Challenges and Dynamics of Global Carbon Taxation and Emissions Trading – Research Brief

Challenges and Dynamics of Global Carbon Taxation and Emissions Trading – Research Brief

I. Context

Climate change has emerged as an anchoring challenge of this decade – one marked with environmental, economic, health, and debt crises– necessitating a unified response from countries worldwide. The quest to mitigate its impacts focuses on reducing carbon dioxide and other harmful greenhouse gas emissions. Despite global efforts, achieving the targets of limiting global warming to 1.5 or 2 degrees Celsius remains a formidable challenge, as indicated by various studies. 

The response from governments and major polluting corporations has evolved significantly in recent years, spurred by persuasive scientific evidence, heightened advocacy, and key international conferences. These bodies are increasingly committed to addressing the climate crisis, with a notable goal being the achievement of ‘carbon neutrality’ by the mid-21st century. However, the realization of these ambitions is hindered by the difficulty in translating commitments to reduce carbon emissions by approximately 90% into immediate, actionable policies. The ‘Polluter Pays Principle’ has been a pivotal element in initiating environmental measures. This principle, which demands that the costs of pollution be borne by the polluters, has been integrated in international environmental law and forms the foundation of numerous international treaties. Central to the application of this principle are the ‘Carbon Tax’ and ‘Carbon Emission Trading’ systems. 

The Carbon Tax is an environmental tax levied on the carbon emissions produced during the production or consumption of goods and services. A prominent example of this is the carbon tax on fuels and fossil fuels, which targets the carbon components of these energy sources.  Several countries have followed such a strategy. France, for example, has been at the forefront of this approach, implementing a carbon tax on fossil fuels since 2014. It is worth noting that the Carbon Emission Trading, or ‘Carbon Trading,’ is a market-based mechanism for trading emission rights or carbon credits, significantly represented by the European Union Emission Trading Scheme (EU ETS) established in 2005, targeting major industrial polluters. 

An integral aspect of the EU’s strategy is the Carbon Border Adjustment Mechanism (CBAM). Introduced in 2023, the CBAM is designed to prevent carbon leakage by imposing a carbon tax on imports from countries with less stringent climate policies. This measure aims to level the competitive playing field between European industries and international competitors, ensuring that the cost of carbon emissions is factored into the price of imported goods. This mechanism is a critical part of the EU’s broader strategy to address climate change and promote sustainable industrial practices.

The global approach to combating climate change requires a multifaceted strategy. This strategy is characterized by evolving responses from governments and corporations, adherence to principles like ‘the polluter pays,’ and the implementation of regulatory measures such as the Carbon Tax, Carbon Emission Trading, and the Carbon Border Adjustment Mechanism. These efforts represent vital steps toward fostering a sustainable and environmentally responsible future.

Complementing this global perspective, a recent study prepared by Skander Salemi, the President of Tunisian Tax Governance Association (ATGF) and member of Arab Watch Coalition, and Doctor Nacer Mokni Tunisian University professor, examines the comprehensive and strategic efforts within Tunisia, exploring how this North African country is adapting to and contributing to global climate strategies in its own unique regional context. What follows is an English summary of this study. The full study in Arabic is accessible here. 

II. The IMF proposal as a core tenet 

The International Monetary Fund (IMF) issued a pressing call for countries to hasten their transition to cleaner energy sources, in light of the growing and urgent threat of global warming. This move towards energy transition is deemed essential for addressing the pressing concerns of climate change. In this context, the IMF has proposed a carbon tax of $75 per ton, which is estimated to significantly reduce greenhouse gas emissions and help limit global warming to a maximum of two degrees Celsius by 2100, as per the Paris Agreement of 2015. 

This tax, particularly aimed at G20 countries, is set to be implemented by 2030. The rationale behind this hefty tax on carbon-heavy energy sources is to prompt countries to alter their behavior towards major energy producers and consumers, encouraging the reduction of polluting energy use and fostering the development of cleaner industries and technologies, such as electric vehicles and more efficient, less polluting heating and electrical systems. The IMF highlights in its approach the inadequacy of current measures and commitments in combating climate change, emphasizing the increasing human and economic costs of further delays. 

The Fund suggests that finance ministers play a central role in developing and implementing fiscal measures to curb climate change. This involves redefining the tax system and fiscal policies to discourage carbon emissions from coal and other polluting fossil fuels, using the new tax revenues to support the poorest segments of society and to fund investments. Of note, the IMF’s proposed carbon tax ceiling of $75 per ton represents a significant elevation above the levels commonly practiced in most countries committed to fighting global warming. For instance, the European Union trades carbon at about €22 (or $25), while France has set its carbon tax at approximately €44.60 (or $50), which has been frozen since 2018 due to the Yellow Vests movement

This tax is expected to substantially increase the cost of coal, the largest source of carbon dioxide emissions, especially in G20 countries. It will also impact natural gas and gasoline prices, potentially increasing electricity prices, though the extent of this increase would vary by country depending on their primary energy sources. The IMF stresses the importance of using the revenues from the carbon tax, which could represent between 0.5% and 4.5% of a country’s GDP, for three main purposes: alleviating the burden on the poorest households through financial allocations, aiding sectors most affected by the energy transition, and investing in green energy and technological innovations. 

The IMF’s 2020 report on global economic prospects proposes a comprehensive set of mitigation measures to achieve net-zero carbon emissions by 2050. This goal would however require a significant reduction in total emissions and the enhancement of natural emission sinks like forests, along with the use of emission reduction technologies such as carbon capture and storage. To accomplish such a substantive emission reduction, IMF officials suggest that each country should reduce its emissions by 80%, taking into account individual circumstances.  This includes exceptions for certain oil-exporting economies and others whose current emission levels are expected to remain stable due to significant economic contractions. The policy package should be designed to align with each country’s overall economic policy goals and be politically feasible, including gradually increasing carbon pricing and providing compensations to households. 

In summary, gradually adopting a global minimum carbon price by 2030 is a critical step towards limiting global warming to below two degrees Celsius. Delaying action on carbon pricing for a decade, according to the Fund, could significantly hinder achieving net-zero emissions by mid-century, with potentially irreversible damage to the climate and the economy. An agreement on a minimum carbon price, differentiated according to the development level of countries, would facilitate action on carbon pricing and address concerns about unilateral moves affecting the competitiveness of energy-intensive companies and sectors.

III. The Carbon Emissions Trading Market: Between reality and implications

The carbon emissions trading market sets a maximum limit on total carbon emissions for each country and industrial polluter. It operates like a stock market, where emissions shares are bought and sold, with prices determined by supply and demand. This market-driven approach is seen as a main advantage over fixed carbon taxes, allowing for more dynamic pricing and adaptation to changing environmental goals.

Under this system, an industrial polluter exceeding its emission quota must buy the right to emit more from available global markets. This typically involves purchasing surplus carbon dioxide stocks from countries whose total emissions fall below their maximum limit. Consequently, the carbon trading system enables industries with emissions below their cap (maximum volume) to sell their emission rights to higher-emitting entities. Despite criticism,  proponents believe this market-based approach is cost-effective in reducing carbon emissions.

Along with carbon taxes, it’s viewed as a key method for countries to meet their climate change commitments under the Paris Agreement. One can also delve into the current state and prospects of the global carbon trading market. According to a 2022 report by the International Carbon Action Partnership (ICAP), carbon markets are expanding globally, particularly in countries with carbon-intensive industries. As of 2021, 25 carbon markets covered approximately 17% of global greenhouse gas emissions. Around 22 additional markets are in development or being studied, mainly in South America and Southeast Asia. 

However, these markets often lack coordination with specific carbon budgets needed to maintain global warming within the critical thresholds of 1.5 degrees Celsius or “well below” 2 degrees Celsius. It must be noted that the steady growth of carbon markets, including those in the European Union and China, highlight the limited scope of current markets in covering global greenhouse gas emissions. This limitation is partly due to the exemption of significant industrial sectors from the carbon trading system. For example, the EU’s carbon market focuses on large industries and energy generation but has yet to include other significant sectors and potent greenhouse gasses like methane and nitrous oxide. Despite crises due to supply and demand imbalances, carbon trading systems are evolving towards more resilience and capability to withstand external shocks. Many governments are reforming their carbon trading systems to concretize the goal of “carbon neutrality.” 

The markets recovered in 2021 after a slump in 2018, leading to rising carbon prices and revenues from carbon trading auctions. Furthermore, it is projected that there will be continued development of carbon trading systems worldwide, emphasizing the role of these systems in supporting societal acceptance of carbon pricing. This acceptance is crucial for protecting life on Earth and involves various tools to protect vulnerable groups, like financial support for low-income communities.

Finally, these approaches are not void of criticism. Critics, including non-governmental organizations and civil society, economists, labor organizations, and energy suppliers, argue that carbon trading disproportionately focuses on individual lifestyles and carbon footprints, diverting attention from broader systemic changes and collective political actions needed to combat climate change. They assert that carbon trading is a distraction from the urgent need for clean technology and delays the transition to low-carbon infrastructure. Critics also question the effectiveness of current carbon markets in reducing overall emissions and point to the need for comprehensive, structural social reforms to address climate change effectively and conclusively.

IV. Deconstructing Climate Justice

This section delves into why the issue of climate justice is raised today and its legitimacy. Historically, justice has been a topic of philosophical discussion, but in modern times, political philosophy, law, and applied ethics have addressed it more concretely. Discussions traditionally centered around social justice, such as wealth distribution among social classes and nations, or distributive and tax justice. However, the emerging threats of global warming have led intellectuals and experts to introduce the concept of “climate justice.” This term has moved beyond academic discourse into everyday political conversation, becoming a significant democratic demand worldwide. 

Climate change, driven by human activity and technological advancements that dominate nature, is no longer just a physical or quantitative issue but a moral, legal, and political one. This expansion encompasses social, tax, and rights justice due to their interconnectedness with the fate of humanity. Climate justice at the international level now ties in with human rights agendas, international development, legal equality, collective rights, and the right of future generations to a healthy environment. It involves sharing the benefits and burdens associated with climate stability and concerns over climate change impacts. 

Unpacking the Concept of Climate Justice 

The terminology around environmental justice varies, with “justice” and “equity” often used interchangeably despite their slight differences. These terms share a semantic field, and both are used in public, journalistic, and political discourse. The Italian legal expert Rosa Manzo has written an article titled “Climate Equity or Climate Justice? Beyond the Issue of Terminology.” She acknowledges the complexity of defining equity in the context of climate change, which is a multifaceted issue. Manzo defines climate justice as encompassing a set of rights and obligations borne by companies, corporations, individuals, groups, and governments towards those disproportionately affected by climate change. In simpler terms, climate justice can be seen as the fair sharing and distribution of the burdens of climate change and the responsibilities of addressing it to combat global warming and the emissions of CO2 and greenhouse gasses. 

The term “justice” within “climate justice” implies the opportunity for future generations to have a safe climate, equitable distribution of the remaining global carbon budget among countries, i.e., has a futuristic component, as well as the gradual distribution of costs to meet basic needs for housing, transportation, and energy use. 

Practicality of Climate Justice: What are the possibilities?

Climate justice raises several practical legal and ethical issues related to responsibility. These include identifying the perpetrator of harm, the victim of this harm, the nature of the harm itself, establishing a causal relationship between the actor and the harm, and fair compensation for the victim. These aspects are complicated by the transnational nature of climate change impacts and the involvement of multinational corporations in pollution. There’s also a challenge in identifying victims, who are generally the global population but more severely affect low-income communities, farmers, indigenous people, people with disabilities, elderly or young people, and women. Future generations will also face profound impacts of climate change. The scale of environmental damage is difficult to measure and quantify, and there’s a challenge in accessing environmental litigation and seeking compensation for climate-related damages. 

Mechanisms for Achieving Climate Justice

Civil society plays a crucial role in awakening humanity’s conscience and motivating action against environmental system violations. Its effectiveness depends on its independence from major interest groups and political leaders. Civil society can monitor public policies, oppose polluting investments, and ensure that countries do not become dumping grounds for hazardous waste. It can also promote environmentally friendly economic projects, develop environmental laws, and enhance their implementation mechanisms. To be effective, environmental organizations need credibility, integrity, and public trust. The International Bar Association has suggested several realistic and politically feasible recommendations (five in total) to improve climate justice. These include recognizing climate change victims, enhancing human rights protections, holding polluting companies accountable, strengthening international institutions, and ensuring a fair trade system that penalizes the trade of non-compliant goods with climate standards.

V. Tunisia’s positioning

This section discusses Tunisia’s stance on reducing greenhouse gas emissions and carbon pricing. Despite its relatively low levels of CO2 and greenhouse gas emissions, Tunisia has actively engaged in climate change mitigation, fulfilling its ethical obligations to future generations and legal commitments to the international community. The country has pursued two main paths: developing environmental legislation and fulfilling its international environmental commitments. However, the role of civil society in contributing to climate change mitigation efforts has been somewhat overlooked. 

Enhancing Tunisian Environmental Legislation and its limitations

The Tunisian constitutions following the revolution have emphasized environmental issues. The 2014 constitution included numerous provisions for the rights of current and future generations to a healthy environment and sustainable development, establishing an independent constitutional authority for sustainable development and the rights of future generations. Despite these constitutional commitments, studies have pointed out a slow pace in updating environmental legislation to match the challenges of climate change and the country’s international obligations. The involvement of various government bodies and the scattered nature of environmental laws have contributed to the inefficiency of legislative reforms. Moreover, while Tunisia has made some progress in legislative updates, the scope and impact of these changes are still limited. 

Fulfilling International Obligations: how far is Tunisia?

Tunisia ratified the Paris Agreement in 2016, committing to a low-carbon developmental policy focused particularly on energy management. The country aims to reduce its carbon intensity by 41% by 2030 compared to 2010. Key targets in the national plan for carbon reduction by 2030 in the energy sector include reducing primary energy demand by 30%, increasing renewable energy’s share in electricity production to 30%, and reducing the carbon intensity in the energy sector by 46%. 

Tunisian administrative processes in drafting public policies and climate strategies have traditionally been centralized and non-transparent. To improve these processes, it is necessary to adopt governance standards that emphasize transparency, inclusivity, and democratic approaches. Civil society, particularly environmental organizations, should play a fuller role in monitoring, evaluating, and influencing climate policies and projects.

VI. Conclusion

This brief presented a multifaceted explanation of the current global approach to combating climate change, building on a comprehensive study authored by Skander Salemi and published by Arab Watch Coalition. 

This approach is characterized by an evolving response from governments and corporations, adherence to principles like ‘the polluter pays,’ and the implementation of regulatory measures such as Carbon Tax, Carbon Emission Trading, and the Carbon Border Adjustment Mechanism. These efforts represent critical steps toward fostering a sustainable and environmentally responsible future. The IMF plays a significant role in this landscape with its proposal for a carbon tax of $75 per ton by 2030, particularly targeting G20 countries. This initiative is considered a bold move to encourage a shift in global energy consumption patterns towards cleaner, more sustainable sources. However, the implementation of such a tax faces challenges, especially in terms of balancing the economic impacts on different sectors of society and the global economy. 

The Carbon Emissions Trading Market, another crucial component in this strategy, operates on a cap-and-trade principle, allowing for a dynamic market-based approach to reducing emissions.  While the market is expanding, it still faces challenges in terms of global coverage and effectiveness in significantly reducing greenhouse gas emissions. A critical aspect of the global response to climate change is the concept of climate justice. This term encapsulates the ethical dimensions of climate change, emphasizing the need for fair distribution of responsibilities and benefits in combating climate change and its impacts. The practicalities of achieving climate justice involve complex legal, moral, and political considerations, particularly regarding the identification of responsible parties and victims and the nature of reparations. 

Tunisia’s efforts in combating climate change, as detailed earlier, illustrate a national response that aligns with global trends. Despite its relatively low emission levels, the country has committed to significant reductions in carbon intensity, aligning with the Paris Agreement. However, findings underscore the importance of involving civil society in the development and implementation of climate policies, for optimal impact, highlighting the need for more inclusive, transparent, and democratic approaches in environmental governance. 

In summary, this research underlines the multifaceted nature of the global response to climate change. It emphasizes the need for concerted efforts at various levels – from international financial institutions like the IMF to individual countries and civil society groups and coalitions – to effectively tackle this global challenge. The strategies and policies discussed in the report, including carbon taxation, carbon trading, and the principle of climate justice, are integral to this collective effort. However, their success depends on effective implementation, widespread participation, and the ability to adapt and respond to the evolving nature of the climate crisis.


By: Skander Sallemi, Nacer Mokni, and Hussein Cheaito

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