World leaders, government representatives and delegates are set to gather for the annual United Nations climate change summit, known as the Conference of the Parties or COP28  in Dubai, the United Arab Emirates (UAE).

Reining in fossil fuels and carbon emissions are expected to be topping the agenda of the 13-day summit (November 30 to December 12). International funding to help countries adapt to climate change will also be hotly debated as developing countries have been demanding more contributions from the industrialised nations.

An ambitious loss and damages fund agreed last year to support poorer nations to help manage the negative effects of climate change has yet to be put into place. World leaders agreed to the fund after COP27 last year, but they have failed to reach consensus on the most important questions of all – which states will pay into it and how much.

Countries will also face the first review of their progress towards the Paris Agreement,  a landmark international treaty on limiting carbon emissions that was signed at the COP21, almost eight years ago.

Although the UAE was the first Middle Eastern country to ratify the agreement, people are deeply divided over hosting the summit in a nation that has been termed as part of the problem for its reliance on fossil fuels, which account for more than 75 percent of global greenhouse gas emissions. Some are now also criticising the inclusion of oil and gas-linked representatives in such summits at all.

As the debate around COP28 and its impact continues, here’s what to know about this year’s conference and what makes it significant.

What, when, where is COP28?

COP is the primary decision-making body of The United Nations Framework Convention on Climate Change (UNFCCC), established in 1992.

Representatives of 197 countries who have signed or are “parties” to the UNFCCC will participate primarily through debates and negotiations.

COP28 will begin on November 30 and continue for almost two weeks, while the exact schedule for each day will be published a night prior. Pre-sessions for the conference began on November 24.

The conference will be held at Expo City in Dubai, UAE.

Why is COP28 important?

The COP28 will take place in the backdrop of devastating floods and heatwaves, fierce wildfires and the Earth’s hottest summer on record this year.

The event is considered an opportunity for countries to better rein in climate change by devising improved targets and measures through tools such as finance, technology and capacity-building.

The conference comes weeks after a UN report said greenhouse gases in the atmosphere hit a record high in 2022. Based on countries’ current climate plans, the report says, global carbon emissions by 2030 will be cut by only two percent compared with 2019 levels, far short of the 43 percent fall needed to limit warming to 1.5 degrees Celsius since pre-industrial levels.

Although the 1.5 degree Celsius target became binding in the 2015 Paris Agreement, the goal was first adopted after COP16, more than a decade ago.

A report from the World Meteorological Organization in May also found that with current trends, the world may temporarily breach the 1.5 degrees Celsius target in 2027.

As states scramble to catch up before climate change risks spike further, they will not be immune to crises around the world.

“For years parties have been struggling to agree to a fossil fuel phase-out, and the challenge to reach an agreement was made worse by the fiscal crises precipitated by the pandemic and energy crisis following the war in Ukraine,” said Olivia Rumble, director of Climate Legal in South Africa.

What is the agenda and theme for COP28 in Dubai?

A primary objective of COP each year is to review and calibrate the implementation of the UNFCCC terms, Paris Agreement,  and Kyoto Protocol, a binding treaty agreed in 1997 for industrialised nations to reduce greenhouse gas emissions.

This year, member states will negotiate while facing their first Global Stocktake (GST) – a scorecard analysing countries’ progress towards the Paris Agreement – so they can adapt their next climate action plans which are due in 2025.

“Countries will be hard-pressed to make concessions to agree on the principal reasons for historic failures and what they believe needs to be done going forward to make meaningful progress on the agreement’s goals,” said Rumble.

Parties will also seek to operationalise the loss and damages fund after developing nations proposed in September that developed countries should disperse at least $100bn to them by 2030.

Additionally, this year’s presidency has set four themes to be at the forefront of the summit:

• Fast-tracking the energy transition:  revolves around renewable energy, and food and agricultural systems.
• Fixing climate finance: aims to prioritise the Global South in adaptation finance and help vulnerable communities rebuild after climate disasters, among other targets.
• Nature, people, lives, and livelihoods: geared towards food systems, nature-based solutions, and protecting against extreme weather events and biodiversity loss.
• Inclusivity, in climate management: includes youth involvement and improved communication between different sectors and agencies.

However, focusing on specific themes such as financing strategies must also be accompanied by a revamping of global structures to be effective across the world.

While this year’s climate financing agenda aims to better support developing nations with emergency funding, such mechanisms currently lack effective needs analysis and involve the inefficient distribution of funds. High debts imposed on such countries through global financing structures also reduce their ability to invest in the maintenance of climate projects.

“Renewable energy and energy efficiency will mean little to African countries without significant reforms to the global financial architecture to make these targets achievable. This includes revising risk ratings and perception of investment risk in Africa,” said Rumble.

Who will and will not attend COP28 in Dubai?

More than 140 heads of state, senior government leaders and at least 70,000 participants are expected to attend COP28.

Some of the notable figures who have confirmed their attendance so far include:

• Britain’s King Charles III, who will also deliver an address at the opening ceremony
• Rishi Sunak, prime minister of the United Kingdom
• Pope Francis of the Catholic Church
• Humza Yousaf, first minister of Scotland
• Indian Prime Minister Narendra Modi.

US President Joe Biden is not expected to attend but the country will be represented by top officials such as Special Presidential Envoy for Climate John Kerry.

The summit will be divided into a “blue zone” with sessions for UN-accredited participants such as state representatives only, and a “green zone” with events and exhibits for registered participants from the public and civil society.

What are the controversies around COP28?

Many environmentalists and other analysts have raised concerns about COP28’s choice of president.

Sultan al-Jaber, CEO of the Abu Dhabi National Oil Co, has been tasked with changing the world’s climate course while the company he heads is one of the world’s largest oil producers. The UAE is the world’s seventh-largest liquid fuel producer.

In May, al-Jaber faced criticism for referring to the need to phase out “fossil fuel emissions” — using techniques such as carbon capture — instead of phasing out fossil fuels themselves.

Others have questioned the UNFCCC for involving the fossil fuel industry in its discussions and failing to generate sufficient progress towards the 1.5-degree goal.

In September, more than 200 civil society organisations, including Amnesty International, wrote an open letter to the UAE government to follow certain demands in the lead-up to COP28. On top of calling for labour reforms, and abandoning plans to step up oil and gas production, the letter demanded that the UAE refrain from surveilling COP28 attendees.

The country has said it will allow environmental activists to “assemble peacefully” for protest acts during the summit.

(Aljazeera)

Last week, we delved into a significant event in New Zealand, where a group of affluent individuals expressed a willingness to voluntarily pay more taxes, only to have the tax authority reject their offer. This incident prompts questions about the fairness of the current tax system, particularly in relation to the lower tax rates paid by the wealthiest citizens. Drawing parallels with Sri Lanka, the discussion advocates for the implementation of mandatory Tax Identification Numbers (TINs) in developing economies, underlining the necessity for a more equitable tax system.

We observed a unique situation in Sri Lanka where, despite per capita GDP growth, the tax-to-GDP ratio has been on a decline. The introduction of some naïve tax policies, such as the abolition of mandatory PAYE Tax, the increase in tax and VAT allowances, in 2019/2020, were also discussed.

The projection for Sri Lanka’s tax revenue as a percentage of GDP is expected to rise from 7.3% in 2022 to 12.1% in 2024, with the World Bank emphasizing the importance of maintaining tax revenues above 15% of GDP for economic growth. Projections for Sri Lanka’s GDP per Capita indicate a gradual increase over the next few years, reaching around US$4098.00 in 2025.

Sri Lanka compared

According to a map available on the Internet, depicting global comparison of Tax-to-GDP ratio, Sri Lanka is bracketed with several economically challenged African nations as well as Afghanistan and Bangladesh within its region. Notably, it ranks lower than many neighbouring countries including India, Nepal, Bhutan, Pakistan, and Indonesia etc.

On the contrary, countries with higher income levels, such as US, UK, Australia and any European countries, demonstrate considerably elevated tax-to-GDP ratios, ranging from 20% to 30%, and, in some cases such as UK France, the Netherlands, New Zealand and Denmark, reaching as high as 40% to 45%.

Figure 1 plots countries based on their GDP per capita and tax revenue as a percentage of GDP. Countries with income levels like Sri Lanka (ranging between US $2,000-4,000) are highlighted within the circle. Sri Lanka’s tax-to-GDP ratio falls significantly below the average. For instance, Morocco and Georgia, with GDP per capita figures of US $2,931 and US $3,529, respectively—comparable to Sri Lanka’s GDP per capita of US $3,369—both countries collect 24 percent of GDP as tax revenue, whereas Sri Lanka collects only 11 percent.

The tax revenue as a percentage of GDP for middle-income countries has shown a relatively stable trend over the years. The values range from around 10.7% in 2005 to an expected 11.4% in 2024 (Forecast).

Sri Lanka’s tax revenue as a percentage of GDP has experienced fluctuations during the period. Notable peaks are observed in 2006, 2007, and reaching up to 14.6% in 2015 and was par with the Middle-Income countries, followed by a decline again from 2019. The values have varied, with a dip to 7.8% in 2021, indicating a substantial decrease. Projections for 2022 and 2023 show a gradual increase, with the budget for 2024 aiming at a significant rise to 12.1%. (See Figure 2).

Hence, the tax revenue for Sri Lanka, while exhibiting fluctuations, generally appears to be on a recovery path after a notable decline in recent years. The budgeted figure for 2024 suggests an ambitious target, aiming for a substantial increase in tax revenue as a percentage of GDP.

Not only arbitrage but

also corruption

In countries like the United States, income tax stands out as the primary revenue source. This is facilitated by nearly zero import duties, typically set at 5 percent or less, and the absence of a value-added tax (VAT). In contrast, Europe relies heavily on a value-added tax, often around 20 percent, but does not impose import duties. In Sri Lanka, despite the relatively high import duties borne by the average citizen, the government only receives a fraction of this revenue. This is a result of the diversion of substantial sums to domestic protectionists through the practice of tax arbitrage, coupled with instances of tax avoidance (commonly referred to as tax minimization) and evasion, often involving manipulations and collusion.

Tax arbitrage involves exploiting differences in tax policies or rates across different jurisdictions to gain a financial advantage. In the context of domestic protectionists, individuals or entities within a country capitalize on tax differences among regions. This strategy often involves the strategic use of tax regulations or loopholes to minimize or entirely avoid tax liability. Notably, corruption plays a crucial role in this dynamic. Given the prevalent culture of corruption, extending from the top echelons of the state to even lower-level positions in Sri Lanka, these tactics can be readily implemented by astute business individuals, both on a large and small scale.

Not only anomaly but

also corruption

A noteworthy aberration in Sri Lanka’s tax structure is its disproportionate reliance on taxes related to international trade for tax revenue in comparison to its income level. Global patterns indicate that the proportion of taxes on imports as a share of total tax revenue tends to decrease as income levels rise. For instance, a study by Loewy, titled ‘Taxation: 21st Century Issues and Challenges’, revealed that trade taxes contribute to approximately 25% of total tax revenue in low-income countries, 12% in lower-middle-income countries, 9% in upper-middle-income countries, and less than one percent in high-income countries.

Contrary to these trends, in Sri Lanka’s case, taxes imposed solely on imports constitute nearly 20% of the government’s total tax revenue—a significantly high figure for a lower-middle-income country (Figure 3). The country’s substantial reliance on international trade for tax income has proven to be a risky proposition for the government. While restricting imports is essential to address the trade deficit, it comes at the cost of reduced government revenue and an exacerbated budget deficit. Conversely, increasing imports would boost government revenue but intensify the trade deficit. Consequently, a strategic shift away from trade-related taxes becomes crucial for the government to generate revenue without destabilizing the country’s macroeconomic environment.

Share of expenses on government servants

Government spending in Sri Lanka was 48% in 2019 to public sector salaries and pensions but now only 44% allocated for 2024 as mentioned before. In the most recent budget presentation, over 35% of government expenditure was directed towards public sector salaries, pensions, and public welfare, emphasising their importance in government spending. In a specific breakdown, it is mentioned that Rs. 92 billion was allocated to pay the salaries of public sector employees in July 2022. Moreover, a historical perspective indicates the significance of government spending on salaries, dating back to 1950. Overall, public sector salaries and pensions play a crucial role in Sri Lanka’s government expenditure, reflecting a substantial commitment to the welfare of government employees.

Another anomaly is too many armed forces

Sri Lanka’s armed forces strength of 317,000 personnel is financially unsustainable because of its considerable annual expenditure of Rs.423 billion (410 in 2023), which is 1.88% of the GDP. Comparisons with other nations, including Australia and the Netherlands, reveal significantly smaller military forces. Sri Lanka’s post-civil war armed forces maintenance highlights the country’s unique revenue-based fiscal consolidation strategy, focusing on tax increases without traditional cost-cutting measures.

Conclusions

This analysis reveals three main anomalies in Sri Lanka’s tax structure, including a decline in taxpayers after significant tax cuts. The essay emphasizes the importance of sustaining tax revenues for economic growth and explores the country’s tax-to-GDP ratio, positioning it against global comparisons (over 15% of GDP). Notably, it highlights the overdependence on international trade taxes, the disproportionate spending on government servants, and the financial challenges posed by the substantial size and expenditure on the armed forces. The narrative suggests a need for strategic reforms to navigate the intricate fiscal landscape.

(The writer, a senior Chartered Accountant and professional banker, is Professor at SLIIT University, Malabe. He is also the author of the “Doing Social Research and Publishing Results”, a Springer publication (Singapore), and “Samaja Gaveshakaya (in Sinhala). The views and opinions expressed in this article are solely those of the author and do not necessarily reflect the official policy or position of the institution he works for.)