Climate hypocrisy ensures global warming

Anis Chowdhury and Jomo Kwame Sundaram

SYDNEY and KUALA LUMPUR: Rich country governments claim the high moral ground on climate action. But many deny their far greater responsibility for both historic and contemporary greenhouse gas (GHG) emissions, once acknowledged by the Kyoto Protocol.

Climate injustice

Worse, responsibility has not been matched by commensurate efforts, especially by the largest rich economies in the G7, which dominates the G20. Its continued control of international economic resources and policymaking blocks progress on climate justice.

“That is the greatest injustice of climate change: that those who bear the least responsibility for climate change are the ones who will suffer the most”, says Mary Robinson, former Eire President and UN High Commissioner for Human Rights.

On a per capita basis, the US and close allies – Saudi Arabia, the United Arab Emirates, Australia and Canada – produce more than a hundred times the planet-warming greenhouse gas (GHG) emissions of some African countries.

The African population produced about 1.1 metric tonnes of carbon (dioxide equivalent) emissions per person in 2019, under a quarter of the 4.7 tonnes global average. The US emitted 16.1 tonnes – nearly four times the global average.

GHG emissions accumulate over time and trap heat, warming the planet. The US has emitted over a quarter of all GHG emissions since the 1750s, while Europe accounts for 33%. By contrast, Africa, South America and India contributed about 3% each, while China contributed 12.7%.

Wealth inequalities worsen climate injustice. The world’s richest 5% were responsible for 37% of GHG emissions growth during 1990-2015, while the bottom half of the world’s population accounted for 7%!

Poor regions and people take the brunt of global warming. The tropical zone is much more vulnerable to rapid climate change. Most of these countries and communities bear little responsibility for the GHG emissions worsening global warming, but also have the least means to cope and protect themselves.

Thus, climate justice demands wealthy nations – most responsible for cumulative and current GHG emissions – not only reduce the harm they cause, but also help those with less means to cope.

Rich hypocrisy

Wealthy countries have done little to keep their 2009 promises to provide US$100 billion annually to help developing countries. Most climate finance has been earmarked for mitigation. But this ignores their needs and priorities, as developing countries need help to adapt to climate change and to cope with losses and damages due to global warming.

The OECD club of rich countries has been criticized for exaggerating climate finance, but acknowledges, “Australia, Japan and the United States consider financing for high-efficiency coal plants as a form of climate finance.”

It reports climate finance of US$79.6bn in 2019, but these figures are hotly contested. However, ‘commercial credit’ is typically not concessional. But when it is, it implies official subsidies for “bankable”, “for profit” projects.

Many also doubt much of this funding is truly additional, and not just diverted (‘repurposed’) from other ends. Private finance also rarely goes where it is most needed while increasing debt burdens for borrowers.

Leading from behind

At the COP26 Climate Summit in Glasgow in November 2021, US President Joe Biden described climate change as “an existential threat to human existence” and pledged to cut US emissions by up to 51% by 2030.

Biden had claimed his ‘Build Back Better’ (BBB) package of proposed social and climate spending would be a cornerstone of restoring international trust in the US commitment to stem global warming.

At the G7 Summit in June 2021, Biden announced his vision of a “Build Back Better World” (B3W) would define the G7 alternative to China’s multitrillion USD Belt and Road Initiative (BRI).

All this was premised on US ability to lead from the front, with momentum growing once BBB became law. But his legislative package has stalled. Unable to attract the needed votes in the Senate, BBB is ‘dead in the water’.

Putting on a brave face, US Senate majority leader Chuck Schumer promises to bring the legislation to a vote early next year. But with their party’s declining political fortunes, likely ‘horse-trading’ to pass the bill will almost certainly further undermine Biden’s promises.

Meanwhile, breaking his 2020 campaign promise, Biden approved nearly 900 more permits to drill on public land in 2021, more than President Trump in 2017. While exhorting others to cut fossil fuel reliance, his administration is now urging US companies and allies to produce more, invoking Ukraine war sanctions.

Aid laggard

At COP26, Biden promised to help developing nations reduce carbon emissions, pledging to double US climate change aid. But even this is still well short of its proportionate share of the grossly inadequate US$100bn yearly rich nations had pledged in 2009 in concessional climate finance for developing countries.

Considering its national income and cumulative emissions, the US should provide at least US$43–50bn in climate finance annually. Others insist the US owes the developing world much more, considering their needs and damages due to US emissions, e.g., suggesting US$800bn over the decade to 2030.

In 2017-18, the US delivered US$10bn to the pledged US$100bn annual climate finance – less than Japan’s US$27bn, Germany’s US$20bn and France’s US$15bn, despite the US economy being larger than all three combined.

President Obama pledged US$3bn to the Green Climate Fund (GCF) – the UN’s flagship climate finance initiative – but delivered only US$1bn. Trump totally repudiated this modest pledge.

At the April 2021 Earth Day leaders’ summit, Biden vowed to nearly double Obama’s pledge to US$5.7bn, with US$1.5bn for adaptation. But even this amount is far short of what the US should contribute, given its means and total emissions.

After the European Commission president highlighted this in September 2021, Biden vowed to again double the US contribution to US$11.4bn yearly by 2024, boasting this would “make the US a leader in international climate finance”.

At COP26, the US cited this increased GCF promise to block developing countries’ call for a share of revenue from voluntary bilateral carbon trading. The US has also opposed developing countries’ call for a funding facility to help vulnerable nations cope with loss and damage due to global warming.

Worse, the US Congress has approved only US$1bn for international climate finance for 2022 – only US$387m more than in the Trump era. At that rate, it would take until 2050 to get to US$11.4bn. Unsurprisingly, Biden made only passing mention of climate and energy in his last State of the Union address.

OECD’s regressive world corporate income tax reform

Anis Chowdhury and Jomo Kwame Sundaram

SYDNEY and KUALA LUMPUR: After decades of rejecting international tax cooperation under multilateral auspices, rich countries have finally agreed. But, by insisting on their own terms, progressive corporate income tax remains distant.

Tax avoidance and evasion by transnational corporations (TNCs) are facilitated by ‘tax havens’ – jurisdictions with very low ‘effective’ taxation rates. Intense competition among developing countries to attract foreign direct investment (FDI) makes things worse.

Developing countries need tax revenue most, but they will lose more, as a share of GDP, than wealthy countries. But a global minimum corporate (income) tax rate (GMCTR) can become a “game changer” undermining tax havens.

Minimal minimum rate

TNCs exploit legal loopholes to avoid or minimize tax liabilities. Such practices are referred to as ‘base erosion and profit shifting’ (BEPS).

Tax havens collectively cost governments US$500–600bn yearly in lost revenue. Low-income countries (LICs) will lose some US$200bn, more than the foreign aid, of around US$150bn, they receive annually.

Corporate income tax represents 15% of total tax revenue in Africa and Latin America, compared to 9% in OECD countries. Developing countries’ greater reliance on this tax means they suffer disproportionately more from BEPS.

A GMCTR requires TNCs to pay tax on their worldwide income. This discourages hiding profits in tax havens. The Independent Commission for the Reform of International Corporate Taxation (ICRICT) recommended a 25% GMCTR.

This 25% rate was around the current GDP-weighted average statutory corporate tax rate for 180 countries. Slightly below the OECD countries’ average, it is much less than the developing countries’ average. So, a GMCTR below 25% implies major revenue losses for most developing countries.

To reverse President Trump’s 2017 tax cut, the Biden administration proposed, in April 2021, to tax foreign corporate income at 21%. In June, the G7 agreed to a 15% GMCTR, endorsed by G20 finance ministers in July. This poor G7 rate is now sold as a “ground-breaking” tax deal.

Unsurprisingly, the World Bank President also rejected 21% as too high. The Bank has long promoted ‘race-to-the-bottom’ host country tax competition. Embarrassingly, its Doing Business Report was ‘suspended’ indefinitely in 2021 after its politically motivated data manipulation was exposed.

The OECD also wants to distribute taxing rights and revenue by sales, and not where their goods and services are produced. Critics, including The Economist, have pointed out that large rich economies would gain most. Small and poor developing economies, particularly those hosting TNC production, will lose out.

The OECD proposals could reduce small developing economies’ (SDEs) tax bases by 3%, while four-fifths of the revenue would likely go to high income countries (HICs). Hence, developing countries prefer revenue distribution by contribution to production, e.g., employees, rather than sales.

Undemocratic inclusion

Developing countries have never had a meaningful say in international tax matters. G20 members should have asked multilateral organizations, such as the UN and the IMF, which the G7 dominated OECD has long blocked.

Instead, the G20 BEPS initiative asked the OECD to work out its rules. After decades of keeping developing countries out of tax governance, its compromise Inclusive Framework on BEPS (IF) promotes lop-sided international tax cooperation.

          Developing countries were only involved “after the agenda had been set, the action points were agreed on, the content of the initiatives had been decided and the final reports were delivered”.

Developing countries have been allowed to engage with OECD and G20 members, supposedly “on an equal footing”, to develop some BEPS standards. To become an IF member, a country or jurisdiction must first commit to the BEPS outcome.

Thus, the non-OECD, non-G20 countries must enforce a policy framework they had little role in designing. Unsurprisingly, with little real choice or voice, the 15% GMCTR was agreed to, in October 2021, by 136 of the 141 IF members.

FDI vs taxes

The proposed OECD tax reforms are supposed to be implemented from 2023 or 2024. The United Nations Conference on Trade and Development (UNCTAD) Investment Division recognizes it will have major implications for international investment and investment policies affecting developing countries.

UNCTAD’s World Investment Report 2022, on International tax reforms and sustainable investment, offers guidance for developing country policymakers to navigate the complex new rules and to adjust their investment and fiscal strategies.

Committed to promoting investments in the real economy, especially by FDI, UNCTAD recognizes most developing countries lack the technical capacity to address the complex tax proposal. Implementing BEPS reports and related documents via legislation will be difficult, especially for LICs.

Existing investment treaty commitments also constrain fiscal policy reform. “The tax revenue implications for developing countries of constraints posed by international investment agreements (IIA) are a major cause for concern”, the Report notes.

Although tax regimes influence investment decisions, tax incentives are far from being the most important factor. Other factors – such as political stability, legal and regulatory environments, skills and infrastructure quality – are more significant.

Nonetheless, tax incentives have been important for FDI promotion. Such incentives inter alia include tax holidays, accelerated depreciation and ‘loss carry-forward’ provisions – reducing tax liability by allowing past losses to offset current profits.

With the GMCTR, many tax incentives will be less attractive to much FDI. Tax incentives will be affected to varying degrees, depending on their features. UNCTAD estimates productive cross-border investments could decline by 2%.

Hence, policymakers will need to review their incentives for both existing and new investors. The GMCTR may prevent developing countries from offering fiscal inducements to promote desired investments, including locational, sectoral, industry or even employment-creating incentives.

Investors rule

With generally lower rates, ‘top-up taxes’ could significantly augment SDEs’ revenue. Top-up taxes would apply to profits in any jurisdiction where the effective tax rate falls below the minimum 15% rate. This ensures large TNCs pay a minimum income tax in every jurisdiction where they operate.

However, host countries may be prevented by IIAs – especially Investor State Dispute Settlement (ISDS) provisions – from imposing ‘top-up taxes’. If so, they will be imposed by TNCs’ mainly rich ‘home countries’.

Thus, FDI-hosting countries would lose tax revenue without benefiting by attracting more FDI. Existing IIAs – of the type found in most developing countries – are likely to be problematic.

Hence, the GMCTR’s implications are very important for FDI promotion policies. Reduced competition from low-tax locations could benefit developing economies, but other implications may be more relevant.

As FDI competition relies less on tax incentives, developing countries will need to focus on other determinants, such as supplies of skilled labour, reliable energy and good infrastructure. However, many cannot afford the significant upfront financial commitments required to do so.

Many important details of reforms required still need to be clarified. Thus, developing countries must strengthen their cooperation and technical capabilities to more effectively negotiate GMCTR reform details. This is crucial to ‘cut losses’, to minimize the regressive consequences of this supposedly progressive tax reform.

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SWIFT dollar decline

Anis Chowdhury and Jomo Kwame Sundaram

SYDNEY and KUALA LUMPUR. US-led sanctions are inadvertently undermining the dollar’s post-Second World War dominance. The growing number of countries threatened by US and allied actions is forcing victims and potential targets to respond pro-actively.

SWIFT strengthened dollar

The instant messaging system of the Society for Worldwide Interbank Financial Telecommunication (SWIFT) informs users, both payers and payees, of payments made. Thus, it enables the smooth and rapid transfer of funds across borders.

Created in 1973, and launched in 1977, SWIFT is headquartered in Belgium. It links 11,000 banks and financial institutions (BFIs) in more than 200 countries. The system sends over 40 million messages daily, as trillions of US dollars (USD) change hands worldwide.

Co-owned by more than 2,000 BFIs, it is run by the National Bank of Belgium, together with the G-10 central banks of Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the UK and the US. Joint ownership was supposed to avoid involvement in geopolitical disputes.

Many parties use USD accounts to settle dollar-denominated transactions. Otherwise, banks of importing and exporting countries would need accounts in each other’s currencies in their respective countries in order to settle payments.

SWIFT abuse

US and allied – including European Union (EU) – sanctions against Russia and Belarus followed their illegal invasion of Ukraine. Created during the US-Soviet Cold War, SWIFT remains firmly under Western control. It is now used to block payments for Russian energy and agriculture exports.

But besides stopping income flows, it inadvertently erodes USD dominance. As sanctions are increasingly imposed, such actions intimidate others as well. While intimidation may work, it also prompts other actions.

This includes preparing for contingencies, e.g., by joining other payments arrangements. Such alternatives may ensure not only smoother, but also more secure cross-border financial transfers.

As part of US-led sanctions against the Islamic Republic, the EU stopped SWIFT services to Iranian banks from 2012. This blocked foreign funds transfers to Iran until a compromise was struck in 2016.

US financial hegemony

Based in Brussels, with a data centre in the US, SWIFT is a ‘financial panopticon’ for surveillance of cross-border financial flows. About 95% of world USD payments are settled through the private New York-based Clearing House Interbank Payments System (CHIPS), involving 43 financial institutions.

About 40% of worldwide cross-border payments are in USD. CHIPS settles US$1.8 trillion in claims daily. As all CHIPS members maintain US offices, they are subject to US law regardless of headquarters location or ownership.

Hence, over nearly two decades, CHIPS members like BNP Paribas, Standard Chartered and others have paid nearly US$13 billion in fines for Iran-related sanctions violations under US law!

Exorbitant privilege

The USD remains the currency of choice for international trade and foreign reserve holdings. Hence, the US has enjoyed an “exorbitant privilege” since World War Two after the 1944 Bretton Woods conference created the gold-based ‘dollar standard’ – set at US$35 for an ounce of gold.

With the USD remaining the international currency of choice, the US Treasury could pay low interest rates for bonds that other countries hold as reserves. It thus borrows cheaply to finance deficits and debt. Hence, it is able to spend more, e.g., on its military, while collecting less taxes.

Due to USD popularity, the US also profits from seigniorage, namely, the difference between the cost of printing dollar notes and their face value, i.e., the price one pays to obtain them.

In August 1971, President Nixon unilaterally ‘ended’ US obligations under the Bretton Woods international monetary system, e.g., to redeem gold for USD, as agreed. Soon, the fixed USD exchange rates of the old order – determining other currencies’ relative values – became flexible in the new ‘non-system’.

In the ensuing uncertainty, the US ‘persuaded’ Saudi King Feisal to ensure all oil and gas transactions are settled in USD. Thus, OPEC’s 1974 ‘petrodollar’ deal strengthened the USD following the uncertainties after the Nixon shock.

Nevertheless, countries began diversifying their reserve portfolios, especially after the euro’s launch in 1999. Thus, the USD share of foreign currency reserves worldwide declined from 71% in 1999 to 59% in 2021.

With US rhetoric more belligerent, dollar apprehension has been spreading. On 20 April 2022, Israel – a staunch US ally – decided to diversify its reserves, replacing part of its USD share with other major trading partners’ currencies, including China’s renminbi.

Sanction reaction

The EU decision to bar Iranian banks from SWIFT prompted China to develop its Cross-border Interbank Payment System (CIPS). Operational since 2015, CIPS is administered by China’s central bank. By 2021, CIPS had 80 financial institutions as members, including 23 Russian banks.

At the end of 2021, Russia held nearly a third of world renminbi reserves. Some view the recent Russian sanctions as a turning point, as those not entrenched in the US camp now have more reason to consider using other currencies instead.

After all, before seizing about US$300 billion in Russian assets, the US had confiscated about US$9.5 billion in Afghan reserves and US$342 million of Venezuelan assets.

Threatened with exclusion from SWIFT following the 2014 Crimea crisis, Russia developed its own SPFS (Financial Message Transfer System) messaging system. Launched in 2017, SPFS uses technology similar to SWIFT’s and CIPS’s.

Both CIPS and SPFS are still developing, largely serving domestic BFIs. By April 2022, most Russian banks and 52 foreign institutions from 12 countries had access to SPFS. Ongoing developments may accelerate their progress or merger.

The National Payments Corporation of India (NPCI) has its own domestic payments systems, RuPay. It clears millions of daily transactions among domestic BFIs, and can be used for cross-border transactions.

Sanctions cut both ways

Unsurprisingly, those not allied to the US want to change the system. Following the 2008-9 global financial crisis, China’s central bank head called for “an international reserve currency that is disconnected from individual nations”.

Meanwhile, China’s USD assets have declined from 79% in 2005 to 58% in 2014, presumably falling further since then. More recently, China’s central bank has been progressively expanding use of its digital yuan or renminbi, e-CNY.

With over 260 million users, its app is now ‘technically ready’ for cross-border use as no Western bank is needed to move funds across borders. Such payments for imports from China using e-CNY will bypass SWIFT, and CHIPS will not need to clear them.

Russia has long complained of US abuse of dollar hegemony. Moscow has tried to ‘de-dollarize’ by avoiding USD use in trade with other BRICS – i.e., Brazil, India, China and South Africa – and in its National Wealth Fund holdings.

Last year, Vladimir Putin warned the US is biting the hand feeding it, by undermining confidence in the US-centric system. He warned, “the US makes a huge mistake in using dollar as the sanction instrument”.

The scope of US financial payments surveillance and USD payments will decline, although not immediately. Thus, Western sanctions have unwittingly accelerated erosion of US financial hegemony.

Besides worsening stagflationary trends, such actions have prompted its targets – current and prospective – to take pre-emptive, defensive measures, with yet unknown consequences.

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