Climate Damages Tax FAQs

Climate Damages Tax – Basics

What is the Climate Damages Tax (CDT)?

The Climate Damages Tax (CDT) is a levy on the extraction of each tonne of coal, barrel of oil, or cubic litre of gas, charged on the fossil fuel industry to pay the costs imposed on communities by climate devastation, and to pay for the transition to renewable energy, green transport and jobs.

Why do we need a CDT?

Climate change is already causing devastation in climate vulnerable countries. This is called LOSS and DAMAGE – impacts that go beyond what people and ecosystems can adapt to. These include extreme heat waves, rampant forest fires, devastating droughts, catastrophic floods, increasingly destructive hurricanes, typhoons and cyclones and sea level rise stealing people’s homes. The worst often occur in the poorest countries who have done the least to contribute to emissions.

Vulnerable countries need finance of at least US$50 billion a year by 2022 to help them cope with projected loss and damage. This is over and above the current inadequate level of funding for adaptation.

How does the CDT fit with phasing out fossil fuels?

Fossil fuels must be phased out by the middle of the century: the International Panel on Climate Change Special 1.5°C Report from October 2018 shows this is essential to avoid catastrophic climate change. The CDT will assist by putting a price on carbon and incentivising a shift to renewables. It must be embedded within an overall plan to phase out fossil fuels, which will require a host of measures. Accordingly, the CDT should complement, and not replace, other regulations and carbon prices.

How would the money be spent?

We propose that a proportion of CDT revenue is allocated to an international facility to pay loss and damage costs of affected communities, and a proportion is remitted back to the country where the oil, coal or gas was extracted. In this way, countries where fossil fuel extraction takes place will derive revenue from the CDT.

Internationally, the CDT revenue would help communities in climate vulnerable countries rebuild more resilient homes and buildings after storms; fund emergency cash transfers for those left with nothing; fund welfare programmes during extreme droughts; and pay for relocation and retraining of farming, fishing or tourism workers after the natural resources on which they depend are destroyed or damaged by climate change.

Domestically, the CDT revenue would help low income communities and workers shift to carbon-free jobs, energy and transport. This is called JUST TRANSITION. These funds would help support domestic renewable energy industries; fund green energy and transport options for low income communities; and fund relocation costs and welfare schemes for fossil fuel workers, and retraining to move into the green energy sector or other industries.

How would the CDT work?

The CDT is a charge on the extraction of each tonne of coal, barrel of oil, or cubic litre of gas, calculated at a consistent rate globally based on how much climate pollution (CO2e) is embedded within the fossil fuel.

Working with existing systems of payment, fossil fuel companies, who already pay royalties (or similar) to the states where they operate, will pay an extra amount on the volume they extract to a Solidarity Facility for loss and damage. We propose this facility is managed by the already existing United Nations’ Green Climate Fund (GCF). International law and precedents embodying the Polluter Pays principle, such as apply to oil and nuclear pollution, serve as working examples of similar facilities.

How much would the CDT raise?

We recommend that the CDT is introduced in 2021 at a low initial rate of $5 per tonne of CO2e, increasing by $5 per tonne each year until 2030 to $50 a tonne, with the expectation that it is increased at the rate of $10 per tonne annually after that to reach $250 a tonne by 2050.

If implemented as we recommend, the CDT would raise in the region of $210 billion in its first year. Increasing the rate of the tax, as we propose, will incentivise the phasing out of fossil fuels by the middle of the century, and help keep CDT revenue for loss and damage at roughly $300 billion a year over this period.

Why tax the fossil fuel industry?

Fossil fuels are the largest source of climate pollution in the world, responsible for 91% of global industrial greenhouse gases in 2015, and about 70% of all anthropogenic emissions. 100 fossil fuel companies and other entities are responsible for over half of all emissions since the start of the industrial revolution. A huge acceleration in the extraction of fossil fuels has doubled their contribution to climate change since 1988.

Can the fossil fuel industry afford to pay a CDT?

During this time, some of the largest fossil fuel companies have run campaigns to spread disinformation and misunderstanding about climate science to confuse and deceive, lobbying politicians not to take action so sustaining and boosting their profits. In 2017, just six of the biggest oil companies made combined profits of approximately $133 billion.

Most Frequently Asked Questions

Will fossil fuel companies pass the cost on to us?

Even if passed on in full, at $5 a tonne the CDT would add one cent to the average price of a litre of petrol worldwide – a price increase of just over 1%. In comparison, the price of petrol in the UK fluctuates by ten percent or more throughout the year. Any price increase due to the CDT would be barely noticeable. However, it is not likely that the cost of the CDT would be passed in full to consumers, because fuel is a highly competitive market in most countries.

What is the problem with using insurance to pay for loss and damage?

Within the UN climate talks, rich countries including the UK and Germany and bodies such as the World Bank have pushed back on the delivery of dedicated loss and damage finance. They instead advocate for insurance to cover these risks, with developing countries paying the insurance premiums in the vast majority of cases.
Insurance as a means of response to loss and damage is essentially unfair, because it puts the onus and the cost on those suffering its consequences, not on those who have caused it. The Polluter Pays principle and liability of fossil fuel companies for the effects of loss and damage – that they have known about and actively fought to obscure for decades – demands that fossil fuel companies rather than climate vulnerable countries should pay these costs.
Even if insurance was an acceptable approach, it is only ever going to provide a very small part of the solution. In the experience of Dominica, insurance covered just 1.5% of the total loss and damage costs suffered in 2017. Further, the changing risk profile from climate change makes risks harder to forecast and insurance more difficult. The range and severity of impacts from extreme weather events are increasing, as are the events themselves.

How can the CDT be implemented?

At the UN climate talks in 2013 (COP19), the Warsaw International Mechanism for Loss and Damage (WIM) was established with a mandate to provide loss and damage finance. This was reinforced in the Paris Agreement in 2015 – but to date there has been no finance provided.

At the UN climate talks in 2019 (COP25), the WIM is finally being reviewed, providing an important opportunity to create a long overdue solidarity facility to pay for loss and damage. There are a number of UN countries that are already pressing for this, including the Governments of Vanuatu, Dominica, the Seychelles and Bangladesh. Our proposal for a CDT is an important means to provide the funding for the solidarity facility.

With every passing hurricane season, the problem of loss and damage gets worse – it is only a matter of time before a facility must be established to pay the costs, as occurred in response to oil spills and nuclear accidents. It is in the interests of rich and poor countries alike to have the bill paid by the fossil fuel industry and not their citizens. Our CDT proposal also includes a proportion of revenue being remitted back to the country where the oil, coal or gas was extracted, to fund just transition. In this way, countries where fossil fuel extraction takes place will derive revenue from the CDT.

How does spending on mitigation and adaptation affect potential loss and damage costs?

The more money is spent on mitigation, and therefore making efforts to reduce emissions, the less climate change will occur. Similarly, the more money is spent on adaptation, the less loss and damage will result from the climate change that does occur. Current mitigation commitments place the world on a pathway to more than three degrees of warming, to which it would be extremely difficult to adapt, resulting in high levels of loss and damage.

A pathway of rapid and far-reaching transitions that limits warming to 1.5 degrees would still require a significant amount to be spent on adaptation in developing countries to reduce loss and damage. Even with this spending, given that there will be limits to adaptation, some loss and damage will still be incurred, and funds will need to be found to cover these costs.