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A carbon tax would encourage companies to reallocate the capital they spend on consumption towards developing green technologies
Thibault Serlet is co-founder and chief researcher at Adrianople Group.
Replacing corporate income tax with a carbon tax would help governments crack down on tax evasion while also creating a powerful incentive to safeguard the environment.
The 2016 publication of the Panama Papers shocked the world. It revealed to the public what many had suspected - that international corporations were spending vast amounts of time and legal resources to avoid corporate income taxes. For tax experts, this hardly came as a surprise.
Companies will attempt to dodge taxes no matter what is taxed.
They will hire accountants, move money offshore, and engage in shady accounting practices. The actions businesses take to avoid income tax are socially harmful.
But replacing corporate income tax with a carbon tax would give companies an ethical and socially beneficial way of dodging taxes. Instead of putting their money into low taxation offshore jurisdictions, a carbon levy would push them to minimize their carbon footprint.
An income tax rewards the worst corporate excesses. Because companies can write off business expenses, they are incentivized to spend money on fripperies. The more they spend, the more they can deduct from their effective tax rates.
Often, these fripperies come at the cost of the environment. The world doesn’t need more fancy plastic business cards, second offices or corporate retreats. It needs the opposite. A carbon tax would encourage companies to reallocate all the capital they spend on consumption towards the development of green technologies.
Companies hoping to dodge taxes would move meetings to Zoom rather than spending money on executive travel. Tax-dodging manufacturers and e-commerce stores would seek to reduce the amount of plastic in their packaging. Climate-controlled office buildings would go from tax-deductible appreciating assets into money drains.
Governments would need to carefully audit corporate emissions to implement a carbon tax. Doing so at scale would be impossible in the near term. Small-scale trials need to be first attempted so that governments can develop the monitoring processes necessary for widespread implementation.
Defining carbon emissions is a tricky process. Once defined, measuring them can also be difficult.
TESTING GROUND
The best way to test this policy would be by utilizing a staple of corporate tax avoidance: Special Economic Zones (SEZs).
SEZs are tax-exempt business parks, with more than 6,000 located across 70 countries worldwide. Companies in these zones enjoy various tax breaks, regulatory incentives and other preferential treatment. Governments usually create them for the purpose of stimulating economic growth in disadvantaged areas.
SEZs have a mixed track record. On the one hand, they have acted as corporate tax havens. On the other hand, their regulatory autonomy has enabled innovation.
In Rwanda, Special Economic Zones have consolidated the dozens of government permits businesses need to operate into a single, efficient process. In China, SEZs created the conditions necessary to foster free market capitalism, lifting tens of millions out of poverty. Costa Rica is already home to a carbon-neutral business park.
Many SEZs are already completely exempt from corporate income tax. Here governments wouldn’t need to replace such a tax - instead they would just need to add a carbon tax.
Another reason why piloting carbon taxes in SEZs would work is because they are already home to the most polluting industries such as mineral processing, plastics manufacturing and chemical refining. As most of the parks are physically confined, it also makes the logistical challenge of monitoring emissions far easier.
One major issue that could hinder efforts to pilot a carbon tax in SEZs is the risk that polluting businesses will simply relocate to more carbon-friendly jurisdictions. Until carbon taxes are implemented at scale, this problem is unavoidable.
Zones implementing a carbon tax will likely cater to industries that are already green. An imperfect pilot is infinitely better than no pilot - an SEZ-scale carbon tax experiment will still allow for testing of different carbon measuring tools and tax rates, as well as receiving feedback from participating businesses.
Working with several SEZs to implement a carbon tax would be a good place to start. It would allow them to shed their reputation as tax havens, cleaning up their image both metaphorically and literally.
Should a carbon tax prove successful within the trial SEZs, it could give policymakers a powerful tool in the fights against both climate change and tax evasion.
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