Cooperative fossil fuel levies could raise 66 bn annually to fight climate change: Study

Smaller coalitions of fossil fuel-importing countries could generate USD 66 billion annually to help developing nations cut emissions, according to a new study by climate economists at the Potsdam Institute for Climate Impact Research (PIK).

Governments at COP29 in Baku, Azerbaijan, in November 2024 agreed to a new climate finance goal of USD 300 billion per year by 2035, with an ambition to mobilise USD 1.3 trillion from public and private sources, but failed to propose a mechanism to incentivise contributions.

Countries are advancing new taxes to boost climate finance. Brazil and others back a 2 per cent global wealth tax on billionaires, which could generate USD 230-250 billion annually.

The International Maritime Organization (IMO) has approved a USD 100 per tonne carbon dioxide shipping fee from 2027, expected to generate USD 13 billion. France, Spain, Kenya, and Barbados plan levies on premium flyers and private jets, which could add over USD 100 billion yearly for climate action.

According to the PIK study, cooperative levies on fossil fuels could raise USD 66 billion every year for financing emission reduction efforts in low and middle-income countries.

Expanding the scope to include pricing emissions from international aviation and maritime shipping could push contributions to USD 200 billion annually.

“Governments are facing tightening fiscal space and are grappling with the question of where the money for international climate finance will come from. Smaller coalitions of countries cooperating on different kinds of levies could go a long way to solve the problem, without extra cost to consumers,” said PIK Director and lead author Ottmar Edenhofer.

The study explores scenarios where countries act in their own interest but cooperate on fossil fuel levies and channel the revenues to support energy transition in developing nations.

It finds that if the European Union makes the levy rates conditional on other countries joining, large importers like China would have an incentive to participate.

In one scenario, the EU-China cooperation would quadruple the climate finance raised by each compared to acting alone. Such collaboration would also benefit consumers by lowering global fuel prices, offsetting any price increases from the levies.

The study estimates that with the EU-China cooperation, developing countries could receive USD 66 billion annually to reduce fossil fuel use, including USD 33 billion in net gains.

Avoided damages from climate impacts could be worth USD 78 billion, with an additional USD 19 billion saved on fossil fuel prices each year.

The funding from these levies could also cut emissions by more than a billion tonnes of CO2 annually, exceeding Germany’s current emissions.

PIK researchers say this approach offers a model for funding global public goods.

“Our analysis strongly suggests that coalitions to raise funds for global public good provision would be a win-win. We show by pairing targeted spending of these levies on international climate finance, benefits can be shared by all,” said Matthias Kalkuhl, one of the study’s authors.

The study is part of the project “ODA in the Mutual Interest of Donors and Recipients”, funded by the Gates Foundation and coordinated by the Kiel Institute for the World Economy.