On 16 October 2024 the UN Tax Committee discussed environmental tax issues. The environmental taxation subcommittee presented some papers to the committee for discussion or approval.

Phasing out fossil fuel subsidies

A paper on phasing out fossil fuel subsidies was presented to the committee for final approval. The paper notes that fossil fuels such as coal, lignite, oil and gas account for more than 75% of global greenhouse gas (GHG) emissions, and reduction of their use is critical in combating global warming. Fossil fuel subsidies (FFS) are policy instruments that subsidize the costs of using fossil fuels at some stage in their production or consumption, either directly by money transfers or indirectly through expenditure schemes, discounts, and incomplete pricing. Fossil fuel subsidies can influence the effectiveness of carbon taxes and other pricing instruments.

Reducing fossil fuel subsidies is fiscally advantageous, mitigating the long-term costs of climate change and adaptation. It can also create fiscal space, allowing a carbon tax to be introduced at a lower rate (which may increase support for the measure) and increasing the budgetary resources available for priority sectors. Phasing out fossil fuel subsidies risks increasing inequalities among households, and well targeted subsidies supporting low income groups are essential.

An important element when designing subsidy reforms is data availability and the limited institutional capacity in most developing countries. Identifying fossil fuel subsidies, determining how efficient they are and assessing their impact on the economic actors is a difficult administrative task. If direct targeting for fuel costs is not feasible, an alternative could be to expand existing targeted programs with lump-sum payments for fossil fuel costs.

Border carbon adjustments (BCAs)

The paper on potential responses to border carbon adjustments was presented to the Tax Committee for final approval. The paper examines the impact of BCAs on developing countries and looks at policy measures to mitigate the effects.

One way in which countries can react to a BCA is through the application of a domestic carbon price, designed to ensure that the taxpayer could obtain a credit against amounts payable in the BCA region. The home country could then effectively keep the revenues from their exports which would otherwise be collected by the BCA region. Alternatively, an existing fuel duty could be modified to create an explicit carbon price, for example with an explicit link to the carbon content of the fuel, so a credit could be given against the BCA. Another way to achieve the goal is by a tax only on carbon intensive exports. If a country does not want to take any of these measures, it could try to redirect exports away from the BCA area.

Other solutions could be found by international cooperation. For example, BCA areas could give exemptions to less developed countries; or revenues from BCAs could be used to compensate developing countries. If developed countries can fulfil their obligations on climate finance and the transfer of green technologies, this would enable developing countries to implement improved carbon solutions. International discussions could find ways to overcome the trade barriers that could result from BCAs.

Environmental measures other than carbon taxes

A paper on environmental measures other than carbon taxes was presented to the Tax Committee for final approval. An Appendix to the paper contains an inventory of select environmental taxes and other measures. The paper looks at air pollution taxes; plastics taxes; energy taxes; waste, landfill and incineration taxes; pesticides taxes; and water and sewage taxes, using country examples.

Interaction between carbon tax and other taxes

A paper on how to assess and correct the interaction between carbon taxes and other taxes was presented to the Tax Committee for a first reading. The paper examines the interaction of carbon taxes with excise duties, value added taxes, personal income taxes and corporate income tax. The paper concludes that the design of carbon taxes must take into account the existing domestic tax framework. The effectiveness of the carbon tax can be enhanced by well designed incentives and reductions in traditional taxes, and by accelerated depreciation. These measures may increase public support for a carbon tax.

Government revenue levels must be maintained, and revenue from carbon taxes is relatively low. Tax expenditures such as incentives can be costly and government revenue may come under pressure during the carbon transition. In developing countries, excise taxes normally contribute a sizeable share of revenue, and the carbon tax should be structured in a way that does not negatively affect revenue from excise taxes.