Gurria Recommends Recycling Green Taxes

by Ulrike Lomas, Tax-news.com, Brussels

26 April 2010

Angel Gurría, OECD Secretary-General, spoke against taxes on imports from countries lacking stringent carbon emission targets and for alternatives such as recycling of green taxes as a means of allaying competition fears, in a speech at the Johns Hopkins School of Advanced International Studies, Global Energy and Environment Initiative.

Reflecting on the strong relationship between economic performance and the delicate environmental balance of this planet, Gurría said it was time to reverse climate change with effective and coordinated policies, inclusive global agreements, innovative multilateral tools and responsible enterprises.

The Secretary-General highlighted three challenges:

• The most ambitious target for industrialized countries needs to be increased; an 18% emissions reduction in emissions by 2020, from 1990 levels, still falls short of the 25% to 40% reduction that scientists say is needed to keep the temperature rise to 2°C;
• Building-up a global carbon market will be critical; market-based instruments, such as carbon taxes and auctioned permits in emissions trading schemes, are needed to finance climate change action in developing countries; and
• More needs to be done to make actions taken “measurable, reportable and verifiable” – enforcing transparency and accountability.

Gurría proceeded to expound the OECD perspective on concerns around the possible impact of policy commitments on competitiveness, which he regards as a major obstacle to progress.

OECD analysis showed that the most cost-effective way to mitigate climate change was to build up a global price signal on carbon, through the use of market mechanisms such as cap-and-trade systems and carbon taxes. However, progress on the European Union Emission Trading Scheme and similar moves in the US, Japan and Australia were undermined by competitiveness concerns.

Of particular concern were fears that developed world industries would be disadvantaged by competitors from emerging economies not facing similar constraints. Such fears had led to calls in some developed countries for taxes on imports from countries lacking stringent targets – so-called Border Tax Adjustments (BTAs), according to Gurría.

He explained why fears of competitiveness loss and carbon leakage might be exaggerated, and BTAs are unlikely to be an effective means of addressing costs in those rather limited sectors, which might be affected.

He also outlined the diplomatic risks that BTAs posed for international negotiations. India, China and the G-77 had already been calling for more attention in the UN climate negotiations to discourage BTAs and other countervailing border measures.

Gurría suggested some preferable alternatives to BTAs, including:

• The "first best approach" – to have a completely level playing field by ensuring action on climate change by all countries;
• Revenues from carbon taxes or auctioned emission permits could be recycled back to the affected sector in ways that would not undermine the incentive to reduce emissions. Gurría said that this could help to stimulate innovation and the application of green technologies to reduce the carbon footprint of that particular sector;
• Finding ways through international cooperation of not exempting energy intensive industries from carbon pricing in both developed and emerging economies. OECD analysts estimate that not doing this would raise costs by 50% of achieving even a moderate 2050 target;
• Governments need to put in place measures to smooth the transition in the most exposed sectors that might be negatively affected, while seizing new “green growth” opportunities, technologies and jobs.

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