Today, there is a historic opportunity to rebuild the architecture of the global tax system. In August 2024, the UN finalised the Terms of Reference for a new UN Tax Convention (to give it its proper title, a UN Framework Convention on International Tax Cooperation), which is set to be agreed by the end of 2027. The aim is to establish an “international tax system for sustainable development”, and the agreement opens up an avenue towards binding global rules that can ensure equitable taxation of multinational corporations; effective taxation of the super-rich (high-net worth individuals); and international tax initiatives to promote sustainable development, including environmental protection.

This global tax deal is desperately needed to end the exploitation of the public purse by multinational corporations, the ultra-rich … and the polluters.  The fact is that the same polluters who are causing the climate crisis are committing tax abuse - reducing the capabilities of countries to address this crisis. The introduction of progressive taxation and tackling illicit financial flows will strengthen the ability of all global south countries to mobilise financial resources. The global north will gain more resources which must be used to deliver on their international climate finance obligations to the global south. At same time, it can enable a coordinated approach towards surcharging the profits of fossil fuel industries. This top-up tax on the industries’ profits will impact its business models, disincentivise the business-as-usual approach, shift investments and thus catalyse a just and equitable energy transition.

Decades of global north dominance in setting international tax rules have led to a system that deepens inequalities, between and within countries, and that fails to secure the financing so urgently needed to deliver on climate justice, human rights, equality, environmental protection, development, and more. Trillions are hidden in tax havens with hundreds of billions of dollars lost every year due to tax abuse. And the global south is losing out in this unjust global tax system. At a moment when the global north owes urgent and significant climate finance to the global south, recovering lost revenues is a question of tax and climate justice: this is the real money that could and must contribute to climate finance.

Big profits for polluting companies, devastating losses for the global south

The current international corporate tax rules are particularly problematic for global south countries when it comes to taxation of extractive industries. This system creates avenues for them to shift their profits to offshore jurisdictions, depriving countries of crucial domestic revenues. Given that the current international system – known as the transfer pricing system – relies on pricing of transfers between affiliated entities of corporations, extractive industries can shift profits by underquoting the value of natural resources when they are exported from the countries of extraction. In a working paper published by the IMF, researchers have estimated the annual global tax loss in the extractive sector at US$44 billion per year. Furthermore, they highlight that “[l]arge revenue losses are more frequent in low income and developing countries” and that “revenue losses are largest in emerging markets”. The host countries in the global south, in contrast, continue to receive inadequate tax revenues and instead have to deal with a devastated environment. And still, relatively small revenues are often an important income for affected countries, deepening their dependency on natural resource and fossil fuels extraction, cementing their ‘resource curse’.

The fossil fuel industry bears particular responsibility for the worsening climate and ecological crises. The industry is bringing in unprecedented high net incomes: in 2022 alone, the revenues of the oil and gas industry soared to at least $4 trillion from an average of $1.5 trillion in recent years. In terms of profits, Shell, Chevron, ExxonMobil and TotalEnergies alone announced a total profit of over US$ 150 billion in 2022. While 2022 was an unusual year, the profits of these four corporations remained over US$ 100 billion in 2023. And, while the EU has introduced a temporary excess profit tax - or “solidarity contribution” - on the profits of fossil fuel industries, there is currently no global initiative to introduce a permanent polluter pays tax on fossil fuel profits.

This fossil fuel industry rent comes at the expense of a safe climate, with everyone bearing the costs, and vulnerable communities in the global south are hit the hardest. Current environmental taxation policy largely targets consumers. There is an urgent need for more aggressive climate action which targets the core of the industries’ business models: a permanent pollution surcharge that channels back parts of the industries profits to society and steer its business towards sustainable activities. In essence, the polluters must pay.

The richest 1 per cent have also burned through more than twice as much carbon as the bottom half of humanity since the 1990s. In 2019, the super-rich - top 1 per cent  - were responsible for 16 per cent of global carbon emissions, which is the same as the emissions of the poorest 66 per cent - five billion people. It is a crucial question of climate equity that the super-rich pay a fair amount of taxes on their wealth and income. This will cut carbon emissions, address inequality, and provide public resources to fund renewable energy and the just transition.

Ultimately, tax justice and climate justice are deeply interconnected. Governments of the world must seize the opportunity for the world’s first truly global, fair, green, effective, and inclusive agreement on international tax cooperation which delivers on both. This what the UN Tax Convention can do.