How green are my taxes? The use of taxation in forwarding sustainable policy goals

Swiss Re Institute hosted an interactive online event on the use of carbon taxes and prices to support reducing carbon emissions and aiming for carbon neutrality.

"It's very simple. It's a numbers game."

So stated Claire O'Neill of the World Business Council for Sustainable Development. And, in one sense, it is simple. Much like a ticking clock, we can measure the build-up of greenhouse gases in the atmosphere. Those measurements point in one direction: we need to reduce our carbon emissions if we want to limit the economic and physical damage of global warming.

Not only do we need to reduce carbon emissions, Mischa Repmann of Swiss Re’s Environmental Management team reminded us. Reducing emissions is not enough. We need to actively take carbon out of the atmosphere. There are a number of means of doing this, from planting trees – millions, billions of trees – to technical solutions locking carbon back into the ground we took it from. As Swiss Re stated in our recent sigma publication on The Economics of Climate Change – "no action is not an option."

How then to instigate action? This was when our presenters and panellists came alive. The key theme to our discussion was, of course, tax and other financial mechanisms. For Allison Christians, McGill University, our economy has a fundamental failing. The external costs of production – the smoke released from the chimney, polluted water pumped directly into rivers, carbon emissions entailed in transportation – are often not captured in company financial reports. It is a fundamental market distortion. A well-functioning tax system, whether using carbon tax or carbon credits, should aim to correct this distortion and encourage reallocation of investment to sustainable businesses.

For Joseph Pryor, of the World Bank, carbon taxation is simply one example of carbon pricing, with the aim being to accurately represent the full costs of resources. The polluter should pay, forced to pass on increased costs through the supply chain, so that higher – and more realistic – costs are paid by consumers. Consumers will respond by shifting demand to less carbon-intensive goods and services. There are currently 61 carbon pricing schemes across the world. As with so much else in the global economy, China will be a key player to watch.

From Andrea Burkhardt, Swiss Federal Office for the Environment, we were given a reminder that tax or price, the politics of carbon are not always easy to negotiate – particularly in Switzerland, where politicians must continually adjust to the demands of direct democracy.

Powerful statements about carbon neutrality were being made by private sector players over recent months. As Nina Arquint, Swiss Re Corporate Solutions’ Chief Risk Officer stated, in many jurisdictions companies are running ahead of governments. At Swiss Re, we do not see carbon reduction just in terms of targets; we believe it will be fundamental to our business model, both on the asset and on the underwriting side, in years and decades to come.

We already know that achieving climate stability will require major changes in mentality and behaviour – what we saw today shows us that numbers can help us get there. By making company financial results reflect true costs, by aligning tax rules to incentivise companies and consumers to make sustainable choices, and by linking actions to numerical outcomes, numbers can help us take the discussion to the next level.

We hope the "How green are my taxes?" event was one more small step in that direction.