April 21, 2023
There is an urgent need to address the overarching challenge of climate finance to effectively tackle climate change. A Universal Financial Transactions Tax could be considered and should be a part of the G20 agenda. This instrument has the potential to generate $650bn a year for climate finance.
As part of a global initiative undertaken by CUTS International, on April 21, 2023, on the eve of the World Earth Day, a webinar on the theme ‘Universal Financial Transactions Tax for Climate Finance’ was organised.
It was an attempt to deliberate on one of the solutions towards generating resources for the Loss and Damage Fund to combat climate change. The webinar witnessed participation of experts with a diverse range of views as they comprehensively examined the feasibility of a Universal FTT and the opportunities and challenges associated with it.
Moderating the programme, Bipul Chattopadhyay, Executive Director, CUTS International, said: “While an agreement to set up a Loss and Damage Fund at the COP 27 Summit, in November, 2022, was hailed as a landmark decision, there is uncertainty over where this Fund will draw its resources from.”
“In the backdrop of this uncertainty, a universal FTT may well be contemplated as one of the solutions, to meet a part of the requirements. As the costs of inadequate climate action continue to soar, a universal FTT, backed by strong political will, could play an influential role in bridging this gap,” he argued.
According to Nagesh Kumar, Director and Chief Executive of New Delhi-based Institute for Studies in Industrial Development, “Even conservative estimates foresee considerable sums on account of a global FTT. A Financial Transactions Tax, levied at a rate of 0.05 per cent, could generate $650bn a year. It is a significant amount as it stands at three and a half times of the current Official Development Assistance flows.”
The panelists also discussed past attempts to push for a global FTT and the reasons why they did not succeed, including at the 2011 G20 Summit in France. Fears of a spill-over effect beyond borders and reluctance of countries to forego their ‘sovereign right to tax’ were some key factors building up opposition against such initiatives.
Keeping those factors in mind, Ashima Goyal, Emeritus Professor, Indira Gandhi Institute of Development Research, Mumbai, argued that a universal FTT must also focus on the need to reduce arbitrage, which creates volatility and is responsible for escalating the costs of borrowing. “There is a need to do a global study on such taxes, regulatory systems under which they are working, and their impacts.”
There is also need to ascertain the workability of global collection mechanisms. It may be slightly ambitious to have developed countries collect FTT proceeds and park it with a repository managed by a United Nations body, indicated by Abdul Muheet Chowdhary, Senior Programme Officer of Geneva-based South Centre.
He highlighted that alternatives such as the Climate Finance Withholding Mechanism must be explored. Under CFWM, multinational enterprises’ taxing residents of developed countries are required to retain their tax liabilities in developing countries, which is adjusted vis-a-vis climate finance commitments of developed countries.
Mumbi Wachira, Lecturer in Nairobi-based Strathmore University, emphasised on concerns of the Global South, induced by climate change. She highlighted that the climate finance gap in Africa stands at $2.8tn and is only expected to widen. More than 50 per cent of climate assistance extended to Africa is offered in the form of debt. Therefore, a global framework must focus on innovative finance solutions which don’t pile up further burden on vulnerable countries.
While the idea of a universal FTT certainly holds huge potential, according to Shubhashis Gangopadhyay, Managing Trustee and Research Director, India Development Foundation, much more evidence is required to address contextual issues, taking into specific regulatory concerns and tax incidences.
“A universal FTT should not just be a revenue collection mechanism as the original idea of such a tax was to reduce currency volatility. As the financial markets ecosystem is composed of closely interlinked components, an impact on one component resulting from an FTT is likely to have a bearing on the profile of the financial sector as a whole,” he argued.
According to Karin Jancykova, Programme Officer of Brussels-based KAS Multinational Development Policy Dialogue, the proposed Universal FTT must focus on efficient implementation so as to ensure that the proceeds generated are optimally distributed for benefitting the targeted sections.
“While it is a fact that the Global North is responsible for a higher share of emissions, the Global South must work with it as a partner to mitigate the impact of climate change. There is also a need to build awareness around green investment models,” she argued.
Neha Kumar, Head, South Asia Programme, Climate Bonds Initiative, stated that while investors are optimistic about investments in green financial instruments with measurable gains, awareness levels are still very low, with clear benefits not known in many cases. While we debate the utility of a universal FTT to address the challenge of climate finance, we must also look at other alternatives, she argued.
According to Suranjali Tandon, Assistant Professor at the New Delhi-based National Institute of Public Finance and Policy, argued that for the purpose of generating requisite resources to counter externalities arising out of climate change, a global carbon tax could be a more suitable alternative to a universal FTT.
All panellists urged CUTS to take this initiative forward to the G20 and at the global level. Key takeaways will be used to build on the enriching exchange of views. They agreed to remain engaged in future deliberations on what, why and how to address the global challenge of climate finance.
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