Welcome!
This webpage hosts the text of the Multilateral Carbon Tax Treaty (MCTT) and its accompanying policy brief. The MCTT was developed under a research project funded by the International Centre for Tax and Development (ICTD) and is the result of ample consultations with over 50 experts in areas connected to tax, climate, policy and economics.
The MCTT is an instrument that supports the introduction of a multilateral and globally coordinated carbon tax. Carbon taxation is the most efficient measure known to lead towards reduction in release of carbon-based emissions. Reducing or mitigating carbon-based emissions is a key target in the Paris Agreement. A carbon tax is the only fiscal policy instrument capable of directly reducing emission levels known to be responsible for climate change. A carbon tax translates into a country’s environmental cost of doing business, to the extent it sets a price on the cost of using the environmental commons, for personal or corporate benefit.
While many countries have adopted carbon taxes at national level, there is of yet, no multilateral approach to taxing carbon. A multilateral approach to carbon taxation is important to allow heightened levels of pricing commitment, avoid loss of competitiveness when trading products in international markets, and to avoid double or multiple taxation of the same carbon ton. Multilateralism is also important to construe a cooperative environment where countries can use part of the revenues accumulated via the tax for the benefit of the treaty members. The treaty creates a pool of shared resources that is expected to be invested in the development of new technologies. All treaty members will be guaranteed access to those technologies, so that countries can transition into a low or no carbon energy base at the same pace. The MCTT therefore sets to use the carbon tax instrument as an enabling instrument to assist countries in working cooperatively towards a financial environment that is conducive towards energy substitution and emissions mitigation.
More specifically, the MCTT is an environmental agreement that uses a carbon tax instrument to assist countries in meeting the mitigation objective contained in the nationally determined contributions (NDCs), as set forth in the Paris Agreement. It enables countries to use a tax instrument to quantify and reduce carbon dioxide emissions in furtherance of the climate commitments assumed under the Paris Agreement. It also allows countries to accumulate new revenue resources, that can then be totally or partially employed to sponsoring the energy transition process.
The MCTT focuses on a narrow tax base – carbon. Narrowing the tax base to carbon makes the MCTT practicable and ready to implement. Immediate implementation was the initial threshold used to inform policy actions when formulating the MCTT. The MCTT does not aspire to regulate actions where the definition of legal terms is still disputed. For this reason, it does not support a global carbon price. As countries come to agree on a definition of a carbon price, the scope of the MCTT could be expanded to cover other pricing instruments.
Obtaining plurilateral, regional or global agreement on the MCTT is important because it will finally put to practice the notion of an environmental cost of doing business. The minimum carbon tax supported in the treaty text is the lowest denominator to which all member countries are subject. Countries are allowed to apply a higher tax, but the minimum tax should be enough to meet the temperature commitment in the Paris Agreement.
If adopted at global level, it would revolutionize the way countries think about environmental taxation. Below are a few trickle-down impacts from implementation of the MCTT:
Equitable distribution of (i) taxing ability; and (ii) revenues depending on the place where the extractive fossil fuel resources are located. The country with the first right to tax is that where the mineral ore is extracted. If the country entitled to tax at the level of extraction chooses not to exercise its right to tax, it allows first the country of refining or processing, and second, the country of consumption, to tax the fossil fuel’s inbuilt emissions;
Increase of countries' ability to generate new revenue resources to finance the energy transition process;
Introduction of the notion of an environmental cost of doing business to all business practices;
Alignment of the national indirect tax practice with environmental objectives;
Creation of a level playing field between developed, developing and least developed countries;
Setting up of a fund to finance and distribute in an equitable manner, access to new technologies for energy generation and storage;
Allowing countries the achieve the political buy-in to increase the level of ambition for the pricing of carbon;
Facilitation of energy substitution.
Furthermore, the formal recognition of an environmental cost of doing business (through a carbon tax), would provide the benchmark needed to quantify voluntary credits traded in voluntary markets, and to assess the sustainability of a stock or bond traded in a capital market, a feature which is important for ESG purposes. Therefore, this tax measure would have direct positive impact on the working of the other types of climate finance instruments: voluntary carbon markets, Article 6 Paris Agreement Markets, and debt instruments.
The webpage you are accessing now contains the product of this ample consultation process. It is a living webpage, which is being updated as the debate progresses.
This is an independent website. All views are my own, and do not reflect those of any other person or institution I may have been associated with.
If you would like to get in touch, do not hesitate to email me at: mctt.earth@gmail.com
