Thinking about the Sage of Ely’s Sustainable Cost Accounting. He insists that each and every part of the supply chain should be responsible for their own Scope 1, Scope 2 and Scope 3 emissions. Anyone having any of those three must be declared carbon bankrupt unless they’ve the capital to wipe those out.
Now think of the difference between VAT and sales tax. A sales tax is a tax on the selling price of whatever. There’s a problem with this. If it applies to every part of the chain then longer chains get charged more. It’s a strong incentive to have entirely vertically integrated companies. This is not known to be useful. Therefore a sales tax regime does not charge that tax upon the supply chain. Instead it’s a once only tax at the retail point of sale.
A VAT regime instead says that we’ll tax each part of the value add at each point along the chain. This implies being able to claim back against suppliers’ VAT and charging to customers. We now do not have that incentive to vertical integration because there is no tax difference dependent upon the number of transactions in the chain. Cool.
It’s also possible to charge more in VAT than it is in sales tax. Because that entire supply chain is now – somewhat – self-policing in order to be able to reclaim input VAT.
Of course, the value add at any specific point in the chain is the same as the Scope 2 emissions. This is the value add/emissions of this particular part in the chain. The value add/emissions of Scope 1 is embedded into the prices paid for supplies.
Think on it. “He” is my supplier, I am me, you are my customer. His Scope 1 and 2 emissions are my Scope 1. My Scope 2 and 3 emissions are his Scope 3. Your Scope 2 and 3 emissions are my Scope 3. My Scope 1 and 2 emissions are your Scope 1.
We are in the same place as we are with VAT and sales tax. We can have a sales tax, sure we can. But that then rests upon every transaction. And we’re double to triple counting at each transaction point because we are adding Scopes 1 through 3 each time. Think of supplying jet fuel (what I persist in calling avgas). Saudi Aramco pumps up the oil. Some refiner, BP, turns it into avgas, some airport fueler buys that and sells it to the airline, Ryanair uses it. We’ve now four sets of Scope 1 through 3 emissions, we’re counting and taxing them all. The logical end point is that Saudi Aramco owns Ryanair so that we’ve only the one set of transaction taxes on that set of Scope 1 to 3 emissions.
Or, of course, we do what we do with sales taxes and charge it only on the ticket of the consumer at the final retail point and we charge it the once.
Equally, we can adopt the VAT idea. Each pays VAT on the value add of each stage of the transaction. Or our carbon fee, or our carbon bankruptcy, on only Scope 2 emissions. Scope 1 is dealt with at the level of the supplier, Scope 3 the purchaser.
If we charge at each stage then it has to be as with VAT, only on Scope 2. If it’s to be as a sales, tax, as with Scope 3, then it has to be on the final retail point only.
Anyone who now says that avgas doesn’t pay VAT an be derided as an idiot – this is an analogy, of course. We can also dismiss as a drooling moron anyone who says that any such tax won’t be large enough to change behaviour like this. But if that’s true then what the hell use will it be anyway, the entire point is to try and change behaviour.
Sustainable Cost Accounting tries to adopt the sales tax approach and then apply it at every transaction stage. But sa any accountant should be able to grasp, there’s a reason why w don;t do that. Either it’s sales tax at the retail point or it’s a VAT only on Scope 2 emissions.
Or, of course, they’re the Sage of Ely.