International Environmental Taxation in the Absence of Sovereignty
  • 1 0000000404811396 Monetary Fund

Traditional public finance theory may be applied to the internalization of international environmental externalities. The policy constraint imposed by the absence of sovereign international government may be partially overcome through international environmental agreements. Instruments such as cost sharing, found in existing agreements, are generally unsophisticated. Two proposals entailing improved instruments are considered: (a) an international carbon tax, and (b) a global commons trust fund financed by earmarked excise taxes or charges. Political realities appear to preclude the early adoption of sophisticated international environmental taxes, but modest improvements in the design and implementation of existing instruments may be feasible.


Traditional public finance theory may be applied to the internalization of international environmental externalities. The policy constraint imposed by the absence of sovereign international government may be partially overcome through international environmental agreements. Instruments such as cost sharing, found in existing agreements, are generally unsophisticated. Two proposals entailing improved instruments are considered: (a) an international carbon tax, and (b) a global commons trust fund financed by earmarked excise taxes or charges. Political realities appear to preclude the early adoption of sophisticated international environmental taxes, but modest improvements in the design and implementation of existing instruments may be feasible.

I. Introduction

International environmental taxation, is an elusive topic due to the absence of sovereign international government with the authority to impose taxes. Nonetheless, considerable potential exists for the application of traditional tax and other fiscal instruments to important transnational and global environmental problems. The economic nature of international environmental externalities and their close relationship to the global commons is examined in Section II, along with a discussion of conflicting industrial nation and developing nation property rights and interests that often accompany such issues. Efficient economic policy for internalizing environmental externalities is found, to be much, more difficult than within nations since the geographical scope of the externalities exceeds the sovereign authority to internalize them. In lieu of a solution to this noncorrespondence problem via a reassignment of sovereignty that would create a corresponding sovereign supranational government, international environmental agreements or treaties are seen as the best available means for overcoming the noncorrespondence impasse.

Section III extends the theoretical concepts and policy instruments of traditional public finance to the world of delegated authority and treaties, describing alternative international environmental tax and fiscal instruments that may be used in relationship to international environmental externality and global commons problems. This is followed by a description of environmental tax and fiscal instruments found under existing international environmental agreements. Section IV examines a possible agenda for more efficient and equitable international environmental regimes, inclusive of earmarked excise taxes, trust funds, and financial transfers: (1) in relationship to current proposals for an international carbon tax to abate global warming, and (2) in a comprehensive manner directed toward the entire global commons inclusive of the atmosphere, oceans, space resources, and the preservation of biological diversity.

It is concluded that contemporary international political attitudes and institutional constraints are likely to prevent the early introduction of sophisticated international environmental tax and fiscal instruments. However, it is suggested that an evolutionary or gradual approach may be feasible, building upon such existing international institutions as the. Global Environment Facility (GEF). Meanwhile, long-run parameter changes may eventually allow the widespread use of sophisticated forms of international environmental taxation.

II. International Environmental Externalities in a Nonsovereign World

1. International environmental externalities, global commons, and the noncorrespondence problem

The primary characteristic of externalities is that of collective or nonrival consumption 2/ causing certain economic benefits or costs to escape the price system, often resulting in public sector allocational intervention within nations and, in some instances, resulting, in the spillover of important benefits and costs across the political boundaries of the subnational governments of a nation. The latter “intergovernmental” externalities are the more relevant to the subject at hand, the primary difference being that externalities transcend the political boundaries of nation states in the present context. Importantly, within a nation, sovereign political authority 3/ exists for the imposition of Pigovian 4/ excise taxes and other fiscal instruments to help internalize environmental externalities into the price system. There is a correspondence between the consumption area of such externalities and the political authority to apply corrective policies. 5/

However, a similar correspondence is absent in the case of international environmental externalities whose geographical range of collective consumption is greater than the sovereign political jurisdiction of any one nation. The ensuing noncorrespondence or asymmetry that characterizes the supranational consumption of environmental externalities creates a major obstacle to the imposition of Pigovian taxes as well as the traditional policy instruments of fiscal federalism as applied within nations. There is no sovereign central polity to implement policy. In addition, the fact that certain important international environmental externalities are associated with the utilization of global common property resources—the so-called “global commons”—provides an additional policymaking complexity.

Technically, an international environmental externality may be defined as an uncompensated environmental side effect, either positive (beneficial) or negative (harmful), incurred by one nation as the result of actions taken by another nation. As is true with all externalities, there is a tendency to undersupply positive international environmental externalities and to oversupply those which are negative. Such misallocation occurs because the relevant benefits and costs either are not internalized within the price system, or are not internalized within the political control of one nation—as in the supranational case.

Furthermore, international environmental externalities may be classified as “unidirectional” if they flow only from one nation to another nation or nations, but as “reciprocal” if they flow mutually between two or more nations. Hence, a nation which preserves its rain forests exerts a positive unidirectional externality to the benefit of all other nations. Yet, all nations harm each other as they exert negative reciprocal externalities in the form of carbon emissions. In both cases, the outcome affects “all nations” since the atmosphere is a global commons to which all nations have free access, but to which no nation possesses the incentive providing property rights that would prevent its overuse.

Accordingly, even though a global commons resource such as the atmosphere has a positive economic use value, each nation’s access price to it is zero. Given the strong demand for its use during the industrial age, there is a tendency toward its overutilization. However, since all nations reciprocally both influence the supply of a clean atmosphere as well as demand its use, there exists a mutual basis for bargaining in order to reach an efficient solution. However, such bargaining will have to overcome the international public choice obstacle of “noncorrespondence” caused by the absence of a sovereign international polity.

Figure 1 is used to demonstrate the demand and supply characteristics of an international environmental public good. 6/ The global atmosphere in which carbon pollutants are “internalized” to varying degrees is used as an example of the public good. Assuming a two-nation world, 7/ let curves MBa arid MBb represent the marginal benefits to nations A and B, respectively, from the consumption of an atmosphere unpolluted by excessive carbon emissions. 8/ Curve MSBw depicts the marginal social benefits to both nations combined (the world) from the consumption of the public good which benefits include “net global gains” over and above the nation specific benefits received by each nation. Curve C represents the costs of supplying the public good, with curves MCa and MCb showing the marginal costs of attaining an unpolluted atmosphere for each nation, and curve MSCw the marginal social costs of a clean atmosphere for both nations combined (the world).

Figure 1
Figure 1

Demand and Supply Characteristics of an International Environmental Public Good

Citation: IMF Working Papers 1992, 104; 10.5089/9781451947847.001.A001

The optimal quantity of the public good (the abatement of carbon pollution externalities) is OXa for nation A, OXb for nation B, and OXw, for both nations combined (the world) since at each tangency point (a, b, w) the marginal rates of substitution in production and consumption are equal. Yet, due to the nonrival nature of atmospheric consumption as well as the atmosphere’s common property characteristics, each nation will be motivated to act as a free rider in contributing toward the supply of the public good and will understate its demand. For example, if nation B were to supply its optimal quantity OXb, nation A would only have to provide the smaller quantity, OXa minus OXb, to attain its optimal quantity OXa. Conversely, if nation A were to supply its optimal quantity OXa, nation B would not have to supply, any of the public good since nation A would be supplying more than B’s optimal quantity OXb. Hence, the interdependence between the two nations causes a and b to not be equilibria points but, instead, the parameters of a “bargaining game,” the outcome of which is indeterminate. This bargaining game will be complicated by the noncorrespondence problem, that is, the fact that the consumption area of the externalities does not correspond to (is greater than) the sovereign political authority to internalize them.

2. Industrial versus developing nation property rights and interests

Meanwhile, the disaggregation of the world’s 179 nations into industrial nation and developing nation categories 9/ further complicates international and global environmental, policy. Consider, for example, that the industrial nations are the primary emitters of carbon pollution even though both the industrial and developing nations consume the same global atmosphere to which-this pollution enters. Or, consider that certain developing nations own most rain forests which absorb carbon dioxide from the atmosphere, the benefits from which are collectively consumed by both industrial and developing nations alike. Moreover, consider that the demand for a clean global atmosphere tends to be income elastic, thus making it a higher priority consumption good for industrial nations than for developing nations.

Figure 2 helps to demonstrate this interface between developing and industrial nations as well as some policy dimensions of the question. 10/ It depicts the demand and supply for an environmental public good, such as rain forests, owned by a developing nation. Let curve MBd represent the demand and related marginal benefits that would accrue to developing nation A from various levels of conservation of its rain forests. Curve MBw represents the world demand for and marginal benefits from such conservation. The space between curves MBw and MBd shows the international environmental externalities that flow from nation A’s conservation efforts. Meanwhile, curve MCd represents the marginal costs to nation A for various levels of rain forest conservation. The optimal level of conservation for nation A is quantity OX, as determined by the intersection of MBd and MCd at point a, which is less than the optimal world quantity OY, as determined by the intersection of. MBw and MCd at point b. Hence, there is an opportunity for “global welfare gains” through the internalization of those international, environmental externalities represented between rain forest conservation quantities OX and OY.

Figure 2
Figure 2

The Demand and Supply for a Developing Nation Environmental Public Good

Citation: IMF Working Papers 1992, 104; 10.5089/9781451947847.001.A001

The minimum financial transfer or payment necessary to induce nation A to conserve its rain forests at the globally optimal level OY would be the area abc but, since the overall global benefits between OX and OY conservation levels are equal to the area abc + abd, the world could also pay part or all of abd in order to help attain this outcome. In effect, the area abd is a “bargaining zone” between the world and the developing nation with the final outcome being indeterminate. The large number of nations “bargaining for the world” suggests that considerable opportunities exist for free-rider behavior and subsequent high transactions costs. On the other hand, the developing nation may be burdened by a large debt and may lack political clout in the international public choice arena. Such considerations will bear upon the final bargaining outcome. Moreover, the final outcome may also become caught up in a much larger, multiple issue, international political game in which various “political side payments” between the relevant parties reduce the reliance upon specific financial transfers as a policy instrument.

Thus, it may be observed that transnational and global environmental policies must deal with complex and difficult decision-making variables that would provide a formidable policymaking challenge even if there were correspondence, as is true within a nation, between the geographical zones of the environmental externalities and sovereign political authority. Is there any way around this “noncorrespondence impasse” so that international environmental externalities can be dealt with in an efficient and equitable manner?

3. Overcoming noncorrespondence: internalizing International environmental externalities

A direct response to this dilemma would involve a “reassignment” of sovereignty so as achieve a correspondence between the consumption zone of the externalities and sovereign political authority. This would result in the creation of a sovereign supranational government possessing the direct authority to impose environmental taxes and other corrective policies—a seemingly impossible political prospect in a 179 nation world in which national sovereignty is a jealously guarded possession. 11/ Thus, rather than a reassignment of sovereignty upward to a central supranational polity, a less obtrusive approach seems in order. Such may be found in the negotiation of international environmental agreements (IEAs) 12/ which “delegate” national sovereignty to a nonsovereign supranational body or treaty mechanism for the purpose of internalizing the relevant externalities.

An economic argument can be made, and demonstrated via game theory, for nations to become party to such an agreement. The supplying of the international or global environmental public good that would internalize such externalities involves a game of conflicting motives. There is an internal contradiction between the maximization of the collective gains of all nations and the maximization of individual nation gains, leading to a classic example of the so-called prisoners’ dilemma. Though each nation would individually gain by being a free rider and not cooperating, all nations together would be better off if they do cooperate to internalize the relevant environmental externalities. While the noncooperative outcome is inefficient, the efficient outcome which yields a “positive sum” from cooperation is difficult to attain. In addition to the primary role of IEAs in sponsoring such cooperation, existing major nonenvironmental international organizations may play a useful secondary role in promoting inter-nation environmental cooperation. 13/

Figure 3 demonstrates the gains to be made from cooperation in the internalization of international environmental externalities—an international environmental public good. 14/ It is assumed that all nations of the world participate in the agreement and that they are identical. Let curve MBn depict the marginal benefits to one nation, and MBw the marginal benefits to the world defined as the sum of every nation’s net benefits from carbon abatement. Each nation’s marginal cost is represented by curve MCn. In the absence of multinational cooperation, each nation will maximize its own net benefits at point a, the equality of MBn and MCn, resulting in abatement level OX. However, if all nations fully cooperate in order to maximize global net benefits at point b (MBw = MCn), the larger abatement level OY would be attained. There is greater global welfare and each nation is better off as well. 15/

Figure 3
Figure 3

Gains from Cooperation in the Internalization of International Environmental Externalities

Citation: IMF Working Papers 1992, 104; 10.5089/9781451947847.001.A001

However, unlike Figure 3, it is quite possible that there would be “some losers” in a comprehensive global environmental agreement encompassing as many as 179 nations even though the overall global gains are positive. This would open the way for the judicious use of financial transfers in the form of side payments (bribes) from “winners” to “losers,” to be financed from the net global gains, in order to help attain the desired universality of the agreement. In addition, it may be argued that the creation of a supranational body, or alternative mechanism for implementing the agreement, may be economically justified if the “transactions benefits,” defined as those gains which would be unavailable if each nation acted independently, exceed the “transactions cost” associated with the supranational body. 16/ The latter would entail various decision-making, interdependency (loss of sovereignty), and monitoring/enforcement costs.

Yet, the specter of free-rider behavior is likely to haunt efforts to successfully negotiate and implement IEAs such as would accomplish the above gains. The motivation for such behavior has two dimensions: first, the motivation for a nation not to join an international agreement and, second, the motivation not to fully comply with an agreement which a nation has joined. Once a treaty is negotiated, the ability to mitigate free-rider behavior will be determined in no small way by the “coupling” of the IEA. 17/ A tightly coupled, cohesive, agreement, accompanied by effective monitoring and enforcement powers, will tend to minimize free-rider behavior. Moreover, as discussed above., side payments may be necessary to induce reluctant nations to participate in the agreement. However, it is worth noting that a “completely global” agreement inclusive of all nations may not be required for the attainment of effective policy if a subset of “key nations” joins in an agreement. Meanwhile, having observed the complex international public choice issues that are involved in the internalization of international environmental externalities, the paper now turns to the potential use of international environmental tax and fiscal instruments for the internalization of such externalities.

III. International Environmental Tax and Fiscal Instruments

1. The adaptation of traditional public finance theory and policy instruments to international environmental taxation

Generally speaking, the theories and policy instruments of traditional, domestic-oriented, public finance are adaptable to international taxation. For example, the standard “efficiency” and “equity” criteria used to evaluate tax performance within a nation are also relevant for taxes imposed under international agreements. Thus, either a domestic or international tax (except for a lump-sum tax) will exert deadweight losses when it impacts on the private sector. 18/ Moreover, either a domestic or international tax can be progressive, proportional, or regressive in relationship to the ability-to-pay norm for tax equity. Or, the benefit (benefits received) principle may help to justify certain international taxes just as it does certain domestic taxes. The same tax bases—income, wealth, and sales or transactions—are available for use in international taxation that are available for domestic taxation. Also, taxes may be used for general fund financing or for special, trust fund, financing in either setting.

In addition, fiscal federalism, an important component of domestic public finance that is concerned with economic and fiscal relationships between subnational governments, has much to offer for the design of inter-nation environmental tax and fiscal instruments. In particular, the integrated use of earmarked excise taxes, trust funds, and financial transfers, which have proven to be effective intergovernmental fiscal instruments in a national setting, may be adapted to the international scene. Within nations, these instruments are used to pursue both allocational objectives such as the internalization of environmental and other externalities, and distributional goals such as alleviating horizontal fiscal imbalance between subnational governments. Depending upon the purpose at hand, such grants or transfers may be either of a conditional or unconditional nature—an option also available in the international setting.

Meanwhile, it may be useful to view financial transfers between nations as “reverse transfers” in comparison to intergovernmental revenue grants within a nation. While funds flow downward from a national government to lower-level governments within a nation, the flow is reversed in the case of inter-nation transfers so as to flow upward from national governments into supranational political space. In either instance, however, some mechanism is required to coordinate the taxes, trust funds, and revenue flows into a coherent policy. In the supranational setting, such coordination requires an international environmental agreement.

2. Alternative instruments of international environmental taxation

a. Environmental taxes imposed by a supranational body

An international environmental tax (IET) may be imposed either by (a) a sovereign or nonsovereign international body, or (b) national governments acting under an international agreement. An IET imposed by a “sovereign” supranational body would possess the advantage of a direct correspondence between the political authority to levy the tax and the geographical zone of the externalities. However, as observed above, the extreme reluctance of nations to reassign sovereign authority to a supranational entity makes the discussion of such a tax academic, except for benchmark reasons. Thus, politically speaking, the only realistic possibility for the imposition of an IET by a supranational body is one levied by a “nonsovereign” polity utilizing delegated sovereignty received under an international environmental agreement.

Once such an approach to international environmental taxation is agreed upon, a number of other issues arise concerning its structure. While any major tax base could be used, a sales tax base—especially of the narrow-based or excise variety—would generally be less obtrusive on the domain of national governments than taxes more directly linked to fundamental economic power in the form of income and wealth. Also, an excise tax possesses the advantage of directly entering the price system, thus changing relative prices and making it an ideal economic incentive (market-based) instrument for the abatement of negative environmental externalities.

In addition, the question arises whether a nonsovereign supranational taxing body should possess vertically integrated taxation authority under its delegated powers, inclusive of its own collection and enforcement system, or whether it should utilize existing national tax administration systems. The latter option would be more palatable to nations since it would represent a lesser delegation of national sovereignty to the supranational body. This approach would still permit the central taxing polity to exert varying degrees of administrative influence over the harmonization of the multinational tax collecting mechanism. An important additional question arises pertaining to the use of the tax revenues. Would any or all of the revenues be spent by the supranational taxing body or, instead, would some or all be returned to the nation of tax base origin?

b. Internationally harmonized national environmental taxes

An alternative form of IET would rely upon the internationally coordinated imposition of taxes by the nations signatory to an international agreement. The agreement would mandate the use of a certain type of tax and, in addition, certain tax base and tax rate features would be harmonized across the domestic taxes imposed by the individual nations. Harmonization of the tax would be necessary in order to precisely internalize the environmental externalities as well as to discourage free-rider behavior and treaty noncompliance. The tax would involve a lower order delegation of sovereignty than an IET imposed by a nonsovereign supranational body and, thus, would be more acceptable politically to individual nations.

Although home-nation retention of the revenues collected under such a tax would seem logical, to do so may conflict with the international objectives at hand. Thus, it may be necessary for the treaty to specify that part or all of the revenues collected from nationally imposed taxes be earmarked for international environmental uses, as implemented through a supranational body created under the treaty. Moreover, even if the taxing nation is allowed to keep some or all of the IET revenues, the treaty may need to specify that the funds be used for designated environmental purposes.

Any major type of tax base could be utilized, just as with an IET imposed by a supranational body, with the most likely candidate again being an excise tax due to its economic incentive features as well as its relative detachment from the income and wealth tax bases of a nation. In addition, an excise tax is conducive to earmarking for trust funds and financial transfers.

c. Cost sharing

The understandable reluctance of nations to delegate the jealously guarded “power to tax” to a supranational body, or even agreeing to internationally harmonized domestic environmental taxes, has resulted in the dominant use of cost sharing in existing international environmental agreements as well as in the financing of international organizations such as the United Nations. Cost sharing, also known as burden sharing, lacks the automaticity of a conventional tax. There is no direct use of a conventional tax base, that is, income, wealth, or market transactions. Instead, it is a “voluntary” contribution made by nations signatory to an international agreement. Even though revenue/tax assignments may be assessed as obligations to each nation via a formula authorized under the agreement, as is true in the more refined cost-sharing cases, the fact remains that a nation has “voluntarily” participated in the agreement. Moreover, the enforcement of cost-share payments is normally lax and, as a result, nations frequently delay, or avoid, their contributions.

Meanwhile, the question may be raised whether cost sharing actually constitutes a “tax.” If one defines a tax as the direct payment of revenues by a private sector consumer or business to government, the answer would be “no.” 19/ However, cost sharing may be viewed as a tax in another context, namely, a tax imposed directly by governments upon governments. The agreement calls for cost shares to be assessed to each nation which, in effect, become taxes paid by those nations signatory to the agreement. The nation pays an international tax—its cost share—but then proceeds to impose national taxes upon its private sector to finance the cost share.20/

At best, however, cost sharing is an unsophisticated method of taxation, especially when an assessment formula is not prescribed and/or enforced. Revenue stability under the cost-sharing approach leaves much to be desired. Often, the international programs financed via this instrument are replenished on a sporadic basis, subject to the political whims and macroeconomic conditions of signatory nations. Also, it possesses the characteristics of a general rather than a specific tax and, as such, cannot be directly linked to those economic activities which generate environmental externalities. Thus, unlike an IET of the excise variety imposed either by a supranational body or harmonized across nations, cost sharing cannot be used to change relative prices so as to internalize environmental externalities into market prices. Nonetheless, cost-sharing, revenues can be earmarked for particular international environmental expenditures or trust funds. Moreover, the ability-to-pay norm of equity in the distribution of tax burdens can be applied to cost sharing. For example, the assessment formula can assign burden shares in a “progressive” manner reflecting national per capita income or GDP differentials.

Overall, the present use of international environmental tax and fiscal instruments in IEAs is limited and unsophisticated. There exist upward of 150 such agreements, many of which have no specific financial provisions. The discussion below describes several of the most important and interesting contemporary examples of international environmental taxation.

3. Tax and fiscal provisions in existing international environmental agreements

a. Global Environment Facility (GEF)

The GEF was established in 1990 after being endorsed at a Development Committee meeting of the World Bank and International Monetary Fund. The idea had been proposed during the previous year by France and supported by Germany. Although it constitutes a form of international environmental agreement, GEF does not directly emerge from a convention or treaty. The four policy areas of GEF encompass part, but not all, of the global commons. These are: global warming, ozone depletion, international waters or oceans, and the preservation of biological diversity (biodiversity). It utilizes the trust fund concept for providing financial assistance to developing nations for specific projects within these four environmental categories.

GEF is jointly administered by the World Bank, UNDP, and UNEP. It is presently operating on an interim three-year basis for the period 1991-93. The initial funding for this period amounts to US$1.36 billion: US$860 million in the Global Environment Trust Fund (GET), known as the “core fund”; US$300 million in co-financing arrangements, and US$200 million administered in cooperation with the Multilateral Fund for ozone policy under the Montreal Protocol. 21/ As of June 1992, 28 nations (11 of them developing nations) had pledged contributions to GET. 22/ Contributions are currently made on a strictly voluntary basis without the use of a formula for assigning burden shares.

b. Multilateral Fund [Montreal Protocol]

The Multilateral Fund (MF) was adopted in November 1990 as part of the London amendment to the Montreal Protocol to help abate ozone pollution. 23/ Established on an interim three-year basis for the period 1991-93, it provides financial assistance, in addition to the technological assistance required under the Protocol, to developing nations to assist them in attaining economic development paths which are not reliant upon chlorofluorocarbons (CFCs) and other chemicals known to deplete the stratospheric ozone layer. These transfers have helped to encourage developing nations to become party to the Protocol. 24/

MF is financed through voluntary contributions made by industrial nations signatory to the Protocol. The United Nations standard assessment scale is used to determine these cost shares. MF is administered by an Executive Committee consisting of seven industrial nations and seven developing nations, using a “double majority voting rule” requiring a two thirds majority approval by both the industrial and developing nation categories in order for a motion to pass if a consensus has not been reached. 25/ Initial funding is set at US$160 million over the three-year period, with an increase to US$240 million if both China and India become party to the Protocol (US$40 million increment for each nation). To this point, China has acceded while India has not, thus placing the current fund total at US$200 million.

c. World Heritage Fund

The World Heritage Fund (WHF), officially known as the “Fund for the Protection of the World Cultural and Natural Heritage,” was established by the World Heritage Convention in 1972. 26/ The international environmental aspects of WHF derive from its goal of preserving the natural environment in terms of the “unidirectional” externalities which emanate from the unique natural resource endowment of a particular nation to the benefit of other nations. It consists of a trust fund financed largely by contributions from convention signatories. The trust fund concept, as applied in this case, implies a permanent funding arrangement intended to provide revenue stability via a replenishment every second year. 27/

A cost-sharing formula is used to assess burden shares. This assessment is set equally for all nations as a flat percentage, not to exceed 1 percent, of each nation’s contribution to the regular budget of UNESCO. Hence, the cost-sharing formula used by UNESCO generally sets the pattern of WHF contributions. Also, this funding arrangement means that low-income nations contribute something to WHF, but that high income nations provide most of its financing. 28/ In addition, both joint nation and nation specific benefits are recognized in WHF since the nation receiving financial assistance is expected, if possible, to pay a substantial share of the costs of a project. WHF revenues are used for a variety of activities including research studies, the supplying of technical experts, low-interest or interest-free loans, and financial transfers.

d. General Trust Fund [Long-Range Transboundary Air Pollution]

A 1984 protocol to the Convention on Long-Range Transboundary Air Pollution in Europe creates a General Trust Fund (GTF) for the long-term financing of the cooperative program for the monitoring and evaluation of such pollution. 29/ Unlike the GEF and the MF which are concerned primarily with environmental problems related to the global commons, the GTF is concerned with regional transnational air pollution in Europe. Cost sharing is used to provide revenues to the fund, with burden shares assigned on the basis of the United Nations assessment schedule. The contributions, which are mandatory for signatories to the convention, are made on an annual basis.

e. International Oil Pollution Compensation Fund

The International Oil Pollution Compensation Fund (IOPCF) was established under a 1971 treaty to provide compensation for the victims of oil spills in international waters. 30/ Contributions to the fund are paid directly by companies or persons on the basis of a specified sum for each ton of oil 31/ imported into a signatory nation during a calendar year. These payments are made in two stages: first, an initial contribution when a nation becomes party to the treaty and, second, periodic replenishment contributions. IOPCF thus is financed by a de facto excise tax on oil imports, with revenues “earmarked” for trust fund use in accordance with compensation rules for oil pollution damage. Such an arrangement contains features of both Pigovian taxation and fiscal federalism policy as applied “within” nations.

f. Taxation of seabed and other minerals

Interesting examples of international environmental taxation may also be found in several treaties associated with the exploitation of minerals in the global commons. One of these pertains to the taxation of seabed mining by the International Seabed Authority (ISA), a nonsovereign supranational body created under the law of the sea treaty. 32/ To date, however, no mining has occurred. The treaty provides for both conventional monetary taxation as well as taxation in kind. 33/ These taxes would be imposed upon private and state mining firms operating as one component of the “parallel mining system” established by the treaty, the other component being the mining arm of ISA known as “The Enterprise.”

One monetary tax, in effect, is a user fee paid by private and state enterprises to cover the administrative costs of processing applications for the authorization to mine. The other, more fundamental, monetary tax comes in two variations, either one of which may be selected at the discretion of the mining company: (1) the payment of a production tax assessed as a fixed percentage of the market value of mining output, or (2) the combination of such a production excise tax and a proportion of the net proceeds (net income) derived from the mining output.

One in-kind tax is the mandatory provision of a prospected nodule site by each private/state mining applicant to the ISA for possible use by The Enterprise. Additional in-kind taxes come in the form of mandatory prospecting services to be provided to The Enterprise in conjunction with each mining application and a controversial, quasi-mandatory transfer of mining technology from private/state mining firms to The Enterprise.

Another international mining convention containing taxation provisions is the Svalbard Islands Treaty, a treaty relevant initially to the mining of coal, but later oil, in this archipelago in the Arctic Ocean off Norway. 34/ The six-nation treaty grants sovereignty over the islands to Norway, but then tempers this sovereignty by stipulating that taxes and duties collected in Svalbard must be used only in Svalbard and, in addition, that such taxes must only be as high as necessary to cover the costs of administering the islands. 35/ In addition, the Convention on the Regulation of Antarctic Mineral Resource Activities adopted in 1988 as part of the Antarctic Treaty System but unlikely to be ratified due to subsequent events, 36/ contains explicit provisions calling for fees and levies related to possible minerals development in Antarctica. 37/

Thus, it has been observed that certain environmental tax, trust fund, and financial transfer provisions are used in existing IEAs. These are generally of an unsophisticated nature, with the most prevalent form of international environmental taxation being the loose-knit, essentially voluntary, cost-sharing method of finance. The final section of the paper will examine certain proposals for more sophisticated international environmental taxation.

IV. Proposed International Environmental Tax and Fiscal Regimes

1. An international carbon tax for the abatement of global warming

a. The nature of an international carbon tax

A “possible” venue for the introduction of an international carbon tax (ICT) would be the climate convention recently adopted at the UNCED conference in Rio de Janeiro. 38/ An ICT is an economic incentive instrument designed to increase the prices of carbon emitting fossil fuels 39/ (coal, oil, natural gas), so as to encourage their more efficient use, while encouraging the substitution of nonfossil fuels (geothermal, nuclear, 40/ solar, water, wind power) as energy sources. 41/ It would enter the prices of fossil fuels in an excise tax format. An ICT imposed on the consumption of fossil fuels would be compatible with the destination principle of GATT 42/ and would provide the desired increase in world fossil fuel prices. Marginal tax rates would vary in accordance with the carbon content of each fossil fuel. 43/ These tax rates should be uniform across nations 44/ since the global warming problem is associated with the entire global atmosphere. Tax rates would be set in relationship to the carbon abatement targets reached in an international agreement and could be adjusted as the level of scientific information increases.

Although an international carbon tax possessing these characteristics would internalize carbon emission externalities in an efficient manner, significant distributional effects would accompany the adoption of such a tax. There will inevitably be winners and losers in the international carbon tax game. However, since successful international cooperation is a positive-sum game, 45/ there will be net welfare gains from which side payments could be made to losers to induce their cooperation. 46/ Moreover, there are a number of other dimensions to the distributional issue. For example, carbon tax burdens, both total and per capita, will vary across nations; the macroeconomic effects of the tax on GDP will vary across nations; the industrial nations are responsible for a large percentage of carbon emissions, 47/ and the developing nations own most rain forests. Meanwhile, the manner in which ICT revenues are distributed will bear importantly upon the success of any policy regime that reconciles the efficiency and equity dimensions of the tax.

b. Alternative international carbon tax regimes

At what level of government—supranational or national—should an international carbon tax be imposed? The only politically viable basis for a tax imposed at the supranational level, as observed above, would be through the delegation of sovereignty to a nonsovereign supranational body rather than via the creation of a sovereign supranational body. Meanwhile, since nonharmonized national carbon taxes would invite a “free-riders’ nightmare,” this type of ICT regime is rejected. However, an ICT imposed by national governments, using a tax base and rate structure that is “harmonized” across nations through a tightly coupled treaty, could more effectively address the free-rider problem. Thus, we are left with two choices: (1) an ICT imposed by a nonsovereign supranational body, or (2) an ICT imposed by national governments in an internationally harmonized manner.

An adjunct to the question of whether the tax should be imposed at the supranational or national level is the matter of who would administer and collect the tax. A tax imposed by a nonsovereign supranational body would not necessarily require that body to have its own tax administration system. Instead, existing national government systems could play a major role in tax collection and enforcement, as coordinated through the supranational body. Hence, the argument that an ICT imposed by a supranational entity would create a large new international bureaucracy needs to be tempered. Generally speaking, however, the level of tax imposition is more important than the level of tax administration. Moreover, even if the tax administration question should be answered via an internationally harmonized national ICT, thus further defusing the international bureaucracy point, the critical question of how to use the tax revenues would still remain.

The following revenue distribution approaches, the first two of which are polar opposites, may be considered:

1. The revenues derived from an ICT imposed by a nonsovereign supranational body would be earmarked for an international carbon tax trust fund. These revenues, in turn, would be used for financial transfers, including side payments, 48/ and other expenditures linked to both the carbon abatement and distributional objectives.

2. The national governments imposing an internationally harmonized ICT would retain the revenues from the taxes which they impose, without restrictions as to use. Nonetheless, even in this case, depending upon whether the treaty designated, nationally imposed tax is levied on the production of fossil fuels or at the point of energy consumption, distributional patterns may vary considerably between nations. 49/

3. Some combination of the above two approaches, whereby either (a) the supranational taxing authority would return some ICT revenues to the nation of revenue origin, keeping the remainder for trust fund use, or (b) the nations imposing a harmonized ICT would provide some portion of the revenues to the supranational body for trust fund use, while keeping the remainder for themselves.

A closer look at these revenue-distribution choices suggests that the second alternative, unrestricted national government retention of the funds, would badly miss the equity goal since none of the revenues would be available for treaty negotiated distributional goals including possible side payments between winners and losers. There would be no international institutional mechanism to coordinate the efficiency and equity dimensions of the agreement. This problem would be avoided under alternative one (supranational retention of all revenues) and alternative three (supranational retention/receipt of some revenues). In the latter case, however, additional international coordination may be required in order to reconcile that portion of ICT revenues left in the hands of a nation with the overall treaty objectives.

In sum, the efficiency goal of an ICT regime can be met through either a supranationally imposed tax or by harmonized national carbon taxes. Yet, attainment of the equity goal will require, in addition, an international body or mechanism to manage the distribution of ICT revenues.

The above policy scenario fits the mold of traditional “fiscal federalism.” That is, an international carbon excise tax would be earmarked for an international trust fund in accordance with the benefit principle of taxation. In turn, the trust fund revenues would be used to finance a variety of expenditures and transfers linked to the nature of the tax and the goals of the sponsoring treaty. For example, some of the revenues could be used for payments to developing nations for conserving rain forests (see Figure 2 above). Accordingly, the carbon excise tax would internalize the negative externality (carbon emissions) while the financial transfer would internalize the positive externality (the use of rain forests as carbon sinks). 50/ In addition, some revenues could be used for transfers from high carbon emitting to low carbon emitting nations based upon a distributional criterion, or to finance subsidies for the development of nonfossil fuel energy sources.

An interesting alternative to the direct imposition of an international carbon excise tax to alleviate global warming has been suggested by Hoel. 51/ Under his proposal, each nation would be assessed a per unit tax on its carbon emissions by an international agency created under a treaty, the payments being made directly by the central government of the nation to the agency. In effect, this amounts to a sophisticated form of cost sharing with each nation’s assessment linked to the total volume of its carbon emissions. Moreover, it constitutes an “implicit” excise tax on carbon emissions.

This assessment/implicit excise tax on carbon emissions would be uniform across nations. The tax period could be one or several years. A set of treaty negotiated reimbursement rules (distributional criteria) would be applied. A nation would be debited for its cost share on the basis of its CO2 emissions and would be credited for its reimbursement share from total cost-share revenues depending upon its eligibility under the reimbursement rules. Thus, it could either receive net payments from the fund, make net payments to the fund, or come out even. The fund itself would be in balance at all times (except for administrative costs).

Hoel argues that such an approach would avoid a large and costly international bureaucracy, as compared to a supranational tax, while reducing the potential for free-rider behavior that would accompany nationally imposed ICTs. He suggests that a rational nation would select a carbon emissions level so that the sum of carbon taxes paid to the international agency (its cost share) and its domestic costs of reducing carbon emissions are minimized.

However, it is doubtful that such a cost-sharing/implicit carbon tax regime would be superior to those regimes described above that would directly impose a carbon excise tax on the private sector. For example, it would not avoid a substantial international institutional framework for the functioning of its assessment and reimbursement scheme. Moreover, an ICT imposed by a supranational government, but utilizing existing national government systems of tax administration, might not entail any greater “international bureaucracy” than would the Hoel proposal. Furthermore, free-rider behavior need not be a prohibitive problem under a harmonized nationally imposed ICT if the treaty mechanism is “tightly coupled.”

Most importantly, however, the cost-sharing aspects of the Hoel proposal appear to render it inferior to those ICT variants that directly impose a carbon excise tax since there is no guarantee that a national government would, in fact, impose equivalent domestic carbon excise taxes to raise its burden share. Until this step is taken, the “implicit” carbon excise tax does not become an “actual” carbon excise tax. If national governments do not act rationally, which is very possible given political pressures from fossil fuel industries and other negatively impacted economic interests, “nonexcise” tax sources may be used to finance part or all of the assessment share. To the extent this may occur, cost sharing would not change the relative prices of fossil fuels—unlike the carbon tax which is an excise tax that directly enters the prices of such fuels.

In sum, an appropriately designed international carbon excise tax can efficiently abate carbon emissions in accordance with a particular abatement target. Unquestionably, however, there are many political obstacles to bringing about an ICT regime, not the least of which relate to its complex distributional dimensions. Meanwhile, what about the other global commons? What sort of an international environmental tax and fiscal regime might be recommended for providing an efficient and equitable use of the global commons as a whole?

2. Toward a comprehensive tax and fiscal policy for the global commons

a. The global commons trust fund concept

The specific global commons may be identified as the atmosphere, oceans, space, biological diversity and, perhaps, Antarctica. 52/ The most visible aspects of the utilization of the atmospheric commons are the ozone layer and carbon balance that are under threat from industrial age activities. There are several relevant economic aspects of the oceanic commons, including fishing and transportation in international waters, mining for deep seabed minerals, and the use of the oceans as dumping grounds for toxic and other wastes. The space commons include the geostationary orbit for satellites, travel and space stations in outer space, and the electromagnetic radio spectrum. Biological diversity encompasses the earth’s large and diverse number of living animal and plant species and the ecological relationship of these to the planet as a whole. Finally, if Antarctica is to be counted as a global commons, it would be primarily due to its significant scientific linkage to global climates and ocean levels.

The policy challenge at hand is how to achieve an efficient economic use of these commons in the absence of explicit national or international sovereignty (property rights). Even though the commons have economic value. it is difficult to price this value in the absence of such rights. In order to overcome this obstacle, it has been suggested that a global commons trust fund be established, using delegated national sovereignty under an international agreement, that would utilize international tax and fiscal instruments for the efficient use of the global commons. 53/ Taxes or charges would be imposed on access to the commons, with revenues earmarked for an environmental trust fund whose expenditures would help restore the commons from past damage and help develop technologies that would make the future use of the commons more efficient. The proposed taxes would be levied upon such uses of the commons as the annual world harvest of fish, offshore oil and gas production, the use of the oceans as dumping sites for wastes, carbon emissions (a form of “carbon excise tax”), ozone depleting CFCs and related gases, the mining of seabed minerals (currently provided for in the law of the sea treaty), and the various uses of space such as parking fees for geostationary communications satellites. 54/ Such taxes/charges could be justified via the benefit principle of taxation. 55/

b. The current state of global commons policy

Considering the atmosphere, it may be observed that no explicit national property rights exist to the atmosphere as such, though certain developing nations do hold property rights to rain forests which are an integral part of atmospheric carbon balance. The Montreal Protocol and the recent climate treaty do take small steps toward an “implicit” res communis (all nations “co-own” the atmosphere) property rights criterion by providing a framework for global policies intended to protect the atmosphere from ozone depletion and global warming, respectively. Present policy under these conventions largely follows a regulatory, command and control, approach. However, the Montreal Protocol uses, and the climate treaty plans to use, an integrated cost-sharing, trust fund, financial transfer mechanism to help abate ozone pollution. Moreover, if an international carbon tax should be adopted, it would put a price on access to the global atmosphere in the form of carbon emissions.

In terms of the oceans, there is no assignment of sovereignty to regulate fishing on the high seas. However, fishing in coastal waters (exclusive economic zones) is controlled by coastal states under authority granted by the law of the sea treaty. 56/ Also, that treaty provides a loose form of res communis or global property rights to the mining of the deep seabed. Moreover, there is recognition of the property rights of victims “not to incur damage” (negative externalities) under the International Oil Pollution Compensation Fund (IOPCF) and certain other ocean pollution treaties. 57/ In effect, these conventions recognize the “polluter pays principle.” Meanwhile, there are no international taxes nor charges for fishing nor for passenger and freight transportation in international waters, but there are for deep seabed mining. In addition, IOPCF uses a de facto excise tax as a financing instrument.

Regarding the space commons, the outer space treaties of 1967 and 1979 provide a weak application of the res communis property rights tenet to outer space, but fail to back this up with meaningful implementing institutions or policies. For example, there are no restrictions nor charges for access to outer space. However, there are some access restrictions, but no charges, for use of the geostationary orbit by communications satellites and the situation is similar for access to the electromagnetic radio spectrum. 58/

Turning to biological diversity, the recent convention signed in Rio de Janeiro provides a framework for recognizing national property rights to biological resources as well as an overall global interest in the preservation of biodiversity. The convention also provides a basis for the future introduction of an integrated cost-sharing, trust fund, financial transfer policy approach. Meanwhile, a joint industrial and developing nation biotechnology industry is beginning to emerge which links the preservation of biological resources to the profit motive.

In the case of Antarctica, the Antarctic Treaty 59/ provides what amounts to a global trust regime for the continent. It imposes a moratorium on claims to sovereignty in Antarctica by individual nations and, in general, manages the resources of the continent under the affiliated Antarctic Treaty System. A command and control approach is used for this purpose, though a 1988 convention formulated a regulatory framework for mining that includes taxes and charges. 60/ However, this treaty was sidetracked by a recent protocol to the Antarctic Treaty that imposes a de facto 50-year mining ban in the Antarctic as well as other resource conservation measures. 61/

c. The role of the Global Environment Facility (GEF)

Given this “less than comprehensive” contemporary approach to global commons policy, the question of possible future policy takes on considerable significance. In this regard, it would appear that the GEF is in a favorable position to play a useful role. The policy areas of GEF, for example, encompass several of the global commons. The ozone and global warming problems, the centerpiece problem areas of current global atmospheric policy, are among these policy areas. GEF also devotes policy attention to biological diversity and to the oceans. In addition, it is in the process of adding land degradation, primarily desertification and deforestation, as a subsidiary area. 62/

Moreover, as observed above, GEF is helping to administer the MF for ozone policy and, in addition, it has been included in the climate convention as the international entity entrusted with the operation of the financial mechanism (on an interim basis) under that treaty. 63/ Furthermore, it has been designated for a similar role in the biological diversity convention. 64/ However, GEF is not specifically linked to the law of the sea treaty in relationship to seabed mining nor in other ways, nor to any other functional economic areas of the oceanic commons such as fishing, transportation, or the disposal of wastes. Also, it is not associated with the space commons. Yet, the door has been left open for possible future linkage to these other global commons in the following statement of principle: “The GEF is available to function as the funding mechanism for agreed global environmental conventions, should the parties to those conventions so desire.” 65/

GEF advocates the use of a single unitary funding mechanism in terms of efficiency in mobilizing resources. 66/ Relatedly, it advocates predictability in the flow of funds through contributions from industrial nations and other nations in a position to do so, thus suggesting the need for more permanent revenue sources such as through a sophisticated form of cost sharing. GEF envisions that if a “single unitary funding mechanism” were established, it would be replenished periodically, possibly every three years, through a single replenishment process. Meanwhile, the Sustainable Development Commission created by the UNCED (Rio de Janeiro) Conference to help implement its objectives will interact with GEF in the pursuit of these goals.

3. Conclusions: international environmental taxation in the absence of sovereignty

There is no question that the implementation of international environmental taxes, especially those of a sophisticated nature such as an international carbon tax, faces severe international political obstacles in the absence of sovereign international government. Moreover, the complex distributional issues that interface with such instruments present a formidable roadblock to their adoption. Furthermore, the current global recession and the focus of industrial nations upon financial assistance to Eastern Europe and the former U.S.S.R. place severe constraints on the availability of financing for global environmental projects. In addition, the rapidly growing number of sovereign nations potentially increases the transactions costs associated with global environmental agreements though, possibly, a few “key nations” may be able to carry the thrust of an effective global policy.

While it is true that existing international environmental agreements have partially filled the noncorrespondence gap, they have resulted unfortunately in a hit-and-miss coverage of problem areas. Moreover, they have generally utilized crude tax and fiscal instruments as compared to those used within nations. However, it may be politically feasible to provide modest improvements in the tax and fiscal policy instruments of existing IEAs as well as in any new IEAs adopted in the near future. Even though cost sharing is likely to remain the primary financing format in the foreseeable future, it can be improved upon in such ways as more precise and reliable assessment criteria, scheduled replenishment dates, and better linkages to trust fund operations. In addition, the latter can be designed to reflect the “long-term nature” of many international and global environmental projects such as global warming and biological diversity. For example, the recently established Trust Fund for Environmental Conservation in Bhutan, under GEF sponsorship, is specifically designed with long-term funding in mind. 67/

A more comprehensive role for the GEF possibly be the vehicle for such an evolutionary approach to improved global environmental policy—a sort of “half-way house” using more reliable and better designed cost-sharing, trust fund, and financial assistance instruments than are presently in use, though stopping short of the adoption of highly sophisticated international environmental taxes. The format of the GEF, in general, and its proposed single unitary funding mechanism, in particular, appear to fit this role for gradualism in policy improvement. While the close link of the World Bank to GEF could prove to be an obstacle to developing nation endorsement based on past negative feelings toward the Bank among a number of developing nations, significant efforts are now under way to modify GEF so as to overcome this difficulty. 68/ These include the consideration of a double majority voting rule 69/ for the Participant’s Assembly of GEF that will serve as the liaison between separate environmental conventions and the implementing agencies of GEF (UNDP, UNEP, World Bank). The rule would require a simple (or special) majority approval by both industrial and developing nations.

To conclude: since international environmental externalities and related problems in the efficient utilization of the global commons are likely to increase in importance as we approach the next century, and since there exists a body of knowledge and experience in traditional public finance for dealing with similar problems within nations, it would seem prudent to pursue modest improvements in international environmental taxation at the present time. Moreover, given the possibility of major long-run parameter changes in international political attitudes and institutions, especially in the matter of assigning sovereignty or authority over global environmental resources, ample room exists for the adoption of sophisticated international environmental tax and fiscal instruments over the long term.


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Professor of Economics, University of Arizona. This paper was written while the author was a visiting scholar in the Fiscal Affairs Department at the International Monetary Fund. Earlier work in this subject area was supported by the Udall Center for Studies in Public Policy at the University of Arizona. He would like to thank David Nellor for valuable comments and suggestions. Also, the observations of Johnathan Levin and of seminar participants proved useful. Any errors are attributable to the author.


Additional characteristics include: (a) a sufficiently large consuming group so that an efficient market solution is difficult, and (b) technological difficulty in appropriating the collectively consumed effects into the price system.


“Sovereignty” refers to “national property rights,” as established under the res nullius tenet of international law, whereby a nation gains autonomous power or independence based upon such factors as the discovery, exploration, and occupancy of a geographical area of the earth.


In his Economics of Welfare, A. Pigou (1920) left a legacy of fiscal theory for the internalization of negative environmental externalities in the form of an excise tax or charge imposed upon the polluting activity. The alternative “Coasean” approach [R. Coase (1960)], based upon a pure market solution to negative externality problems devoid of excise taxation, is not emphasized in this study due to its assumption of zero (or very low) transactions costs. The transactions costs of inter-nation negotiations are likely to be quite high in the absence of sovereign supranational political authority and, especially, if “n” number of nations approaches the global roster of 179 nations (United Nations membership during mid-1992).


The present paper will focus upon the use of tax and fiscal instruments in international environmental policy rather than upon tradeable pollution permits or instruments of a regulatory, command and control, nature.


See the discussion of international public goods and common property resources in Frey (1984).


The same analysis would apply to a 179 nation world, though such variables as transactions costs would differ between the two cases.


In scientific terms, “excessive” carbon emissions may be defined as those which contribute to a stock of carbon which is greater than can be absorbed through natural global ecological forces.


This classification is not intended to suggest that homogeneity exists between all nations within each category.


See the discussion in Tisdell (1990).


Previous efforts at redefining property rights to certain global commons, namely, outer space and the oceans, have not been taken to the “sovereign supranational government” point. Instead, the application of the res communis tenet of international law (along with its “close cousin”—the common heritage principle) merely recognizes that these resources “belong to all mankind.” See: Treaty on Principles Governing the Activities of States in the Exploration and Use of Outer Space…(1967); Agreement Governing the Activities of States on the Moon and Other Celestial Bodies (1979); and United Nations Convention on the Law of the Sea (1982).


An IEA may be either “binding” in the form of a convention or treaty or of a “nonbinding” nature.


The list of existing international organizations that may help facilitate such cooperation includes the United Nations, inclusive of UNDP, and UNEP, and the World Bank.


See the discussion in Barrett (1991b).


Even though MCn exceeds MBn at the global optimum abatement level OY, each nation is better off in this particular cooperative solution since each nation benefits from the abatement efforts of other nations.


See the discussion of “tightly coupled” versus “loosely coupled” international agreements and supranational structures in Sandler and Cauley (1980).


This point will receive further elaboration in Section III.2.c. below.


This definition of a “tax” is based upon the notion of a two-sector, circular flow economy in which revenues extracted from the private sector finance public sector economic activities.


It is interesting to observe that the “international tax” features of cost sharing do not directly cause market distortions since the revenue base is not the private sector. However, the “national tax” features do impact directly upon private sector behavior and, thus, create market distortions (except for a lump-sum tax). Hence, cost sharing itself does not cause deadweight losses but its financing does cause such losses.


See Section III.3.b. below for a description of the Multilateral Fund.


The so-called Montreal Protocol (Protocol on Substances that Deplete the Ozone Layer) of 1987, and the London amendment to the Montreal Protocol (1990), are part of the (Vienna) Convention for the Protection of the Ozone Layer (1985).


In this sense, they take on the characteristics of “side payments” as discussed in Section II.3 above.


A “double-majority” voting rule may also be found in the Convention on the Regulation of Antarctic Mineral Resource Activities (1988), and is being considered for use in The Participant’s Assembly of the Global Environment Facility. Concerning the latter, see Section IV.3 below.


For reference to a similar “long-term trust fund” arrangement, see the discussion of the Bhutan Trust Fund, which is under GEF sponsorship, in Section IV.3 below.


In excess of 150,000 tons of crude oil and heavy fuel oil.


For a discussion of seabed mining taxation under the law of the sea treaty, see Pethig (1984).


For a discussion of the taxation provisions of the Svalbard Treaty, see Westermeyer (1984).


See Section IV.2.b. below.


The convention includes several thresholds to minerals development and, as such, deals with mining as a possibility rather than as an established fact.


United Nations Conference on the Environment and Development (1992). At this point, the climate convention does not endorse such a tax.


Fossil fuels constitute more than 80 percent of the greenhouse gases which contribute to global warming.


Nuclear power may pose its own negative externalities in the form of radiation risks.


The tax rates required to meet a particular carbon abatement goal will be importantly related to the price elasticities of demand for each fossil fuel, the cross-price elasticities of demand between the different fossil fuels, and the cross-price elasticities of demand between fossil fuels and nonfossil fuels.


The interface between international environmental policy and international trade policy, though a very important topic, is not treated in this paper due to space limitations. For additional discussion of this topic, see Cnossen and Vollebergh (1992), Low (1992), and Whalley (1991).


Coal emits 25.1 grams, oil 20.3 grams, and natural gas 14.5 grams of carbon per 1,000 BTUs.


Adjustments would be required for existing sales/excise taxes on fossil fuels in the various nations so as to make the total carbon tax rates, inclusive of existing taxes, uniform across nations.


See Section II.3 above.


To actually capture these gains and convert them into side payments would obviously involve a very difficult institutional process. Such a process would be assisted, however, by the growing efforts to calculate a “green GDP” as part of national social accounts, inclusive of the principle of “full cost pricing” that takes into account both market and nonmarket costs.


For example, OECD nations are responsible for 45 percent of carbon emissions from fossil fuels.


Technically, a side payment is a particular type of “financial transfer” between winners and losers in a decision-making game. However, the term financial transfer is more comprehensive, inclusive of side payments but also including inter-nation transfers for a number of other efficiency, equity, and macroeconomic purposes.


For example, a nationally imposed ICT in the form of a “production” tax on fossil fuels, with revenues retained by the taxing nation, would be to the advantage of oil exporting nations. However, a tax imposed on the “consumption” of fossil fuels, with revenues retained by the taxing nation, would work to the advantage of high consumption nations.


For a similar argument, see Weimer (1990).


Hoel (1991a; 1991b).


See Herber (1992) for a discussion of the global commons characteristics of Antarctica.


This point is made in Mendez (1992), and is consistent with the argumentation made earlier in this paper for earmarked taxes, trust funds, and financial transfers.


Although this treaty is not yet ratified, such property rights have largely taken on the force of international law.


The International Telecommunications Union (ITU), under United Nations sponsorship, provides some regulation in both cases.


See Section III.3.f. above.


This point is made in Article 21 of the climate convention: “…the Global Environment Facility should be appropriately restructured and its membership made universal…”.


This rule would be applied after the failure to reach consensus on a decision.

International Environmental Taxation in the Absence of Sovereignty
Author: Mr. Bernard P. Herber
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    Demand and Supply Characteristics of an International Environmental Public Good

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    The Demand and Supply for a Developing Nation Environmental Public Good

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    Gains from Cooperation in the Internalization of International Environmental Externalities