A report on Tax Policy and Climate Change, produced by the IMF and the OECD, was included as an attachment to the OECD report for the meeting of G20 Finance Ministers on 13 October 2021.
Carbon taxes and emissions trading systems result in explicit carbon prices, however some taxes on energy use, regulations to discourage carbon emissions and subsidies for low carbon technologies give rise to implicit carbon prices. The preferred policy mix depends on the circumstances of each country such as the level of economic development.
Countries must balance explicit carbon pricing with other instruments, such as feebates and regulations, which can be less efficient but may have greater public acceptability as they have a smaller impact on energy prices. Other supporting elements include public investment, technology policies and the productive use of carbon pricing revenues.
The measurement of different policy instruments and approaches must be improved. Explicit carbon prices are well understood, but for more accurate international comparisons further data is required on other mitigation policies. Where possible their implicit carbon price equivalent needs to be estimated.
If common international approaches are to be developed there must also be a mechanism for sharing metrics and indicators on policy approaches. Assessing the relative merits of different responses to negative international spill-overs will help to strengthen cooperation on reaching common climate goals.
The report recommends that the Finance Ministers should support improved measurement of principal greenhouse gas mitigation policy measures through monitoring of explicit carbon pricing policies, such as carbon taxes and emissions trading systems, and implicit carbon prices from other measures including fossil fuel subsidies. The monitoring process can be extended through the development of improved indicators for implicit carbon pricing policies from measures such as energy efficiency standards, emission regulations, feebates, clean energy subsidies, taxes on individual fuels and sectoral emissions pricing. Indicators for measuring the carbon footprint of countries can also be shared.
The Finance Ministers could organise a process for regular updates on implicit and explicit pricing measures, looking at the countries’ mitigation pledges and the impacts of pricing on emissions, local air pollution, economic welfare and other important areas. This could include analysis of the effects of energy price changes and of assistance measures introduced to mitigate the effects. The Ministers could promote coordination of mitigation policy packages among the countries of the G20.
More analysis is required on the impact of carbon prices on imports, exports, output and employment. Discussion is required on the role of border carbon adjustments in relation to other measures to compensate for differences in carbon prices. The Ministers could also look at other areas of international collaboration on emissions pricing, such as setting up an Inclusive Framework to coordinate efforts. Another possibility are climate clubs, agreements by groups of countries to cooperate on activities to combat climate change, such as implementing the same carbon price through a carbon tax or emissions trading scheme.
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