On 25 June 2015 the OECD published “Taxing Energy 2015 – OECD and Selected Partner Economies”. This analyses energy use in the 34 OECD countries and in Argentina, Brazil, China, India, Indonesia, Russia and South Africa. For the purpose of the study statutory tax rates are translated into effective tax rates per unit of energy and per unit of carbon dioxide for various energy uses to produce a comparative analysis of the structure and level of these taxes.

The study shows that in the countries analyzed the taxation of energy use is low compared to the environmental costs. The social cost of carbon is estimated to be around 30 Euros per tonne of carbon dioxide whereas the average effective tax rate on all energy use in the 41 countries surveyed was found to be EUR 14.8 per tonne. This is before taking into account the other negative side effects of energy use.

Taxes are particularly low or even zero on some of the most harmful fuels, effectively facilitating their use. Coal is the lowest and least frequently taxed fuel although it is a significant contributor to climate change and local air pollution. Around 85% of the coal used for heating and process purposes in the countries surveyed is not subject to tax at all. This is in contrast to oil products most of which are subject to energy taxes.

The study finds that energy taxes differ greatly according to the type of user in ways that do not have any connection to the environmental impact. These taxes are much lower for heating and process fuels and electricity than for transport, and there are differences in the levels of taxation on fuels that are used for the same purpose. The analysis reveals that 39 of the countries tax diesel for transport use at lower rates than gasoline even though its environmental impact is greater.

In addition to specific energy taxes there are other areas of policy that impact energy prices and patterns of usage including differential rates of value added tax (VAT) and carbon permit systems. Of the countries surveyed nineteen apply a different rate of VAT to some energy products. The effect is that energy use is made cheaper compared to other forms of consumption and this policy therefore runs counter to the aims of environmental taxation.

The conclusion from the study is that taxes on energy use are currently not very well aligned with the negative side effects and are having only a limited impact on efforts to improve energy efficiency and shift towards less harmful forms of energy. Taxation is one of the most effective tools that governments can use to reduce the negative effects of energy use but they are currently applied incoherently. Taxes are not being used to reduce adverse health effects or to reduce emissions of greenhouse gases. There is therefore still considerable scope for using taxation as a tool to improve the environment and combat climate change.