The Legal Framework for Carbon Tax: A Case of Cameroon

3.1 Relevant Legal Instruments Providing Anchor Points for the Design and Implementation of Carbon Tax in Cameroon

Both international and national legal instruments contain relevant provisions that lend support to the design and implementation of carbon tax for the purpose of regulating GHG emissions in Cameroon. An analysis of the international legal instruments that support the introduction of a carbon tax in Cameroon is therefore crucial.

3.2 Principles of Environmental Law that Underpin the Institution and Implementation of Carbon Tax for Regulating GHG Emissions

Two fundamental principles of environmental law notably, the polluter-pays principle and the principle of liability underpin the design and implementation of carbon tax for the purpose of regulating GHG emissions in Cameroon. In other words, the polluter-pays principle and the principle of liability offer the theoretical foundation for the implementation of carbon tax for the purpose of combating climate change. Cameroon’s Constitution 48 guarantees to every person a right to a healthy environment and imposes state and individual environmental duties to protect the environment in its preamble, which is part and parcel of the Constitution by virtue of Article 65 of the same. These provisions of the preamble may be interpreted to mean the indirect constitutionalization of the polluter-pays principle and the principle of liability in Cameroon on which carbon tax could be anchored.

4.1 The Prospects of Implementing Carbon Tax in Cameroon

Carbon tax is widely recognised 59 as an opportunity and the most cost-effective policy instrument to reduce GHG emissions, slow the pace of climate change and stir economies towards a low-carbon emission path compared to other measures such as subsidies and other regulatory instruments. This is probably why an increasing number of countries are implementing carbon tax to meet their emission reduction targets under the international climate change regime. 60 In fact, since 1990 when the first carbon taxes 61 . were implemented, the number of countries 62 in which carbon tax is in operation and under consideration has increased steadily in recent years. In Africa, apart from South Africa in which carbon tax is being implemented and Senegal and Côte d’Ivoire in which carbon tax is still under consideration, 63 countries of the global South including Cameroon have not yet joined the train.

Falcão 64 has argued that existing non-tax climate change policies are unable to result in a reduction of carbon emissions due to among other factors, administrative complexity, mismatched policies in different countries, burdensome methods for measuring emissions, too much tax holidays in the form of exemptions, subsidies, credits, etc., all of which can be blamed on politics. Furthermore, Avi-Yonah and Uhlmann 65 note that while regulatory tools can help reduce carbon emissions as part of a broad-based approach to tackle climate change, majority of the debate among scholars and policymakers has favoured market-based approaches to limit carbon emissions and that a market-based instrument may be the best approach to address all sources of GHGs. Ngwome 66 notes that public fund and markets-based financing of climate actions from industrialised countries are unlikely to meet the regular and long-term funding needed by so-called developing countries to effectively mitigate climate change and improve livelihoods. Internal funding sources through carbon tax for example, are therefore crucial for bridging the financial gap. Within the context of implementing the REDD+ initiative for instance, countries such as Costa Rica and Mexico had long established mechanisms through taxation to generate internal funds to finance the initiative. 67 Cameroon and other countries in the global South could replicate these countries’ examples. In fact, many countries have implemented carbon tax with positive outcome from which Cameroon can replicate. For example, in 2013, Britain imposed a carbon tax of $25 per metric ton of CO₂ and in 2019 Canada imposed a national carbon tax of $16 per ton of CO₂. 68 . Other examples are Alberta and British Columbia in Canada that use carbon taxes as part of their strategies to reduce emissions and encourage investments in energy-efficiency and renewable energy 69 Cameroon and other countries of the global South can replicate and adapt these best practice examples and introduce carbon tax which can reduce the emission of GHGs, spur innovation and a transition to a low-carbon economy and ultimately, to meet their pledges under the Paris Agreement.

The carbon heavy or carbon intensive sectors in Cameroon that would be subject to a carbon tax are many and therefore necessitate the institution of such a tax in the country. They include but are not limited to the forestry and land-use change, agricultural, energy, waste, and industrial sectors. A breakdown of GHG emissions in Cameroon shows that land-use change contributes about 51,51% to the total amount of the country’s GHG emissions, followed by the agricultural sector with 37,37% , the energy sector with 7,7% , the waste sector with 4,4% and lastly, the industrial sector with 1,1%. 70 The introduction of a carbon tax in Cameroon would help them to reduce their amount of GHG emissions but would also incentivize them to innovate.

A concern that requires some clarification is whether the global North models of carbon tax can easily be transplanted in the global South such as in Cameroon. The United Nations Handbook on Carbon Taxation for Developing Countries 71 helps sheds some light. The Handbook notes that ‘countries in every region and at all levels of development can take action to reorient their domestic tax policies to raise revenues’ and that ‘multilateral solutions and international cooperation can amplify and support these individual endeavours’. 72 This implies that the global North models of carbon tax need not be transplanted to the global South such as in Cameroon as, with the support of multilateral solutions and international cooperation, they can take advantage of their existing fiscal infrastructure to design and implement carbon tax. In replicating the global North Model of carbon tax, Cameroon and other countries of the global South will have to build on its existing tax infrastructure to design and implement their own country specific carbon taxes. Countries of the global South can design and implement according to their different needs and priorities. 73

The economies of many industrialised countries that have used carbon taxes to discourage GHG emissions and promote green investments, remain solid, watering down the concern raised by the David Suzuki Foundation that carbon tax would damage economies. 74 A good example in this regard is Sweden that introduced carbon tax to reduce GHG emissions since 1991 and since then, its economy has grown by more than 100%. 75 In fact, the Swedish Ministry of Environment estimated that although a suite of other policies were also used, carbon tax reduced emissions by an additional 20% (as opposed to solely relying on regulations), enabling the country to achieve its 2012 target under the Kyoto Protocol. 76 Cameroon can emulate these good examples and introduce carbon tax to help meet its carbon cut commitment under the Paris Agreement. However, Cameroon is not an industrialized country and since no country in the global South has recorded a success story regarding the implementation of carbon tax to cut its GHGs, whether or not it will work in the global South such as in Cameroon is still to be ascertained.

Appropriate governance structures are critical for administering carbon tax, performing effective monitoring, reporting and verification (MRV) of emissions and ensuring compliance with tax obligations. 77 One of the advantages of implementing carbon tax in Cameroon is that the country already has a tax collection framework and a tax administration in place, and can therefore align the administration of carbon tax with the existing taxation framework and administration. 78 The government can rely on existing taxation framework to tax GHG emitters. Since designing effective administrative arrangements requires establishing the actions needed to oversee and implement the tax, the government will need to map the various functions that need to be carried out in administering the carbon tax. 79 This will enable the government to determine whether to adapt the existing taxation framework and administrative services or to create additional procedures and bodies.

Another opportunity for the administration of carbon tax in Cameroon is that it can be levied at the source, allowing the government to tax the full carbon-emission potential of any source. In the case of the energy sector for instance, carbon tax can be levied whenever energy is generated at the source. On this note, carbon tax appears simple to implement and more transparent. Another prospect of carbon tax is that it is simple to implement in the sense that it can be imposed at a fixed rate per ton of carbon content on the main sources of CO₂ emissions. Monitoring of the carbon content and sources can be performed by independent certified bodies working in partnership with the Secretariat of the UNFCCC. Carbon tax is also simple to administer or implement because it could be levied “upstream” (e.g., during logging and clearing or conversion of forest to agricultural lands, during energy production) as opposed to midstream (e.g., wood and agricultural products transformation, oil refineries) and “downstream” (e.g., energy use), 80 i.e., at the genesis of emission such as clearing of forest, or importation of products with high carbon content such as fertilizer. It is even simpler because there are few large or high GHGs emitters. E.g., there are few logging companies, few large-scale agricultural investors, few importers of high carbon content fertilizer, few energy production companies, etc.

In order to take full advantage of the opportunities of a carbon tax, and replicate favourable experiences elsewhere in the world, the challenges of implementing carbon tax in Cameroon will need to be addressed. These challenges are discussed next.

4.2 The Challenges of Implementing Carbon Tax in Cameroon

Although carbon tax could be helpful in combating climate change, in the words of Marron and others, 81 ‘moving a carbon tax from the whiteboard to reality is challenging. A tax that works well in principle may stumble in practice. A real carbon tax will inevitably fall short of the whiteboard ideal’. Thus, despite the opportunities that carbon tax presents for tackling climate change in Cameroon, its implementation in the country could be hampered by some difficulties. The major challenges of designing and implementing carbon tax in Cameroon which require close attention include: absence of legislation or legislative provision that can provide a springboard for its design and implementation; how to levy it and the cost or tax rate; when to levy it –whether or not it will be an upfront tax; who should be taxed; the socio-economic costs associated with its implementation –whether it will have any negative impact on the population and the economy as a whole. These are crucial questions that require clarifications on how carbon tax can be designed and implemented in Cameroon.

As with any tool for combating climate change, legislation serves as the bedrock of actions to reduce GHG emissions. At present, Cameroon disappointingly has no carbon tax legislation with the effect that the opportunities offered by carbon tax are not being tapped in the country. As argued in the case of Chile, 82 legislation is needed to: identify establishments subject to carbon tax; quantify emissions subject to taxation; establish emissions declaration rules; tax calculation and payment; etc. Such legislation constitutes a spring board for the design and implementation of carbon tax in Cameroon. It would appear the prospects of such legislation being introduced in Cameroon are far-fetched as the country has not enacted any climate change related legislation so far. Moreover, the government of Cameroon relies heavily on the 2018 REDD+ Strategy 83 to tackle climate change.

As to the challenge of who should be taxed, the Partnership for Market Readiness 84 noted that carbon tax can be applied to a wide range of different actors along the value chain, from producers and importers (upstream) to distributors (midstream) and consumers (downstream). Norway and the Canadian provinces of Alberta and British Columbia are standout countries for upstream carbon taxes while; President Joe Biden’s green agenda is making upstream carbon tax operations in the US more likely. 85 This researcher is inclined to reason with Avi-Yonah and Uhlmann who are of the opinion that an upstream carbon tax is the most straightforward approach to tackle climate change because its implementation at the upstream level ensures that the tax covers all emissions because it is levied at the point that GHG emissions are provoked. 86 Another argument in favour of an upstream carbon tax is that with such an approach, there would be a limited number of taxpayers, which would reduce the rate of tax evasion and compliance costs, resulting in higher tax system efficiency. 87 That said, legislation could establish a tax-free threshold target beyond which emitters of GHGs across sectors should be taxed. In this regard, sources of GHG emissions that can potentially attract carbon tax in Cameroon are: CO₂ emissions from the forestry sector; methane leakage during the extraction, processing, and transportation of oil and gas; CO₂ emissions from the production of clinker (limestone) for cement production; agricultural and livestock based GHGs, which include nitrous oxide emissions from soil and fertilizer practices, methane emissions from cows, and CO₂ emissions from forest clearance and burning for agriculture); 88 X etc. In the forestry sector for instance, the government could tax forest owners and logging permit holders who store less carbon on their property relative to storage in a baseline year and gives rebates to those who increase carbon storage. 89 With respect to methane emissions during the extraction, processing, and transport of oil and gas, technologies for monitoring methane emissions are still evolving, but as the IMF 90 noted, in the meantime methane leakage could be taxed in proportion to a default leakage rate, with rebates for companies that demonstrate emission rate below the default rate. Regarding CO₂ emissions released during the production of clinker for cement production, carbon tax could be levied on clinker production in proportion to a default emission rate as proposed by the IMF. 91 With respect to agricultural and livestock-based GHGs, which include nitrous oxide emissions from soil degradation and fertilizer practices, methane emissions from cows, and CO₂ emissions from forest clearance for agriculture, the IMF 92 noted that carbon taxes could be imposed per head of cattle, on fertilizer inputs, and on profits for farming involving deforestation and that carbon taxes, however, might be limited to large-scale agricultural investments. 93

With respect to the challenge of establishing a tax rate, an important element of designing carbon tax is setting the tax rate. Legislation could establish a minimum emission tax threshold above which a carbon tax should be imposed on any emitter and upon a liability assessment report to be made by an independent assessor. Any emission below the minimum threshold will not trigger the responsibility of an emitter to pay carbon tax. The establishment of a minimum threshold aims at reducing the costs of administering the tax so that the cost of administration is not more that the amount recovered in tax in line with the taxation principle of efficiency. 94 A threshold is also important because the government will have to deal with a relatively high number of emitters with a significant variation in the rates of emissions across dozens of economic sectors. 95 In this regard, it would be wise for the government to consider the need to establish two thresholds, one for small emitters (who may be many in number) and another for big emitters. With regard to the small emitters, a relatively low threshold may be needed to ensure that, in totality, a significant proportion of GHG emissions are covered. 96 Thus, there will be two emission tax thresholds representing two different tax rates. Denmark’s carbon tax rate varies with the GHG type. 97 In countries such as Singapore, Canada, Argentina, Iceland, the tax rates increase over time 98 while there is also the possibility of a static carbon tax rate according to which the carbon tax remains constant over time. 99 Cameroon could build on these experiences in setting a rate that works best for the country, taking into consideration social, economic, technological, and political context and of course if it eventually decides to establish a carbon tax system.

The tax rate chosen, together with the extent of coverage have implications on the amount of emissions abatement achieved, the revenue raised, and the economic impact of the tax. 100 Ideally, it is important that the amount in tax should be high enough to keep global temperature rise to the safer 1.5°C target as set by the Paris Agreement. 101 Although the tax rate should be high enough to discourage activities that generate excessive levels of GHG emissions, it should not be too high as to discourage any investments. Thus, to implement a carbon tax, the government will need to determine the cost or price for each ton of GHG emissions which of course presents some challenges because scientists and economists need to first agree on which assumptions to use. 102 To overcome this challenge, the tax could be levied at a default rate per ton of GHG emissions in line with the taxation principle of certainty. In this regard, it is crucial to provide certainty with respect to the price or tax rate because a stable rate for emissions is important for investment decisions such as shifting to low emission technologies and innovations. 103 The government may however, need to consider the need to design a flexible tax rate in order to take care of changing circumstances such as inflation. 104 For instance, Iceland’s carbon tax rate rises by at least the rate of inflation 105 As proposed by the Draft Explanatory Memorandum for the South Africa Carbon Tax Bill, 106 targeted emitter could be accorded tax-free allowances in the implementation of carbon tax in order ‘to provide for a smooth transition to a low carbon economy and to take into account international competitiveness.’ Such allowances include 107 basic allowance, 108 fugitive emissions allowance, 109 trade exposure allowance, 110 performance allowance, 111 carbon budget allowance, 112 and offset allowance 113

Regarding the challenge of when to levy carbon tax, whether or not it will be an upfront tax, it is important that carbon tax should be applied after emissions have occurred. However, to guarantee effectiveness, legislation could oblige potential emitters to pay some cautions into the public treasury to guaranteed payment of tax when they exceed the tax-free emission threshold. The upfront payment approach could work well although there is no evidence that such an approach is in practice anywhere in the world at the moment.

Another challenge is the socio-economic costs associated with the implementation of carbon tax. There is concern that carbon tax will lead to socio-economic costs by adding significant costs to businesses, high prices for consumers, reducing global competitiveness, weakening profit margins and consequently, will negatively impact the economy. 114 This concern is particularly raised within the context of the South African Carbon tax system which may not be different if carbon tax is eventually introduced in Cameroon. To overcome this challenge, legislation could make provisions that allow for the tax to be implemented at a moderate rate and in a phased approach that provide for a transitional tax period in order not to add economic costs on businesses and social costs on consumers and employees as a result of increase in the prices of products on which carbon tax are levied for generating GHGs. This approach is present in the South African carbon tax regime. 115 The implementation of carbon tax could also place a burden on workers with fixed income especially low income earners and on investors of carbon-intensive undertakings or activities. To avail this challenge, the carbon tax design should be accompanied by a general reduction of some taxes (such as personal income taxes) to ensure that carbon tax is revenue-neutral and does not disproportionately affect consumers of products offered by the major GHG emitters. 116 This method has been adopted and tested successfully in British Columbia in which there are personal tax reductions such as the Low Income Climate Action Tax Credit, which reduces the first two personal income tax rates by 5 percent. 117 This way, the government is able to reduce GHG emissions while maintaining economic growth and social welfare. However, it has been noted that while ‘such tax shifts may be appropriate for high income countries with high levels of income tax, they may be less relevant –and less advisable –for developing countries with comparatively low overall tax-to-GDP ratios and low levels of income taxation.’ 118 This hypothesis has not yet been tested in less income countries where carbon tax applies. Notwithstanding the preceding argument, for this to work, revenues from carbon tax should be used to invest in alternative carbon-free or low-carbon products and services, but also to invest in climate adaptation activities as it obtains in British Columbia 119

In all, there are a number of caveats that should be kept in mind when designing a carbon tax in Cameroon. The government will need to determine the scope of the tax with regard to the types of GHGs to target; the choice of economic sectors and activities that the tax will cover; the possible thresholds for the application of the tax and at what point in the value chain to levy the tax for the purpose of determining emitters that will be targeted and therefore liable to pay across dozens of economic sectors; whether emissions below a certain threshold will be excluded from carbon tax; the socio-economic impacts of carbon tax; etc. Deciding on these caveats has crucial implications not only for the social and political acceptability of the tax, but also for administrative considerations and the overall effectiveness of the tax in reducing GHGs.