How Can a Fossil Fuel Levy Cut Emissions and Finance Climate Action?

The briefing examines the design and implementation of a fossil fuel extraction levy, comparing four specific proposals: the Windfall Profits Tax, the Climate Damages Tax, the Multilateral Carbon Tax Treaty, and the Wellhead Carbon Tax. It argues that levies based on carbon content are more effective at discouraging production and providing stable revenue than those based on windfall profits. The authors highlight tensions between the goals of revenue generation and emission reduction, noting that high revenues could create a moral hazard by incentivizing continued extraction. The document also discusses implementation challenges in low-income countries, such as 'stabilization clauses' in contracts and the opacity of national oil companies. To encourage adoption, the authors suggest mechanisms similar to the EU's Carbon Border Adjustment Mechanism, where importing countries impose taxes if exporting countries fail to do so.

• Levies based on the carbon content of production are superior to windfall profits taxes for discouraging fossil fuel extraction because they apply regardless of a company's profitability, making marginally profitable projects unviable. Additionally, carbon-based levies provide more stable revenue and are easier for authorities to verify than corporate profits.
• There is an inherent tension between using a levy to raise revenue and using it to discourage extraction; if a levy successfully reduces production, it shrinks the tax base. Furthermore, reliance on these revenues may create a moral hazard where governments or industries support continued extraction or use the payments to "greenwash" expansion.
• Implementing extraction levies in low- and middle-income countries is complicated by "stabilization clauses" in existing contracts that prevent governments from altering fiscal regimes. There is also a risk that governments may compensate companies through subsidies or other tax reductions to protect their fossil fuel industries, often obscured by secret contracts or opaque national oil company finances.
• To incentivize exporting countries to adopt a levy, the Multilateral Carbon Tax Treaty and Wellhead Carbon Tax propose a mechanism where importing governments only impose a carbon tax on imported fuel if the exporting government has not already implemented its own extraction levy, similar to the EU's Carbon Border Adjustment Mechanism.

APA

Manley, D., & Parra, P. Y. (2024). How Can a Fossil Fuel Levy Cut Emissions and Finance Climate Action? International Institute for Sustainable Development. https://www.iisd.org/articles/explainer/how-can-fossil-fuel-levy-cut-emissions-finance-climate-action

Chicago

Manley, David, and Paola Yanguas Parra. How Can a Fossil Fuel Levy Cut Emissions and Finance Climate Action? International Institute for Sustainable Development, 2024. https://www.iisd.org/articles/explainer/how-can-fossil-fuel-levy-cut-emissions-finance-climate-action.

Wikipedia

{{cite report |last1=Manley |first1=David |last2=Parra |first2=Paola Yanguas |title=How Can a Fossil Fuel Levy Cut Emissions and Finance Climate Action? |publisher=International Institute for Sustainable Development |date=24 October 2024 |url=https://www.iisd.org/articles/explainer/how-can-fossil-fuel-levy-cut-emissions-finance-climate-action |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{manley2024how, author = {Manley, David and Parra, Paola Yanguas}, title = {{How Can a Fossil Fuel Levy Cut Emissions and Finance Climate Action?}}, institution = {International Institute for Sustainable Development}, year = {2024}, month = oct, url = {https://www.iisd.org/articles/explainer/how-can-fossil-fuel-levy-cut-emissions-finance-climate-action}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }