I have been investigating legal solutions to the multilateral, coordinated taxation of carbon for over ten years. Starting during the years of doctorate investigation, therefore pre-2030 Agenda for Sustainable Development (which brought about the Sustainable Development Goals) in 2015, pre-Addis Ababa Action Agenda, pre-Paris Agreement, and before the consideration of Border Carbon Adjustment measures (BCA). It was a different world from the one we experience now. I was interested in researching how the taxation of carbon could be instrumental to catalyse the global energy transition process. The answer then, as it is now, was that the key to success lay in the introduction of a carbon tax through a multilateral, coordinated, binding treaty framework: a Multilateral Carbon Tax Treaty (MCTT). This is therefore my second attempt at construing a MCTT which, for all the reasons underlined above, is a different text from my original proposal.


The MCTT in a Nutshell

For one, the text of the new MCTT draws on feedback received via consultations with over 50 experts in the fields of international taxation, environmental law, economics, public policy, maritime taxation, air taxes and biodiversity. Some of these experts are individually acknowledged for their contributions, others preferred to contribute without being named.

The treaty is now framed as a ‘climate agreement to tax carbon on a multilateral basis’, having as an objective to instrumentalise the emissions mitigation goals that are present in the United Nations Framework Convention on Climate Change (UNFCCC) and the Paris Agreement. It foresees an internal BCA (an intra-member tax rate adjustment when the difference in tax rate exceeds 10%) as well as an external BCA (a full border adjustment applied to non-treaty members), so that there is no risk of leakage, or race to the bottom when it comes to the application of carbon tax rates (in light of the different – developing country – tax rate schedules).

It also contains two business-specific articles designed to contemplate taxation of maritime and air transport, which are the only articles that the members can choose to opt out from. Finally, it provides a de minimis approach to the taxation of carbon based on the existing international consensus in climate negotiations, that can nevertheless be expanded over time to also cover the taxation of Greenhouse Gas (GHG) emissions, plastics produced from hydrocarbon materials, the notion of a carbon price, and to assist in the preservation of biodiversity, to the extent it addresses also the taxation of fishing activities.

Importantly, the MCTT provides for the establishment of a Fund, resourced through the revenues derived from the carbon tax itself, for the development of new technologies and carbon alternatives, intended to benefit the entire membership of the treaty. It creates a sharing space for the dissemination and transfer of new technologies so that all countries can transition away from the use of fossil fuel resources at the same pace.


A Multilateral approach to instruct the development of National Legislation

It is perhaps utopian to think that one and the same instrument could be capable of not just establishing a new taxing right, but also the rules of priority for exploring that base, the attribution of taxing right, and to a minor extent, a portion of the revenue use. However, for most countries, carbon taxation still is a largely inexistent, and/or underexplored domain. Dealing with an untapped source of government revenue means that countries have not yet accounted for those revenues for basic government functions. It also provides the right momentum to establish an implementing legislation that is coordinated with that of other countries, to avoid the rise of future, transnational disputes, whether based on trade or tax issues.


Past attempts to create a political commitment consensus failed due to lack of a legal construct

Today’s world harbours the needed political momentum for breakthrough progress on climate change mitigation. Ever since the adoption of the Paris Agreement (2015), there seems to have been a greater sense of urgency and commitment by countries in placing environmental issues as a primary consideration capable of impacting even fiscal approaches. Climate negotiations thrived during the pandemic years, in great part because one could then witness the world outside a business-as-usual scenario. The leadership of some countries and regions (particularly the EU) over the climate cause, (i) spurred action from countries by using trade as a bargaining tool; and (ii) showcased different means (and instruments) with which to catalyse greater coordination. As a result, there has been a growing movement for the proliferation of carbon taxes, consideration of new Border Carbon Adjustment measures, and thoughts of coordinated, and even multilateral approaches.

This is manifested in practice through the creation of new interfaces at intergovernmental level, to facilitate communication, coordination, and sharing of best practices between countries. The Coalition of Finance Ministers for Climate Action is the prime example of that. With a specific action area (Helsinki Principle 3) to deal with carbon pricing, it is openly working towards getting coordinated approaches in the field of, among other policies, carbon tax. Another example, albeit failed, was the attempt to create in 2021, an open and cooperative climate club spearheaded by Germany as president of the Group of 7 (G7) at the time. The proposal, originally only geared towards G7 countries, but with the intent of expanding towards the Groupe of 20 (G20) countries, aimed at achieving the 1.5 degree target of the Paris Agreement and accordingly, climate neutrality by 2050 at the latest. These are the same goals supported by the MCTT.

The German proposal foresaw a roadmap for joint measurement and pricing of carbon emissions that encompassed, among others:

(i) the measurement of carbon prices through the development of uniform procedures to measure and monitor GHG emissions at producer level.

(ii) explicit carbon prices, consisting of carbon taxes and allowance prices in emissions trading systems.

(iii) implicit carbon prices which would also take into consideration additional energy and climate-related taxes (especially energy taxes) and duties (minus relevant benefits/subsidies), production-related standards and emission limits, converted into €/t of CO2.

The G7 proposal fell short, and eventually became the existing OECD Inclusive Forum on Climate Mitigation Approaches which has a less ambitious objective of sharing best practices. However, it nevertheless showcases that there is interest by some countries, especially those already acquainted with carbon taxation, to make the next step seeking single solutions for multiparty objectives.

More recently, and perhaps most remarkably, the theme of “ensuring that tax measures contribute to addressing environmental challenges” was the only substantive issue to receive unanimous support from the countries discussing the terms of reference of a UN Framework Convention in International Tax Cooperation, during the first session of the ad hoc committee meeting between 26th April and 8th May.

The MCTT provides the initial legal construct upon which countries can negotiate positions without losing sight of the environmental commitments.


Demands for a Multilateral Carbon Tax Solution are on the rise

The MCTT comes at a unique time in history when countries are asking for greater coordination and are committing to phasing out the use of fossil fuels. There is a positive momentum for the consideration of an instrument of the likes of the MCTT, that is principally marked by the African Leaders Nairobi Declaration on Climate Change issued following the Africa Climate Summit in September 2023, urging ‘world leaders to consider the proposal for a global carbon taxation regime including a carbon tax on fossil fuel trade, maritime transport and aviation’.

This is now topped by the Conference of the Parties (COP28) Decision of 2023 calling on countries to contribute to global efforts to transition ‘away from fossil fuels in energy systems in a just, orderly, and equitable manner, accelerating action in this critical decade, so as to achieve net zero by 2050 in keeping with the science’.

In addition to that, climate litigation is starting to push the elephant’s back, as most recently shown in a revolutionary decision from the European Court of Human Rights in KlimaSeniorinnen v Switzerland (ECtHR). The case was initiated by Senior Women for Climate Protection Switzerland, under the argument that Switzerland’s inability to respond appropriately to the climate crisis was in violation of Articles 2 (‘right to life’) and 8 (‘right to private and family life’) of the European Convention on Human Rights (ECHR).

The decision, rendered on April 9th 2024, found that:

(i) Article 8 ECHR affords a wide scope of protection that includes protection against environmental harm or risk of harm

(ii) that it is a  State’s primary duty to adopt and apply in practice roles and regulations capable of mitigating the adverse impacts of climate change

(iii) that such actions should be adopted via regulations at national level immediately, must be binding, and must be followed by implementation

(iv) that mitigation measures should be implemented over the next three decades with a view to achieving net neutrality and therefore there must be short, middle and long-term mitigation targets

(v) that the states have wide margin of appreciation for the adoption of instruments leading towards carbon mitigation, but they must monitor, review and verify emissions release and be able to demonstrate through compliance mechanisms that emissions have effectively been reduced over time.

Even more recently, the International Tribunal on the Law of the Seas rendered an advisory opinion (May 21st 2024) whereby it establishes state obligation to protect and preserve the marine environment in relation to climate change impacts and ocean acidification concluding that the obligations cover land-based emissions, sea bound (shipping) and fisheries. It clarified that laws and regulations issued with that objective should be aligned with the Paris Agreement and the NDCs, much to the inspiration of what the MCTT does. It also opines that there is an obligation for countries to cooperate internationally and regionally.

The opinion is not binding on countries, but it adds steam to the debate – and increases expectation over the pending advisory opinion from the International Court of Justice on the obligation of states with respect to climate change.


How does the Swiss climate case connect to the MCTT?

According to the Intergovernmental Panel on Climate Change (IPCC), there are four main instruments that are broadly employed by policy makers to mitigate climate change, two of which are fiscal instruments, and three are pricing mechanism, the latter are: (i) taxes and charges; (ii) tradable permits (regulated market); and (iii) financial incentives such as incentives and tax credits (or negative carbon pricing as it is more widely referred to nowadays).

This case is therefore important because it sets precedent for other cases to emerge at the European level, and requires binding action for the mitigation of climate change, one instrument of which is via the introduction of carbon taxes. The application of carbon taxes could be made uniform, potentially at the European level, via the MCTT. This is just one application of the proposed treaty, which can have regional, plurilateral, or multilateral (leading to global) coverage.


MCTT as a template for political negotiation of what should be the ratified

The MCTT is a proposal for a climate agreement to tax carbon as an instrument of emissions mitigation, that is aligned with the commitments assumed by countries in the Paris Agreement. It uses a minimum common denominator deriving from international climate negotiations to tax carbon at the level of extraction. It provides rules of prominence in the allocation of taxing rights in international value chains.

The MCTT proposal is at the same time the result of an academic exercise and a potential practical answer to one of the biggest challenges of our times: tackling climate change.

Tatiana Falcão

Tatiana Falcão is a senior policy expert in international tax and environmental taxation, and a member of the United Nations Subcommittee on Environmental Taxation. She holds a doctorate in international taxation from the Vienna University in Economics and Business (WU), an LL.M from New York University (NYU) and an LL.M from University of Cambridge (Cantab).