JPMorgan Chase, the first American bank to create and successfully test a digital coin representing a fiat currency, also provided the most fossil fuel financing out of any bank in the world, according to a 2019 report titled “Banking on Climate Change.” The bank recently joined a chorus of other financial institutions and endowments that have declared that they will, going forward, be reluctant to provide funding to the fossil fuel industry — which energizes emerging digital technologies and companies — in order to mitigate the effects of climate change.
In a hard-hitting report released to clients on the same day as the World Health Organization published its 32nd coronavirus update, economists at JPMorgan Chase warned that human life "as we know it" could be threatened by climate change. Without action being taken, there could be "catastrophic outcomes."
Carbon pollution defies national borders and is inescapable. The true cost of climate change is felt when it penetrates deep into our respiratory and circulatory systems and damages our lungs, which are highly vulnerable to the coronavirus, according to a report prepared by the WHO. The economists at JPMorgan Chase state that “climate change could affect economic growth, shares, health and how long people live.”
In order to mitigate the effects of climate change, there needs to be a global tax on carbon, the report added. This stance echoes that of the Organization for Economic Cooperation and Development, which has said that greater reliance on environmental taxation is needed to strengthen global efforts to tackle the principal source of both greenhouse-gas emissions and air pollution, particularly since society is now witnessing the implementation of digital currencies, artificial intelligence and blockchain technology worldwide. These new digital technologies require very high consumptions of electricity, which is currently produced with coal and fossil fuels that have adverse environmental impacts.
Global environmental tax policy
Environmental tax is used as an economic instrument to address environmental problems by taxing activities that burden the environment — like a direct carbon tax — or by providing incentives to lessen environmental burdens and preserve environmental activities — like tax credits or subsidies. It’s used as part of a market-based climate policy that was pioneered in the United States, which also includes cap-and-trade programs that attempt to limit emissions by putting a cap and price on them.
Environmental taxes are designed to internalize environmental costs and provide economic incentives for people and businesses to promote ecologically sustainable activities, such as reducing carbon emissions, promoting green growth and fighting climate change through innovation. Some governments make use of them to integrate climate and environmental costs into prices to reduce excessive emissions while also raising revenue to fund vital government services.
Under a carbon tax regime, the government sets a price that carbon emitters must pay for each ton of greenhouse gases they emit. This encourages businesses and consumers to take the necessary steps, such as switching fuels or adopting new technologies, to reduce their emissions and avoid paying the tax. These taxes are favored because assigning a fee to carbon pollution is administratively simple when compared to addressing climate change by setting, monitoring and enforcing caps on greenhouse gas emissions and regulating emissions of the energy-generation sector. Environmental taxes include energy taxes, transport taxes, pollution taxes and resources taxes.
According to the OECD, outside of road transport, 81% of carbon emissions are untaxed, and tax rates are below the low-end estimate of climate costs for 97% of emissions. Coal, which is characterized by high levels of harmful emissions and accounts for almost half of carbon emissions from energy use in the 42 countries examined by the OECD, is taxed at the lowest rates or goes untaxed. Only 40 out of the 197 governments that have signed on to the first legally binding climate change agreement — the United Nations Framework Convention on Climate Change’s 2015 Paris Agreement — have adopted some sort of price on hydrocarbons, either through direct taxes on fossil fuels or through cap-and-trade programs.
Carbon taxes have been implemented in 29 of the jurisdictions that have signed on to the Paris Agreement. A Scandinavian wave starting in the early 1990s saw carbon taxes legislated in Denmark, Finland, Norway and Sweden, among other countries. A second wave in the mid-2000s saw carbon taxes put in place in Switzerland, Iceland, Ireland, Japan, Mexico, Portugal and the United Kingdom. In 2019, Canada, Argentina, South Africa and Singapore implemented a carbon tax. These tax rates range from $1 to $139 per ton.
According to the World Bank’s “Report of the High-Level Commission of Carbon Prices,” a carbon price/tax of between $50 to $100 per ton of carbon emissions would need to be implemented by signatories to deliver on Paris-Agreement commitments by 2030.
Through tax credits, subsidies and other business incentives, governments can encourage companies to engage in behaviors and develop technologies, including blockchain, that can reduce carbon emissions. These credits could combat the use of fossil fuels. For example, a new study by the Overseas Development Institute titled “G20 Coal Subsidies: Tracking Government Support to a Fading Industry” suggests that coal subsidies have increased threefold since the Paris Agreement, even though it commits its signatories to hold global warming to well below two degrees Celsius through significant greenhouse emission cuts.
According to the International Monetary Fund, as well as the International Energy Agency, the elimination of fossil fuel subsidies worldwide would be one of the most effective ways of reducing greenhouse gases and battling global warming.
For example, Saudi Arabia has the world’s second-largest oil reserves that sustain 90% of its total public revenues, and is the primary swing oil producer in the Organization of the Petroleum Exporting Countries. According to a study on the country, its energy subsidies in 2012 were $80 billion, representing 11% of the country's gross domestic product. Saudi Arabia has undertaken blockchain-oriented national projects aimed at diversifying and modernizing its economy by backing numerous financial-technology initiatives, including the world’s first state-backed bilateral cryptocurrency with the United Arab Emirates called “Aber,” which is Arabic for passing by, crossing or traveling on a road.
Paris Agreement climate change advocates
The urgency to wean off fossil fuels as a major energy source, given its negative consequences to the world's climate and human life — which has recently been forced into a digital quarantine lifestyle — wasn’t only written in the reports by the OECD and JPMorgan Chase, however. There have been many other climate change advocates penning action.
An op-ed jointly written by the heads of the Bank of England, which is seriously weighing the pros and cons of issuing a central bank digital currency denominated in pounds sterling, and pf France’s central bank, which plans to test plans a central bank digital currency for financial institutions this year, said that any company that does not change strategically to the new energy reality “will fail to exist.”
In an open letter, the founder and CEO of investment giant BlackRock — which is setting up a working group to evaluate its potential involvement in the Bitcoin (BTC) market, including investments in Bitcoin futures — said that “climate change has become a defining factor in companies’ long-term prospects.” And, investment advisors who manage nearly half the world's invested capital, amounting to more than $34 trillion in assets, urged G-20 countries to comply with the Paris Agreement to save the global economy $160 trillion. They pointed to the alternative, which is that noncompliance would result in damages of $54 trillion.
In a landmark German class-action lawsuit, hundreds of thousands of diesel car owners sought compensation over emissions test cheating from Volkswagen, a company in which digitalization impacts all areas of business: development, vehicle production and the entire work environment on the shop floor and in the office.
In the biggest settlement of its kind, the Brazilian oil company Petróleo Brasileiro — commonly referred to as Petrobras — settled a U.S. class-action lawsuit for $2.95 billion that resulted from the “Operation Car Wash” money-laundering investigation. A memo from the settlement stated that the company made materially false, misleading statements to U.S. investors about climate-related bribery, branding and lobbying payments — potentially also using cryptocurrencies — to politicians that were designed to control, delay or block binding climate-motivated policies in various countries, hindering the implementation of green-energy policies in the wake of the Paris Agreement.
In another class-action lawsuit, 17,000 Dutch citizens tried to stop Royal Dutch Shell from extracting oil and gas and force it to reduce its greenhouse-gas emissions to zero by 2050. The company is in talks with a subsidiary of the Chinese oil and chemical giant Sinochem Group and Australian financial-services firm Macquarie Group to develop a blockchain platform, with the goal of reducing trade and settlement inefficiencies, improving transparency and reducing the risk of fraud in the oil industry.
A landmark legal opinion from the Dutch Supreme Court stated that the Dutch government, which has an upbeat blockchain and crypto action agenda, has explicit duties to protect citizens’ human rights in the face of climate change and must reduce emissions by at least 25% of 1990 levels by the end of 2020.
An article by a pioneering proteomics scientist said: “The need to dramatically reduce global emissions is a black swan moment that investors need to pay attention to” because of the significant near-term threat from climate change activism toward the top four global fossil fuel businesses — Exxon Mobil, Chevron, British Petroleum and Royal Dutch Shell, all of which recently formed a global blockchain consortium — that are behind more than 10% of the world’s carbon emissions since 1965, according to a recent report.
The writing has been on the wall for the oil markets for quite some time, given that fossil fuel energy was the worst-performing sector on the S&P 500 index in 2019. In 1980, the energy industry represented 28% of the index’s value, according to the Institute for Energy Economics and Financial Analysis. Last year, it represented less than 5%. The shift away from oil loomed so large that Moody’s warned in 2018 that the energy transition represented “significant business and credit risk” for oil companies. Accordingly, on March 8, Saudi Arabia announced oil price cuts and plans to increase oil production after expanding its downstream oil operations by acquiring Royal Dutch Shell’s 50% stake in their refining joint venture Saudi Aramco Shell Refinery Company, referred to as SASREF, for $631 million.
This kick-started a global oil price war sending prices, along with world stock market prices and crypto prices — which showed minute-by-minute correlation with the stock market, negating its status as an uncorrelated investment asset — into a free fall that spiraled into a bear market at the fastest rate in history. The resulting global economic downturn has been unprecedented. The Dow Jones Industrial Average, which is seen as the benchmark index to gauge the health of the global economy, declined by 38% during mid-March before seeing a moderate recovery. This has been its worst month in 90 years and has been emblematic of those incurred during major recessions.
The magnitude of the stock and bond value losses that major corporations — 100 of which have been identified as being accountable for more than 70% of the world’s greenhouse gas emissions — have sustained as a result of the ongoing global economic decline have been extraordinary, as they have occurred concurrently with the rapid, global spread of the lethal coronavirus in a border-blind fashion. This has led to lockdowns of countries and shutdowns of businesses, sending millions of out-of-work people to the unemployment lines, cut off from health care plans, and with a severe loss of pension and retirement plan assets.
Corporate internal carbon pricing
Public companies are generally required to disclose material information in their financial filings, including climate and related bribery, branding, and lobbying payments. Directors of these public companies are generally required to act in the best interests of the company and its shareholders, and to consider and manage material risks to a company’s business.
Shareholders are allowed to challenge companies and/or boards of directors for failure to do so under Rule 10b-5 of the Securities Exchange Act, which gives shareholders the right to file a lawsuit to recover economic losses sustained as a result of fraud related to the trading of their investments in stocks, bonds, tokens or initial coin offerings. As the U.S. Securities and Exchange Commission has stated, tokens and ICOs that feature and market the potential for profits based on the entrepreneurial or managerial efforts of others contain the hallmarks of a security under U.S. law.
Fraud can come in many forms: corporate misgovernance through tax evasion; a lack of effective internal controls over corruption prevention involving bribery, lobbying, bid-rigging and money laundering; or poor financial recordkeeping, including statements regarding future environmental liabilities and climate change impacts.
Companies are coming under growing pressure from shareholders, activists and investment advisors who want companies to be transparent about how the physical impacts of a changing climate will affect their business. They are bringing class-action lawsuits based on climate change.
Originally a uniquely American undertaking, and historically prohibited in most other countries, class-action lawsuits have ramped up and spread across 33 countries. As of January, the total number of climate change cases filed thus far has reached approximately 1,444, with some success.
The threat of multi-jurisdictional class-action lawsuits stemming from environmental liabilities motivated nearly 1,400 public- and private-sector organizations — including global financial firms responsible for assets in excess of $118 trillion — to support the work of the Task Force on Climate-related Financial Disclosures, which has aligned with the Business Leadership Criteria on Carbon Pricing issued by the United Nations Global Compact’s Caring for Climate initiative. Internal carbon pricing has emerged as an important tool to help companies manage climate risks and identify opportunities in the low-carbon economy transition.
In the past two years, there has been a particularly strong increase in corporate internal carbon-pricing initiatives in China, Japan, Mexico and the U.S. Studies estimate that the financial value at risk could be up to 17% of global financial assets, if not more. Digital companies, including crypto mining companies, that haven’t yet adopted an internal price/tax will soon have to do so as investors demand more and more insight into the risks of climate disruption, according to a report prepared by the Center for Climate and Energy Solutions.
Country-by-country reporting scheme
Multinational enterprises in 90 countries, which include crypto exchanges and crypto mining companies, also adhere to country-by-country reporting policies as a part of a tax-transparency initiative included in OECD’s “Inclusive Framework on BEPS” — BEPS being an acronym for “base erosion and profit shifting.”
Country-by-country reporting, or CBCR, requires tax administrations to collect and share with other tax administrations information about multinational enterprises that operate in their countries, including MNE group revenue, profit before tax and tax accrued. The American Institute of Certified Public Accountants issued further nonbinding guidance in a practice aid on how to account for cryptocurrencies.
The goal is to give tax offices the information needed to assess if there is a risk that an MNE group is avoiding taxes through inappropriate transfer pricing or other means.
In the OECD’s March 6 CBCR-related public consultation, 21 of the 78 respondents requested that the OECD revise BEPS framework to adopt the first global standard on public tax disclosure, published in December 2019 by the Global Reporting Initiative, that brings tax transparency to thousands of MNEs by making CBCR disclosures publicly available.
One notable submission, signed by 33 U.S. Congresspeople, endorsed the GRI’s new CBCR standard by calling on the OECD to ensure CBCR reporting is “aligned with the GRI.” Meanwhile, members of the U.S. House of Representatives have introduced a tax-transparency bill that would require MNEs to publicly disclose key tax and financial information on a country-by-country basis.
The OECD’s scheduled second CBCR public consultation on March 17 was postponed due to the coronavirus pandemic.
One-third of the world’s population is now locked down in order to mitigate the global spread of the coronavirus pandemic, which has already infected over 500,000 people and brings in its wake great losses in health and finance. This has led to a new quarantine lifestyle that necessitates increased digital social and business interaction. Even climate change protesters — who have swarmed the World Economic Forum’s annual meeting in Davos, the United Nations Climate Conference, and the headquarters of Royal Dutch Shell — are holding digital climate change protest meetings via Twitter.
Digital technologies require a high consumption of electricity, which is currently mostly produced with fossil fuels that adversely impact the environment. A global shift toward green energy to meet Paris Agreement requirements is likely going to compel changes to the environmental tax policies and tax transparency reporting standards of digital companies, affecting their financing, technology, infrastructure and regulation. Because human life "as we know it" is threatened by climate change, catastrophic outcomes will only get worse if no action is taken. Carbon pollution, which heightens the coronavirus’s lethal impact, is border blind and inescapable.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Selva Ozelli , Esq., CPA, is an international tax attorney and certified public accountant who frequently writes about tax, legal and accounting issues for Tax Notes, Bloomberg BNA, other publications and the OECD.