cover of the climate damages tax

The Climate Damages Tax

A guide to what it is and how it works
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The Climate Damages Tax (CDT) addresses the injustice of climate devastation impacting populations around the world who did not cause the climate change but are left to pay for it without the means to do so. It looks to the fossil fuel industry – the burning of whose products are the root cause of the problem – who are currently making grotesque levels of profits in the hundreds of billions of dollars every year, to be held accountable for their actions. Most specifically, by being taxed considerably more to help pay for the skyrocketing bill for damages they have to date avoided.

The CDT is a fossil fuel extraction charge, levied on each tonne of coal, barrel of oil or cubic litre of gas produced. It would generate billions in extra income, most especially from fossil-fuel producing states. We propose that this substantial additional revenue is allocated in two ways. Firstly, it can help, particularly OECD countries contribute finance to the Loss and Damage Fund (LDF), without unfairly costing their taxpayers. Secondly, it will generate a significant domestic dividend that can be channelled to climate action nationally, helping to pay for the necessary support for workers and communities to transition away from fossil fuels, towards green energy and transport.

It is important to stress that with precious little of our carbon budget remaining, ideally we would have already stopped extracting and using fossil fuels allowing them to from now on remain in the ground. However, since this will still take a number of years, in the interim period as fossil fuels are phased out, the CDT is a valuable means to generate much-needed additional funds to benefit vulnerable populations facing catastrophic climate impacts. The CDT can also help accelerate fossil fuel phase-out by making its production more expensive. This is why we propose that the tax rate is ratcheted up annually adding costs to the fossil fuel industry’s bottom line incentivising the shift from carbon. In this transition from fossil fuels, we need to deploy a diverse portfolio of financial instruments. While the CDT, levied at the point of fossil fuel extraction, will initially provide substantial funding for the LDF, the diversification of revenue sources will ensure the resilience and adequacy of funding as we progress towards a fully renewable energy future.

Beyond the revenue benefits, advocating for the CDT publicly links the fossil fuel sector to the ever- increasing frequency and intensity of climate damage we are witnessing across the world. Shining a spotlight on the fossil fuel producers in this way puts pressure on them to change their business model or risk their reputation with consumers and their influence over governments.

Stamp Out Poverty initially developed the Climate Damages Tax proposal in a paper that we published in December 2018 in which we argued strongly for the setting up of a funding facility for loss and damage. In light of the decision to set up the LDF at COP27 and the historic agreement to operationalise it on the first day of COP28, with countries now focussed on how to mobilise sufficient funds to meet the costs associated with loss and damage impacts, we decided to revisit the paper to bring it up-to-date. By doing so, we offer decision makers a worked-up policy demonstrating a practical way to tap hitherto unharnessed revenue at scale from the very sector that caused the loss and damage crisis, and all its attendant costs, in the first place.

In this endeavour, we owe an important debt of gratitude to Julie-Anne Richards, the lead author of the first Climate Damages Tax report, who seeded the idea and helped so powerfully to develop the proposal. Below, we set out a brief overview of the sections of this paper.

Section 1 describes loss and damage giving the example of the Pakistan floods in 2022 before addressing the global scale of the loss and damage challenge, concluding with a section on the fossil fuel industry’s culpability for the problem and sufficiently broad shoulders to be an important part of the funding solution.

Section 2 describes the academic and moral basis and precedents of the CDT and the mechanics of how tax revenue would be captured.

Section 3 addresses the importance of the CDT as one instrument in a basket of complementary measures, such as levies on maritime shipping, aviation and financial transactions, to generate finance for climate action. As well, how the CDT funds would be allocated both to the LDF and, via the domestic dividend, to climate action nationally.

Section 4 addresses CDT revenue, including starting rate, annual ratchet and income potential.

Product details
Date of Publication
April 2024
Number of Pages
All rights reserved
Language of publication
Table of contents

Dedication 2

Foreword 3

Acronyms 4

Introduction 5

Executive Summary 6

Introduction 6

Loss and Damage 6

The Fossil Fuel industry 6

The Climate Damages Tax proposal 7

Revenue potential 7

Phasing out fossil fuels 7

Conclusion 7

1 Loss and Damage 8

1.1 Describing Loss and Damage 8

1.2 Breakthrough decision to set up the Loss and Damage Fund at COP27 9

1.3 Agreement to operationalise the Loss and Damage Fund at COP28 9

1.4 The Pakistan floods in 2022 9

1.5 Funding requirement for Loss and Damage 11

1.6 The Fossil Fuel industry 12

2 The Climate Damages Tax 14

2.1 Design 14

2.2 Rationale 14

2.3 Precedents in collection and disbursement of revenue 15

2.4 The Climate Damages Tax proposal 15

2.5 Payment and collection 16

2.5.1 Steps to capture CDT revenue 16

2.6 Compliance 16

2.7 Distributional impact 17

3 Allocation of revenue 18

3.1 The Loss and Damage Fund 18

3.1.1 New sources of finance 18

3.1.2 Debt-free finance 19

3.1.3 The need for gender-transformative climate action 19

3.1.4 The need for disability-inclusive climate action 20

3.2 Domestic Dividend 21

4 Revenue 22

4.1 Initial rate 22

4.2 Increasing the rate over time 22

4.3 First, furthest, fastest 22

4.4 Calculating revenue 23

4.5 Revenue potential 24

4.5.1 For OECD countries 25

4.5.2 For G7 countries 25

4.5.3 Cumulative revenue potential 25

5 Conclusion 26

Annex 1: Methodology 27

Annex 2: Considerations for setting the tax rate 29

Requirements of just and equitable climate finance 30

Annex 3: Alternative base rates 31

Endorsements 32