Questions and Answers of a levy on the Carbon Majors

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A groundbreaking report by Richard Heede released in 2013 revealed that 63% of global carbon emissions can be traced back to the 90 biggest oil, gas and coal producers and cement manufacturers.

One half of the emissions from Carbon Major entities have occurred since 1986.

Breakdown of top Carbon Majors (use infographic ‘Who are the Carbon Majors?’ to communicate some of this information):

The Carbon Majors have made massive profits from selling fossil fuels.

Taxpayers for Common Sense have calculated that, in the decade to 2012, the top five oil and gas companies alone made more than US$1 trillion in profits.

Groundbreaking research by Richard Heede has revealed that 63% of global carbon emissions can be traced back to the 90 biggest oil, gas and coal producers and cement manufacturers. Heede’s research debunks the myth that everyone (and therefore no one) is responsible for climate change. The Carbon Majors, who comprise just a few dozen entities, are responsible for the lion’s share of greenhouse gas emissions in the atmosphere.

 Cumulative or historic emissions drive climate change. Heede’s analysis thus provides the groundwork for apportioning responsibility for the loss and damage caused by climate change.

 In addition, approximately half of the emissions have occurred over the past 25 years. The risks of climate change have become well known through this time. Nonetheless, the Carbon Majors have accelerated their production and sale of products. Arguably, they have done this with the knowledge that their products will cause harmful effects on the global atmospheric commons.

Many of the Carbon Majors have even been accused of engaging in campaigns to spread disinformation concerning the science of climate change. The Carbon Majors have spent billions to lobby politicians to ensure that their operational existence and profits are protected.

The Carbon Majors have made, and continue to make, a project from selling fossil fuels. Just five of the Carbon Majors have made more than US$1 trillion in profits in the decade to 2012. They have made this profit by externalising one of the key costs of their business – climate change – for which all of us, but especially the world’s poor, are paying.

Focusing on the point at which fossil fuels are extracted makes it administratively easier than focusing on the point at which fossil fuels are used. And as the amount of CO2 emitted from burning a unit of coal, oil, or gas is largely consistent, regardless of how it is used, emissions can be calculated more easily and equally accurately upstream. 

The Carbon Majors may choose to pass the cost of the levy onto their customers. In this way, the price signal is applied across the fossil fuel chain, making it irrelevant where in the chain the levy is applied for a dampening effect on demand. Governments should consider implementing complementary policies to ensure any pass-on of the levy does not have an impact upon the poor and exacerbate inequality.

Whilst the ‘no harm rule’ does not differentiate between developed and developing countries, the UNFCCC requires developed countries to take action first and to provide support for developing countries to take climate change action. The Carbon Majors report shows that entities from both developed and developing countries share the burden of responsibility for historical carbon emissions.

Some of the Carbon Major entities are from developing countries, owned by developing-country governments, or in some cases are developing-country governments. Charging the cost of loss and damage to each entity in proportion to their pollution would not take into account differentiation along the developed/developing country divide identified in the Annexes to the Convention.

In discussions with various stakeholders, the CJP has found that some consider treating the Carbon Majors as equal entities and simply taking into account the emissions they are responsible for an advantage, as it is the actual extraction of fossil fuel that is being targeted. Regardless of its origin, each tonne of coal/barrel of oil/cubic metre of gas has added to the climate change loss and damage being inflicted upon the most vulnerable.

Some have argued that fossil fuel extraction in developing countries is more likely to have been used to provide customers with the basic necessities of life, whereas fossil fuel companies in developed countries are more likely to be extracting fossil fuels for luxury consumption (air conditions, driving cars). The challenge is that, certainly for oil – and to a lesser extent gas and coal – fossil fuels are traded on an international market. Additionally, as the latest IPCC report demonstrates, a growing share of CO2 emissions from fossil fuel combustion and industrial processes in low- and middle-income countries has been released in the production of goods that are subsequently exported to high-income countries. Hence, where a fossil fuel is extracted is not necessarily a guide as to where it is burnt, which is not necessarily a guide as to where the product it may have been used to produce is eventually consumed.

One way of approaching differentiation would be to implement a two-tier levy system, whereby entities extracting fossil fuels within developing countries pay a lower levy. However, this could have unintended consequences, including an excess of fossil fuel extraction from developing countries and the associated health impacts and economic dependency that is related to such emphasis. And as identified above, just because a fossil fuel is extracted in a developing country, it does not mean that it – or the product it is used to make – is ‘consumed’ in that country. It does not make sense to exclude extractions from developing countries on equity grounds if the products are then consumed in the most affluent countries – rather, the levy should be passed through the supply chain on to the eventual (affluent) consumer.

A practical alternative is to give consideration to phasing-in various entities. For instance, it might be considered desirable to begin the scheme with shareholder-owned entities, bringing in state-owned entities and states over a period of time. This approach was proposed to the CJP on the basis that the shareholder-owned entities are operating on a for-profit basis, and are primarily based in the developed world, whereas the state-owned entities and states could be seen to be operating ‘for the people’ and are primarily based in the developing world.

If the International Mechanism for Loss and Damage, as proposed by the CJP, agrees to provide funding only to most vulnerable countries suffering from the impacts of climate change, this may sufficiently address the issue of differentiation and the levy could therefore be applied on an equal footing based on extraction and emissions.

There may be other considerations and other ways to approach this issue, and we welcome the sharing of ideas as to how to address this issue.

 The most effective way to address loss and damage is to reduce greenhouse gas emissions, and therefore reduce the impacts of climate change. The sooner greenhouse gas emissions are phased out, the less loss and damage their will be. A net phase-out of greenhouse gas emissions by 2050 would ensure a very high likelihood of staying within 2°C of warming, and give a 50% chance of staying below 1.5°C of warming. Keeping warming below 1.5°C would prevent some of the worst impacts of climate change, but still poses serious challenges, especially for least-developed countries, small island developing states, and African countries.

Fossil fuels make up the majority of greenhouse gas emissions. Therefore, the approach to funding the International Mechanism for Loss and Damage must be embedded within a plan to phase out fossil fuel use altogether. It should also be teamed with the even more urgent need to phase out subsidies for fossil fuels and write down fossil fuel reserves/assets. It should do this in a number of ways:

  • Firstly, the levy should be in addition to existing royalties and taxes, in order to add to the market signal that fossil fuels must be phased down, and then out, and replaced with renewable technologies;
  • Secondly, the levy should increase over time. This will reinforce the need to phase out fossil fuels, and to accelerate their replacement with renewables. It will also have the advantage of keeping the income stream reasonably steady as fossil fuel extraction reduces; and
  • Thirdly, there should be a recognition that the levy will cease to generate funds in the future (once fossil fuels are phased out) and a plan to replace this finance with a different income stream.

The UNFCCC negotiations began to seriously address the issue of loss and damage with the establishment of a work programme at the Cancun COP in December 2010. This work programme resulted in the Warsaw International Mechanism for Loss and Damage agreed in November 2013.

Very broad functions of the Warsaw International Mechanism for Loss and Damage were agreed at Warsaw:

  • Enhance knowledge and understanding of comprehensive risk-management approaches to address loss and damage associated with the adverse effects of climate change, including slow-onset impacts;
  • Strengthen dialogue, coordination, coherence, and synergies among relevant stakeholders;
  • Enhance action and support, including finance, technology, and capacity-building, to address loss and damage associated with the adverse effects of climate change, so as to enable countries to:
  • assess the risk of loss and damage; systematically collect and share data on climate impacts;
  • design and implement country-driven risk-management strategies and approaches, including risk-reduction, risk-transfer, and risk-sharing mechanisms;
  • implement comprehensive climate risk-management approaches;
  • promote an environment that encourages investment and involvement of stakeholders;
  • involve vulnerable communities and populations, civil society, the private sector, and others in the assessment of and response to loss and damage.

Whilst the financial needs for the International Mechanism for Loss and Damage are not yet fully defined, significant costs are already being incurred by vulnerable communities. The current need for funds on loss and damage from climate change is urgent and will be significant. At the moment, the cost is being borne disproportionately by the poorest and most vulnerable.

In order to undertake the functions agreed at Warsaw, the Warsaw International Mechanism for Loss and Damage will need funding for a number of specific elements – some of which are foreshadowed below, and all of which are within the remit of the Warsaw International Mechanism for Loss and Damage.

The Excom has had one meeting. There will need to be many more meetings, and further meetings of experts will also be required. It seems likely that a bureaucracy will need to be established (even if it is housed within the UNFCCC) to manage the Warsaw International Mechanism for Loss and Damage and to facilitate cooperation across the many bodies that have a role to play in dealing with loss and damage.

Capacity-building for governments and communities in most vulnerable countries will be an essential element in dealing with loss and damage effectively, as will technology cooperation and technology transfer.

There is a need to support vulnerable developing countries in developing national-level institutions to assess and address loss and damage; to develop and implement long-term policies, plans, and programmes; and to undertake pilot projects that develop and implement innovative approaches to address loss and damage. Support will be required for information-gathering and sharing about the success of various approaches, and the replication of best practices, appropriate for each country’s circumstances.

Increasing resources will be required to monitor and forecast both slow-onset and extreme events from climate change so that countries can build their programmes on the best understanding of future events and expected climate change.

It is recognised that there is a need for support to develop and implement risk-management options appropriate to addressing loss and damage associated with slow-onset events. One frequently proposed approach to managing risk from loss and damage is insurance – individual, local, national, regional, or international schemes. Insurance is most relevant for events of a relatively low frequency and high severity, as premiums will rise accordingly. An example of an innovative approach to insurance is the Caribbean Catastrophe Risk Insurance Facility. It is a regional fund, capitalised via a multi-donor trust fund and membership fees by participating governments, and provides short-term liquidity when a policy is triggered by an earthquake or hurricane catastrophe.

Another example is the African Risk Capacity (ARC) project, a pan-African disaster risk-pool managed by the African Union that addresses the increased risk of hunger and malnutrition. It includes an early warning system and a risk pool that provides automatic payouts in case of drought. The payout is dependent on contingency plans being in place before the disaster. By pooling risk across African countries, substantial savings are made on both administrative costs and the capital required.

Particularly in the case of slow-onset loss and damage, but also in instances where extreme events before too frequent and destructive, where land is no longer habitable, compensation and relocation may be the only option.

At present, these activities are funded on an ad hoc process by funders, or directly by affected communities and governments, or they are not being undertaken due to lack of funds. There is clearly a need for a predictable and substantial source of funds to allow communities to prepare for and deal with loss and damage from climate change. It is not acceptable to expect that affected communities will fund these activities themselves. Those responsible for causing climate change have the responsibility to pay for the loss and damage arising from it.

The Carbon Majors report calculates the annual and cumulative contribution of each of the largest 90 producers from as early as 1854 through to 2010 and calculates that, as a percentage of global industrial CO2 emissions since the Industrial Revolution began (from 1751 to 2010), the 90 Carbon Major entities fossil fuel extractions and cement manufacture have resulted in 63% of emissions.

As the Carbon Majors have contributed in a substantial way to the losses and damages being felt by vulnerable countries right now, it is only fair that they pay a levy – in direct relation to the emissions their products are responsible for – that goes towards the damage they have caused.

Some will argue that the levy for historical emissions should take into account emissions since 1850, in line with the Brazil proposal around historical responsibility for countries; this would mean that the whole period of the Carbon Majors Project would be included.

The science of climate change, whilst extending back until 1827, was recognised as a major concern by the international community at the 1972 Stockholm Conference. The Intergovernmental Panel on Climate Change released their first assessment report in 1990, which detailed their concerned about climate change and the continued burning of fossil fuels. And in 1992 at the United Nations Conference on Environment and Development in Rio de Janeiro the world’s Governments agreed to the UNFCCC, which makes clear the harm from greenhouse gas emissions and the need to limit them. In 1994, the UNFCCC entered into force. Any of these dates (from 1972 to 1994) are appropriate to start calculating levies based on historical responsibility, as from this date all entities were aware of an impending responsibility from emissions.

It is worth noting that approximately half of emissions from the Carbon Major entities have occurred since 1986, demonstrating a reckless disregard for the health of the planet in the face of ever-increasing impacts from climate change and warnings from climate scientists.

Calculation of the exact levies per tonne of coal, barrel of oil, or cubic metre of gas is a topic requiring further research. However, a few relevant pieces of information may give context.

The levies should be calculated while taking into account the expected need for loss and damage funding. There is not clear agreement on what the loss and damage costs are or will be, but annual costs have been estimated at US$0.3 to $2.8 trillion by 2060. As needs are already substantial, it could be argued that an appropriate place to start would be generating US$50 billion per year by 2020 with the levies, and increasing total revenue to between 5% to 10% each year, depending upon how much mitigation and adaptation action is taken. US$50 billion is less than US$77.5 billion in profit made by only three of the biggest Carbon Major companies in 2013. The 90 original Carbon Major entities contributed 27.95 GtCO2e in 2010, therefore US$50 billion per year would be priced at less than US$2 per tonne of CO2e to start.

It is important that the levy on ongoing extraction should increase over time. This will reinforce the need to phase out fossil fuels, and to accelerate their replacement with renewables. It should also be calculated in order to keep the income-stream reasonably steady, and in line with the needs of the most vulnerable communities and countries, as fossil fuel extraction is reduced.

The historical levies should be calculated based on the historical emissions of each of the Carbon Majors. Levies on future extraction should take into account the carbon intensity of each fossil fuel.

The levies should be additional to the taxes and royalties that are already levied upon fossil fuel extractors in order to add to the price signal required to phase out fossil fuels. This will also minimise impact upon state revenues.

It is worth noting that many of the Carbon Majors, and other companies, are already applying internal carbon pricing significantly higher than this level in the expectation that they will have carbon prices applied against them in the future.

The levy on fossil fuel extraction paid to the International Mechanism for Loss and Damage should be on top of existing taxes and levies, in order to create a price signal that fossil fuel must be phased down and then out.

The levy paid to the International Mechanism for Loss and Damage will make it easier to achieve country-level emission-reduction targets, but it will not directly interact with them. Hence, it will not remove the need for all countries to set targets and establish policies to reduce their greenhouse gas emissions. Nor does it reduce the need for developed countries to act first and to provide climate finance to support developing-country climate action.

The levy on fossil fuel extraction to fund the Warsaw International Mechanism for Loss and Damage could be taken up within the finance discussions under the Ad Hoc Working Group on the Durban Platform for Enhanced Action (ADP), the Warsaw International Mechanism for Loss and Damage Excom discussions, loss and damage discussions within the ADP, or the non-market mechanism discussions in the ADP. There is ample space within the current negotiations to take this item forward with a view to agreeing it as part of the 2015 package.

We welcome input from stakeholders on practical ways to progress this concept within the UNFCCC.

 

 

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