Consider transaction tax for climate financing: Experts to G20

A brainstorming session organised by CUTS International, a leading advocacy firm for inclusive policy making, has suggested that a proposal to introduce a Universal Financial Transactions Tax (FTT) should be a part of the G20 agenda as it has the potential to generate $650 billion a year for climate finance.

“While an agreement to set up a Loss and Damage Fund at the COP 27 Summit, in November, 2022, was hailed as a landmark decision, there is uncertainty over where this Fund will draw its resources from. In the backdrop of this uncertainty, a universal FTT may well be contemplated as one of the solutions, to meet a part of the requirements. As the costs of inadequate climate action continue to soar, a universal FTT, backed by strong political will, could play an influential role in bridging this gap,” said Bipul Chattopadhyay, Executive Director, CUTS International.

Chattopadhyay was moderating a webinar on ‘Universal Financial Transactions Tax for Climate Finance’ to seek experts’ views on the feasibility of a Universal FTT and the opportunities and challenges associated with it.  The discussants recalled the past attempts to push for a global FTT and the reasons why they did not succeed, including at the 2011 G20 Summit in France. Fears of a spill-over effect beyond borders and reluctance of countries to forego their ‘sovereign right to tax’ were some key factors building up opposition against such initiatives, they pointed out.

“Even conservative estimates foresee considerable sums on account of a global FTT. A Financial Transactions Tax, levied at a rate of 0.05%, could generate $650 billion a year. It is a significant amount as it stands at three and a half times of the current Official Development Assistance flows,” said Nagesh Kumar, Director and Chief Executive of New Delhi-based Institute for Studies in Industrial Development.  

Meanwhile, Ashima Goyal, Emeritus Professor, Indira Gandhi Institute of Development Research, Mumbai, argued that a universal FTT must also focus on the need to reduce arbitrage, which creates volatility and is responsible for escalating the costs of borrowing.“There is a need to do a global study on such taxes, regulatory systems under which they are working, and their impacts,” she said.

Stating that there is a need to ascertain the workability of global collection mechanisms Abdul Muheet Chowdhary, Senior Programme Officer of Geneva-based South Centre said it may be slightly ambitious to have developed countries collect FTT proceeds and park it with a repository managed by a United Nations body. He opined that alternatives such as the Climate Finance Withholding Mechanism under which multinational enterprises taxing residents of developed countries are required to retain their tax liabilities in developing countries, which is adjusted vis-a-vis climate finance commitments of developed countries must be explored.

Shubhashis Gangopadhyay, Managing Trustee and Research Director, India Development Foundation said much more evidence is required to address contextual issues related to FTT, taking into specific regulatory concerns and tax incidences. “A universal FTT should not just be a revenue collection mechanism as the original idea of such a tax was to reduce currency volatility. As the financial markets ecosystem is composed of closely interlinked components, an impact on one component resulting from an FTT is likely to have a bearing on the profile of the financial sector as a whole,” he said.  

Suranjali Tandon, Assistant Professor at the New Delhi-based National Institute of Public Finance and Policy, argued that for the purpose of generating requisite resources to counter externalities arising out of climate change, a global carbon tax could be a more suitable alternative to a universal FTT.

All panellists urged CUTS to take this initiative forward to the G20 and at the global level.