27 Nov 2023

The COP meeting has to find at least $3 trillion a year of funding to fight climate change. Here's how.

Two years ago, I made three specific proposals for things that could be implemented at the COP 26 meeting in Glasgow

I can't say that I am surprised that nothing happened. 

But COP 28 starts in a few days, and I am terrified that the whole meeting will be taken up with people arguing about who should be paying for the actions that are so clearly needed. The situation was terrible in 2021. Surely, everyone will agree that things are much worse today. 
So I would like to come back to my Proposition #2, and provide some more details about my precise proposals. 
First, we need to decide how much we will need to spend. In 2019, a report from Morgan Stanley had said that tackling climate change would need $50 trillion of investment before 2050. On the basis of the UN Environment Programme's Emissions Gap Report in 2019 it was concluded that the cost of fixing climate change was between $1.6 trillion and $3.8 trillion. The recently released Emissions Gap Report for 2023 says that $4 trillion a year is need to stay on track with the net-zero scenario.
It's clear that the cost of inaction will be huge.  In 2022, Deloitte’s Global Turning Point Report  claimed that unchecked climate change could cost the global economy US$178 trillion over the next 50 years, unless global leaders unite in a systemic net-zero transition.
Last month, the World Economic Forum claimed that climate change is costing the world $16 million an hour, and that the global cost of climate change damage is estimated to be between $1.7 trillion and $3.1 trillion per year by 2050.
Logically, this means that $3.5 trillion a year of investment would pay for itself.
And yet, nothing will happen if the COP delegates waste their time arguing about who should be paying. 
That brings me to the second point. Where can we find  find $3 trillion a year? 
Rather than trying to convince governments to find money from their current tight budgets, forcing them to raise taxes, which they are understandably reluctant to do if they don't want to lose voters support, I believe that we should be looking at two radical new sources of funding that are (a) totally fair, (b) simple to implement, and (c) totally independent of national budgets.
 The first would be a tiny Financial Transaction Tax on absolutely all transactions, wherever they occur in the world, and whatever the denomination of the currency. The second would be a very modest annual tax on the net wealth of all households, trusts, corporations and governments - again, irrespective of where that wealth is located. 

The funds generated by these two new taxes would be provided directly to the United Nations Environment Program (UNEP) or some other global authority, and that authority would be mandated to use the funds in the best possible way to fight climate change. Simple.

Using a Financial Transaction Tax

So what level of Financial Transaction Tax would be needed to provide the UNEP with €3 trillion a year. 
Well, for the last 13 years I've been using the data provided by the Bank for International Settlements to get one measure of the annual volume of transactions. For 2021, the total was $15.9 quadrillon, up 6.51% on the previous year..As you can see in this graph, it has been going up steadily since 2015.

However, even these eye-watering figures must be hopelessly underestimated. Firstly, BIS only reports figures for a set of 26 countries. But more importantly, BIS doesn't bother to include many major players. The most obvious and glaring absentee is the Options Clearing Corporation, "the world's largest equity derivatives clearing organization". The following graph shows the total number of executed trades per year since 2013, taken directly from their webpage. The number was fairly stable around 4-5 billion a year until 2020. Since then it has sky-rocketed. My number for 2023 is an estimate based on trades up to October, but looks set to be well over 11 billion.

What OCC don't say is the financial value of those transactions. It is not inconceivable that we are talking about trades worth a million dollars each. If so, there could be another $11 quadrillion to add to BIS total. 

Even if we only use the figures that are provided by BIS, it should be clear that to generate $3 trillion in funds, it would be enough to impose an FTT of less that 0.02%. 

Importantly, this tax would not just be imposed on the High Frequency Traders responsible for a large proportion of the activity, it would be imposed on absolutely everyone on the planet, including you and me. When my pension is paid into my account (I retired from my job with the CNRS on the 1st of July) - 0.02% of it would go to the UNEP. Every time I make a payment by direct transfer or by credit card, 0.02% would go to UNEP. 

Would I object, given that I know that the money would be used to help ensure that my grandchildren will have a habitable planet? Of course not. Especially when I know that every time I use my credit card, I am forced to pay Credit card processing fees that can typically range from 2.87% to 4.35% of each transaction - paid by the merchant, and passed on to me. The financial transaction taxes imposed by the banking system are even more outrageous when I use my credit card outside the Eurozone. Those international charges are typically an additional 1-3%. Thus, the FTT required to tackle climate change is hundreds of times less than the transaction taxes imposed by the banks. 

Of course, those same banks will say that while it's fine to clobber each of us with what is effectively financial transaction taxes of 4-6%, imposing even a 0.02% tax on the financial sector's trillions of dollars of trading every day would cause the sky to fall in, prevent efficient price discovery, etc etc etc. Don't believe them. It would certainly reduce the incentive to make trades when the margin is less than 0.02%, but trading would certainly continue. 

One of the standard arguments against imposing an FTT in a particular area (such as the Eurozone) has been that the traders would simply move their activity elsewhere. But, clearly, if the UN imposed tax applied to absolutely all trades, wherever they occur, and whatever the denomination used for trading, such arguments completely fail. 

I think that it would also be vital to include the 0.02% FTT on trading in cryptocurrencies. There are now currently 8847 different cryptocurrencies, with a combined market cap of $1.4 trillion. These are involved  tens of billions of dollars worth of trading every day, but there were days in 2021 when the daily volume exceeded $300 billion.  I see no reason why this activity should not also be subject to the climate change tax, especially since cryptocurrencies  have a huge energy cost - because of all the hardware needed for mining.  Bitcoin mining alone is estimated to consume 127 terawatt-hours (TWh) a year — more than many countries, including Norway. See also my proposition #1 from 2021

Using a Net Wealth Tax
My second proposition would be to impose an annual tax on Net Wealth - whether held by households and individuals, trusts, corporations and companies, but also governments. I talked about this option recently with respect to the option of eliminating other types of taxation such as sales taxes, income taxes and taxes on company profits. But here, the aim would be different. It would be an additional new tax that would be specifically and exclusively used to finance the $3 trillion needed to tackle climate change. As stated, the tax would be paid by all holders of net wealth, whatever their status or location
For individuals and households, the vital information can be found in the latest version of the Credit Suisse Global Wealth Report for 2023, which can be downloaded here. They report that total household net wealth at the end of 2022 was $454.4 trillion, corresponding to an average value of $84,718 per adult. 
That wealth is very unevenly distributed, with a small number of individuals holding a massive proportion of the total, as shown in the following pyramid, with 45.8% of total wealth held by the 1.1% of the population who have net wealth of over $1 million. 

Of course, net wealth varies enormously between countries, as you can see in the figure below. The highest average net wealth levels are seen for adults in Switzerland at $685,230, followed by the USA ($551,350), but for many countries in Africa, average net wealth is tiny.  It follows that, if a global tax on net wealth was introduced, the contributions of people in different countries would vary naturally, and would automatically produce a shift of resources from highly advanced economies to developing economies. And that with no need for endless arguments at COP meetings about who should be paying.
In previous posts I used the figures for the Forbes Global 2000 list to show that those 2000 top countries have assets of $231 trillion, $171 trillion of which are held by Banks and other Financial Institutions. I've not yet managed to find figures for the net wealth of the many other publicly traded companies, but in 2022 there were 58,200 of them, and in principle it would be relatively simple to get the required information about their assets and liabilities needed to calculate net wealth. 
There are also large numbers of other companies that also presumably have to file annual accounts. According to Statista  there are 334 million companies in the world. Reporting requirements may vary between countries, but it is presumably the case that with companies with audited accounts, net wealth would be straightforward to calculate. What could the total be? It's difficult to say, but if a global net wealth tax were to be introduced, the numbers would presumably become visible rapidly.  
One other type of structure that should be subject to a global net wealth tax are trusts, often located in tax havens.  According to a 2020 study by the Paris-based Organization for Economic Cooperation and Development, at least $11.3 trillion is held “offshore,”. But earlier work in 2012 had reported that the super rich have as much as $32 trillion in offshore havens. One of the advantages of implementing this sort of global tax on net wealth is that such trusts would be forced to pay or risk being put into liquidation. In the end, it does not matter who the final owners of the assets are, or how many different chains of owners are used to dissimulate the owners, if trusts in the Cayman Islands and elsewhere were forced to pay the same amount to the UNEP fund, it wouldn't matter. I don't care who actually pays, as long as someone does!
The final group that would be required to pay are governments. As is well known, many of our governments are massively in debt, and so their net wealth is often negative. Such countries would clearly not be in a position to pay the tax. The OECD provides a chart for a restricted set of countries showing that 10 countries actually have positive net wealth - Switzerland, Estonia, Denmark, New Zealand, Russia, Sweden, Korea, Luxembourg, Finland and Norway. But Norway stands out because its government has net wealth amounting to 270% of its GDP.

The reason why Norway stands out is almost certainly because it is a major supplier of Fossil Fuels - which no doubt explains why Russia also belongs to the group. 

Unfortunately, I have not been able to find many figures for the net wealth of other governments involved in Fossil Fuel production. But we know that Saudia Arabia produces 12% of the world's oil, the United Arab Emirates 4% and Kuwait 3%. And the Saudi Sovereign Wealth Fund is expected to have over $1 trillion by 2025 and targets $2.7 trillion by 2030.

 It seems likely that by grouping together Individual and Household net wealth ($454.4 trillion) with the wealth of both Public and Private companies, Trusts and Governments, the total amount of wealth that could be subject to an annual net wealth tax could approach $1 quadrillion. This is a figure that I have seen elsewhere, though rarely with a detailed breakdown. See for example, a youtube presentation entitled "What everyone gets wrong about debt" by the Economics Explained.
If true, it follows that a 0.3% annual tax on global net wealth would provide the $3 trillion needed to tackle climate change.

Would I be prepared to hand over 0.3% of the value of my properties and financial assets every year to save the planet?  You bet. 

The fact is that, as demonstrated by the Credit Suisse Wealth Report, household wealth (and almost certainly the wealth of companies) have been increasing by around 6-8 percent every year for the last 20 years - as seen in the following graph - with the notable exception of the financial crash in 2008.
I honestly think that those with wealth might be able to spare 0.3% of their wealth every year, when they get to keep the other 7%.
FTT or Net Wealth? Or both? 
I think that it should be clear that either an FTT of around 0.02% or an annual Net Wealth Tax of 0.3% could provide the $3 trillion we need. 

I propose that the United Nations should be empowered to impose one or both these taxes as soon as possible. It could easily decide to do both and have  a 0.01% FTT coupled with a 0.15% Net Wealth Tax which would also work. But it could also decide to use one more than the other, if implementation is easier for one. On the face of it, the FTT option seems simpler, effectively requiring simply the addition of one line of code to the software handling all electronic financial transactions. For the Net Wealth Tax, it may be simpler to introduce it first for publicly traded companies, before adding individuals. 

But the fact is that both options are by relatively simple. Above all they are fair, because they can be applied to everything - with no exceptions. There will be no reductions or exemptions. And they would need to be applied everywhere. Anyone cheating by attempting to avoid the payments would have the problem of trying to explain why they should be an exception. And, they could easily be banned from the international financial system.
Importantly, if it turns out the $3 trillion a year is not enough, and that we need to double the amount (something that seems to me to be highly plausible), the UN body mandated to impose the two tax systems should have the power to increase the rates to whatever is needed. There can be no wrangling about this. We have to give the final say to people who can be trusted. 
And if, as a result I end up having to pay 0.04% on all my financial transactions, or 0.6% of the value of my property, then so be it. I would be truly insane to think that I could find a better use of my money. 

Finally, I would like to point out that while I have largely ended up with these proposals by thinking through the ideas myself, I recently discovered that there are other people proposing essentially the same sorts of ideas. 

I have been discussing with Laura Bannister who is the Executive Director at https://www.equalright.org/. They have three key objectives that are very close to my own. 
I strongly recommend downloading some of their material, such as this presentation of the No Borders Tax Justice idea. 
Could this years COP 28 meeting be the moment when people move on from saying that we are not doing enough, to actually doing things and deciding how the actions can be financed.  

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