The Feasibility of a Climate FTT: How Clearing Houses Can Become the Engine of Global Financing
The reality today is undeniable: to meet the Paris Agreement goals and limit the most severe consequences of climate change, the world must invest trillions of dollars every year. Yet, a gaping financing deficit persists, slowing down a vital transition. Faced with this urgency, the idea of a Financial Transaction Tax (FTT) is regularly raised. Often presented as a miracle solution by its supporters and as a dangerous utopia by its detractors, it is hindered by an image of complexity and risk.
The central question remains: how can we efficiently and securely collect hundreds of billions of dollars from millions of daily transactions scattered across the globe? The answer, counter-intuitive for many, lies at the very heart of the global financial machinery, in its most critical and least-known cogs: the clearing houses.
Part 1: Clearing Houses, the Unsung Plumbers of Global Finance
If finance were a water distribution network, clearing houses (or Central Counterparties - CCPs) would be its hydraulic engineers and pressure controllers. To the general public, they are invisible entities. For the markets, they are indispensable.
Their role can be understood with a simple analogy: a clearing house acts like the notary securing a real estate transaction. When a buyer and a seller agree on a deal, the notary steps in to guarantee that the buyer will indeed pay the price and the seller will hand over the property. A CCP does the same for financial transactions. It places itself between the buyer and the seller of an asset (a stock, a bond, a derivative...), becoming the buyer to every seller and the seller to every buyer.
This mechanism has a dual advantage:
1. It eliminates counterparty risk: if one of the parties goes bankrupt before the exchange is finalized, the clearing house assumes the loss and ensures the other party is not harmed. This prevents the "domino effects" that led to the 2008 crisis.
2. It optimizes financial flows: through a process called "netting," the CCP calculates each market participant's net position (the balance of all their purchases and sales) at the end of the day. Instead of making millions of individual payments, institutions only make a single payment or receive a single credit, drastically simplifying operations.
The systemic importance of these "plumbers" is illustrated by the volumes they handle. For example, LCH, one of the world's largest clearing houses, cleared over $1 quadrillion in interest rate swaps in 2023 [1]. Meanwhile, the Depository Trust & Clearing Corporation (DTCC) in the United States processed securities transactions with a total value of $3.0 quadrillion in 2023 [2]. These infrastructures are designed to manage incredible complexity and volume with near-absolute reliability.
Part 2: The Technical Feasibility of a Levy at Source
The key argument is this: for an institution capable of managing quadrillions of dollars and calculating complex risks on thousands of financial products in real time, collecting a micro-tax is a technically trivial task.
The IT systems of clearing houses are already programmed to calculate and levy a multitude of fees on each transaction: clearing fees, margin calls, various commissions... These calculations are often far more complex than a simple proportional tax. Integrating a levy of, for example, 0.01% on the value of each transaction would, to put it simply, amount to adding a single line of code to an existing algorithm.
This feasibility is not mere speculation. It has been studied and confirmed by numerous institutions. In its proposal for a European FTT, the European Commission had already identified market infrastructures, particularly settlement systems and clearing houses, as the most natural and efficient collection point for the tax. The proposed mechanism relied entirely on these automated systems to ensure efficient and low-cost collection [3]. Experts and economists have argued for years that this method of collection at the source is not only the simplest but also the most robust.
Part 3: A Structural Solution to Historical Obstacles
Using clearing houses not only solves the technical challenge; it offers an elegant answer to the two main obstacles that have historically hindered the implementation of an FTT.
1. Countering the Risk of Fraud
The memory of the "Bluenext" scandal on the carbon credits market still looms large. This massive VAT carousel fraud cost European states billions of euros. The mechanism was simple: shell companies would buy carbon credits tax-free in one country, sell them including VAT in another, and then disappear with the collected VAT without ever remitting it to the state [4].
Levying an FTT through a clearing house makes this type of fraud structurally impossible. The tax would be collected instantly, at the very moment of the transaction, by an automated, trusted third party (the CCP). There is no invoice, no VAT return, no payment delay. The money is collected the nanosecond the trade is validated, even before the funds are transferred to the counterparties. There is simply no opportunity for an intermediary to "disappear with the cash."
2. Addressing the Challenge of Fiscal Sovereignty
The other major obstacle is the fear of a loss of fiscal sovereignty for states. A global FTT is often seen as an infringement on each nation's right to levy taxes.
The CCP collection model bypasses this issue. The goal is not to create a "global tax" that would pass through national budgets. It is to establish, through an international treaty, a technical levy on a transnational activity. The funds collected by the clearing houses would be directly channeled to a mandated international body, such as the Green Climate Fund, without ever entering the finances of any particular state. National fiscal sovereignty is preserved because the levy applies to an activity that has no single territory and whose revenues are allocated to a commonly defined global objective.
Conclusion: From a Political Idea to a Credible Project
The idea of a Financial Transaction Tax for the climate is not an unworkable fantasy. By relying on clearing houses, we already have the necessary infrastructure to implement it. These pillars of the global financial system are robust, ultra-efficient, and perfectly capable of becoming the collectors of a global climate contribution.
Their use transforms the FTT from a controversial political idea into a technically plausible and credible project. The obstacles of fraud and fiscal sovereignty find structural answers in this automated and secure mechanism of collection at the source.
At Neutral Project, our vision is to realign the powerful mechanisms of finance with the urgent needs of the planet. Using clearing houses to finance the climate transition is the perfect example of this ambition: an elegant solution, hidden in plain sight, that is simply waiting for the political will to be activated.
Sources
[1] LCH Group, "LCH reports record clearing volumes in 2023," Press release, January 9, 2024.
[2] DTCC, "DTCC processed a record $3.0 quadrillion in securities transactions in 2023," Annual Report and corporate website (consolidated figures).
[3] European Commission, "Proposal for a COUNCIL DIRECTIVE implementing enhanced cooperation in the area of financial transaction tax," COM(2013) 71 final, February 14, 2013.
[4] Cour des comptes (French Court of Auditors), "La fraude à la TVA sur les quotas d'émission de carbone," Annual public report, February 2012.
[5] Bank for International Settlements (BIS), "Central counterparties: what are they, why do they matter and how are they supervised?," Fact sheet, October 10, 2019.