle for large corporations to bother with it. (Don’t believe me? Ask Gabriel Zucman.)

Just as BEPS has dominated international taxes, almost to the exclusion of everything else, for the past decade, carbon pricing/taxes and carbon border adjustments could be the primary issue in international taxes of the future. For all intents and purposes, it could be international taxes for the foreseeable future.

(Don't worry, international tax friends, in the interim there's still plenty of unfinished BEPS-related work to keep us all busy for a long time.)

The OECD is just one of many international organizations angling to become a major policymaker in the climate change area. But there are a few reasons why they could be well-positioned to take, if not a leading role, a crucial supporting one.

This is in part because many of the challenges with implementing a global carbon-reducing framework bear striking similarities to BEPS issues. Both are about balancing national sovereignty with a common transnational goal–and dealing with jurisdictions who, for whatever reason, refuse to cooperate.

Just as loose international tax rules make revenue collection hard for everyone, individual carbon mitigation measures don’t do much good if there isn’t a way to ensure that carbon is reduced globally. That’s what the climate experts call “carbon leakage,” the incentive that carbon emitters will have to move production to wherever the rules are most lenient.

In theory, a carbon border adjustment can help with this issue. If a country institutes a Pigouvian price on carbon, to account for the global climate damage it causes, that price can account for pollution in other jurisdictions by adding the tax to their imports. (While also applying a rebate for exports.) This looks like a tariff, but according to experts, it doesn't necessarily have to act like one.

"In principle, economywide border adjustments are trade-neutral," wrote Shuting Pomerleau, research manager for climate policy at the Nisaken Center. "They neither encourage nor discourage imports or exports."

The problem is that it’s pretty unlikely everyone will impose a carbon tax. That might be the  ideal way to tackle the problem, but to insist on it is to set a high bar for action that may never be achieved. No one likes taxes, especially taxes that will disproportionately hurt the poorest–even if the revenue can be used to offset the hardship. (After all, if the tax is effective its revenue will decrease over time.)

Some countries may opt for a cap-and-trade system, or stricter regulations or limits on carbon. Or some may choose the U.S. route, and grant generous subsidies for alternative energy sources while focusing less on stricter rules or increased taxes for fossil fuels.

So on top of the pretty-hard challenge of pricing carbon, policymakers will have to deal with the much-harder question of how to incorporate all of these non-tax measures into some kind of system, or at least a basis of comparison. If Country A has hard limits on carbon emissions while Country B adds an excise tax on them, how should they account for this when they trade? Should Country B add its carbon price to Country’s A’s imports, without taking into account the implicit cost of Country A’s rules? How should they even calculate that?

It’s a problem that makes your head spin. That’s where the OECD could come in, leveraging its vast research apparatus and experience setting international tax standards.

Although, compared to its BEPS projects, the OECD’s stated goals here seem remarkably modest.

“It's not a standard-setting body, we're not going to be doing peer reviews, we're not going to be ranking countries,” said Grace Perez-Navarro, then the acting director for tax and policy at the OECD, at a later webcast. (She's since left the organization.)

“We're really going to do this data-gathering information and bringing countries together so that they all have a better understanding of what countries are doing,” she said.

Mathias Cormann, secretary-general of the OECD, said in his opening speech for the conference that the forum was focused on “facilitating data and information sharing, evidence-based mutual learning and support in an inclusive multilateral dialogue.”

A key goal of the project will be to create “a consistent methodology to assess the impacts on emissions of carbon mitigation policies at the country level.”

“This will help provide a better understanding of the comparative effectiveness of different policy tools,” he said. “Over time, this approach could form the basis for a more rigorous assessment of the effectiveness and cost efficiency of different policy approaches to reducing carbon emissions.”

Of course, if there is eventually a unified standard for carbon pricing, or carbon mitigation, someone will likely need to design and implement it--and the OECD could be the likely candidate.

But as its battle scars from the past few years has shown, this can be a much harder process than it sounds, even when all of the participating countries claim to be in agreement on the goal.

DISCLAIMER: These views are the author's own, and do not reflect those of his current employer or any of its clients. Alex Parker is not an attorney or accountant, and none of this should be construed as tax advice.

LITTLE CAESARS: NEWS BITES FROM THE PAST WEEK

• Speaking of the IRA, the U.S. Treasury Department last week seemed to pull off the rare trick of making no one happy with new proposed rules on the law's tax credits for electric vehicles. The law includes requirements that a certain amount of the "critical minerals" necessary to make cars run without gasoline be from the U.S.--and based on the Treasury guidance, very few U.S. cars on the market today will qualify, according to industry experts. Nevertheless, Republicans blasted the administration for allowing too much foreign production--according to Rep. Jason Smith, R-Mo., chairman of the Ways and Means Committee, Biden is "leaving America’s key supply chains in the control of the Chinese Communist Party." Sen. Joe Manchin, D-W.Va., also kept up his campaign against Treasury, calling the guidance "horrific" and a "pathetic excuse." The rules also seem to try to loosen the definition of "free trade agreement" to allow for more foreign-made components, something that has provoked bipartisan objections.
• The Internal Revenue Service on Thursday finally released its spending plan for the $80 billion in new funding the IRA authorized last year--something that Sec. Yellen requested last year and which Republicans have been angrily demanding in the months since. The 150-page document was criticized for being broad and light on specifics, but it does outline that more than half of the spending will go to heightened enforcement, with thousands of new hires for that purpose. Part of those resources will go towards enforcement in "complex, high-risk and emerging issues" including "certain international issues," although it didn't get much more specific than that. The agency will be under pressure to show results from these increases, so expect to see some new energy in international cases.
• The British Parliament Public Accounts Committee released Wednesday a report on the country's 2% digital services tax, enacted in 2020. The tax targets revenue--not profit--from Internet activities such as online marketplaces and social media platforms. The report states and obvious point that likely bears repeating--with no solution in sight for the OECD's Pillar One, these supposedly temporary DSTs could continue indefinitely, and policymakers need to plan for some of the problems this will cause.

PUBLIC DOMAIN SUPERHERO OF THE WEEK

Blue Bolt, appearing first in Blue Bolt Comics #1. (Created by Joe Simon, co-creator of Captain America.) A Harvard football star is struck by lightning in the mountains, and then is saved by mysterious mountain-dwelling scientists. Using radium deposits, they not only rejuvenate him, but they capture what electricity remained in his body to endow him with lightning-related powers. He can fly and shoot lightning from his eyes, which is a little redundant since they also made him a lightning gun. Using these powers he fights not only Earthly crime but green alien sorceresses.

Happy Easter, Passover, or however you're spending the weekend!

Contact the author at amparkerdc@gmail.com.