Recent relevant OECD publications.
Below are summaries of OECD's main points on carbon pricing, drawn together by Kurt Van Dender (OECD, Centre for Tax Policy and Administration) and Richard Baron, Principal Advisor OECD Round Table on Sustainable Development
We attach a couple of recent OECD publications that we think will be of relevance. Below are summaries of their main points on carbon pricing, drawn together by Kurt Van Dender (OECD, Centre for Tax Policy and Administration) and myself.
Main points of the OECD’s September 2016 report: Effective Carbon Rates (OECD, 2016)
Carbon prices alone do not suffice to decarbonise the global economy (see the points on policy alignment below) but – by steering investment towards low-carbon infrastructure and technologies, and discouraging carbon-intensive production and consumption patterns – are indispensable to achieve them.
To what extent are prices already used to mitigate carbon emissions? The OECD report “Effective Carbon Rates: Pricing CO2 through taxes and emissions trading systems” provides answers. For 41 OECD and G20 economies, representing approximately 80% of global carbon emissions from energy use, the report measures effective carbon rates (ECRs) – the price signals resulting from emissions trading systems and carbon taxes, but notably also from specific taxes on energy use. These three components all increase the relative price of CO2 emissions, so they capture the economically relevant contribution of tax and emissions trading policies to the cost of emitting CO2.
The results paint a dire picture. Countries are very far from exploiting the full potential of emissions pricing policies. Most emissions across the 41 countries are not priced, and 90% are priced at less than EUR 30 per tonne of CO2, a conservative estimate of the costs resulting from a tonne of CO2 emissions. Relatively high effective carbon rates occur mostly in road transport, because of high excise taxes on motor fuels. In addition to cutting CO2 emissions, motor fuel taxes can help curb air pollution, congestion and other external costs related to car use. They also may help raise government revenue at a relatively low economic cost. Therefore, relatively high rates in transport may well be justified, at least as long as external costs are not addressed by more targeted instruments such as distance- or congestion-charges. It also is worth observing that the high rates in transport have not resulted in strong decarbonisation. Higher prices do lead to less fuel use in transport, but up to now not by enough to induce a switch to cleaner fuels, or a structural shift towards less low occupancy and car-oriented mobility patterns. Prices work, but can’t do the job alone.
Non-road sectors account for 85% of carbon emissions across the 41 countries. Outside road transport, effective carbon rates are usually well below EUR 30 (only 4% of emissions across all countries face a price of EUR 30 or more). This is very hard to justify, now and especially going forward.
It is worth noting that the 10 countries with the highest effective carbon rates represent 5% of the 41 countries’ carbon emissions, whereas the 10 countries with the lowest rates – which include several large countries –account for 77% of emissions.
The three pricing instruments – carbon taxes, other specific taxes on energy use, and emissions trading systems – are used to varying extents across economic sectors. In road transport, carbon is priced almost exclusively via excise taxes on fuel use in all countries analysed. Specific taxes on energy use are the dominant component of the average effective carbon rate in the industry, electricity and residential and commercial sectors too, but the role of price signals from tradable emissions permits tends to be larger in these sectors than in the road sector. Carbon taxes presently only play a small role on average, and their impact is largest in the residential and commercial sector.
Taxes and emissions trading systems overlap frequently. However, taxing emissions that are subject to a trading system does not result in additional emission reductions as long as the cap is binding. The overlap then may compromise the cost-effectiveness of abatement as it undoes the uniformity of the price signals sent by a trading system. While this does not necessarily mean that taxes and trading systems should never be combined, the justification for levying taxes on ETS-covered emissions should be to address other market failures, or raise revenue.
Main points of Aligning Policies for a Low-carbon Economy, (OECD-IEA-ITF-NEA, 2015, OECD Publishing, http://oe.cd/lowcarbon)
- First, the publication points out the importance of broadening the scope of climate policy beyond the usual policy portfolios, where some margins for improvement may exist to increase the effectiveness of climate policy instruments. The ‘elasticity’ with which a sector can respond to a carbon price may be increased with targeted policy reforms, some of which are indicated in the report.
· For instance, incentives through the income tax treatment of company cars (20% of the car fleet in OECD and key partner countries) bias choices and uses of cars to more carbon-intensive ones – chapter 3.
· A second example is provided by the pricing of electricity on wholesale markets, with a volatility that implies that a higher carbon price is required to trigger investment in high-capital cost low-carbon generation than would be the case if there were more certainty on electricity market returns for these investments; this is the logic that is pushing the introduction of auctions for renewables. At the moment, the price of carbon is unlikely to be the instrument of choice for the decarbonisation of power generation, even if it is useful to reflect the carbon constraint in short-term operation choices – Chapter 7).
I note that the issue of policy alignment as addressed in the report goes beyond the treatment of this issue in the World Bank’s latest State and Trends of Carbon Pricing.
- The report also contains important policy points on carbon pricing itself:
· Page 29 (see also the reference to Acemoglu et al. 2012) on the superiority of policy packages to a ‘price only’ approach, in light of technology dynamics.
· Page 30: countries are using monetary carbon values to guide long-term investments (see Figure 1.2 p.30 and publication by Smith and Braathen, 2015). There are also examples of use of carbon values in public procurement procedures (see Baron, 2016, The Role of Public Procurement in Low-Carbon Innovation, page 17, http://www.oecd.org/sd-roundtable/papersandpublications/The%20Role%20of%20Public%20Procurement%20in%20Low-carbon%20Innovation.pdf ). These approaches can usefully complement ‘effective carbon rates’ when there are political economy barriers to the introduction of higher carbon prices.
· Page 35: see discussion about industrial competiveness, and page 37 about distributive impacts and their possible mitigation.