By Ian McKee, Founder, Carrot

To host the World Cup, governments routinely suspend their own tax laws for FIFA. Meanwhile, we tax the markets meant to fund the climate’s repair by default, and badly. A time-limited exemption on verified carbon and recycling credits would correct that – and de-risk climate finance through the tax code rather than scarce public cash.

The World Cup is underway. Before a single match was played, the host governments already rewrote their tax codes. To win the right to host, a country must commit to giving FIFA what its own rulebook calls “a general tax exemption”, or one covering “all taxes that may be applicable” – justified, in FIFA’s words, because the tournament is “an event of national importance and public interest”. Brazil did exactly that for 2014, through a dedicated federal law; South Africa built what critics called a “tax-free bubble” in 2010.

Set aside whether football deserves this. When we decide that something matters enough, we suspend the ordinary rules of taxation to make it happen – and we do it for things that will long outlast any tournament. The US expects to give up around $300 billion this decade in tax credits for wind and solar power, and a further $600 bln by leaving the interest on municipal bonds untaxed, on the logic that tax-free returns lower borrowing costs and get infrastructure built. The instruments differ, but the principle is one: we forgo revenue, deliberately, for the things we have agreed are worth it.

So here is a question for finance ministries, the World Bank, and every climate summit: if a month of football is worth a tax holiday, what about the decade that will decide the climate? We do not get another.

By 2035, the world needs to be moving some $1.3 trillion a year to developing economies to hold global warming in check. About half of that – roughly $650 bln — is meant to come from cross-border private finance. In 2023, that flow reached about $42 bln, most of it concentrated in a handful of large markets; for the countries that need it most, it all but disappears. Public balance sheets cannot fill the gap: every dollar a development bank spends today pulls in less than forty cents of private capital alongside it. And the markets built to channel private money into climate action – carbon and recycling credits – remain too small and too fragile to do the work. A recycling credit for one tonne of recovered plastic can sell for under $150 or for more than $800, depending on who is counting. Investors do not commit to a market priced like that.

How do we tax these fragile markets today? As ordinary commerce, and incoherently. The US has no dedicated rules at all; sellers are left to general principles and case-by-case rulings. The UK only began charging value-added tax on voluntary carbon credits in September 2024. We tax the planet’s repair as an afterthought, and a football tournament not at all.

The proposal is straightforward. For a defined period – ten years is long enough to change behaviour without becoming permanent – governments should exempt from tax the income a verified carbon or recycling credit delivers to the projects and people who earned it, from the first sale through to the workers who share its proceeds, while leaving the speculative trading that follows fully taxed. This is not a new subsidy; it is a decision to stop taxing the one thing we keep saying we want more of.

The clean way of doing something almost always costs more than the dirty way; the task of climate policy is to close that gap, until the better choice is also the cheaper one. A tax exemption works the gap from the supply side: it changes not what a buyer pays but what a project keeps. On the ground – where a recycling operation or a forest restoration often sits just below the return a bank requires – a few dollars more per credit decides whether a project gets built. And it rewards results, not promises: it attaches only to credits tied to a verified outcome – a tonne of emissions actually avoided, a tonne of plastic actually recovered – which is what disciplines the price chaos and the doubts about quality that drive capital away.

This is less radical than it sounds. India already taxes carbon-credit income at a concessional 10%; Brazil has exempted credit sales from two federal levies. No country has yet taken the decisive step of a full, time-limited exemption. That is the step worth taking – and worth designing well.

Designing it well means answering the hardest objections honestly. The first is the windfall problem – the benefit being pocketed by investors rather than reaching the cause it was meant to serve. With tax-free municipal bonds, the closest precedent, much of that $600 bln never reaches the towns – it is captured by high-income investors. That is why the exemption should follow the credit’s value to the people who did the work, not the secondary trading that comes after, and should expire on a fixed date rather than harden into a permanent giveaway. The second objection is sharper: a tax break is also an incentive to manufacture credits – to over-issue, or to game whatever “verified” comes to mean. The answer is to tighten verification in step, not to keep taxing real reductions and worthless ones at the same rate.

What makes this idea unusual is who can get behind it. A government forgoes almost nothing, because the market it would be exempting barely exists yet – which is the whole problem. If it works, the forgone revenue grows, but alongside a larger climate economy, and the sunset closes it before the cost turns significant. Development banks gain leverage their balance sheets cannot match – a line in the tax code, not another tranche of concessional cash. Commercial banks gain an asset class they can actually underwrite. Philanthropy sees its grants multiplied rather than replaced. And since any nation can act on its own terms, none has to wait for a treaty to begin.

The burden is already stacked. Before a credit reaches the people who earned it, the UN’s own new crediting mechanism keeps 5% for adaptation and cancels at least 2% more, with fees on top – legitimate charges, but a real bite before the first sale. Then we tax whatever survives as ordinary income. The people doing the work are charged coming and going.

Carbon pricing belongs here too, but it creates demand while doing nothing for the bankability of the projects that supply it, and supply is the bottleneck these numbers describe. Pricing pulls; an exemption de-risks. Neither excuses what we do now: taxing, by default and without design, the very markets we are begging private capital to enter.

The World Cup will be over in a month. The climate decade will not. We have proven, again and again, that we know how to use the tax code to build the things we value. It is time to decide that a liveable planet is one of them – and, this time, to make sure the public keeps the upside.

Ian McKee is the founder of Carrot, which builds infrastructure for carbon and recycling credit markets.

Any opinions expressed in this commentary reflect the views of the authors and not of Carbon Pulse.

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