In Praise of Simplicity

Climate is a horribly complex problem. Maybe the answer lies in finding simpler solutions

Must simple mean easy?

Can something be difficult without being complex?

Modernity struggles with these categories. Elisions abound, to our detriment; and the resulting friction between expectations and reality robs us of motivation and confidence.?

It is a particularly pertinent time of year to reflect on this issue, as anyone (i.e. everyone!) who has failed to hold a New Year’s resolution will know. Going to the gym three times a week is such a simple goal: so why is it so hard? Conversely, we know how difficult it is to lose weight, and so we are seduced into believing the solution must be more complex. We stack tracking apps and meal plans atop dietary restrictions and bespoke blood tests until the edifice collapses around us.?

But we’re not here today to talk about New Year’s resolutions; I’m sure every other podcast and newsletter you subscribe to will have that covered! Instead, I want to talk about simplicity as a design philosophy for climate policy.?

And if that sounds like a horrible sentence to be reading on a cold evening in Dry January, fear not – I promise to make it an easy read…

Putting a floor under a race to the bottom

All this came to me as I have been thinking back on episode 14 of this season’s Conversations on Climate podcast, with Dr. Marcel Olbert. Marcel is Assistant Professor of Accounting at London Business School, where he has forged a path for himself as a bright young scholar at the leading edge of global taxation and policy research. So naturally I had to ask: what do we need to do to create an effective global carbon tax?

His answer was, ironically, to recast an incredibly difficult job in wonderfully simple terms:

“Just don’t make the process any more complex.”

This is a thinker who knows of what he speaks, having just walked me through the OECD’s Base Erosion and Profit Shifting framework, better known as 2021’s two-pillar Global Tax Reform. As you can imagine, fixing the unintended consequences of decades of financial globalisation is an incredibly difficult puzzle to solve; even moreso when the multinationals will rationally spend those hundreds of billions (the rough value of global tax avoidance) on huge legal and accounting teams to stay on step ahead of government.?

The secret to the success of BEP’s Pillar II reform, Marcel believes, is its simplicity: a 15% global minimum corporation tax rate. Here’s his explanation of why it is a gamechanger for its 140 signatories:

First, it's very easy. Each and every country in the world can decide to apply at least a corporate income tax rate of 15% and enforce this. But we know many countries don't do this. You can have a tax rate of 20%, but government subsidies and other types of deductions lead to lower effective tax rates. Some tax haven countries decide to not levy a corporate income tax rate. The idea of this reform is that other countries – typically the country where the multinational firm is headquartered – can implement a top up tax for the remainder between the effective tax rate in a given country and 15%.

By implementing this rule, you basically take away the incentive for a given country to lower the corporate income tax rate below 15%. There's a race to the bottom and that's why we want to put an end to it.

Again, this is an incredibly difficult task that we have been trying to solve collectively for decades. Under the hood, there is plenty of nuggety complexity for the technocrats to get stuck into (anyone want to talk ‘Neutralising the Effects of hybrid mismatch arrangements?’ No?) But his point is that the elegance of the headline 15% policy is why it should succeed where others have failed. Its transparency makes it hard for companies to wriggle out of. It’s a clear win for government treasuries without requiring heavyweight regulatory capacity. And it has a moral clarity that is hard to deny.?

Back to the source

But will it carry over to carbon taxes? There are reasons to think it might.

To start with, Marcel pointed out that some climate scholarship already promises effective simplicity. This proposal, for example, calls for a requirement that all global corporations disclose their scope 1 emissions, and nothing more. This is the simplest form of carbon accounting, but that is its strength – firms don’t get lost in the weeds of upstream and downstream emissions, so they can’t hide in the weeds either. With inarguable logic, they point out that if all businesses reported scope 1, it would cover all our emissions.?

There is surely hope for a similar approach to global carbon taxation. Fossil fuels account for 90% of our carbon, so let’s focus our attention there. A single, mandatory minimum wellhead tax on all oil, gas, and coal, levied on producers at the point of extraction, would therefore price 90% of climate damage. (Yes there are other vectors such as methane, radiative forcing from contrails, etc – but we’re after simplicity here!)

This would be remarkably simple, in theory, to achieve. Just 20 fossil firms are responsible for a third of total emissions over the last half-century, and it's hardly a surprising list of names. Aramco, Gazprom, Exxon, Chevron, BP, Shell – we know where to find them. 12 of the 20 are state-owned! Widening to the top 100 firms cover 70%+, and so on. Furthermore, fossil extraction is a physical, activity embedded in clear infrastructure – transfer pricing for intangibles this ain’t. Taxing at the wellhead for a few hundred companies is well within our capabilities.?

But what should that global minimum price be? I’m sure climate economists (and oil lobbyists) could happily debate the matter right through to 2050. Instead, we should find a ballpark figure congruent with the science that the world can agree upon. Wood Mackenzie, for example, estimated a global price of $160 per tonne by 2030 would be necessary to hit 1.5 degrees. They reckon the average global price in 2020 was just $22; getting the final target perfectly accurate matters less than simply making serious progress in the upward direction.?

I love this idea. Sadly, I can see why it would be a political nightmare. The fact that so many of the biggest fossil-fuel companies are state-owned reflects the reality that oil production is a geopolitical matter. This is not just about cash-hungry treasuries working together to chase down multinationals; it’s about a progressive bloc of nations squaring off against the petrostates. Furthermore, the world already has a patchwork of incongruent local and regional carbon taxes. The EU’s BAT alone is a black hole of complexity. This kind of path-dependency is hard to shift, which was a big part of the collapse of Article 6 talks at COP 28, with the EU and US squaring off over certifying existing national schemes or starting afresh.

The Laws of Simplicity

I’m not holding my breath for this to become a reality any time soon. But I do think it’s worth serious consideration, because the alternative – an ever-expanding mire of complex and mutually exclusive frameworks – hasn’t worked so far. In fact, the simplicity of a global minimum wellhead tax could be just the kind of target the world needs to rally around and transform the bloated corpse of COP in the process. The 1.5-degree target (perhaps the best example of the power of simplicity) did it for Paris. Why couldn’t $150 by 2030 do it for us now?

The paradox is that the best examples of simplicity are very hard to design. There is a reason the iPod (moreso than the Macbook or iPhone I would argue) remade the 21st century; and why Jobs and Ives and Co were so well rewarded for it. Do we have visionaries of that calibre at the climate governance level today??

Perhaps one solution is to send our lawmakers back to school – to study the art of design itself. To begin, I might recommend ‘The Laws of Simplicity,’ by John Madae (artist, teacher, and Silicon Valley whizz kid). I’ll leave you with his ten principles, and you can have fun puzzling out how they would work for designing good climate policy. Here’s hoping.

John Madae’s Laws of Simplicity:

LAW 1. REDUCE: The simplest way to achieve simplicity is through thoughtful reduction.

LAW 2. ORGANIZE: Organization makes a system of many appear fewer.

LAW 3. TIME: Savings in time feel like simplicity.

LAW 4. LEARN: Knowledge makes everything simpler.

LAW 5. DIFFERENCES: Simplicity and complexity need each other.

LAW 6. CONTEXT: What lies in the periphery of simplicity is definitely not peripheral.

LAW 7. EMOTION: More emotions are better than less.

LAW 8. TRUST: In simplicity we trust.

LAW 9. FAILURE: Some things can never be made simple.

LAW 10. THE ONE: Simplicity is about subtracting the obvious, and adding the meaningful.

#londonbusinessschool #climateaction #sustainablesolutions #policyinnovation