Financing Climate Justice: Taxation-and-Bonds Strategy

By | March 2, 2022

During the most recent United Nations Conference of the Parties (COP-26) on Climate Change, fair financialization of climate justice endeavors gained unprecedented momentum. This post proposes a novel taxation-and-bonds strategy that targets redistributing the gains of a warming earth around the world to offset the losses of global warming. Contemporary attempts to finance climate change mitigation and adaptation efforts are proposed in a diversified taxation and bonds scheme. Overall, mapping climate justice within society, between countries, and over time is targeted at finding a fair, just, and feasible climate change benefit transfers and burden-sharing strategy. 

Climate justice within society entails solutions of a consumption tax and a progressive taxation scheme that alleviates disproportionate tax burdens. The tax contribution to climate stabilization should be weighted in relation to income to ensure that the costs for saving a favorable climate are not disproportionately heavy on low-income households. So, to place a fair share of the burden of climate change mitigation upon society, progressive taxation schemes must be adjusted to the disposable income level of individuals so that low-income households are not overcharged. A carbon emission consumption tax appears fair in placing a heavier burden on those who engage in activities that contribute to climate change. A consumption tax can also curb harmful emissions and directly nudge behavior towards sustainability. Retroactive inheritance taxation – where there has been past wealth accumulation at the expense of environmental damage – accounts for the most innovative extension of climate justice. In the case of a corporate inheritance tax, corporations could be charged with a tax when there is a merger and acquisition or a board member change, in order to reap past wealth accumulation gains at a point of corporate transition that is often related to a wealth maximization. 

Climate justice between countries can be addressed when highlighting the vast differences of the impact of global warming around the world. When comparing the burden of climate change distributed throughout the world, legal arguments from the past can be subsumed to ensure a fair and just solution for tomorrow’s climate stability. In international law, private property rights are, in some cases, disregarded in establishing common goods. If the possessor of property is no longer alive, private property rights can be overruled to be turned into public goods. Argumentations of an unknown possessor of tomorrow’s stable climate, but also drawing attention to the benefits of the common good of a favorable climate, lead to distributing the benefits of climate gains among different countries to ensure climate justice. Argumentations of climate being a common good to be protected for all, and those countries having economic benefits of a warming globe in the short run and better means of protection and conservation of a stable climate, lead to conclusions about climate change benefit transfers in areas that are losing the most and the fastest from a warming earth. Macroeconomic results that unravel the gains of a warming earth can inform how to share the expected benefits around the world or conserve financial assets for future generations. Highlighting the economic gains of global warming must be coupled with the legal impetus to redistribute in order to enact climate justice based on inclusive growth that is sustainable over time.

Macroeconomic prospects are found to be distributed highly unequally around the world in light of global warming (Puaschunder 2020). Economic climate gains and losses being distributed unequally around the world draws attention to ethical imperatives guiding on redistribution schemes to alleviate climate injustice. Most recently, the insights of an unjust distribution of economic gain and loss prospects due to climate change have led to the proposal of a novel contribution to contemporary carbon taxes and green bond solutions. The combined effect of taxation in gaining territories to redistribute funds via bonds can not only be used to help raise substantial revenue but also sets positive market incentives for transitioning to renewable energy in subsidizing countries for decarbonization.  

The “Mapping Climate Justice” project investigates economic climate change gains and losses around the world until the end of this century. The project determines how much time each country has to reach peak temperature conditions for productivity around the world based on: the mean temperature per country; the country-specific Gross Domestic Product (GDP) composition in agriculture, industry, and service sector contributions; and the peak temperature for productivity per GDP sector in a business-as-usual-path climate rise. Methodologically, state-of-the-art welfare function measurements and economic productivity parameters become the basis for conclusions about a fair spread of the gains and benefits from a warming earth. With climate projections until the year 2100, the climate winners and losers index revealed for the very first-time which countries have a relative better economic growth outlook due to a warming climate on the short-run than those countries that lose out the most and the fastest. Based on the country-specific time for optimum temperature for GDP production and a country’s mean temperature, some countries have run out of a favorable climate for economic production already, while other countries still have time ahead until they reach the optimum temperature for productivity. 

From a narrow-minded GDP perspective, the world will benefit more macroeconomically from climate change until 2100 than lose – as outlined in Governance and Climate Justice – but only some countries are beneficiaries of a warming globe. Human capital and financial market inflows are already noticed in areas that are winning economically from a warming globe. Based on a 187 country-strong dataset and under the implicit assumption of an open economy, a significantly positive inflow of migrants was found in the relative climate change “winner” countries.  The degree of climate flexibility – the range of temperature a country has in different climate zones – is also found to be related to human migration inflow. A statistically significant correlation outlines a positive Foreign Direct Investment (FDI) remaining financial inflow into the winning countries. As a cross-validation of the finding of financial inflows into climate change winner countries, a non-significant correlation and independent t-test reveal that there are no significant financial returns in the form of remittances to the climate change “loser” countries. This highlights that the money transfer into winning countries is only one-sided and not reversed by remittances. 

The results underline the importance of climate change benefit transfers to offset the losses incurred in the global warming-burdened areas of the world. A world CO2-emissions dataset outlines winning and losing from a warming earth is significantly positively correlated with the Paris COP 21 emissions country percentage of Greenhouse Gas (GHG) for ratification; leading to the conclusion that the national motivation to act on the global climate change predicament differs based on the short-term benefits and the time until a warming climate becomes an obstacle.  

Grounded on insights from law, economics, and governance, the unequal climate change gains and loss prospects for economic productivity urge international climate change mitigation and adaptation regimes to discuss fair climate stability implementation strategies. Based upon insights from current efforts to finance climate change mitigation and adaptation around the globe, a threefold climate justice approach is introduced to share the burden of climate change within society.  First, climate justice within a country should pay tribute to the fact that low- and high-income households share the same burden to stabilize the climate, proportional to their dispensable income via taxation redistribution efforts. Second, fair climate change burden-sharing between countries comprises of arguments that those countries benefiting more from a stable climate also bear a higher responsibility to protect a stable climate. Third, climate justice over time is proposed in an innovative climate change burden-sharing strategy enacted via a tax-and-transfer bonds solution. Comparing international climate mitigation and adaptation, as well as unraveling complex interdependencies, is aimed at protecting vulnerable communities from variegated climate change risks while establishing ways for all to enjoy the upsides of a warming earth. 

Mapping Climate Justice elucidates international climate regimes around the world based on geographic, technological, socio-economic, and political factors. The macroeconomic projections shed light on the inherent inequality in climate change around the globe in order to advocate for a global warming benefits transfer scheme, which would enact a fair distribution of the gains from a warming earth and a just burden-sharing solution. In the current frustration over the neglect of interest in ratifying intergovernmental climate agreements, this innovative way to frame the “prisoner’s dilemma” of a warming climate proposes a completely new incentive structure based on favorable benefits share prospects. Highlighting different countries’ climate stability efforts offers fair and universally-accepted ways to share the benefits and burdens of climate change equally within societybetween countries, and over time. The Mapping Climate Justice project thereby can enrich unidimensional climate negotiations that are one-sidedly focused on problem solving through burden-sharing. Climate change-related economic productivity gains and losses are highlighted in order to derive public policy implications to sharing the burden and the benefits of climate change within societybetween countries, and over time in a novel taxation-and-bonds strategy. 

The most novel policy proposal within the Mapping Climate Justice framework are now climate bonds with diversified interest rate and maturity yield regimes. A macroeconomic model of climate justice can be enacted in a novel diversified taxation-and-bonds strategy. Climate justice is introduced to comprise of fairness between countries but also over generations in a unique and unprecedented tax-and-bonds climate change gains and losses distribution strategy. In order to finance climate change abatement, a climate bonds financing mix can be proposed to subsidize the current world industry for transitioning to green solutions. Climate change winning countries could use taxation to raise revenues to offset the losses incurred by climate change. Climate change losers could issue bonds partially subsidized by climate winner countries’ taxation revenues and partially by being paid back by taxing future generations. 

On a global governance level, climate bonds have been proposed to raise funds for the financialization of global climate stability. Green bonds are fixed-income securities that are usually certified by a third-party to scale up climate policies. Bonds are primarily used by companies, municipalities, states, and sovereign governments to raise money and finance future-oriented long-term projects. Through debt investments, investors loan money to an entity in bonds, which borrows the funds for a defined period at a variable or fixed interest rate. This solution appears as a real-world relevant means to tap into the worldwide USD 80 trillion bond market in order to fund the transition to a sustainable path. Historically, bonds have been used to fund large-scale projects ranging from infrastructure projects to ideologies. In the environmental domain, green bonds provide capital for the investment of sustainable projects and a transition to a zero-carbon emissions economy.

Sachs (2014) introduced bonds to enact intergenerational fairness: bonds finance today’s climate mitigation through an intertemporal fiscal policy mix backed by carbon tax. As a debt instrument, by which investors lend money to an entity, bonds enable the borrowing of funds from the populace for a defined period at a variable or fixed interest rate. Over time, climate bonds offer an intergenerational climate change burden-sharing strategy. This current generation can raise funds via debt that is paid back by future generations who inherit a favorable climate in lieu. Sharing the costs of climate change aversion between and across generations is an important strategy to immediately instigate climate change mitigation and adaptation. This turns climate change burden-sharing into a Pareto-improving option over time. Inequality over time can therefore be alleviated by climate bonds as an alternative way to enact commitment bonds on environmental concerns. A novel idea of climate bonds with diversified interest rate regimes incentivizes a transition to renewable energy and allows redistributing unequal economic outcomes of climate change.  

The novel policy proposal are climate bonds with diversified interest rate and maturity yield regimes. A commonly pursued international taxation-and-bond strategy could be enabled via an international climate change fund that redistributes climate gains to climate losing territories. Whether a country should be obliged to contribute funds via taxation or whether a country should be a recipient of funds in favorable bonds premium transfer payments could be based on a country’s: (1) initial position on the climate change gains and losses index spectrum; (2) overall climate flexibility in the range of temperature zones in relation to other countries, as this determines the future economic productivity diversification potential, total degrees of production freedom, and comparative advantage to other nations in the world; (3) CO2 emission levels in relation to other countries; (4) CO2 emission changes over time to set positive market incentives to decarbonize; (5) consumption-adjusted CO2 emission levels to address trade-related CO2consumption patterns; and (6) historically-grown bank lending rates as an indicator of access to investment capital for transitioning to renewable energy.

An overall redistribution plan could determine per country transfers based on the climate change winner or loser status; a country’s climate flexibility understood as a future climate wealth of nations trading asset; the contribution to the climate change problem measured by per country (CO2 emissions, CO2 emissions adjusted for consumption levels, the willingness to change CO2 emissions in relation to other countries’ behavior and historically-grown bank lending regimes). 

An international taxation-bonds climate strategy is proposed, featuring a commonly shared international green bond that incentivize countries or market actors strategically.  An international climate regime could encourage countries to raise funds via taxation if a country: (1) appears to have short-term climate change economic gain perspectives; (2) benefits from overall climate flexibility in the range of temperature zones in relation to other countries; (3) has relatively high CO2 emission levels in relation to other countries; (4) has rising CO2 emission changes over time; (5) consumes CO2emission levels in goods and services that are produced at other parts of the world; and (6) enjoys access to capital in low bank lending rates. 

In climate-taxation prone countries, foremost the GDP sectors with rising economic prospects, should be taxed for raising funds based on the short-term gains from a warming globe. Climate justice within a country should also pay tribute to the fact that low- and high-income households share the same burden proportional to their dispensable income, for instance, through a progressive carbon taxation. Those who caused climate change could be regulated to bear a higher cost through a carbon tax in combination with retroactive billing through a corporate inheritance tax (that would be enacted when there is a merger or acquisition or corporate board changes) to map benefits from past wealth accumulation that potentially contributed to global warming. These countries would also be incentivized to change their harmful emissions behavior in the hope of shifting from immediate bonds taxation payments to bonds payment recipients. This would use market competition forces to steer country actions over time to transition to a renewable energy solution. 

The idea of redistribution regimes is also extendable to sector-specific bond yield interest rate regimes. Within a country, the bonds could be offered by commissioning agents, such as local investment banks that could provide industry-specific diversified interest rate maturity bond yields based on the environmental sustainability of an industry, e.g., as measured by the European Sustainable Finance Taxonomy. The more sustainable an industry performs, the higher bond yield should be granted in sector-specific interest rate regimes within a country. Bond yield differences between industries could set market incentives for transitioning to renewable energy productivity solutions.  

Overall, this novel climate taxation-and-bonds redistribution scheme is a new incentivization method aimed at ensuring to share of the burden and benefits of climate change over time within countries and markets, but also within society in an economically efficient, legally equitable, and practically feasible way.

Julia Puaschunder is a Postdoctoral Researcher in the Interuniversity Consortium of New York.

This post is adapted from her paper, “Green Bonds and Diversified Interest Rates” available on SSRN.

The views expressed in this post are those of the author and do not represent the views of the Global Financial Markets Center or Duke Law.

One thought on “Financing Climate Justice: Taxation-and-Bonds Strategy

  1. T. L. Morson and Associates, LLC

    The concept of Green Bonds is outstanding. The United States government should issue bonds of this nature that are triple exempt from taxation much like bonds issued by U.S. Territories. I’m not sure how the taxation of foreign Green Bonds would work or if these bond are general obligation or revenue bonds. Also, how would they be rated and would it be possible for them to be insured along the line of municipals. I love the idea.


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