OECD: Governments must boost carbon pricing to address climate change

The Organisation for Economic Co-operation and Development (OECD) says that taxes in major economies are far below the cost of pollution from the use of fossil fuels on climate and the environment, urging governments to do more to make polluters pay.

A lax tax

Taxes on high-carbon activities can trigger catalytic shifts towards low-carbon societies by incentivising behavioral change and innovation and raising funds that can be used for climate action and support for those negatively affected by climate policies. Pricing pollution is, therefore, an important tool to put us on the right path to meet the Paris Agreement climate goals.

However, looking at 42 OECD and G20 countries between 2012-2015, the Taxing Energy Use 2018 report by the OECD exposes the reality of a very bleak carbon pricing landscape. Only 6% of emissions are subject to a carbon tax, and only 0.3% are taxed at or above 30€/tCO2, which is a very conservative estimate of climate costs, by the OECD’s own accord, and which still excludes air pollution and health-related costs.

Going beyond direct carbon taxes, the report measures effective carbon tax rates by translating excise duties on goods to a cost per ton of CO2. It found large differences between road transport and other sectors: 97% of road transport emissions are subject to a tax, 47% of them at rates above 50€/tCO2. In the other sectors, however, which account for 95% of energy-related emissions, only 19% of emissions are taxed.

The international transport sector which is exempt from almost all forms of energy taxes was not considered in the report.

When it comes to energy sources, the worst climate offender, coal, is taxed at or near zero. Increasing effective tax rates on the use of coal is one of the most important steps to transition away from high-carbon energy, benefiting both people and the planet. The UK is a good example of how carbon pricing can support the coal phase-out: its carbon tax of £18/tCO2 on top of the EU Emissions Trading System (EU ETS) contributed to coal emissions going down by 60% in a single year.

Is change in the air?

The evolution of energy use taxes between 2012 and 2015 offers a somewhat more nuanced picture with some countries having taken steps to increase the coverage and level of carbon pricing. These include France which has increased taxes on road transport and Canada which has recently launched a nationwide carbon pricing scheme. Looking only at carbon taxes (i.e. excluding excise duties), coverage increased from 1% to 6% between 2012 and 2015.

Unfortunately, the bigger picture shows that when it comes to taxing dirty energy, we are far below the levels required to meet the Paris Agreement goals. The OECD says as much: “comparing taxes between 2012 and 2015 yields a disconcerting result” and “the whole progress towards more effective use of taxes to cut harmful emissions is slow and piecemeal”.

Lack of public engagement and the influence of powerful interest groups lobbying to keep carbon prices at ineffective levels are among obstacles in the way towards putting an effective price on pollution. There is both an opportunity and an urgent need to mobilise progressive voices in order to push governments towards climate-safe carbon pricing and ensure that the resulting financial resources are used to support the just transition of affected communities.

The OECD has a clear message: “Governments should do more and better” – and we fully agree.