Bocconi Students for Sustainable Finance

Though Unilateralism  and the lessons from Tax Policy

Which international summit can have a greater impact on the fight against global warming? Everyone interested in climate change policies knows about the upcoming COP26 that will be held in Glasgow this fall.

However, that might not be the international negotiation to follow, the OECD one on tax reforms canactuallyhavemuchbiggerconsequences. Why?Becausebothtaxformultinationalsand global warming face the same challenge: free riders. Indeed, we know that many countries think that if they make a special effort to be sustainable and then maybe make their products more costly, then others have an incentive not to make the same effort, and thus nothing gets done. Indeed, carbon dioxide has not decreased, but instead has kept an upward trend for 30 years, despite the apparent efforts of multilateralism. In the same way, big nations are not willing to increase taxes for corporations because small have an incentive to undercut them and attract multinationals in their territory.

The Biden administration has proposed to the OECD to create a global minimum tax. The idea is based on “thought unilateralism”. The core of the proposal is that if small countries decide to barely tax multinationals which do business in their jurisdictions, the host country of the group holding company will have the right to impose taxes on their profits. This would allow the US to tax the BigTech companies, for example.

As a consequence, he could collect more tax revenue at home without others free riding and trying to attract US companies by offering them lower taxes. Biden needs higher taxes at home, in order to finance his ambitious plan related to infrastructure and climate change. He is indeed proposing a raise of $2.5tn over the next 15 years. The US Treasury Secretary Yellen said last week that “we have to use all the tools at our disposal, including the tax code, to drive toward net-zero emissions”. The Biden plan includes also the removal of subsidies to fossil fuels companies, which will probably will not be approved by Congress. Taxes are then a precious weapon they can both create disincentives to pollute and finance green projects. The IMF recently underlined the importance of carbon taxes to reach the Paris Agreement’s goals, which still look very far as they would require cutting emissions by around 1/3 by 2030 and an approximately $70 per -ton global carbon price.

.

What lessons can we draw from this new approach to international tax policy? Free riding is a problem with huge economic consequences. The large economies can try to lower emissions with measures such as carbon tax, but all efforts will be in vain if polluting companies will just switch their production to other countries, the same way imposing taxes on BigTech would not work if other can afford to undercut. Emissions at home risk to just become emission abroad. This is why the fight against climate change cannot be delegated to a single country or even to a group of countries as the EU,but must be a global solution. Chris Giles from the Financial Times writes: “Free riding will prevent a global treaty being agreed, let alone working. But principled and muscular unilateralism by big players can work. The test this year is in international taxation. If

domestic or international politics prevents a deal on tax at the OECD, we should also wave goodbye to the prospect of a solution to global warming.”.

Sources

https://www.ft.com/conte nt/66 3cba6f-391e-4789-908e-b560936f2eaf

https://www.ft.com/conte nt/84 7c5f77-f0af-4787-8c8e-070ac6a7c74f

https://www.reuters.com/article/us-usa-treasury-climate-idUSKBN2C32JM https://www.ft.com/conte nt/84 7c5f77-f0af-4787-8c8e-070ac6a7c74f https://www.ey.com/en_us/ tax/how-climate-change-is-a-us-tax-policy-issue

Author: Laura Fracaro

RELATED

Though Unilateralism  and the lessons from Tax Policy

Which international summit can have a greater impact on the fight against global warming? Everyone interested in climate change policies knows about the upcoming COP26 that will be held in Glasgow this fall.

However, that might not be the international negotiation to follow, the OECD one on tax reforms canactuallyhavemuchbiggerconsequences. Why?Becausebothtaxformultinationalsand global warming face the same challenge: free riders. Indeed, we know that many countries think that if they make a special effort to be sustainable and then maybe make their products more costly, then others have an incentive not to make the same effort, and thus nothing gets done. Indeed, carbon dioxide has not decreased, but instead has kept an upward trend for 30 years, despite the apparent efforts of multilateralism. In the same way, big nations are not willing to increase taxes for corporations because small have an incentive to undercut them and attract multinationals in their territory.

The Biden administration has proposed to the OECD to create a global minimum tax. The idea is based on “thought unilateralism”. The core of the proposal is that if small countries decide to barely tax multinationals which do business in their jurisdictions, the host country of the group holding company will have the right to impose taxes on their profits. This would allow the US to tax the BigTech companies, for example.

As a consequence, he could collect more tax revenue at home without others free riding and trying to attract US companies by offering them lower taxes. Biden needs higher taxes at home, in order to finance his ambitious plan related to infrastructure and climate change. He is indeed proposing a raise of $2.5tn over the next 15 years. The US Treasury Secretary Yellen said last week that “we have to use all the tools at our disposal, including the tax code, to drive toward net-zero emissions”. The Biden plan includes also the removal of subsidies to fossil fuels companies, which will probably will not be approved by Congress. Taxes are then a precious weapon they can both create disincentives to pollute and finance green projects. The IMF recently underlined the importance of carbon taxes to reach the Paris Agreement’s goals, which still look very far as they would require cutting emissions by around 1/3 by 2030 and an approximately $70 per -ton global carbon price.

.

What lessons can we draw from this new approach to international tax policy? Free riding is a problem with huge economic consequences. The large economies can try to lower emissions with measures such as carbon tax, but all efforts will be in vain if polluting companies will just switch their production to other countries, the same way imposing taxes on BigTech would not work if other can afford to undercut. Emissions at home risk to just become emission abroad. This is why the fight against climate change cannot be delegated to a single country or even to a group of countries as the EU,but must be a global solution. Chris Giles from the Financial Times writes: “Free riding will prevent a global treaty being agreed, let alone working. But principled and muscular unilateralism by big players can work. The test this year is in international taxation. If

domestic or international politics prevents a deal on tax at the OECD, we should also wave goodbye to the prospect of a solution to global warming.”.

Sources

https://www.ft.com/conte nt/66 3cba6f-391e-4789-908e-b560936f2eaf https://www.ft.com/conte nt/84 7c5f77-f0af-4787-8c8e-070ac6a7c74f

https://www.reuters.com/article/us-usa-treasury-climate-idUSKBN2C32JM https://www.ft.com/conte nt/84 7c5f77-f0af-4787-8c8e-070ac6a7c74f https://www.ey.com/en_us/ tax/how-climate-change-is-a-us-tax-policy-issue

Author: Laura Fracaro

RELATED