CARBON, CLIMATE AND COVID-19: AN OPPORTUNITY TO CREATE A GREEN ECONOMY

By Afshin Nazir

The environment and the economy are really both two sides of the same coin. If we cannot sustain the environment, we cannot sustain ourselves.

-Wangari Maathai

No event in the past century has had as dramatic an impact on emissions as compared to the COVID-19 pandemic. Several sources have posited that the pandemic has resulted in “an unrivalled drop in carbon output.[1] This state of affairs is attributable to the altered energy demand patterns around the world due to government policies and changes in human behaviour. It is estimated that daily global emissions have decreased by around 17% compared to the mean levels in April last year.[2] Against this background, this blog post seeks to raise awareness on some of the economic and environmental issues around the COVID-19 pandemic, highlighting that the environment and the economy are inextricably linked. It is argued herein that the current economic model is not sustainable in the long term and that the pandemic can be used as an opportunity to remedy this situation and create a green economy.

Although high carbon output has been driving climate change, the current drop in carbon output due to the pandemic is not a cause for celebration for a number of reasons. First, while the pandemic has led to a decrease in emissions, it has caused a myriad of other environmental problems, including increased destruction of rainforests in Brazil and Indonesia (which experts suggest could bring a new pandemic),[3] and an increase in solid waste due to the use of masks and gloves.[4] Second, in order to achieve a long-term decrease in carbon emissions – and reach a state of net-zero emissions – sustainable long-term solutions have to be implemented. The pandemic only presents a temporary and circumstantial opportunity for reduction of emissions. Additionally, this decrease comes at a heavy cost for lives, livelihoods and economies.[5] The rebound effect in China is an indicator that emissions are likely to shoot up as economies re-open. Similarly, the financial crisis in 2008 had led to a drop of 1.3% in carbon emissions, but this rebounded soon after as the economy recovered in 2010, and an all-time high was observed.[6] It is possible that the situation post COVID-19 might pick up the same trend.

In order to mitigate the increase in emissions, COVID-19 has to be viewed as an opportunity for the creation of a green economy. The United Nations Environment Programme (UNEP) has defined a green economy as one that is “low carbon, resource efficient and socially inclusive“.[7] The Global Green Economy Index (GGEI) measures the green economic performance of 130 countries across the dimensions of leadership and climate change, efficiency sectors, markets and investment, and the environment.[8] One country which has been ranked highly on this index and demonstrated good practice in creating a green economy is Sweden. Through the implementation of a two-level carbon tax system and increased focus on renewable energy, the country has managed to cut its emissions by 26% over a little less than three decades, as Gross Domestic Product (GDP) has grown by 78%.[9] The country has debunked the myth that the attainment of economic growth has to come at an environmental cost.

Economists have maintained that the current global economic model is not sustainable. This model is based on a country’s GDP and fails to consider the impact of economic growth on the planet. Due to the pandemic, trillions of dollars of emergency funds have been earmarked to revive the economy. If these funds are used to revive the fossil fuel industry, the worst effects of climate change will follow. It has been suggested that if these funds – or at least part of these funds – are used to make the switch to a zero-carbon economy, this would help in creation of employment opportunities while preserving the planet. Governments have to ensure that their stimulus packages and recovery efforts are tilted to green. In the long term, such a move would prevent catastrophic impacts of climate change on lives, livelihoods and economies.[10] Likewise, the International Monetary Fund’s Managing Director, Kristalina Georgieva, opines that we must consider how historians will view this pandemic – either as the ‘Great Reversal’ or the ‘Great Reset’. In order for the latter to be the case, she advocates for smarter, fairer and greener growth, suggesting that governments should consider putting in place public investments supporting low-carbon growth, as well as incentives for private investments to adopt the same path. These investments can lead to a recovery that is both green and job-rich.[11]

The incorporation of green goals into tax systems has to be taken seriously. The pandemic and the oil price wars have led to a massive fall in oil prices as there is a collapse in demand and lack of storage for excess supply, presenting a suitable situation to make strides in carbon pricing and to eliminate harmful subsidies. Carbon taxes can be used as a tool to increase revenue and decrease the risk of investment in carbon-intensive activities.[12] In this regard, Ackva and Hoppe highlight as follows:

 “There is a strong agreement that a broadly applied, robust carbon price signal is one of the most efficient tools to achieve emission reductions in the short term…and…to facilitate — alongside other policy instruments — deep decarbonisation in the long term.”[13]

A carbon price which is high enough to create a price signal will discourage the use of oil and instead promote the adoption of cleaner and greener technologies. In this way, a distorted recovery founded upon high carbon output from fossil fuels will be discouraged. The revenues from these taxes will soften fiscal deficits. They can be earmarked and used in various ways including investment in green technology and in sectors such as health and education which have suffered greatly due to the pandemic. The revenues can also be recycled to support consumption (especially in low-income households) and to ensure that the polluter pays the cost in line with the “Polluter Pays Principle” instead of the consumer.[14]

It must be mentioned that even though the transition to a low-carbon green economy is important for every part of the world, it is particularly important for major emitters to use the pandemic as a means to reduce emissions. It is a sad reality that although Africa contributes only about 5% to global emissions, it is especially vulnerable to the impacts of climate change due to its geographical location in the tropics, low-lying topography, low adaptive capacity and widespread poverty.[15] For several African countries, the COVID-19 crisis has come in the midst of other problems including poverty and extreme weather events induced by climate change. Now more than ever before, major emitters have to use this chance to cut emissions and steer economies towards a green path.

In summary, the drop in carbon output due to the COVID-19 pandemic – although not a cause for celebration due to reasons highlighted above – can be used as an opportunity to decrease emissions in the long term and create a green economy. This is especially relevant for major emitters as the consequences of their actions are magnified for many developing countries. In order to create a green economy, steps have to be taken now by recognising the link between the environment and the economy and using instruments such as carbon taxes to remedy the situation. Measures to combat COVID-19 and the climate crisis are not mutually exclusive. In fact, recognising the link between the two and acting accordingly could produce better results in the long term. Wangari Maathai calls for us to recognise this link, asserting that the environment and the economy are really two sides of the same coin and that if we cannot the sustain the environment, we cannot sustain ourselves. In this light, therefore, as we tackle the COVID-19 crisis, we cannot afford to forget the climate crisis.

[1] Matt McGrath, ‘Climate Change and Coronavirus: Five Charts about the Biggest Carbon Crash’ (BBC, 6 May 2020) <https://www.bbc.com/news/science-environment-52485712&gt; accessed 3 July 2020.

[2] Corinne Le Quere and others, ‘Temporary Reduction in Daily Global CO2 Emissions during the COVID-19 Forced Confinement’ [2020] Nature Climate Change <https://www.nature.com/articles/s41558-020-0797-x&gt;.

[3] Thais Borges and Sue Branford, ‘Rapid Deforestation of Brazilian Amazon Could Bring Next Pandemic: Experts’ (Earth, 10 June 2020) <https://earth.org/rapid-deforestation-of-brazilian-amazon-could-bring-next-pandemic/&gt; accessed 10 July 2020.

[4] The Economist, ‘Covid-19 Has Led to a Pandemic of Plastic Pollution’ (The Economist, 22 June 2020) <https://www.economist.com/international/2020/06/22/covid-19-has-led-to-a-pandemic-of-plastic-pollution&gt; accessed 10 July 2020.

[5] Al Jazeera, ‘Could Coronavirus Change How We Tackle the Climate Crisis?’ (Al Jazeera, 22 May 2020) <https://www.aljazeera.com/programmes/thestream/2020/05/coronavirus-change-tackle-climate-crisis-200518234235592.html&gt; accessed 10 July 2020.

[6] Martha Henriques, ‘Pollution and Greenhouse Gas Emissions Have Fallen across Continents as Countries Try to Contain the Spread of the New Coronavirus. Is This Just a Fleeting Change, or Could It Lead to Longer-Lasting Falls in Emissions?’ (BBC, 27 March 2020) <https://www.bbc.com/future/article/20200326-covid-19-the-impact-of-coronavirus-on-the-environment&gt; accessed 7 June 2020.

[7] UNEP, ‘Green Economy’ (UN Environment) <https://www.unenvironment.org/regions/asia-and-pacific/regional-initiatives/supporting-resource-efficiency/green-economy&gt; accessed 27 July 2020.

[8] Knoema, ‘Global Green Economy Index 2018’ (Knoema, 11 March 2019) <https://knoema.com/infographics/enedcw/global-green-economy-index-2018&gt; accessed 27 July 2020.

[9] Henrik Hammar and Susanne Åkerfeldt, ‘CO2 Taxation in Sweden – 20 Years of Experience and Looking Ahead’ <https://www.globalutmaning.se/wp-content/uploads/sites/8/2011/10/Swedish_Carbon_Tax_Akerfedlt-Hammar.pdf&gt;.

[10] Al Jazeera, ‘Can the Coronavirus Help Save the Planet?’ (Al Jazeera, 5 July 2020) <https://www.aljazeera.com/programmes/start-here/2020/07/coronavirus-save-planet-start-200705074443076.html&gt; accessed 5 July 2020.

[11] Kristalina Georgieva, ‘The Great Reset’ (IMF, 3 June 2020) <https://www.imf.org/en/News/Articles/2020/06/03/sp060320-remarks-to-world-economic-forum-the-great-reset?utm_medium=email&utm_source=govdelivery&gt; accessed 5 June 2020.

[12] Kristalina Georgieva, ‘Managing Director’s Opening Remarks at the Petersberg Climate Dialogue XI’ (IMF, 29 April 2020) <https://www.imf.org/en/News/Articles/2020/04/29/sp042920-md-opening-remarks-at-petersberg-event?utm_medium=email&utm_source=govdelivery&gt; accessed 10 July 2020.

[13] Johannes Ackva and Janna Hoppe, ‘The Carbon Tax in Sweden: Fact Sheet for Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU), Germany’ (2018).

[14] John Burke, Sam Fankhauser and Alex Bowen, ‘Pricing Carbon during the Economic Recovery from the COVID-19 Pandemic’ <http://www.lse.ac.uk/granthaminstitute/wp-content/uploads/2020/05/Pricing-carbon-during-the-recovery-from-the-COVID-19-pandemic.pdf&gt;.

[15] Michael Addaney, Bamisaye Olutola and Elsabe Boshoff, ‘The Climate Change and Human Rights Nexus in Africa’ (2017) 9 Amsterdam Law Forum 5.

REVIEW OF THE INFORMAL TAX COLLECTION METHOD

BY SAMUEL NG’ANG’A

Overview of situation
Mr. Samuel Ng’ang’a, an informal trader in Nakuru County proposes a solution towards taxation of the informal sector of which he belongs. To put the situation in context, the informal sector by definition contains traders and businesses which are not registered by the state and which do not necessarily comply with legal obligations. Mr. Samuel confirms that he is a small business owner in Nakuru town, operating a stall selling chips. He accordingly confirms that he neither pays tax nor files nil returns even though he earns up to Kshs 500 daily and he approximates 100,000 other small traders in Nakuru County are similarly positioned.
Overview of proposed solution
Mr. Samuel is starkly aware that there is need for the informal sector to also contribute their fair share of taxes. A huge problem that has faced taxation of this sector has been that they are often unregistered and even though the state has tried to tax the sector indirectly through fees, charges, licenses etc. these produce regressive results as they often overlap and fail to take account of one another. Further, he argues that most small traders cannot afford to make the Kshs 4500 per year in taxes mandated by KRA. To solve this issue, Mr. Samuel proposes the payment of a daily flat fee of Kshs 20 tax by informal traders for 5 days each week. He argues that the imposition of this daily tax could result in a potential yield of Kshs 4800 per year from each trader and for 100,000 traders that would result in a potential outlay of Kshs 48,000,0000 in yearly taxes for the country.
Analysis of proposed solution
A review of the proposed solution reveals that a critique could be effectively conducted through placing the proposed solution alongside the principles of an effective taxation system;
Efficiency: The principle of efficiency in taxation implies that compliance costs to businesses and administration costs to revenue administrations should be minimized as much as is possible. To this end, the imposition of a Kshs 20 daily tax faces a single major hurdle – Problem with the administration of this tax. Effective imposition of this tax would mandate that all such traders be registered, an issue that the government has struggled with and also the fact that most traders would blatantly refuse to be registered.
How then can we ensure efficiency? A proposed solution to overcome this problem would be the issuance of a daily digital tax stamp that could be generated once the daily tax has been paid. This idea is borrowed from the imposition of a national tax stamp in Ghana paid by informal sector businesses. Accordingly, in Kenya payment of the tax could be linked to the renewal of licenses such that traders would be unable to renew licenses unless the tax had been paid. Facility could also be provided where traders accumulated arrears that would result in a negotiated payment structure and a provisional license. Efficient imposition of the tax would require coordination with the county councils to ensure compliance.
Certainty and Simplicity: This principle basically mandates that the tax set to be imposed be as clear and as simple as possible such that each taxpayer understands clearly their tax obligation. To ensure certainty and simplicity constant civic education needs to be conducted by the revenue authority on the type of tax, the businesses covered, registration requirements etc. in order to ensure higher compliance and increase awareness
Neutrality: Neutrality in taxation implies that the tax imposed should strive to be neutral in the sense that decisions made as a result of imposition of the tax should be based on their economic merits and not for tax reasons. To each according to his ability. To this end, I would propose that the Kshs 20 daily flat fee should not be imposed on all informal traders overall but rather a graduated payment with the lowest being Kshs 20 depending on the informal business size and type. A graduated payment will help ensure that those who are earning too little are able to pay some taxes and also the thresholds on such payment will fish out those ‘hiding’ in the informal sector to evade the taxes. The tax administration should also create thresholds below which informal workers and businesses are not taxed.
Effective and Fairness: Effectiveness and fairness mandate that enforceability of a tax set to be imposed is a very crucial consideration. As much as possible the potential for tax evasion and tax avoidance of a particular tax should be minimized. Under the proposed solution, the inclusion of a digital tax stamp would help minimize the potential for tax evasion and avoidance while the inclusion of thresholds for the taxes on the various types of informal traders would help ensure fairness.
Conclusion
Mr. Samuel’s proposal of the imposition of a Kshs 20 daily flat fee on informal trader is interesting in the discussion around the informal sector. Such a proposed solution goes on to show that there are solutions to the problem around taxation of this sector and that the traders themselves are equally aware and willing to contribute their fair share of taxation but only to the extent that they are able. To this end, we are in agreement with Mr. Samuel that the imposition of a daily flat fee would be a good step in the right direction.