How realistic is a global fossil fuels tax to aid the green transition? 

An estimated $100trn of global spending on the green transition is required by 2050. Credit: Shutterstock

A report has claimed that a tax on the extraction of fossil fuels could raise $720bn by the end of the decade for to support the green transition in the world’s poorest countries. 

Led by Stamp Out Poverty and backed by the likes of Greenpeace, Climate Action Network and Christian Aid, the Climate Damages Tax report, published in late April, examines the proposal that OECD countries, in particular members of the G7, should “lead in introducing a fee per tonne of CO₂ embedded (CO₂e) within the domestic extraction of coal, oil and gas.” 

The report outlines that, if introduced in OECD countries in 2024 at a low initial rate of $5 per tonne of CO₂e increasing by $5 per tonne each year, the tax would raise a total of $900bn by 2030. This, it says could be split so that 80% ($720bn) went to the newly established Loss and Damage Fund for helping developing countries with in responses to climate losses and damages and 20% ($180bn) was retained by countries for use domestically. 

Certainly, ways to ensure money finds its way to transition efforts are necessary, with upwards of $100trn of global spending typically estimated as being required by 2050 – and some estimates being closer to $300trn. 

David Hillman, director of Stamp Out Poverty and co-author of the Climate Damages Tax report said of the proposed tax: “This is surely the fairest way to boost revenues for the Loss and Damage Fund to ensure that it is sufficiently financed as to be fit for purpose.” 

How realistic it is that wealthy countries would stump up funds to that tune is a different matter, though. 

Speaking to us following the launch of the report, Hillman argues: “We believe it to be very feasible, as such a tax can be implemented using currently existing systems whereby fossil fuel producers report the volume of extracted fuels.” 

But Paul Hasselbrinck, upstream analyst at GlobalData, disagrees. 

“The political feasibility is low, as cross-jurisdiction tax agreements have proved challenging,” he tells us. “With an increased tax burden to international oil companies (IOCs) and only partial revenues for the producing countries, there are high incentives for individual countries not to adhere to the agreement. Moreover, given that the tax proposal levies the charge on all CO₂ embedded in the extracted resource, not the actual emissions produced in the extraction process, IOCs will argue that this tax does not comply with the ‘polluter pays principle’.” 

What’s more, Hasselbrinck is not convinced such a tax would have the desired effect. 

“The proposal suggests that the agreement be made within G7 countries or OECD countries,” he says. “Among the top 20 oil and gas producers, only the US, Norway, Canada, Australia and Mexico are OECD members, representing roughly 33% of current oil and gas production, leaving out all production from the Middle East and the former Soviet Union. Even if the proposal were completely adopted by OECD countries, production would slowly shift away into other regions, where 72% of global recoverable reserves lie.” 

Despite his reservations about it, Hasselbrinck believes that the Climate Damages Tax is innovative in principle due to being proposed “at the multinational level and levied on embedded CO₂”. 

However, he concludes: “While the idea may gather momentum, or may evolve as it gets discussed, right now it seems unfeasible and perhaps even ineffective.”