A new report finds that developed countries could raise $2 trillion in climate finance per year by raising their tax-to-GDP ratios by four points.
Despite being responsible for a tiny fraction of the greenhouse gas emissions, African countries are among the worst affected by the climate crisis and least financially able to cope. Vulnerable communities are being devastated by cyclones, droughts, floods, and heatwaves and need urgent action to adapt. Yet the debt distress that over half of African countries face mean much of their limited budgets is being spent on simply servicing debts.
While those least responsible for the climate crisis are most affected, those most responsible - wealthy nations and corporations that rely on fossil fuels and industrial agriculture - are shirking their responsibility. Although rich countries are projected to have belatedly fulfilled their pledge to provide $100 billion in climate finance per year in 2022, much of this has been in the form of loans rather than grants. The result is that climate-vulnerable countries are pushed deeper into debt, creating perverse incentives to scale up fossil fuel extraction to repay those loans.
This broken system demands a new approach that guarantees a huge increase in financing for global climate responses.
A new report by ActionAid reveals that tax justice offers a pathway to raising climate finance. Finding the Finance: Tax Justice and the Climate Crisis shows that with ambitious and progressive taxes to target the biggest and wealthiest polluters, rich countries can raise the trillions that can give our planet and its people a fighting chance to address the climate crisis.
By increasing their tax-to-GDP ratios by 4%, developed countries could raise more than $2 trillion per year for climate finance. That may sound like a lot, but there is already a 26% difference between Ireland's tax-to-GDP ratio (21.9%) and Denmark's (48%). 4% is entirely feasible.
A range of progressive, gender-responsive, and climate-sensitive measures that address tax avoidance and target high earners and big corporations would ensure that the wealthiest and those that are most responsible for causing climate change would bear the burden. As outlined in the report, this could include wealth taxes, property taxes, capital gains and inheritance taxes, trade and digital taxes, as well as personal and corporate income taxes. Every country would need to use a different combination of measures to increase their tax to GDP ratios fairly.
Fair taxation can also help developing countries raise revenues domestically. However, African countries have long been constrained in setting their national tax rates by the OECD, the club of rich countries that currently control the global tax framework. This deeply unfair situation means that international corporations are barely taxed in Africa even as they extract staggering profits from our resources.
There is some hope that this could changes soon. Last year, the UN agreed to develop a UN Framework Convention on Tax, as advocated for by African countries. Negotiations are still underway about how it will work, but initial signs are positive that it could transform global rules in ways that help all countries increase tax revenues through progressive and climate sensitive reforms. This would make a huge difference to developing countries' ability to raise domestic resources for vital priorities. As ActionAid's report also shows, if the 60 most climate-vulnerable countries were to increase their own tax-to-GDP ratios by 5%, it could raise over $300 billion per year. This could and should be achieved through the same range of progressive tax reforms that are proposed for wealthy countries, making sure that the burden does not fall unfairly on the poorest, a mistake that recently prompted widespread protests in Kenya.
The new UN Framework Convention on Tax also provides an opportunity for globally coordinated action to introduce a range of global taxes that could raise trillions of dollars through measures such as windfall taxes, wealth taxes, higher tax rates on the income of the top 1%, and financial transaction taxes, as well as through a range of carbon and climate damage taxes, including on aviation and shipping.
By addressing tax loopholes, tackling illicit financial flows, and implementing fairer tax regimes, vast resources can be unlocked for the climate action needed to put our planet on track for survival. There will always be resistance, as we saw from wealthy countries in the OECD who benefit most from the present global tax rules and who have tried to block a new UN Framework Convention on Tax. But the momentum for radical reform is strong and the OECD countries have been consistently outvoted in the UN General Assembly.
Imagine the resilience-building infrastructure, early warning systems, renewable energy, public transport, and sustainable agriculture systems that could be funded with this money. Imagine the empowered communities adapting to a changing climate, not succumbing to it. Critics might argue that this is an internal issue for African nations. However, the historical exploitation, unfair trade practices, and biased tax global tax regimes that persist contribute significantly to the limited financial resources on the continent. Climate justice demands that those most responsible for the crisis accept responsibility and act.
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Progressive taxation is also about more than raising money. It is about sending a clear message that those who have benefited most from the system causing this crisis have a moral obligation to contribute to its solution. It's about shared responsibility within nations and across the globe.
African governments and civil society must push for progressive tax reforms under the new UN Framework Convention on Tax, and at home. And wealthy nations should support these efforts and acknowledge their historical responsibility. The climate crisis demands a global response, and true justice lies in empowering Africa to chart its own way out of this crisis.
