How can we build back green and just? Financial Sector Taxes as one idea

This blog is based on a new published report “Financial Sector Taxes and Climate Goals” from the 2° Investing Initiative, an independent, non-profit think tank. The report forms part of their research on mapping the opportunity space to finance a green and just recovery.

About the Author

Anne Schoenauer

Anne Schönauer joined the 2° Investing Initiative in 2020. She is Deputy Research Head of the 1in1000 program that aims at developing evidence, designing tools, and building capacity to help financial institutions and supervisors to mitigate and adapt to future risks and challenges. Prior to joining 2°Investing Initiative, Anne worked as a research assistant at SOAS University of London in the area of decarbonizing monetary policy. She also gained experience in the public sector, with experience at the German Federal Ministry of Education and Research, the German international development agency, as well as at a public sector consultancy and an economic research institute. Anne holds a MSc. in International Finance and Development from SOAS University of London, where she specialized in sustainable finance and monetary policy. She holds a bachelor’s degree in Philosophy and Economics from the University of Bayreuth.

The global economy is about to face its biggest reconstruction challenge since the end of World War II. The key question then is how to fund and design this recovery. As papers on the topic proliferate, one of the most significant sources of governmental revenue, and a critical lever for creating private sector incentives is largely ignored: financial sector taxes. Despite the important role they play both for governmental revenues, as well as supporting broader policy objectives, they are almost nonexistent in the discussion on how to “rebuild better”.

So how could these types of taxes be used to create an effective green recovery – in other words to fund the recovery? And how can we use those taxes to design the green recovery in a way that is just – just in the sense that those countries most affected by COVID-19 are supported and that the burdens of a green recovery are shared equitably across the globe?

Despite the important role financial sector taxes play both for governmental revenues, as well as supporting broader policy objectives, they are almost nonexistent in the discussion on how to “rebuild better”.

Let me start first with giving you a quick review which types of taxes are particularly relevant to the financial sector: a) tax incentives on saving schemes and pension funds; b) bank levies and c) financial transaction taxes. Having those three types in mind, there are three main ways to “green” them. All of those suggestions are meant to provide incentives (signaling effect) to direct capital flows towards green assets and activities.

  • Implementing a tax incentive for green savings. This policy could involve “green” eligibility requirements in order to benefit from existing tax incentives or removing tax incentives for “dirty” financial products.
  • Adjusting the bank levy on green/carbon intensive assets. Bank levies – most of which were introduced after the last global financial crisis in 2008 – can offer two potential areas for green policy intervention: increasing the bank levy on carbon-intensive assets and / or reducing the bank levy on green assets. This mechanism could also involve levies determined by minimum or maximum portfolio exposures of banks.
  • Imposing a financial transaction tax (popularly known as “Tobin Tax”) on carbon-intensive assets or exempting green assets from a financial transaction tax. These could extend to tax incentives on “stamp duty” related to green buildings/real estate and exemptions for green assets related to financial transaction taxes.

The question remains of course, how financial sector taxes could not only be a source of revenue but also contribute to a recovery that is just. One interesting area is the potential for governments and the international community to influence how revenues from such green financial taxes are distributed among countries. For example, from a climate (and COVID-19) justice perspective, tax revenues from Global North countries could be used to contribute to the United Nations COVID-19 Response and Recovery Fund which support low- and middle-income program countries in responding to the pandemic and its impact. The process would of course require a coordinated discussion and effort amongst the Global North and Global South. 

We must think about every way to make the reconstruction effective and just – including the greening of financial sector taxes.

While estimates of potential scale of revenue generation are obviously a function of the exact policy design and nature of implementation, their potential could be high. In the UK, tax incentives on savings and pensions alone represent 6% of governmental revenue. In any case, knowing that revenues of green financial sector taxes will be larger than zero, there are reasons enough to keep investigating in the wake of the collective action on our doorstep. To meet that challenge, we must think about every way to make the reconstruction effective and just – including the greening of financial sector taxes. In this context, the blog – and the underlying report – stimulates discussion among stakeholders about the idea to green financial sector taxes, while recognizing that more research and reflection is needed on how to implement them.

About our Funders

The report “Financial Sector Taxes and Climate Goals” is part of 2DII’s long-term risk management research program, which aims to integrate long-term risks, especially those related to climate change, into financial markets and supervisory practices. The program combines a number of current and past research streams, including the Tragedy of the Horizons research project (2015-2017), 2DII’s work on climate and sustainability stress-testing, and its broader research initiatives on integrating long-term risks into private sector and government practices. The program is part of the International Climate Initiative (IKI). The Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU) supports this initiative on the basis of a decision adopted by the German Bundestag. This project has received funding from the European Union’s Life NGO program under Grant Numbers LIFE20 NGO/SGA/DE/200040 and LIFE19/NGO/SGA/DE/100040. The paper reflects only the author’s view and the Agency and the Commission are not responsible for any use that may be made of the information it contains.