On 3 November 2022 the OECD released Pricing Greenhouse Gas Emissions: Turning Climate Targets into Climate Action looking at the development of explicit carbon prices, energy taxes, and subsidies that lower pre-tax energy prices, in the years 2018 to 2021. These policy instruments either directly change the cost of emitting greenhouse gases or change electricity prices.
The report covers 71 countries, in aggregate accounting for around 80% of global greenhouse gas emissions and energy use. The report sets out explicit carbon prices, energy taxes and subsidies analysed by country, sector, product and instrument.
Generally, countries increased their use of carbon pricing through taxes or emissions trading systems in 2021. The report notes that in 2021 more than 40% of greenhouse gas emissions were covered by carbon prices, representing an increase from the figure of 32% in 2018. This increase resulted from the introduction or extension of explicit carbon pricing mechanisms in a number of countries including Canada, China and Germany. The average carbon prices from emissions trading systems and carbon taxes more than doubled, reaching EUR 4 per tonne of CO2, in the period from 2018 to 2021.
Permit prices related to emissions trading systems have increased in countries covered by the European Union ETS, and in the UK, Canada and New Zealand. In addition to the EU ETS, Germany launched a national ETS for heating and transport fuels in 2021.
New carbon taxes were introduced in Luxembourg in 2021 and in Iceland in 2020 for fluorinated gases. Carbon tax rates increased in Finland, Iceland, Ireland and Norway and carbon tax exemptions were phased out by Portugal and Sweden.
Net carbon prices are still generally low outside the transport and building sectors, but this varies from country to country. Where there is pricing of emissions from industry and electricity, it is normally done through emissions trading systems or carbon taxes. The highest net carbon prices are generally due to relatively high fuel taxes in the road sector.
Increasing effective carbon prices could raise substantial revenues at the same time as cutting emissions. Revenues from carbon pricing can be important in financing the substantial adjustment costs of the transition.
Conclusions
Countries need to deploy a wide-range of policy instruments to overcome the barriers to the transition to net-zero in ways that fit their circumstances. Progressively increasing carbon prices, while phasing out fossil fuel subsidies, can help countries to implement more effective and efficient climate policy. These policy approaches are stronger when combined with policies supporting the supply of low and zero-carbon technologies and infrastructures.
Although countries have made progress, carbon prices (net of fossil fuel subsidies) are still zero or negative for almost 60% of greenhouse gas emissions. Where carbon prices are net positive, in most cases the price levels are not high enough to encourage the transition to net-zero. Relief measures taken by governments in 2022 in response to the increases in energy prices have greatly reduced net carbon prices.
As a response to the recent energy price shock, there have been widespread energy tax cuts. The report notes that in the long term the pursuit of a net-zero transition will help to reduce dependence on fossil fuels, and therefore provide a cushion against energy price shocks. In the short and medium term, countries should protect the most vulnerable groups from the impact of higher energy prices, to help build support for the low carbon transition. Any further measures could be targeted through income support and through increasing availability of low carbon options.
