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The New Climate Taxes That May be Closer Than You Think

Last week, a group of Democratic lawmakers known for their climate policy advocacy gathered outside the U.S. Capitol building to call for a new tax on the immense profits earned by oil and gas companies since Russia invaded Ukraine last year. ExxonMobil, Shell and Chevron alone made more than $130 billion in profits in 2022 thanks to high prices, and the lawmakers argued that the U.S. should tax it and redistribute a cut back to consumers.

“We know truthfully how much money they made by gouging consumers,” said Sheldon Whitehouse, a Democratic senator from Rhode Island with a history of pushing for action to combat climate change. “We’re working to try to take that back.”

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Taxes have always played a key role in climate policy. For decades, climate advocates pushed for a tax on carbon to penalize emissions. When that failed to gain traction, they switched gears to advocate instead for tax incentives to spur clean energy. Those two tax policies have dominated the debate over taxation and climate change. Now a new tranche of policies has entered the field. Politicians in Washington are pushing windfall profit taxes. Leaders in Europe have called for levies on high-emitting industries like aviation and shipping. Even the most ordinary of taxes—think of the personal income tax and corporate income tax—are now being linked to climate change in policy discussions in new and perhaps surprising ways.

For now, at least, the idea of a windfall tax is dead on arrival in Congress, where Republicans control the House of Representatives. But elsewhere, including some conservative-led countries, the policy is making progress. Which means it could eventually become one of several new tax tools for financing the green energy transition in the U.S. as well, as countries race to compete for the technologies of the future. “Contrary to what people might think, taxes have good days ahead,” says Lucas Chancel, an economist at the World Inequality Lab of the Paris School of Economics who studies environmental policy and inequality. “They are necessary tools and solutions to the climate crisis.”

Understanding the links between climate policy and taxation begins with the carbon tax. Carbon taxes, long considered the favorite climate policy tool by economists, require polluters to pay for the carbon they emit, pushing big companies to decarbonize while also raising money that can be used for anything from building clean energy projects to helping workers adjust to the transition.

But, despite years of effort and some promising first mover countries, the carbon tax failed to gain widespread acceptance. Positive incentives for renewable energy, on the other hand, were easier to enact. The U.S. has passed piecemeal renewable tax credits on and off since the 1990s, so it makes sense that tax credits played a central role in the Inflation Reduction Act (IRA), the Biden administration’s landmark climate law. The IRA contains more than $200 billion in tax credits, incentivizing everything from nuclear energy to electric vehicles. An analysis from Princeton University’s REPEAT Project shows that by 2025 annual additions of wind capacity could more than double while additions of solar capacity could quintuple. But, for all the IRA’s climate strengths, it didn’t address several core aims of the carbon tax, namely penalizing emissions and raising revenue from bad climate actors.

Almost like clockwork, as the prospects of a global carbon tax have dimmed, other levies entered policy discussions. In the U.S., Democrats have called for a windfall profits tax on the oil and gas industry, saying that companies are using high energy prices to enrich shareholders. Current proposals center on redistributing the profits to taxpayers, but other versions could exempt profits reinvested in clean energy, incentivizing a change in behavior.

While windfall tax proposals stand no chance in the current U.S. Congress with Republicans controlling the House, across the Atlantic, the ideas have taken off faster. The conservative government in the United Kingdom introduced a windfall tax on energy companies last year and is expected to raise around $80 billion with it. Frans Timmermans, the executive vice president of the European Commission, the European Union’s executive body, suggested at COP27, last year’s United Nations climate conference, that taxes on fossil fuels could be paired with taxes on aviation and shipping to raise revenue. “We should work with the United Nations Secretary General to dig into solutions for innovative sources of finance, including levies on aviation, shipping, and fossil fuels,” he told his counterparts at the conference.

Implementing these taxes at a global scale can seem far-fetched. But proposals to tax oil companies have a fundamental difference from failed carbon taxes: they’re easy to explain and politically popular. Polling for the League of Conservation Voters conducted last year by Hart Researchers found that 87% of Americans support a “crackdown” on oil firms. Even polls conducted by neutral parties suggest that Americans have broadly unfavorable views of oil and gas companies.

It’s not just politics that suggest the longevity of these new conversations at the intersection of climate and taxation. Sooner or later governments will likely need to generate more revenue to fund energy transition efforts. The International Energy Agency suggests that energy transition will require $4 trillion in annual investment in clean energy by 2030. A large share of that will come from the private sector, but analysts say that government funding will play a critical role laying the groundwork for the private sector.

To raise that money, some climate wonks have suggested simply relying on the most commonplace of taxes: the personal income tax and corporate income tax. Indeed, the Inflation Reduction Act requires large companies to pay a 15% minimum corporate tax, the most significant revenue raising provision. On Jan. 31, the World Inequality Lab, famed economist Thomas Pikkety’s research group, released a report arguing that such measures are critical to funding climate efforts, particularly for helping developing countries address climate change.

One obvious venue for those discussions to take place is amid the ongoing global discussions about a minimum corporate tax. The report argues that those talks can consider how to use taxation to finance developing countries’ climate needs. “The deal was about a 15% multinational tax rate,” says Chancel. “What about adding a few percentage points to this tax rate, and earmarking this to climate finance and climate adaptation in the Global South?”

The report also argued that developing countries should explore an income tax on their wealthiest citizens to fund their own climate efforts. Much like the rest of the discussion about future climate-linked taxes, it’s easy to dismiss this suggestion. Obvious challenges have prevented developing countries from implementing such policies in the past, including difficulty in data collection and enforcement and corruption, among others. But Chancel addresses these questions without hesitation. “In the beginning of the 20th century, we didn’t have any such thing as progressive income taxation in the US or in France or Western countries and opponents to progressive income taxation were saying exactly the same thing,” he says.

Indeed, it’s easy to dismiss the budding conversation at the nexus of climate and taxation with an eye roll. But politics can change quickly, and the conversations happening now may lay the groundwork for a new, climate-informed tax regime.