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The Paris Agreement

Since the Paris Agreement came into force on November 4 2016 the impetus has been on international tax policymakers to raise their game on climate change, often resulting in tax policy changes.

 The Paris Agreement
The Paris Agreement is a new entry this year

As such, the main means for cutting back on greenhouse gas emissions are forms of carbon pricing, which can either come down to taxes or trading.

The accord sets out a clear target for cutting carbon dioxide (CO2) emissions and a new mechanism for international cooperation on climate policy. The target is to keep the global temperature rise below 2°C and pursue efforts to limit the increase to 1.5°C. Achieving this aim will require the decarbonisation of the global economy by the second half of the 21st century.

As the precursor to Paris, the Kyoto Protocol laid out the basis for countries to reduce greenhouse gas emissions through carbon trading and the 2015 agreement is aimed at expanding the scope for carbon pricing around the world. But this is not a one-size-fits-all approach for its signatories.

Learning from the flaws of the Kyoto Protocol, the Paris Agreement has taken a 'bottom-up' approach, rather than the 'top-down' strategy, for prescribing how to best tackle climate change. The UN decided to take this approach in recognition of the differences between countries in terms of how they are contributing to climate change and what they should do to change this.

The advantage of the UN's 'bottom-up' approach is that it is open enough to allow national governments to pursue their own strategy, taking into account local circumstances.

The domestic approaches to meeting the Paris Agreement commitments have become increasingly apparent throughout the past year and many more countries are set to announce similar measures in the coming months. France and Canada, among others, are taking steps to change their carbon tax rates to curb emissions, while countries such as South Africa plan to introduce a carbon tax.

"France's 2018 budget bill plans to increase carbon taxes to raise prices not covered by the European trading system," Kurt Van Dender, head of environmental tax at the OECD, told International Tax Review. "France introduced a carbon tax in 2014, which started at a modest rate of €7 per tonne, but this will increase to €86 per tonne in 2022."

The tax increase would hit the sectors of the French economy outside the EU's emissions trading system (TS). This would leave out electricity and industry, while transport, construction, agriculture and waste would be directly targeted by the higher rate.

The discussions are not just at federal level for some countries, however. Van Dender notes that in Canada, there are a couple of provinces moving forward with carbon tax. "For example, British Columbia has a tax, Quebec has introduced a trading system, and other provinces are now following suit. Under the Trudeau administration, there is a big initiative to introduce a backstop at the federal level," he says. "The idea is that the provinces are free to introduce what pricing system they prefer, but there will be a minimum approach set by the federal government," he adds. "This is a major development."

Moreover, India and China, which are two of the highest global emitters of carbon, are on board with the initiative. China is already making efforts to reduce its carbon footprint and is investing heavily in renewables. India, meanwhile, accounts for about 4.5% of global greenhouse gas emissions. However, under the Paris Agreement, it has committed to generate at least 40% of the country's electricity from non-fossil sources, showing its desire to adapt.

Nevertheless, the IMF and World Bank recommended that the tax on emissions should be set at $100 per tonne by 2030 to ensure the climate commitments are achieved – a rate many critics say is too high.

Much like the Kyoto Protocol, the Paris Agreement faces the same threat of non-compliance. The decision by the Trump administration to withdraw from the Paris Agreement has been widely condemned. Many multinational companies have joined a campaign for revenue-neutral carbon taxing in the US. These companies include General Motors, ExxonMobil, Royal Dutch Shell and BP. It may seem counterintuitive that big businesses would want higher taxes, but there is logic in this.

"The primary benefit of Paris and other [climate] agreements is that they can provide a roadmap for business investment decisions," Chris Lenon, former head of tax at Rio Tinto, told International Tax Review recently. "As these decisions are often longer term, a roadmap can help plan and also can help justify investment in new technology to move towards a low carbon economy. Being able to plan longer term is crucial."

At the same time, there are doubts that the target of less than 2°C of temperature increase compared to pre-industrial levels is the best goal. Avoiding a global increase of more than 2°C could prevent the most catastrophic scenarios of climate change, but it does not guarantee the world will avoid terrible consequences. Climate change has been linked to the rise of extreme weather events, such as droughts and heatwaves.

A recent study published in Nature Climate Change has warned that the Earth's temperature will surpass 3°C if the world does not wean itself off of fossil fuels soon. The planet is likely to surpass 2°C by 2100, even if fossil fuels were completely cut out today. But whether it is too late or not, there can be no doubt that action is urgently needed – taxation plays a large part in this.

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