On 14 February 2018 the OECD issued Taxing Energy Use 2018, a publication that summarises the patterns of energy taxation in 42 countries of the OECD and G20. The countries included in the publication account for around 80% of global energy use. The facts are presented for fuels and energy sectors for the period 2012 to 2015. The report is based on the data in the OECD’s Energy Tax Use database.

The OECD considers that taxation is effective in reducing harmful emissions from energy use but that governments are not using taxes well enough to achieve this goal. Governments must rely more on energy taxation to strengthen its efforts to deal with the main source of greenhouse gas emissions and of air pollution.

The latest data reveals that energy taxes are not well aligned with the negative side effects resulting from energy use. Currently taxation is only providing a limited incentive to reduce energy use, improve energy efficiency and move towards less harmful forms of energy. The publication notes that emissions trading systems are not having much impact on this situation.

In the period 2012 to 2015 efforts have been made in many countries to apply the principle that the polluter pays but progress towards effective use of taxation to reduce harmful energy emissions is piecemeal. There is therefore room for governments to do more.

Emissions from activities other than road transport were mostly untaxed in 2015 (with approximately 81% of those emissions remaining untaxed). The report notes that tax rates were below the low-end estimate of climate costs for 97% of emissions.

In the road transport sector there have been meaningful increases in tax rates. Fuel tax reforms in some countries have increased the share of emissions that are taxed above the level of climate costs from 46% in 2012 to 50% in 2015. In almost all countries the levels of fuel tax are however still well below the levels that would be needed to cover non-climate external costs.

Coal accounts for almost half the carbon emissions from energy use in all 42 countries but in almost all the countries it is taxed at the lowest rates or remains completely untaxed. Carbon tax rates remain low and reflect climate costs only for 0.3% of emissions. The most important element in the overall tax rates is the excise tax.

The report concludes that there was no structural change in the pattern of energy use taxation between 2012 and 2015, even though improving the effectiveness of taxes on energy use is fully compatible with other tax policy objectives that are currently influencing the tax patterns.

A cost effective policy would involve aligning energy prices with the costs of climate change and air pollution. Although there are concerns about the higher energy costs that would be faced by households or firms and compensation would be necessary for this, this compensation should be provided not by lower tax rates or exemptions but by targeted transfers from government to those people or firms most affected.