Countries Turn to Carbon Taxes Amid Calls for a Global System

Recent years have seen an increase in the number of policies, regulations, and incentives introduced to combat climate change and reduce greenhouse gas emissions.

These measures were initially country-specific—but this changed in 2023, with the EU implementing its Carbon Border Adjustment Mechanism, or CBAM, shaking up the extent to which such measures affect other countries.

This stems from a desire for global emissions’ reduction rather than just in-country decarbonization, considering that emissions aren’t bound by borders and influence worldwide climate change.

The progressive development of carbon pricing globally isn’t contained to the rise in the number of jurisdictions adopting existing measures—we are also witnessing completely new carbon pricing designs emerging.

Whether it’s only introduced as a temporary measure, or permanently changes the way businesses operate, the impact of climate-related legislation on a business must be assessed in advance to allow for timely advantageous adaptation in a world that is increasingly using the carbon content of products as a measure of competitiveness.

Iteration, Not Imitation

Following the 2023 implementation of the EU’s CBAM, several countries have been actively considering introducing their own CBAMs. The UK is the most advanced, having announced on Dec. 18, 2023, that a UK CBAM will be implemented by 2027.

While there appears to be significant overlap with the EU CBAM (detail on the exact product scope, design and delivery of the UK CBAM is being consulted on during 2024), differences in sectoral coverage have already emerged.

During the legislative process, the EU considered including organic chemicals and polymers in the CBAM but ultimately excluded them from the initial scope. The UK CBAM covers the same sectors as those under the EU CBAM but excludes electricity and includes ceramics and glass.

The relevant goods and commodities considered as part of the Australian CBAM consultation paper both overlap with and diverge from the EU CBAM coverage.

It stands to reason that CBAMs won’t mirror each other, as each country’s production, import, and carbon intensive sector profiles may be different. However, these carbon pricing measures impact global commodity trade and products’ competitiveness, and affected companies are required to track and report on the embedded emissions of exported goods.

Questions then arise as to how divergent the reporting requirements and acceptable emissions measurement methodologies under each CBAM will be. How complex will international trade reporting become?

There are also the tax implications to be defined and considered, such as the value-added tax treatment of CBAM transactions, whether the cost of CBAM certificates will be allowed as a tax deduction, and whether CBAM-related costs may be built into the cost of sale of products or should be treated as an additional expense.

Next Big Thing

Calls for a global carbon taxation regime are gaining increased momentum. In the September 2023 Nairobi Declaration, the African Union urged world leaders to “consider the proposal for a global carbon taxation regime,” a concept which is supported by the International Monetary Fund.

A proposed Multilateral Carbon Tax Treaty, the MCTT, has recently emerged for discussion. This treaty would require signatory nations to tax carbon contained in fossil fuel ore or one of its by-products at the level of extraction. The presumed taxable event is “the upstream level of the fossil fuel supply chain, upon extraction from the ground of the fossil fuel resource containing carbonic minerals.”

However, secondary and tertiary allocations allow for a carbon tax to be applied at the midstream phase or on import of the fossil fuel to the country of consumption, if the fossil fuel isn’t subject to tax on the upstream or midstream phases.

Although the power to levy taxes remains firmly with individual nations, the intention behind the proposed MCTT is that this environmental agreement would use a tax instrument, in the form of a carbon tax, to assist countries in meeting their nationally determined contributions under the Paris Agreement.

Signatories would commit to a minimum carbon tax rate while retaining their sovereignty to “exploit their own resources pursuant to their own environmental and developmental policies” and apply higher carbon tax rates at their discretion.

Article 9 of the proposed MCTT, which addresses border carbon adjustments, provides that “contracting States are hereby authorized to employ a border Carbon Adjustment towards non-signatory States, provided the border adjustment measure is proportionate to and does not exceed the carbon tax employed domestically.”

A border carbon adjustment may be employed at a contracting state’s discretion when an exporting state’s tax rate is 10% or more lower than the domestically assessed tax. Whether this discriminates between countries that have or haven’t signed the MCTT irrespective of the level of carbon tax they apply would have to be tested under the World Trade Organization rules.

A Disruptive Force

Even if a minimum global carbon tax becomes the first binding tax treaty as an instrument of environmental law, the acknowledgment of border carbon adjustments in the MCTT, coupled with countries exploring the implementation of their own CBAMs, highlights the extent to which these measures may be more than a fleeting fancy.

In this landscape of uncharted territory, what is certain is that companies should actively pursue decarbonization efforts. Those who only wish to maintain the status quo may either be financially affected, through penalties, increased carbon pricing costs, loss of competitiveness, or suffer reputational damage as consumers increasingly opt to purchase from companies that produce their goods in a sustainable manner.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Nicole de Jager is senior tax manager, global ESG tax (EU green deal and decarbonization) with KPMG International.
Chris Morgan is global leader for the responsible tax program with KPMG International.

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