Tag: international co-operation

Source: Wikimedia Commons: author, Today Testing (https://todaytesting.com)
In his Budget on 29 October, the UK Chancellor, Philip Hammond, announced a new type of tax. This is a ‘digital services tax’, which, after consultation, he is planning to introduce in April 2020. The target of the tax is the profits made by major companies providing social media platforms (e.g. Facebook and Twitter), internet marketplaces (e.g. Amazon and eBay) or search engines (such as Alphabet’s Google).

Up to now, their profits have been very hard to tax because the companies operate in many countries and use accounting techniques, such as transfer pricing (see the blogs Disappearing tax revenues: how Luxembourg saves companies billions and Starbucks pays not a bean in corporation tax, thanks to transfer pricing), to declare most of their profits in low-tax countries, such as Luxembourg. One way of doing this is for a company’s branches in different countries to pay the head office (located in a tax haven) a ‘royalty’ for using the brand.

The proposed digital services tax is a 2% tax on the revenues earned by such companies in the UK. It would only apply to large companies, defined as those whose global revenue is at least £500m a year. It is expected to raise around £400m per year.

The EU is considering a similar tax at a rate of 3%. India, Pakistan, South Korea and several other countries are considering introducing digital taxes. Indeed, many countries are arguing for a worldwide agreement on such a tax. The OECD is studying the implications of the possible use of such a tax by its 36 members. If an international agreement on such a tax can be reached, a separate UK tax may not go ahead. As the Chancellor stated in his Budget speech:

In the meantime we will continue to work at the OECD and G20 to seek a globally agreed solution. And if one emerges, we will consider adopting it in place of the UK Digital Services Tax.

The proposed UK tax is a hybrid between direct and indirect taxes. Like corporation tax, a direct tax, its aim is to tax companies’ profits. But, unlike corporation tax, it would be harder for such companies to avoid. Like VAT, an indirect tax, it would be a tax on revenue, but, unlike VAT, it would be an ‘end-stage’ tax rather than a tax on value added at each stage of production. Also, it would not be a simple sales tax on companies as it would be confined to revenue (such as advertising revenue) earned from the use in the UK of search engines, social media platforms and online marketplaces. As the Chancellor said in his speech.

It is important that I emphasise that this is not an online-sales tax on goods ordered over the internet: such a tax would fall on consumers of those goods – and that is not our intention.

There is, however, a political problem for the UK in introducing such a tax. The main companies it would affect are American. It is likely that President Trump would see such taxes as a direct assault on the USA and could well threaten retaliation. As the Accountancy Age article states, ‘Dragging the UK into an acrimonious quarrel with one of its largest trading partners is perhaps not what the Chancellor intends.’ This will be especially so as the UK seeks to build new trading relationships with the USA after Brexit. As the BBC article states, ‘The chancellor will be hoping that an international agreement rides to his rescue before the UK tax has to be imposed.’

Articles

Government documents

Questions

  1. How do multinational digital companies avoid profit taxes (corporation tax in the UK)?
  2. Explain how a digital services tax would work.
  3. Why is a digital services tax likely to be set at a much lower rate than a profit tax?
  4. Explain the difference between tax avoidance and tax evasion.
  5. Would it be possible for digital companies to avoid or evade such taxes?
  6. Is there a possibility of a prisoners’ dilemma game in terms of seeking international agreement on such taxes
  7. How does a digital services tax differ from a sales revenue tax

After two weeks of negotiations between the 195 countries attending the COP21 climate change conference in Paris, a deal has been reached on tackling climate change. Although the deal still has to be ratified by countries, this is a major step forward in limiting global warming. Before it can formally come into force, it must have been ratified by at least 55 countries, accounting for at least 55% of global greenhouse gas emissions.

The deal goes much further than previous agreements and includes the following:

  A limit on the increase in global temperatures to ‘well below’ 2°C above pre-industrial levels and efforts pursued to limit it to 1.5°C.
A recognition that the pledges already made ahead of the conference by 186 countries and incorporated into the agreement are insufficient and will only limit global temperature rise to 2.7°C at best.
Countries to update their emissions reductions commitments every five years – the first being in 2020. Such revised commitments should then be legally binding.
A global ‘stocktake’ in 2023, and every five years thereafter, to monitor countries’ progress in meeting their commitments and to encourage them to make deeper cuts in emissions to reach the 1.5°C goal. This requires a process of measurement and verification of countries’ emissions.
To reach a peak in greenhouse gas emissions as soon as possible and then to begin reducing them and to achieve a balance between sources and sinks of greenhouse gases (i.e. zero net emissions) in the second half of this century.
Developed countries to provide the poorest developing countries with $100bn per year by 2020 to help them reduce emissions. This was agreed in Copenhagen, but will now be continued from 2020 to 2025, and by 2025 a new goal above $100bn per year will be agreed.
The development of market mechanisms that would award tradable credits for green projects and emissions reductions.
A recognition that the ‘loss and damage’ associated with climate-related disasters can be serious for many vulnerable developing countries (such as low-lying island states) and that this may require compensation. However, there is no legal liability on developed countries to provide such compensation.

Perhaps the major achievement at the conference was a universal recognition that the problem of global warming is serious and that action needs to be taken. Mutual self interest was the driving force in reaching the agreement, and although it is less binding on countries than many would have liked, it does mark a significant step forward in tackling climate change.

But why did the conference not go further? Why, if there was general agreement that global warming should be tackled and that global temperature rise should ideally be capped at 1.5°C, was there not a binding agreement on each country to apply this cap?

There are two reasons.

First, it is very difficult to predict the exact relationship, including its timing, between emissions and global temperature rise. Even if you could make limits to emissions binding, you could not make global temperature rise binding.

Second, even if there is general agreement about how much emissions should be reduced, there is no general agreement on the distribution of these reductions. Many countries want to do less themselves and others to do more. More specifically, poor countries want rich countries to do all the cutting while many continue to build more coal-fired power stations to provide the electricity to power economic development. The rich countries want the developing countries, especially the larger ones, such as China, India and Brazil to reduce their emissions, or at least the growth in their emissions.

Then there is the difference between what countries vaguely pledge at a global conference and what they actually do domestically. Many developed countries are keen to take advantage of currently cheap fossil fuels to power economic growth. They are also still investing in alternative sources of fossil fuels, such as through fracking.

As we said in the previous blog, game theory can shed some useful insights into the nature and outcome of climate negotiations. ‘The global optimum may be for a strong agreement, binding on all countries. The Nash equilibrium, however, may be a situation where countries push for their own interests at the expense of others, with the final agreement being much more minimalistic.’

‘Minimalistic’ may be too strong a description of the outcomes of the Paris conference. But they could have been stronger. Nevertheless, judged by the outcomes of previous climate conferences, the deal could still be described as ‘historic’.

Videos
With landmark climate accord, world marks turn from fossil fuels Reuters (13/12/15)
COP21 climate change summit reaches deal in Paris BBC News (13/12/15)
COP21: Paris climate deal is ‘best chance to save planet’ BBC News (13/12/15)
COP21: Climate change deal’s winners and losers BBC News, Matt McGrath (13/12/15)
The Five Key Decisions Made in the UN Climate Deal in Paris Bloomberg, video: Nathaniel Bullard; article: Ewa Krukowska and Alex Morales (12/12/15)
The key factors in getting a deal in Paris BBC News on YouTube, Tom Burke (13/12/15)

Articles

COP21 agreement: All you need to know about Paris climate change deal Hindustan Times, Chetan Chauhan (13/12/15)
COP21: Paris agreement formally adopted Financial Times, Pilita Clark and Michael Stothard (12/12/15)
Let’s hail the Paris climate change agreement and get to work Financial Times, Jeffrey Sachs (12/12/15)
COP21: Public-private collaboration key to climate targets Financial Times, Nicholas Stern (13/12/15)
Paris climate change agreement: the deal at a glance The Telegraph, Emily Gosden (12/12/15)
Climate Accord Is a Healing Step, if Not a Cure New York Times, Justin Gillis (12/12/15)
Paris Agreement Ushers in End of the Fossil Fuel Era Slate, Eric Holthaus (12/12/15)
Paris Agreement: the reaction Business Green, James Murray and Jessica Shankleman (12/12/15)
World’s First Global Deal to Combat Climate Change Adopted in Paris Scientific American, David Biello (12/12/15)
COP21: Paris climate deal ‘our best chance to save the planet’, says Obama Independent, Tom Bawden (13/12/15)
Grand promises of Paris climate deal undermined by squalid retrenchments The Guardian, George Monbiot (12/12/15)
Paris Agreement on climate change: the good, the bad, and the ugly The Conversation, Henrik Selin and Adil Najam (14/12/15)
COP21: James Hansen, the father of climate change awareness, claims Paris agreement is a ‘fraud’ Independent, Caroline Mortimer (14/12/15)
Paris climate agreement: More hot air won’t save us from oblivion Sydney Morning Herald, Peter Hartcher (15/12/15)

Draft Agreement
Adoption of the Paris Agreement United Nations Framework Convention on Climate Change (12/12/15)

Questions

  1. Could the market ever lead to a reduction in greenhouse gas emissions? Explain.
  2. What are the main strengths and weaknesses of the Paris agreement?
  3. Is it in rich countries’ interests to help poorer countries to achieve reductions in greenhouse gas emissions?
  4. How might countries reduce the production of fossil fuels? Are they likely to want to do this? Explain.
  5. Is a ‘cap and trade’ (tradable permits) system (a) an effective means of reducing emissions; (b) an efficient system?
  6. What is the best way of financing investment in renewable energy?

The Paris Climate Change Conference (COP21) is under way. At the opening on November 30, 150 Heads of State gathered in Paris, most of whom addressed the conference. With representatives from 195 countries and observers from a range of organisations, the conference is set to last until 11 December. Optimism is relatively high that a legally binding and universal agreement will be reached, with the aim of keeping global warming below 2°C – what is generally regarded as a ‘safe’ limit.

But although it is hoped that a successor to the Kyoto Protocol of 1997 will be put in place, there are many problems in getting so many countries to agree. They may all wish to reduce global warming, but there is disagreement on how it should be achieved and how the burden should be shared between countries.

There are several difficult economic issues in the negotiations. The first is the size and impact of the external costs of emissions. When a country burns fossil fuels, the benefits are almost entirely confined to residents of that county. However, the environmental costs are largely external to that country and only a relatively small fraction is borne by that country and hardly at all by the polluters themselves, unless there is a carbon tax or other form or penalty in place. The problem is that the atmosphere is a common resource and without collective action – national or international – it will be overused.

The second problem is one of distribution. Politicians may agree in principle that a solution is necessary which is equitable between nations, but there is considerable disagreement on what is meant by ‘equitable’ in this context. As the third Guardian article below puts it:

The most important hurdle could be over whether industrialised countries like the US, UK and Japan, which have contributed the most to the historical build-up of emissions, should be obliged to cut more than developing countries. India, on behalf of many poor countries, will argue that there must be “differentiation” between rich and poor; but the US wants targets that are applicable to all. A collision is inevitable.

A third problem is that of uncertainty. Although there is general agreement among scientists that human action is contributing to global warming, there is less agreement on the precise magnitude of the causal relationships. There is also uncertainty over the likely effects of specific emissions reductions. This uncertainty can then be used by governments which are unwilling to commit too much to emissions reductions.

A fourth difficulty arises from the intertemporal distribution of costs and benefits of emissions reductions. The costs are born immediately action is taken. Carbon taxes or charges, or subsidies to renewables, or caps on emissions, all involve higher energy prices and/or higher taxes. The flows of benefits (or lower costs), however, of reduced emissions are not likely to be fully experienced for a very long time. But governments, whether democratic or dictatorships, tend to have a relatively short time horizon, governed by the electoral cycle or the likelihood of staying in power. True, governments may not be solely concerned with power and many politicians may have genuine desires to tackle climate change, but their political survival is still likely to be a major determinant of their actions.

Of course, if there is strong public opinion in favour of action to reduce emissions, governments are likely to respond to this. Indeed, all the expressions of public support for action ahead of the conference from all around the world, do give some hope for a strong agreement at the Paris conference. Nevertheless, there is still widespread scepticism in many countries over the relationship between human action and climate change, and many argue that the costs of policies to tackle climate change exceed the benefits.

Game theory can shed some insights into the difficulties ahead for the negotiators. The global optimum may be for a strong agreement, binding on all countries. The Nash equilibrium, however, may be a situation where countries push for their own interests at the expense of others, with the final agreement being much more minimalistic.

There do, however, seem to be more reasons to be cheerful at this summit that at previous ones. But negotiations are likely to be hard and protracted over the coming days.

Videos and webcasts
Paris Climate Conference: The Big Picture Wall Street Journal on YouTube, Jason Bellini (30/11/15)
Why is the Paris UN climate summit important? PwC, Leo Johnson (14/10/15)
Paris climate change summit 2015: ‘the near impossible task’ Channel 4 News on YouTube, Tom Clarke (30/11/15)
COP21: Rallies mark start of Paris climate summit BBC News, David Shukman (29/11/15)
With climate at ‘breaking point’, leaders urge breakthrough in Paris Reuters, Bruce Wallace and Alister Doyle (1/12/15)
COP21: Paris conference could be climate turning point, says Obama BBC News (30/11/15)
Leaders meet to reach new agreement on climate change BBC News, David Shukman (30/11/15)
Poll: Growing Doubts Over Climate Change Causes Sky News, Thomas Moore (30/11/15)
Paris climate protesters banned but 10,000 shoes remain The Guardian (29/11/15)

Articles

COP-21 climate deal in Paris spells end of the fossil era The Telegraph, Ambrose Evans-Pritchard (29/11/15)
Is there an economic case for tackling climate change? BBC News, Andrew Walker (28/11/15)
World Leaders in Paris Vow to Overcome Divisions on Climate Change Wall Street Journal, William Horobin and William Mauldin (30/11/15)
Experts discuss how to build a carbon-free energy industry The Guardian, Tim Smedley (25/11/15)
Africa could lead world on green energy, says IEA head The Guardian, Anna Leach (11/11/15)
Climate change talks: five reasons to be cheerful or fearful The Guardian, John Vidal (30/11/15)
The Paris climate change summit, explained in 4 charts The Washington Post, Philip Bump (30/11/15)
Why This Goal To Curb Climate Change ‘Is Not Ideal’ Huffington Post, Jacqueline Howard (30/11/15)
Paris climate change talks: What the different groups attending expect from these crucial meetings Independent, Tom Bawden (29/11/15)
UN Climate Change Conference: World Leaders Call For Price On CO2 Emissions Despite Uphill Battle At Paris Summit International Business Times, Maria Gallucci (30/11/15)
World Bank, six nations call for a price on carbon SBS (Australia) (1/12/15)
Uruguay makes dramatic shift to nearly 95% electricity from clean energy The Guardian, Jonathan Watts (3/12/15)

Questions

  1. Why is COP21 considered to be so significant?
  2. For what reasons is there hope for a binding agreement to limit global warming to 2°C?
  3. What would be the effect on global warming of the commitments made by more than 180 countries prior to the conference?
  4. What market failings contribute towards the problem of global warming?
  5. Why, if all countries want to achieve a binding agreement at the Paris conference, is it likely to be so difficult to achieve?
  6. Explain what is meant by a ‘Nash equilibrium’ and how the concept is relevant to international negotiations.
  7. Why is China investing heavily in solar power?
  8. Could Africa lead the world in green energy?
  9. Is a ‘cap and trade’ (tradable permits) system (a) an effective means of reducing emissions; (b) an efficient system?
  10. What is the best way of financing investment in renewable energy?
  11. How does the structure/order of the Paris conference differ from previous COPs? Is such a structure more likely to achieve substantial results?

On my commute to work on the 6th October, I happened to listen to a programme on BBC radio 4, which provided some fascinating discussion on climate change, growth, capitalism and the need for co-operation. With more countries emerging as leading economic powers, pollution and emissions continue to grow. Is it time for a green revolution?

The programme considers some ‘typical’ policies and also discusses some radical solutions. There is discussion on developing and developed nations and how these countries should be looked at in terms of compensation, entitlement and aid. Carrots and sticks are analysed as means of saving the planet and how environmental damage can be reduced, without adversely affecting the growth rate of the world economy. I won’t say any more, but it’s certainly worth listening to, for an interesting discussion on one of the biggest problems that governments across the world are facing and it is not going to go away any time soon.

Naomi Klein on climate change and growth BBC Radio 4, Start the Week (6/10/14)

Questions

  1. What are the market failures with the environment?
  2. Why is global co-operation so important for tackling the problem of climate change?
  3. Which policies are discussed as potential solutions to the problem of climate change?
  4. What has been the problem with the European carbon trading scheme?
  5. Why may there be a trade-off between capitalism, growth and the problem of carbon emissions?
  6. To what extent do you think that countries such as Bangladesh should be ‘compensated’?

Finance ministers and central bank officials of the G20 countries are meeting in Sydney from 20 to 23 February. Business leaders from these countries are also attending and have separate meetings.

Amongst the usual discussions at such meetings about how to achieve greater global economic stability and faster and sustained economic growth, there are other more specific agenda issues. At the Sydney meeting these include a roundtable discussion to identify practical solutions to lift infrastructure investment. They also include discussions on how to clamp down on tax avoidance through means such as transfer pricing.

The G20 meetings of finance and business leaders take place annually. There are also annual summits of heads of government (the next being in Brisbane in November 2014).

The G20 was formed in 1999 to extend the work of the G8 developed countries to include other major developed and developing countries plus the EU. In 2008/9 it played a significant role in helping devise policies to tackle the banking crisis and combat the subsequent recession. At the time there was a common purpose, which made devising common policies easier.

Since then, the importance of the G20 has waned. Partly this is because of the divergent problems and issues between members and hence the difficulty of reaching agreements. Partly it is because, to be effective, it needs to remain small but, to be inclusive, it needs to extend beyond the current 20 members. Indeed there has been considerable resentment from many countries outside the G20 that their views are not being represented. Some representatives from non-G20 countries attend meetings on an informal basis.

The following articles discuss the role of the G20 and whether it is fit for purpose.

Articles

Janet Yellen vs. the world: The issues at the G20 finance summit Globe and Mail (Canada), Iain Marlow (20/2/14)
Turning ideas into action at the G20 Business Spectator (Australia), Mike Callaghan (21/2/14)
Boosting infrastructure investment can prove G20’s value to the world The Conversation, Andrew Elek (20/2/14)
Can the G20 ever realise its potential? The Conversation, Mark Beeson (21/2/14)
G20 has failed to fulfil its promise of collaboration amid hostility The Guardian, Larry Elliott (20/2/14)

Official G20 site
G20 Priorities G20
Australia 2014 G20
News G20

Questions

  1. Which countries are members of the G20? Compile a list of those countries you feel ought to be members of such an organisation.
  2. What are the arguments for and against increasing the membership of the G20 (or decreasing it)?
  3. Why is Janet Yellen, Chair of the US Federal Reserve, likely to be at odds with leaders from other G20 countries, especially those from developing countries?
  4. Why have the tensions between G20 members increased in recent months?
  5. Discuss possible reforms to the IMF and the G20’s role in promoting such reforms.
  6. What insights can game theory provide in understanding the difficulties in reaching binding agreements at G20 meetings? Are these difficulties greater at G20 than at G8 meetings?
  7. Should the G20 be scrapped?