An OECD working paper entitled Carbon Pricing Design: Effectiveness, Efficiency and Feasibility was posted on the OECD website on 22 June 2020.

The paper notes that carbon pricing helps countries to achieve carbon neutrality and looks at ways to design carbon pricing to increase its effectiveness. Considerations of efficiency apply both to carbon taxes and to Emissions Trading Systems (ETS). If carbon prices are stable there is a greater incentive for clean investment; and the paper examines policy instruments that may be effective in stabilizing carbon prices. Using various examples the paper looks at the practical outcomes of policy and discusses the tax base, administrative choices and ways in which revenue use can influence the amount of support from households and firms.

After discussing reasons for pricing carbon emissions and the required price levels the paper looks at why carbon price stability is necessary and how carbon price volatility can increase the capital costs for green investment. The paper looks at mechanisms to support carbon price stability including carbon price support; an auction reserve price; an Emission Containment Reserve and a Market Stability Reserve.

The paper also looks at the use of the revenue raised by carbon pricing. Although carbon pricing is primarily introduced to reduce carbon emissions it can also raise substantial revenue for the government. The paper takes into account studies that have been carried out on the use of revenue from carbon taxes and ETS auctions. The revenue from carbon pricing is sometimes earmarked (at least partly) for green spending, but also for general use or to support broader tax reform. Some earmarking or constraints on use can also occur in the case of excise taxes on fuels. The paper notes that recent literature on the use of revenue from carbon pricing suggests that it is generally possible to find a balance between socially beneficial uses and uses that may contribute to support for carbon pricing.

Carbon taxes have a direct effect on the carbon price and aggregate emission reductions will be greater as the carbon price increases. An ETS on the other hand fixes the quantity of the carbon emissions and the permit price would be determined by the cost of the marginal abatement required to reach the cap. As those costs are not known precisely before the emission cap is settled the permit price is not certain at that stage. The long term carbon price expectations are therefore uncertain in the case of either a carbon tax and an ETS.