Climate justice for small island developing states: identifying appropriate international financing mechanisms for loss and damage

ABSTRACT

The inclusion of Article 8 in the 2015 Paris Agreement was, in part, an achievement of the advocacy efforts of small island developing states (SIDS) that sought recognition of climate-related loss and damage (L&D) in the United Nations Framework Convention on Climate Change (UNFCCC). However, when a decision of the Conference of the Parties established that Article 8 of the Agreement does not involve or provide a basis for any liability or compensation, SIDS were left with limited options for financing L&D through the UNFCCC, delaying needed climate justice in view of their negligible contribution to greenhouse gas (GHG) emissions. Since then, several studies have evaluated a range of L&D financing options but without explicitly accounting for whether they can deliver justice for SIDS. In this article, we qualitatively analyze the appropriateness of five of the international financial mechanisms that scholars have argued should be urgently considered by the Executive Committee of the Warsaw International Mechanism under the UNFCCC – levies on (1) airline travel, (2) fossil fuel extraction, (3) GHG emissions, (4) bunker fuel usage, and (5) financial transactions. Our results indicate that no single mechanism will deliver the justice that SIDS need but that, of the five mechanisms, airline travel levies and fossil fuel extraction levies are likely to be the most appropriate. Going forward, and as climate-related weather events intensify, a suite of fair, dependable, feasible, and suitable L&D financial mechanisms will be needed to better account for the special circumstances of SIDS.

Key policy insights

• A specialized international L&D financing facility that is fair, dependable, feasible, and suitable for the special circumstances of SIDS is urgently needed.

• Inaction from establishing a specialized L&D financing facility will further burden particularly vulnerable countries, such as SIDS, that face the brunt of climate change impacts.

• Levies on airline travel and fossil fuel extraction would most appropriately account for and meet the needs of SIDS from a climate justice perspective.

• Any international financial facility should support strengthening governance, increasing compliance, and ensuring that flows are just.

KEYWORDS:

• Climate change
• loss and damage
• Paris Agreement
• small island developing states (SIDS)
• tourism
• vulnerability

Introduction

The road to recognize loss and damage (L&D) as one of the pillars of climate action in the context of the United Nations Framework Convention on Climate Change (UNFCCC) has been long and arduous. Historically, the UNFCCC has centred global climate policy around mitigating greenhouse gas (GHG) emissions and more recently, adapting to the impacts of climate change (McNamara et al., 2021; Schipper, 2006). Small island developing states (SIDS), a suite of 58 developing countries that are particularly vulnerable to the adverse effects of climate change, have been among the strongest and most consistent advocates for L&D financing, which is viewed as being necessary when mitigation and adaptation are insufficient for preventing climate change and its negative impacts (Fekete & Sakdapolrak, 2014; Roberts & Huq, 2015). In 1991, the Alliance of Small Island States proposed an international insurance pool that would compensate low-lying islands for L&D associated with sea-level rise. The proposal, however, faced considerable opposition and, ultimately, was excluded from the text of the UNFCCC when it was adopted in 1992.

Since then, L&D has continued to face opposition in global climate negotiations. It took 15 years for the term to formally appear in a UNFCCC document – the 2007 Bali Action Plan – which called for enhanced action on adaptation through, inter alia, ‘means to address loss and damage associated with climate change impacts in developing countries that are particularly vulnerable to the adverse effects of climate change’ (UNFCCC, 2008, online). Three years later, L&D became an agenda item of its own when the Work Programme on L&D was established. In 2013, at the 19th Conference of the Parties (COP), the Warsaw International Mechanism (WIM) on L&D was agreed, signaling a breakthrough for devising actions that would enhance knowledge and strengthen coordination and support for L&D (Roberts & Huq, 2015; Schäfer & Kreft, 2014; Siegele, 2021).

Another breakthrough was the devotion of a full article in the 2015 Paris Agreement to L&D – Article 8 – which calls for L&D to be regarded as a third pillar of the work under the UNFCCC in addition to mitigation and adaptation (Durand et al., 2016). However, its complex, asymmetrical, and multilateral characteristics have been critiqued (Broberg, 2020; Calliari et al., 2019; Siegele, 2021). So, too, has the ambiguous nature of L&D in the negotiations, serving as an excuse for inaction on financing through cooperative action (Lees, 2017). In Chapter 15 (Small Islands) of Working Group II’s contribution to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change, which was released in February 2022, it is clear that L&D requires further attention along with the means to reduce both economic and non-economic loss (Mycoo et al., 2022). And with authors such as Mace and Verheyen (2016) arguing that all options remain open for the development of a system under the climate regime that can address the underlying concerns raised by SIDS, the pressure to financially support efforts to address L&D in SIDS, and in other particularly vulnerable countries, through the UNFCCC has intensified. This is especially true as climate change escalates, and as its impacts and emissions continue to rise (Khan et al., 2020; Robinson et al., 2021).

To achieve a robust international response to L&D, sufficient funding must be provided to and through the WIM (Branchoux et al., 2018; Mace & Verheyen, 2016; Thomas & Benjamin, 2018). Part of the challenge relates to Paragraph 51 of Decision 1/CP.21, which established that Article 8 of the 2015 Paris Agreement does not involve or provide a basis for any liability or compensation. The recent failure of COP26 in Glasgow to establish a L&D financing facility (see Depledge et al., 2022) raises the question: What are the options for financing L&D in developing countries? Direct aid is perhaps a straightforward way of helping to meet the added cost of L&D, however, it will be driven by a host of factors, including donor self-interest, strategic and foreign policy concerns, and motives related to natural and other resources (e.g. see Robinson & Dornan, 2017). Previous studies such as Durand et al. (2016), Roberts et al. (2017), and Gewirtzman et al. (2018) evaluated the capabilities of other mechanisms, including levies on airline travel, fossil fuel extraction, and GHG emissions. Gewirtzman et al. (2018), in particular, argued that these mechanisms along with levies on bunker fuel usage and financial transactions must be urgently considered by the WIM Executive Committee due to their viability to contribute effective international financial support and funding for L&D. But can these mechanisms deliver climate justice for SIDS?

There are several reasons that SIDS require special consideration in the context of L&D. We highlight four key reasons here. First, it is well established in various agenda-setting policy documents such as Agenda 21 that SIDS are a special case for the environment and development (Kalaidjian & Robinson, 2022). Second, these islands and low-lying coastal countries are disproportionately impacted by climate change, and are already experiencing increasing sea-levels, warming temperatures, and exposure to extreme weather events, which pressure coastal resources and critical sectors such as tourism (Petzold & Magnan, 2019; Robinson, 2019; Robinson, 2020). However, SIDS are not homogeneous in nature; they vary in size, geography, and economic and political statuses, and have different risk profiles (Robinson, 2020). Third, the justice implications of L&D for SIDS are pressing, and full redress must include liability and compensation (Robinson & Carlson, 2021). Fourth, in the absence of concrete financing for L&D, these particularly vulnerable countries are likely to be inadequately served by the Paris Agreement (Sharma, 2017). Therefore, as the international climate regime becomes more complex, it is increasingly necessary that proposed international L&D financing mechanisms account for and meet the needs of SIDS (Betzold et al., 2012).

This article conducts a SIDS-specific policy analysis that examines the appropriateness of the five international L&D financing mechanisms that Gewirtzman et al. (2018) argue should be urgently considered by the WIM Executive Committee – levies¹ on: (1) airline travel, (2) fossil fuel extraction, (3) GHG emissions (i.e. global carbon taxes), (4) bunker fuel usage, and (5) financial transactions. Appendix 1 contains a complete literature review that defines the mechanisms and describes their basic features. Appendix 2 contains the list of sources used in the literature review. The analysis aims to determine whether these mechanisms can deliver climate justice for SIDS, understood as the rights that individuals, communities, and governments in these countries have to enjoy a sustainable environment and to take measures at the national, regional and international levels to mitigate and adapt to the impacts of climate change in ways that respect human rights (following Beauregard et al., 2021). The analysis, however, does not seek to espouse the ways in which the financial mechanisms would be imposed, or how funds would be aggregated and allocated to SIDS.

To achieve our aim, the remainder of the article is divided into three interconnected sections. In the first section, we present our methods and analytical framework. In the second section, we apply the framework to the five mechanisms. In the third section, we present our key takeaway messages, including identifying the mechanism(s) that would most appropriately account for and meet the needs of SIDS from a climate justice perspective.

Methods and analytical framework

We use four criteria to analyze whether the five international financial mechanisms that, Gewirtzman et al. (2018) argues should be urgently considered by the WIM Executive Committee, can deliver justice for SIDS – fairness, dependability, feasibility, and suitability. These criteria constitute our conceptualization of the justice dimensions of L&D financing for SIDS. They are grounded in the literature and are modified primarily from the comprehensive list of criteria used by Durand et al. (2016) and Roberts et al. (2017) to evaluate financial mechanisms for L&D financing more broadly.

This analytical framework allows us to conduct a qualitative assessment to determine the most appropriate mechanisms for the special circumstances of SIDS. It is not intended to quantify or weigh any of the criteria. Specifically, we use a three-point scale (yes/to some extent/no) to answer two questions: (1) Is the mechanism (a) fair, (b) dependable, (c) feasible, and/or (d) suitable? (2) Can it deliver climate justice for SIDS, considering their special circumstances? To do this, we draw on the most recent and relevant literature to qualify our answers. This approach to qualitative policy analysis has been used across the literature. Specific to SIDS, Robinson and Gilfillan (2017) used it to explore the effectiveness of regional organizations in coordinating climate change adaptation, and Robinson et al. (2022) used it to assess the quality of adaptation policies in the Atlantic and Indian Oceans. Both studies acknowledge the approach’s limitations, including the impossibility of eliminating all subjectivity, which also applies here.

Fairness is our first criterion. It is the ability for developed and developing countries to be equally equipped to address L&D (Byrnes & Surminski, 2019). Article 4.4 of the UNFCCC highlights the importance for developed countries providing different forms of assistance to developing countries facing the adverse effects of climate change, and the importance of appropriate burden sharing among developed country Parties. Article 2.2 of the Paris Agreement further states that fairness should be implemented to reflect equity in the light of different national circumstances. Within the context of distributive justice, fairness can also be characterized through the mobilization, governance, and distribution and implementation of funds. Mobilization is based on equitable participation in financing through the polluter pays principle. Thus, commitments and flows would be relative to the quantity of historic and current emissions produced, and that the amount is sufficient and adequate over several years (following Khan, 2015; Roberts et al., 2017). Governance of the mechanism would prioritize transparency and equitable representation in governing bodies and funding entities that administer funds, while distribution and implementation refer to the accessibility and pertinent application of funds to SIDS (Schalatek & Bird, 2016). These three components serve as sub-criteria under fairness. For SIDS, fairness is important because L&D is also a political concept where compensation and equity play a role, and that requires decisions to be made by a range of stakeholders at the local, national, regional, and global scales (Surminski & Lopez, 2015).

Dependability, the second criterion, is where immediate and long-term financing are not subject to major fluctuations (Roberts et al., 2017). For the purposes of this article, it encompasses both predictability and sustainability, as described by Durand et al. (2016) and Roberts et al. (2017). Funds must remain constant or increase over time for a mechanism to be predictable (Pauw et al., 2016); they must be generated without problematic fluctuations to be deemed sustainable (Roberts et al., 2017). This combined conceptualization of dependability reflects Articles 4 and 11 of the UNFCCC, which call for financial flows that are new, additional, and predictable. Moreover, Articles 2 and 8 of the Paris Agreement call for flows that are consistent with low emissions and climate-resilient pathways, and which flag the importance of averting, minimizing, and addressing financing, and the role sustainable development has in reducing the risks of financing, respectively. Dependability is, therefore, important to SIDS to ensure that disaster planning can truly be comprehensive due to the uncertain frequencies and intensities of climate-induced disasters (Gewirtzman et al., 2018).

Feasibility is our third criterion. It refers to whether the financial mechanism has been or is capable of being implemented in the international market (Durand et al., 2016; Kreibich & Hermwille, 2021). It is a term that has not been explicitly used in the UNFCCC or the Paris Agreement, but previous studies have cited it as a guiding criterion when discussing L&D financing mechanisms. Durand et al. (2016) evaluate it by determining whether funds can be mobilized without the construction of a significantly new financial structure. Roberts et al. (2017) see it as the effort needed to gather funding under each mechanism, tying the fairness criterion above to ‘affordability’ (Durand et al., 2016). This criterion is important for delivering justice for SIDS because institutions must either be available and capable to implement the financial mechanism, or the mechanism itself must be widely accepted (Robinson et al., 2021).

Suitability, our fourth and final criterion, refers to a sense of rightness for the circumstances of SIDS. Generally, SIDS are small, low-lying, and geographically isolated (Robinson, 2020). However, they are not homogenous and differ in ‘population, area, international power position, economic performance, and the extent of government involvement’ (Anckar, 2013, p. 13). The diversity in these characteristics increases their exposure and vulnerability to climate change and climate-induced risk, leading to displacement, migration, and loss of culture (Künzel et al., 2017; Thomas & Benjamin, 2020). They also increase their risk of L&D from rapid-onset events such as tropical storms, droughts, and floods, and from slow-onset events such as sea-level rise, increasing temperatures, and ocean acidification. For SIDS, L&D is a human rights issue (Robinson & Carlson, 2021), and scholars have called out the UNFCCC for insufficiently taking human rights into account, and for contributing to policy outcomes that inadequately protect communities that experience L&D (Toussaint & Martinez Blanco, 2020). Therefore, a major component of this criterion is whether the mechanism satisfies the scale of support that SIDS need and whether it addresses non-economic L&D, which affects individuals (e.g. loss of life), societies (e.g. loss of cultural heritage), and the environment (e.g. loss of ecosystem services) in ways that may be hard to quantify (Serdeczny, 2019).

Results and discussion

While recognizing the heterogeneous nature of SIDS, we find that airline travel levies and fossil fuel extraction levies are likely to be the most appropriate. Table 1 below summarizes our findings across the four criteria. Appendix 3 contains a breakdown of the scoring against each fairness sub-criterion. More details are below.

Table 1. Summary of findings.

FINANCIAL MECHANISM	CRITERIA
	Fairness	Dependability	Feasibility	Suitability
Airline travel levy	To some extent: the levy collected could potentially move downstream to traveller destinations, including SIDS	To some extent: air travel demand is growing annually	Yes: similar schemes have been successfully implemented on an international scale	Yes: could help meet other development needs in SIDS (e.g. poverty reduction and healthcare)
Fossil fuel extraction levy	To some extent: developed countries have historically extracted the most fossil fuels but, if applied across the board, SIDS that were not major historical emitters would also be required to pay	To some extent: in the short term, it can provide financing; in the long term, revenues are likely to decrease as fossil fuel use is disincentivized	Yes: The levy will be placed on fossil fuel extractors, which are easy to identify	Yes: the proposal was made with L&D in mind
GHG emissions levy	No: has been previously implemented but countries and corporations might refuse to comply with the terms	To some extent: in the short term, it can provide financing; in the long term, another financing mechanism will be needed	To some extent: future strategy for implementing tax rates and use of generated revenues will be needed	To some extent: most SIDS are low GHG emitters
Bunker fuel usage levy	No: SIDS may be locked out of participation in maritime trade due to increasing costs	Yes: shipping is necessary for importing and exporting goods, including for remote SIDS	No: creating a system will be time-consuming; collection will be difficult and complicated	No: high dependency on imports and exports will increase the burden on SIDS
Financial transaction levy/tax (FTT)	No: revenue raised will eventually hurt end-users	To some extent: collection will be complicated and will likely cause disruptions in the market	To some extent: previously used in individual countries	No: conceptually disconnected from L&D and creates instability in the global market

(Source: Authors).

Airline travel levies

Airline travel levies are dependable, and to some extent, fair, feasible, and suitable. While the financial mechanism has not yet been implemented globally for L&D, 10 countries including Cameroon, Chile, Mauritius, and South Korea have collected air passenger levies for Unitaid, an agency established to supply drugs to treat healthcare issues like Ebola and malaria in developing countries (Bird, 2018; Spiegel et al., 2020). France alone has contributed more than US$1.2 billion, and the proceeds constitute more than half of Unitaid’s budget (Unitaid, 2013; Unitaid, 2017). One advantage is that international travel is more appealing to wealthy individuals who can absorb the cost of a levy when purchasing international air tickets. Moreover, some governments are backed by organizations like Greenpeace and Friends of the Earth in levying those who travel by air more than once per year (Jourdan & Wertin, 2020), though the Caribbean Hotel and Tourism Association and the Caribbean Tourism Organization previously asked that government action in the European Union addressing climate change should not deter potential European travellers from taking vacations in the Caribbean (CHA-CTO, 2018).

Airline travel levies have the potential to generate US$5-10 billion annually (Roberts et al., 2017). Another advantage is their governance; applying a levy on top of the cost for an airline ticket is straightforward. Developed countries can collect the levy at international flight departures and channel funds downstream to travellers’ destinations (e.g. SIDS), through the Green Climate Fund, for example, in support of L&D. Given the level of potential revenues, additional funds can be used by SIDS governments to support other national objectives such as poverty alleviation, health infrastructure, and crime reduction (e.g. see Robinson, 2018; Scobie, 2013).

A key consideration would be the mobilization and impact of the levies on (a) the demand for air travel, affecting the dependability of the flows, and (b) revenue streams from tourism, which is a critical productive sector in many SIDS. One drawback is that this financial mechanism does not follow the polluter pays principle and, therefore, does not account for historical emissions. Regarding (a), it is assumed that such levies would not change the demand for international travel. Passenger demand for air traffic is increasing by 5.2% with an expected 4.1% annual growth until 2034 (Ivaldi & Toru-Delibaşı, 2018). Further, the fees would be a small fraction of the cost of a highly variably-priced commodity. Regarding (b), international tourism receipts make up more than 80% of total exports for some SIDS, including St. Lucia, Palau, and the Maldives (UNCTAD, 2020). Additionally, five of the world’s 10 most tourism-dependent economies are Caribbean SIDS (Mooney & Zegarra, 2020). Recent research shows that travellers are prepared to pay additional fees (Robinson et al., 2021; Seetaram et al., 2014). However, there are exogenous factors such as the COVID-19 pandemic that can affect both (a) and (b). Cuba and Fiji, for example, barred all non-resident foreigners from entering national borders, and Fiji imposed a 28-day quarantine period compared to the standard 14 days imposed by other countries (OECD, 2021). Because of the decrease in tourism receipts during the pandemic, gross domestic product is expected to shrink by more than 16% in tourism-dependent SIDS like Antigua and Barbuda, Belize, Fiji, Maldives, and St. Lucia. These factors complicate the mechanism’s appropriateness for SIDS.

Fossil fuel extraction levies

Fossil fuel extraction levies are both feasible and suitable, but only fair and dependable to some extent. Webster and Clarke (2017) note that any country that extracts fossil fuels would be the obvious candidate to pay the levy based on their emissions to date and future extraction of fossil fuels. Today’s largest producers are expected to continue dominating the global share of production (Achakulwisut & Erickson, 2021). Between now and 2030, the bulk of production is expected to occur in the following five countries (in decreasing order) for each fuel: coal – China, India, Australia, Indonesia, and the United States; natural gas – the United States, Russia, Iran, China, and Canada; oil – the United States, Saudi Arabia, Russia, Canada, Iraq (Achakulwisut & Erickson, 2021). Therefore, it would mostly be up to wealthy countries and historical emitters (including corporations such as BP, ExxonMobil, Pemex, and PetroChina) to pay the levies, as they have primarily benefited the most from fossil fuel extraction and have the most alternative development pathways to leave fossil fuels in the ground (Lenferna, 2018b). The majority of the burden would fall on the major GHG emitters and not on the poor and particularly vulnerable countries, including SIDS, at least at the national level (Roberts et al., 2017). However, the reality of governance at the local level is likely to be different. For example, ExxonMobil’s oil and gas buildout off Guyana’s coast, though projected to allow the economy to grow at an extraordinary rate, will rehash histories of external intervention in domestic affairs and ‘continuous resource extraction’ (Cordis, 2021, p. 268). This could stall development progress in SIDS.

Lyster (2015) calls for the establishment of an international fossil fuel-funded Climate Disaster Response Fund under the WIM to compensate climate disaster victims in developing countries. However, the ideal approach to levying fossil fuel extraction might be to fund L&D and phase out fossil fuel use altogether. Theoretically, these levies can generate US$50 billion annually (US$2/ton) and increase total revenue between 5% and 10% each year (Richards & Boom, 2014). Countries such as the United States, the top oil and gas producer, would be required to provide a one-off payment calculated based on the 150-year historical emissions for which they are responsible (Richards & Boom, 2014). Levies based on contribution to the problem are optimal as the funders are given incentives for prevention (Caney, 2006). This will force fossil fuel companies to conduct cost–benefit analyses of whether their operations can remain financially viable. If not, they would exit the market. In the short term, this financial mechanism is likely to face political opposition from various countries, including potentially from Trinidad and Tobago, Papua New Guinea, Cuba, Timor-Leste, and Singapore, which are the biggest oil-producing SIDS. In the long-term, the levy could be capable of deterring governments from extracting fossil fuels and downsizing the market being taxed. This will, however, depend on the scale and scope of the levy. It will also eventually end any extraction levy funding towards SIDS as governments phase out fossil fuels, though it remains difficult to predict the distribution and accessibility of funds. A plan to replace this revenue stream over time would be needed.

GHG emissions levies

Countries such as Japan, France, and Switzerland have implemented their own GHG emissions levies, mandating US$3, US$36, and US$87 for each ton of carbon emitted, respectively (Haites, 2018). Therefore, proof of concept and implementation exist. In some instances, the impact of GHG emissions levies on gross domestic product and emissions reduction will gradually be greater than the impact of carbon trading. This is the case in China where oil and natural gas emissions will decrease by 2.74–2.81% and power generation will decrease by 4.39–4.45% (Jia & Lin, 2020). Considering the circumstances of SIDS, these levies are dependable and feasible to some extent but not fair. While the goal of climate action is to curb GHG emissions, governance becomes complicated because countries and corporations may inevitably refuse or have limited capacity to comply with the terms. Zhang and Zhang (2018) considered the need for government intervention at the national level to implement a comprehensive carbon pricing strategy involving appropriate prices for different tourism industries at different times in the year. Yet, SIDS generally lack the institutional infrastructure needed to determine such changes by themselves and just compensation will require decisions from different stakeholders. The principle of common but differentiated responsibility and respective capabilities will be vital in ensuring the social and political acceptability of a levy on GHG emissions if a dedicated multilateral fund were employed (Nedumpara & Pradeep, 2021).

Another goal of climate action is to make corporations and consumers divest from fossil fuels (Lenferna, 2018a). GHG emissions levies are likely the most cost-effective regulatory approach to achieving this. At the national level, the levies can be significant contributors to government revenue (Steenkamp, 2021). If applied internationally or universally, SIDS would have to pay the levy as well, even though most of them are low GHG emitters, even on a per capita basis. For example, Turks and Caicos and Kiribati emit less than 0.01% of the world’s total emissions, and Guinea-Bissau and Cabo Verde are some of the lowest per capita emitters in the world at 0.18 and 0.19, respectively (Crippa et al., 2021). Non-SIDS such as China and India that are experiencing rapid economic growth are ‘pollution havens’ (Liu et al., 2019, p. 762) that would also get caught in the net. ‘Pollution havens’ are countries with weaker environmental standards to which multinational firms engaging in high-polluting activities relocate. Therefore, the polluter pays principle fails in this financial mechanism. While these ‘pollution havens’ are not historically responsible for GHG emissions (Carlson et al., 2021), levies based on current consumption rather than historical responsibility could quickly accumulate funds for redistribution among other developing countries, including SIDS.

Bunker fuel usage levies

The shipping industry provides much-needed commodities for global supply chains. Despite transport sectors being suspended during the COVID-19 pandemic, dry bulk shipping increased in demand and even became more resilient in continuing global operations (Millefiori et al., 2021). For these reasons, bunker fuel usage levies are dependable although political reasons and potential negative economic impacts suspended discussions in the past (Psaraftis, 2016). Proof of implementation and distribution have ceased to exist. Both Antigua and Barbuda and the Marshall Islands have submitted proposals to the International Maritime Organization’s (IMO) Marine Environment Protection Committee expressing their interest in a levy on bunker fuel usage. Antigua and Barbuda asked for the levy to increase over time and for generated revenues to compensate SIDS for mitigating the impacts of climate change (Lagouvardou et al., 2020). The Marshall Islands proposed an international fund for GHG emissions paid by ships on every ton of bunker fuel purchased (Monios & Ng, 2021). The mobilization of such levies would align with the polluter pays principle because generated revenue could be used to boost research and development as well as the adoption of environmentally-friendly technologies (Kosmas & Acciaro, 2017; Psaraftis & Lagouvardou, 2019). Would the port of call or flag state of the vessel collect the levies? We are unsure and concede that collection would be difficult and complex, impacting their feasibility. Ideally, the levies would be governed under the IMO. Yet, the IMO highlights major shortcomings regarding the availability and reliability of data on transport and trade costs, especially for SIDS, which would impede a comprehensive assessment of the levies’ appropriateness for these countries. This support is of paramount importance to SIDS as many are remote and have lower maritime transport connectivity. These issues and realities undermine the resilience and reliability of their transportation systems (IMO, 2020).

It is also possible that the governance of bunker fuel usage levies may unfavourably burden SIDS, given their high dependency on imports and exports, and geographic distribution. SIDS already spend almost 22% of the value of imports for international transport and insurance (Rojon et al., 2021). Moon (2014) found that Seychelles, Solomon Islands, and Grenada face the highest expenditures at 17–20.2%, while SIDS pay 2% more than the global average overall. Paying for transfer costs can negatively affect economic growth and bar SIDS from international trade participation. SIDS’ above-average transport costs further impact non-economic impacts such as transport dependency, food security, and disaster response, which would need to be considered (Rojon et al., 2021). However, Psaraftis and Lagouvardou (2019) consider that a levy in excess of US$75/ton of carbon equivalent is what would be required to achieve significant results. This partially explains why bunker fuels are among the only products that are not currently taxed within nations or internationally (Roberts et al., 2017; Robinson et al., 2022).

Financial transaction levies (FTTs)

FTTs cannot be considered fair or suitable because they do not suggest compensation or liability for damage done by parties that have contributed most to climate change (Roberts et al., 2017). Financial transactions hurt end-users and lack appropriate governance structures as levy costs are passed onto the consumers of financial products. This is known as a ‘cascading effect’ (Kalaitzake, 2017). To date, FTTs have only been implemented at the domestic level. Countries such as Germany, Japan and The Netherlands have even elected to repeal their FTTs in the past 25 years because they slowed economic growth and disrupted stock markets (Fankhauser & Ward, 2010; Miller & Tyger, 2020). FTTs are also unstable in the global market because they are difficult to predict, and the optimal rate fluctuates depending on the financial market characteristics such as the tax rate and base. Raising FTTs explicitly raises transaction costs, which decrease trade volumes (Miller & Tyger, 2020). Berentsen et al. (2016) find that, for the United States, the optimal FTT rate is 1.6%, but that reduces the real volume of financial trading by 17%. This impacts the adequacy of the funds on a day-to-day basis, let alone over several years. Furthermore, in the case of global phenomena such as the COVID-19 pandemic, fossil fuel-related financial assets can plummet significantly (by around 40%), and new capital investments in fossil projects worth billions of dollars can cease (Rempel & Gupta, 2021), resulting in demand fluctuations and diseconomies of scale within SIDS.

So while FTTs can generate significant funds for a single country, they are only dependable and feasible to some extent. The funds raised by FTTs are earmarked in advance, which could guarantee funds for SIDS (Durand et al., 2016). Davis et al. (2013) estimate that an annual sum of between US$17.7–35.4 billion will be passed onto end-users indirectly. However, the potential for using bilateral agreements to facilitate the transfer of funds remains untouched and it is expected that global agreements are unlikely to materialize in the near future to efficiently allocate funds to support L&D. Countries may be unwilling to impose such a tax; they may also not be logistically prepared to administer it (Durand et al., 2016). Discussions about imposing FTTs in the European Union have remained unproductive since 2011 due to disagreements between Member States (Hirsch, 2019; Roberts et al., 2017). Surminski and Lopez (2015) have posited that data constraints and uncertainty create challenges for decision-makers and can potentially lead to inactivity if not addressed properly. Singapore, a SIDS that accounts for more than 5% of global foreign currency transactions, has concerns about FTTs because the methods by which compensation would be delivered would still need to be designed (Fankhauser & Ward, 2010). Another consideration is that collection from financial transactions can complicate and cause disruptions in the market. Both France and Italy have failed to reach even half of their estimated target annual collection from FTTs (Miller & Tyger, 2020). This suggests that the dependability of FTTs can vary.

Conclusion

International financial responses to L&D are a critical component of delivering climate justice for SIDS. However, the extent to which sources of finance can be mobilized remains unclear (Khan et al., 2020; Robinson et al., 2021). This is especially the case since Paragraph 51 of Decision 1/CP.21 established that Article 8 of the 2015 Paris Agreement does not involve or provide a basis for any liability or compensation.

In this article, we qualitatively analyzed the appropriateness of the five international financial mechanisms that Gewirtzman et al. (2018) argues should be urgently considered by the WIM Executive Committee – levies on (1) airline travel, (2) fossil fuel extraction, (3) GHG emissions, (4) bunker fuel usage, and (5) financial transactions – based on whether they are (a) fair, (b) dependable, (c) feasible, and/or (d) suitable for the special circumstances of SIDS. Through our three-point scale (yes/to some extent/no), and recognizing that some subjectivity could not be avoided, the application of our four criteria showed that levies on airline travel and fossil fuel extraction are only fair to some extent but that levies on GHG emissions, bunker fuel usage and financial transactions are not fair at all. Bunker fuel usage levies are dependable, given the centrality of shipping to imports and exports, and the likely revenue that could be generated. However, levies on airline travel, fossil fuel extraction, GHG emissions, and financial transactions are only dependable to some extent when considering that air travel may be affected under extenuating circumstances such as the COVID-19 pandemic or that one of the goals of such measures is to eliminate fossil fuel usage, thereby curbing climate change. Airline travel and fossil fuel extraction levies are feasible because the levy would target producers, though GHG emissions and financial transaction levies are only feasible to some extent as some SIDS are wary of their efficacy, making implementation challenging. Bunker fuel usage levies are, however, not feasible at all because of the complexity of the governance structures that would be required to implement them. Levies on airline travel, fossil fuel extraction, and GHG emissions are suitable – SIDS contribute negligibly to GHG emissions and, for the most part, are not major oil producers. However, these levies should not jeopardize revenues from tourism upon which many SIDS depend. Bunker fuel usage levies and FTTs would not be suitable because they would further burden SIDS.

Of the five mechanisms, we found that airline travel levies and fossil fuel extraction levies may be the most appropriate for SIDS, as they best account for these countries’ negligible contribution to GHG emissions and their economic dependence on tourism. While these mechanisms should be prioritized, it is possible that they could be coupled, especially as Roberts et al. (2017) suggest that no single mechanism considered in isolation should be seen as adequate. However, discussions regarding the rate at which the levies should increase to keep L&D funding for SIDS reasonably stable in the long term would be required along with detailed projections as to when incomes would disincentivize fossil fuel use so that other financing streams can replace them. For bunker fuel usage levies to be considered, the availability of transport data must be improved. Trade costs associated with the imposition of bunker fuel usage levies must also be considered to help weigh the costs to and benefits for SIDS. Finally, as literature on FTTs is limited, more research is needed. Therefore, FTTs should not currently be considered because they are conceptually disconnected from L&D and can create instability in national and global markets. However, given the increasing popularity of cryptocurrency and trading in non-fungible tokens, these frontier technologies may offer new possibilities for the future of international L&D finance.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 We recognize that levies and taxes are different, but most of our sources from the literature use them interchangeably.