This chapter presents the current state of taxing energy use across countries, sectors, and energy carriers through the Net Effective Energy Rates. Adding electricity taxes and subsidies to the picture, this indicator illustrates trends and considerations related to energy taxation and assesses requirements for reforms to better protect vulnerable households in an energy crisis and prepare tax systems for a growing energy demand that relies increasingly on electricity.
Pricing Greenhouse Gas Emissions 2024
Gearing Up to Bring Emissions Down
OECD Series on Carbon Pricing and Energy Taxation
Abstract
Although the energy crisis temporarily lowered effective rates on energy use and GHG emissions, it has also spurred the investment in clean energy that may see the global demand for fossil fuels peak before 2030 (IEA, 2023[1]). This marks a turning point for the world economy as countries prepare to step up efforts to mitigate climate change, while dealing with increasing energy demand, especially for low‑emission electricity. These developments accelerate the energy sector’s decarbonisation but bring about challenges such as competitiveness concerns, potential exposure of vulnerable households to higher energy prices, and tax base erosion, among other issues.
This chapter presents trends and changes in energy use taxation, focussing on their intersection with climate goals. It explores the interactions of energy taxes and carbon prices with other policy goals such as the protection of vulnerable households while decarbonising energy use, as well as interactions with other tax policy instruments such as reduced VAT rates. It further analyses the shifting of tax bases and its fiscal impacts through the rapid electrification of energy end-use with an in-depth analysis of the road transport sector. Balancing the sometimes-conflicting objectives of achieving climate goals, building public support, and respecting budgetary constraints requires foresight, good policy design, and flexible systems that allow for uncertainty related to the structural shifts brought about the climate transition.
3.1.1. Specific taxes on energy use require better alignment with climate goals
This chapter presents estimates on how the 79 assessed economies effectively taxed energy use in 2023.1 Together these economies account for 83% of global energy use and 82% of combustion-related CO2 emissions. To provide an informative and harmonised overview of countries’ approach tax-based energy price signals across all forms of energy use, the OECD developed the indicator Effective Energy Rate (EER) (OECD, 2015[2]).
The world is expected to see a considerable reduction in fossil fuel use while also an increase in energy demand particularly in emerging economies with a growing population and with the continued electrification of energy production (Figure 3.1). Electricity and fuel excise taxes were originally designed to raise revenues and address distributional concerns. Today, these taxes can be important policy tools to contribute to emissions reductions as specific taxes on energy use can change the relative price of energy- and emission-intensive products and services. Governments should consider aligning energy taxation and carbon pricing instruments with climate goals, accommodate shifts from combustibles to renewable energy sources and adapt revenue raising approaches accordingly.
Global energy supply and final energy consumption in EJ, historically by energy source and outlook, 2010-2040
Note: The IEA models three scenarios for the global energy sector. The Stated Policies Scenario (STEPS) gives a sense of the energy system progression, based on a detailed review of the current policy landscape and provides a conservative benchmark for the future by not taking for granted that governments will achieve all announced climate ambitions. The Announced Pledges Scenario (APS) illustrates the extent to which announced ambitions and targets can deliver the emissions reductions needed to achieve net zero emissions by 2050. The Net Zero Emissions by 2050 Scenario (NZE Scenario) is a normative scenario that shows a pathway for the global energy sector to achieve net zero CO2 emissions by 2050. (IEA, 2023[3]).
Source: (IEA, 2023[4]; IEA, 2023[5]).
3.1.2. Taxing energy use across all combustible and electricity sources
The Effective Energy Tax Rate is defined as the sum of specific taxes on energy use, net of applicable exemptions, rate reductions and refunds. Specific taxes on energy use include explicit carbon taxes, fuel excise taxes and electricity excise taxes.2 The Effective Energy Rate (EER) includes, in addition to the specific taxes on energy use, the energy price signals that results from ETS permits. All tax rates, which are typically expressed in physical units (such as litres or kilogrammes) are converted into rates per gigajoule (GJ) of energy based on the energy content of the product they apply to (this differs to the ECR, which uses emissions as the base rather than energy). Aggregating rates and prices across different policy instruments, energy sources, end-users or jurisdictions allows the construction of a detailed picture of the state of taxing energy use.
Similar to the development of the ECR to the Net ECR, the Net Effective Energy Rate (Net EER) accounts for fossil fuel subsidies and adds electricity subsidies that change the pre-tax price of energy products and applies these to an energy base – EURs per GJ. Altogether, the Net EER captures the interaction of both positive and negative price signals on energy use, including electricity. The Net EER gives insight into how countries are tackling energy policy in conjunction with climate policy considerations and lead to better policies for economies to use to learn, assess and measure the changes occurring. The trends in coverage and the effective rates are reported, followed by analysis of several issues surrounding energy taxation today.
Source: Authors.
3.2.1. A large share of energy use is not covered by a positive Effective Energy Rate
In 2023, about 53% of energy use was not subject to a tax on energy use or an explicit carbon price (Figure 3.3). High-income countries generally levy higher rates than developing and emerging economies.3 On average, high-income countries taxed energy use at EUR 4.96/GJ in 2023, slightly down from EUR 5.43/GJ in 2018. Covered low-upper and middle-income economies levied on average EUR 0.54/GJ in 2023. The distribution of EERs, however, is heavily skewed in both country groups. There are many reasons for differentiated taxation of different forms of energy use. Within an economy, revenue-raising, energy mix and distributional considerations frequently lead to different rates across fuels, end-use sectors, and consumer groups. Such a distribution can serve environmental goals as not all forms of energy use impose equal external costs on society and the environment.
The distribution of Effective Energy Rates across energy use, 2023
Note: Energy use data is for 2021, adapted from the IEA (2023[5]). Average tax rates do not include electricity and heating imports to avoid the double-counting of this energy use. The vertical axis is cut off at EUR 25, but the share of energy use taxed at a higher rate is negligible. All rates are expressed in real 2023 EUR using the latest available OECD exchange rate and inflation data; changes can thus be affected by inflation and exchange rate fluctuations.
3.2.2. Across countries, fuel excises dominate EERs but explicit carbon pricing is on the rise, in particular among high-income countries
One reason for the heavily skewed distribution in EERs is that energy tax rates vary substantially by country (Figure 3.4). Of all 79 countries covered, only four do not levy any specific taxes on energy use. In 44% of the countries covered, energy use is subject to a positive EER below EUR 2/GJ and in 23% the rate is higher than EUR 5/GJ. Fuel excise taxes are the most implemented policy instrument. All countries with a positive EER levy a fuel excise tax. On average, they account for 74.5% of countries’ EER, making the fuel excise tax currently the largest contributor to the indicator. While fuel excise taxes historically accounted for the largest share in the EER of every country, in 2023, 12 countries levied a higher explicit carbon price than fuel excise tax. In four of these, an increase in their carbon pricing level (as opposed to a reduction in fuel excise tax rates) led to the change in instrument shares.
Generally, explicit carbon pricing instruments, i.e. carbon taxes and ETSs, are more common in high-income countries. Among OECD members, only Costa Rica and Türkiye have yet to implement an explicit carbon pricing instrument, although Türkiye has announced plans to introduce an ETS (Chapter 2). In low to upper middle-income economies, about a quarter had not implemented an explicit carbon price in 2023. Among these economies with an explicit carbon price are, among others, the EU member state Bulgaria, China, Indonesia, Kazakhstan, South Africa, Singapore and Argentina. Of the 79 countries covered, 58% levy an electricity excise tax. Notably, all 27 EU member states have a positive rate in accordance with the EU Energy Tax Directive of 2003, which prescribes a minimum rate. Electricity excise taxes are in almost all countries the lowest component in the EER. A notable exception is Brazil, where electricity excises account for 91% of the EER, as well as Sweden where they contribute 33%. OECD countries tax electricity consumption on average at a rate of EUR 0.12/GJ. Only seven countries, all mid- and northern European economies, levy a rate above EUR 0.5/GJ, among them the Netherlands with the highest rate of EUR 2.21/GJ.
Average Effective Energy Rates, by country and policy instrument, 2018 and 2023
Note: While not always discernible, all EU member countries levy electricity taxes. Energy use data is for 2021, adapted from the IEA (2023[5]). Average tax rates do not include electricity and heating imports to avoid the double-counting of this energy use. All countries are covered for 2023, with varying country composition according to the coverage of previous editions in other years. All rates are expressed in real 2023 EUR using the latest available OECD exchange rate and inflation data; changes can thus be affected by inflation and exchange rate fluctuations.
This section presents the state of Net Effective Energy Rates (Net EER) across energy sources and countries. It assesses how subsidies on fossil fuels and electricity use change the Net EER and explains impacts on energy use patterns and countries’ revenue generation.
3.3.1. Fossil fuels face overall higher Net EERs than other energy sources
Taxing relatively carbon-intensive forms of energy use at higher net effective rates can shift energy demand towards low-emitting energy sources. There remains scope to better align Net EERs with the carbon content of fuels and thus GHG emissions. However, incentives for reducing the demand for emissions-intensive combustible fuels are also affected by the relative tax burden of fossil fuels via other energy sources that do not generate GHG emissions when used (and are hence beyond the scope of Net EERs). Low-emission energy sources are renewable energy sources, such as hydropower, solar PV, and wind power. Therefore, a higher relative tax treatment on fossil fuels can strengthen the economic case for electrification in a reasonably decarbonised electricity mix, e.g. switching to electric vehicles in road transport or electrifying industrial processes.
Net Effective Energy Rates, by energy source, 2023
Note: Fuel excise taxes levied on hydro and solar, wind, ocean consist of electricity input taxes that were been implemented in Norway as of 01 April 2023. Energy use data is for 2021, adapted from the IEA (2023[5]). Average tax rates do not include electricity and heating imports to as the primary energy use is not known and to avoid the double-counting of this energy use. Due to data limitations, fossil fuel subsidy estimates for 2023 are based on data for 2022. All rates are expressed in real 2023 EUR using the latest available OECD exchange rate and inflation data; changes can thus be affected by inflation and exchange rate fluctuations.
Comparing the compononents of the Net EER’s energy sources shows that nearly all fossil fuels face higher rates than low-emitting energy sources (Figure 3.5). Overall, 89% of the energy use grouped by energy sources was subject to a positive Net EER in 2023, a lower share than in 2021 where principally all energy use faced a positive rate. As in 2021, petroleum products, mainly used in road transport (gasoline and diesel), faced by far the highest Net EER. On average across all covered countries, gasoline and diesel were subject to EUR 5.6/GJ and EUR 4.3/GJ, respectively. While coal, other solid fossil fuels, and natural gas faced nearly the same Net EER in 2021. The picture has changed in 2023, where coal faces a higher rate than natural gas. This change was caused by the introduction of the China ETS in July 2021, covering the country’s large, coal-intensive power sector. This increased coal’s explicit carbon price and thus, its Net EER, while natural gas received on average more fossil fuel subsidies. Given the higher carbon content of coal relative to gas, this is a positive development from an environmental perspective. However, the increased subsidy level for natural gas made it also relatively cheaper than biofuels. Biofuels have previously been exempted from fuel excise taxes in many countries, but more recently preferential tax treatment has been phased down or connected to environmental performance, such as higher blending ratios when used in road transport, restricting the applicable base.
The emissions-free electricity sources – geothermal, solar, wind and ocean and nuclear – are subsidised, pointing to stronger incentives for the decarbonisation of the electricity mix and electrification. In contrast, hydro power faces a low positive Net EER in 2023. This results from an electricity input tax, included in this edition under fuel excise taxes that had been temporarily implemented in Norway between 2022 and 2023. With a Net EER of EUR -1.0/GJ, LPG receives the largest subsidy per GJ. Some non-OECD economies, notably Indonesia, Egypt, Morocco, Ecuador, Malaysia and India, subsidise LPG use to provide cleaner and affordable energy to low-income households. For instance, India supports vulnerable households in the uptake of LPG as a clean, modern cooking fuel to reduce use of solid biomass. While there might not be immediate and clear benefits for the climate, such measures can greatly improve health and livelihoods through indoor air pollution reduction.
The fossil fuel surcharge – the difference between the Net EER on fossil fuels and on other energy sources (excluding biofuels) – tends to be higher in countries with a relatively higher average Net EER on fossil fuels (Figure 3.6). For instance, Switzerland, Denmark and Iceland have some of the highest average Net EERs on fossil fuels, as well as some of the highest fossil fuel surcharges. In these countries, fossil fuels are on average priced over EUR 5/GJ higher than other energy sources. However, the two indicators are not always correlated. In Greece for example, the Net EER on fossil fuels is relatively low at EUR 0.47/GJ, but this still represents a large surcharge of EUR 14.11/GJ relative to other energy sources, which are effectively subsidised.
There are 13 countries in which both fossil fuels and other energy sources are effectively subsidised, evidenced by the negative Net EER for both. While it is more desirable to send a strong price signal to reduce fossil fuel use through a positive and relatively higher Net EER applied to fossil fuels than other energy sources, a lower rate of effective subsidies can still maintain incentives to switch to lower-emitting energy sources to an extent. This is the case for Nigeria, Dominican Republic, Kazakhstan, Sri Lanka and Burkina Faso. In fact, Burkina Faso has the largest fossil fuel surcharge at EUR 16.80/GJ, although the Net EER on fossil fuels and other energy sources are negative.
In contrast, if the Net EER is relatively lower on fossil fuels than other energy sources – representing a fossil fuel discount – this distorts incentives to decarbonise and switch to other energy sources. This is the case in 11 countries. On average, the fossil fuel discount is low at EUR 1.06/GJ. Most of these countries have a negative (or otherwise very low) Net EER on fossil fuels but for some, the discount relative to other energy sources is substantial. For instance, in Ethiopia, the fossil fuel discount is EUR 3.24/GJ. These discounts can be driven by either relatively high taxes on the consumption of electricity (e.g. Brazil) or because of relatively high subsidies on fossil fuels (e.g. Ecuador), or a combination of both (e.g. Morocco). However, the fossil fuel surcharge is affected by the composition of countries’ energy use and therefore must be interpreted with caution.
Fossil fuel surcharge (Average Net EER on fossil fuels – Average Net EER on other energy sources (excl. biofuels)) by country, 2023
Note: Energy use data is for 2021, adapted from the IEA (2023[5]). Due to data limitations, some fossil fuel subsidy estimates in this edition are based on data for 2022. Average tax rates do not include electricity and heating imports to as the primary energy use is not known and to avoid the double-counting of this energy use. All rates are expressed in real 2023 EUR using the latest available OECD exchange rate and inflation data; changes can thus be affected by inflation and exchange rate fluctuations. Prices are rounded to the nearest eurocent.
3.3.2. Impact of electricity taxes and subsidies on revenues
As discussed in Chapter 2, revenues from carbon and energy pricing instruments can be a substantial source of government revenue, and the relative volume and makeup of revenues from different pricing instruments differs across countries. Overall, revenues from energy taxes and carbon prices exceeded expenditures on fossil fuels and electricity subsidies, resulting in net positive revenues (Figure 3.7). Almost all OECD countries collect positive revenues from Effective Energy Rates and net revenues amount on average to 1% of GDP, which is more than three times the relative share of other economies assessed.
The role of electricity taxes in government revenues varies substantially across countries. Of the 79 countries covered, 32 do not apply taxes on electricity use. Among those that levy an electricity excise tax, its role in revenues is still small relative to other tax instruments – on average just 0.09% of GDP. However, within specific countries, such as the Netherlands, Sweden and Finland, revenues from electricity taxes make a substantial contribution to government revenues, reaching as high as 0.6%. This is caused by a high electricity tax rate, a broad tax base due to a high degree of electrification, or a combination of both.
A similar number of countries do not subsidise electricity consumption, although there appears to be no clear correlation between countries’ decisions to tax and subsidise the consumption of electricity. Among the countries that do subsidise electricity, these expenditures amount to 0.4% of GDP on average. For those that have both taxes and subsidies for electricity, expenditures tend to be larger than revenues generated. On average, expenditure on electricity subsidises as a share of GDP is 0.3 percentage points higher than the revenues earned from electricity taxes. In Burkina Faso, Bulgaria and Greece, where electricity subsidies are particularly high, the expenditure on electricity subsidies is almost 3 percentage points higher than revenues. In general, however, the role of electricity pricing instruments in net revenues for governments remains substantially smaller than that of other instruments on average.
The relative importance of electricity taxes, both as a tool to contribute to climate change mitigation as well as to raise government resources is set to increase. As economies are increasingly electrifying energy use, revenues collected from electricity taxes, as well as revenues foregone due to electricity subsidies, are likely to change. Moreover, electricity taxes and subsidies also interact with other taxes, such as explicit carbon prices and other policy concerns that include ensuring energy security and affordability (Section 3.4). In addition, an important determinant of energy-related government revenues and expenditures going forward will be how the overall tax base and the share of electricity and other energy products develop as the structure of energy sector evolves (Section 3.5).
Net energy revenue estimates, by country, 2023
Note: Revenue estimates may be considered an upper bound of the actual revenue potential as they are estimated on historical data (fewer and more expensive low-carbon technologies, lower carbon prices, few developing countries in the sample). Estimates are for fossil fuel CO2 emissions and do not include the revenue potential from reforming the pricing of other GHG or biofuels. Through accounting for free allocation, the net effective rates in these revenue estimates represent an average, rather than marginal Effective Energy Rate, as is used elsewhere in the report.
Energy consumption can represent a significant share of household expenditure, especially for low-income households (OECD, 2022[6]), and is closely tied to other policy concerns concerning energy poverty and the affordability of heating or cooling, cooking, transport and others. This dual challenge became particularly striking during the energy crisis in 2022 which had significant costs to households, and poorer households faced a disproportional burden compared to higher-income groups (Guan et al., 2023[7]; OECD, 2024[8]). This section summarises governments’ broad responses to the energy crisis that resulted in a substantial increase in support to households and firms and showcases the importance of targeting such measures to support vulnerable households more efficiently.
3.4.1. Governments responses to protect households during the energy crisis decreased the Net EER of most economies
Soaring fuel and electricity prices during the energy crisis in 2022 triggered many governments to adopt large fiscal packages primarily to support households. These packages included a range of different support measures, which are detailed with examples in Table 3.1. Price support measures reduce the marginal energy prices paid by households or firms (e.g. reduced or capped energy prices or reduced fuel excise tax rates). Income support measures are split into two categories: energy-related income measures, which support income through discounting energy payments, and non-energy-related income measures, which support income through channels not related to energy use reduction in income taxes. Both can be in the form of tax measures or budgetary transfers (subsidies), and energy-related measures can also be in the form of reduced, regulation or capped average energy prices.
Note: The measures and examples listed are not exhaustive.
Source: Framework adapted from (Castle et al., 2023[18]).
Governments responses to the energy crisis included both significant cuts to fuel excise taxes and increases in subsidies to fossil fuels in form of budgetary transfers.4 While some countries paused or reversed advancements of their explicit carbon pricing policies, on average across all countries, explicit carbon pricing remained overall relatively resilient to the pressures of the energy crisis. As a result, the Net EER decreased from 2021 to 2023 in most countries (Figure 3.8). On average, the Net EER dropped by about 25% (EUR 0.44/GJ) between 2021 and 2023.
While some emerging and developing economies have long-standing subsidies on electricity and fossil fuels, the energy crisis triggered in 2022 multiple OECD countries to implement such measures. In these economies, most support was initially introduced as a temporary measure for several months but has been extended in multiple times in many cases. Many measures were still in place in 2023 and a few continued operating in 2024. Therefore, the full impact of the energy crisis on taxation of energy use will only manifest in the upcoming years.
The United Kingdom and France adopted broad fiscal support packages that increased subsidies of electricity and fossil fuels in 2022 to EUR 4.74/GJ and EUR 3.17/GJ, respectively. The United Kingdom introduced in 2022 multiple income and energy price support measures of which most were extended or replaced until spring 2023 or 2024. The Energy Bill Relief Scheme (October 2022 to March 2023) and then the Energy Bills Discount Scheme (April 2023 to March 2024) provided a discount on wholesale gas and electricity prices for non-domestic consumers (UK Government, 2023[19]; UK Government, 2023[20]). The Energy Price Guarantee capped households’ annual bills of electricity and natural gas use (combined) at GBP 2500 until June 2023. Afterwards, support from the Guarantee was lowered to a cap of GBP 3000. Due to falls in energy prices, the price cap was not required until it ended in March 2024 (UK Parliament, 2024[21]). In addition, about 80% of British households benefitted from a non-refundable Council Tax Rebate of GBP 150 on their annual energy bill and a Discretionary Fund for billing authorities provided low-income individuals additional support between February 2022 and April 2023 (UK Government, 2022[22]). Further, the UK also reduced fuel excise taxes on petroleum products in March 2022 and extended the measure twice until March 2025 (UK Office for Budget Responsibility, 2024[23]).
France put in place a cap on regulated prices of natural gas and electricity, adopted sectoral subsidies for firms, lowered the electricity excise tax and introduced a one-off subsidy on gasoline and diesel consumption of EUR 0.10 to 0.30 per litre (Government of France, 2022[24]). This one-off subsidy was fully phased out in December 2022 and even with a new, transitionary measure, a voucher on road fuels, which was in place over the course of 2023- support for road transport fuels strongly decreased. In contrast, other measures such as the electricity excise tax reductions and cap on regulated prices of natural gas and electricity have been extended multiple times (Government of France, 2024[25]; Government of France, 2023[26]).
Greece took numerous steps to shield households from soaring energy prices since autumn 2021. Efforts include expanding existing measures targeting energy poverty and introducing broader measures to reduce energy prices for most consumers. As a result, the Net EER dropped to EUR - 2.77/GJ from EUR 5.79/GJ in 2021. Total subsidies in the form of budgetary transfers were estimated at EUR 5.43 billion in 2022, quadrupling in only one year (OECD, 2023[27]). Between September 2021 and March 2023, Greece strongly increased subsidies of electricity consumption for households and businesses (OECD, 2023[28]). Support was extended on a lower level throughout 2023 (Ekathimerini, 2023[29]; Ekathimerini, 2023[30]). Additional interventions during the year included tax reliefs for farmers’ fuel, subsidy on heating oil price and increase of the heating benefit allowance. Responses to the energy crisis are expected to be phased out in 2024 (Government of Greece, 2023[31]).
Lithuania experienced a drop in its Net EER of EUR 3.66/GJ between 2021 and 2023. Lithuania introduced support measures for firms and households’ gas and electricity bills in 2022. While electricity subsidies were ended mid-2023, support for gas was extended until end of the year and then fully phased out (Government of Lithuania, 2023[32]).
Japan introduced in January 2022 a new subsidy for wholesale energy distributers to limit retail price increases of multiple petroleum products, spending over the course of the year EUR 23.32 billion. As a result, Japan’s Net EER dropped from EUR 2.37/GJ in 2021 to EUR 0.4/GJ in 2023. The initially temporary measure has been extended multiple times, most recently until December 2024 (Japanese Ministry of Economy, Trade and Industry, 2024[33]). While the support rate increased in the first extensions, it has been gradually reduced in the past months, standing in February 2024 at about JPY 20 per litre of gasoline, diesel and kerosene (Koshoji, 2024[34]).
While the energy crisis triggered the greatest changes to fossil fuel subsidies in European countries and Japan, other economies saw their spendings multiplying due to higher international fuel prices or had to expand existing measures to support consumers. For instance, in Colombia, the Fuel Price Stabilisation Fund which compensates since 2007 suppliers for discrepancies between domestic gasoline and diesel tariffs and international prices, saw its deficit rise since 2021, leading to a surge of the country’s fossil fuel subsidies (OECD, 2023[27]). Ecuador, Sri Lanka and Burkina Faso saw there Net EER drop by more than EUR 3/GJ due to higher fossil fuel subsidies.
Instead of raising subsidies on energy use, a few countries also lowered rates of fuel and electricity excise taxes. Apart from Lithuania and the United Kingdom, Israel and Ireland adopted larger decreases in their fuel excise taxes to contain price increases during the energy crisis. While Ireland’s response did not have any budgetary transfers, the government reduced in March 2022 the fuel excises applying to automotive diesel, petrol and marked gas oil. The measures were extended at lower levels and have been phased out in August 2024 (Irish Department of Finance, 2024[35]). Similarly, Israel substantially reduced its fuel excise tax rates on diesel, gasoline and coal in April 2022. Rate reductions for coal and gasoline were extended until the end of 2023 and fully phased out as of 2024 (Dori, 2024[36]; Israeli Ministry of Finance, 2023[37]). Denmark decreased its electricity excise tax rate in 2022 initially by DKK 0.04 to DKK 0.723/kWh and then expanded the reduction until June 2023 to the EU minimum rate of DKK 0.008/kWh (Danish Ministry of Finance, 2022[38]). Not having adopted any subsidies on energy use and slightly increased its explicit carbon prices in 2023, Denmark continues to levy one of the highest Net EERs in the database.
Net Effective Energy Rates, by country, 2021 and 2023
Note: Energy use data is for 2021, adapted from the IEA (2023[39]). Due to data limitations, some fossil fuel subsidy estimates in this edition are based on data for 2022. Average tax rates do not include electricity and heating imports to as the primary energy use is not known and to avoid the double-counting of this energy use. All 79 countries are covered for 2023 with varying country composition according to the coverage of previous editions in other years. All rates are expressed in real 2023 EUR using the latest available OECD exchange rate and inflation data; changes can thus be affected by inflation and exchange rate fluctuations. Prices are rounded to the nearest eurocent.
3.4.2. Targeted response measures to the energy crisis
Some countries enacted policies that provided targeted and timely support to vulnerable households in the wake of rising fuel prices in particular for natural gas, oil and electricity (Castle et al., 2023[18]). For example, means-tested income support through cash transfers or energy bill vouchers via existing social assistance programmes, as well as other forms of transfers such as targeted energy efficiency transfers, work to reduce the burden for the most vulnerable households (Sgaravatti et al., 2021[40]). The use of existing social assistance systems allowed for measures to be introduced and received by households in a timelier manner than where new administrative structures needed to be created.
In contrast, broad-based policies such as cuts to excise tax rates or VAT rates and caps on retail prices of energy taxes effectively worked to subsidise the energy consumption of all households and not just vulnerable households. This included those that had better means to cope with the energy crisis and included non-essential expenditures such as the heating of private swimming pools, saunas, etc. Such broad-based policies tend to be more expensive for governments, less efficient in providing relief and weaken incentives for all households to reduce energy use or switch to renewable energies instead (Van Dender et al., 2022[41]). Moreover, broad-based policies can have compounding effects making their effects even larger. For example, VAT is generally applied to a tax base that includes excise duties such that a reduction in the fuel excise tax rate will also lead to a reduced amount of VAT applicable to the fuel product (Box 3.1).
With the exception of Chile, all OECD countries that operate a VAT apply one or more reduced rates to pursue various policy objectives particularly to address equity concerns for necessary commodities (such as food, education, housing, heating and electricity). To mitigate undesired social impacts of energy price surges triggered by the energy crisis since 2021 many countries introduced further reductions in VAT rates as part of broader policy packages to immediately relieve household budgets. Policymakers most commonly reduced the VAT rates applied to electricity, natural gas and heating fuels though decisions also depended on countries’ relative fuel mix. In most countries, the duration of these temporary measures was initially set to about a few months, but rates were cut further and their duration extended in many countries or even made permanent. As a result, countries still apply reduced VAT rates to a number of energy products, although available evidence suggests that the application of reduced VAT rates remains a poor tool for targeting support to lower income households since rich households have a much higher aggregate benefit from a reduced VAT since they consume more in absolute terms (OECD/KIPF, 2014[42]). Reduced VAT rates that have been adopted prior to or during the energy crisis and currently apply to energy products consumed by households such as residential heating networks (Belgium, France, Greece, Hungary, Latvia, Lithuania and Luxembourg); heating fuel oil (Iceland, Luxembourg and the United Kingdom); gas for domestic use, either permanently (Belgium, Greece, Italy, Luxembourg and the United Kingdom) or temporarily (Germany and Ireland); and electricity either permanently (Belgium, Greece, Iceland, Italy, Luxembourg, Türkiye and the United Kingdom) or temporarily (Ireland, Portugal and Spain).
VAT is a broad-based tax on consumption, in principle applied equally to all products, and therefore does not change the relative price of carbon-intensive goods. However, in practice, many countries apply preferential (i.e. reduced) VAT rates on specific products. Through this channel, VAT interacts with Effective Energy Rates by providing a form of subsidy for certain products. Unlike other taxes examined in this report, which are calculated on a quantity of commodities (e.g. litres of fuel, tonnes of CO2 or kilowatt electricity), VAT is levied on the sales price of the product. If the VAT base includes fuel excise duties (as they generally do), these duties contribute to the VAT burden. The VAT rate applicable to a product therefore has a dual impact on the total amount of taxes collected and on their composition.
Selected energy carriers, consumption weighted averages by end use
Note: While VAT reductions (‘deviations from the standard rate’) are sometimes illustrated as subsidies (Agnolucci et al., 2023[43]), the CPET database presents the reduction on the positive side of the y-axis for this application which is consistent with its approach on fuel excise tax exemptions and refunds. Rates and prices applicable 01/04/2023. Eight countries have reduced rates on heating fuels, with seven among them concerning natural gas. Additionally, nine countries apply reduced rates on electricity use and another seven on district heating
Source: Tax rates from CPET database. VAT standard and reduced rates from Consumption Tax Trends 2024 (OECD, forthcoming[44]). Energy use data refers to 2021 (IEA, 2023[5]; IEA, 2024[45]; IEA, 2024[46]).
Figure 3.9 unpacks the total energy cost of selected energy carriers faced by households in 38 OECD countries into pre-tax prices, excise taxes and explicit carbon prices, and the VAT burden. Additionally, it illustrates what the total price would be if VAT reductions (acting as price subsidies) were not in place. The figure demonstrates that the pre-tax, end-use prices (in EUR/GJ) for the oil products are similar, while excise taxes dominate the tax components of gasoline and diesel in the road transport sector. The VAT x Taxes burden is only visible in the road transport sector because that is where higher Effective Energy Rates apply. The relatively lower VAT burden on gasoline is because the United States account for the majority of OECD gasoline consumption but does not apply a VAT on automotive fuels. VAT reductions have a meaningful impact on natural gas combusted by households and on electricity use. However, taxes on electricity consumption do not transmit carbon price signals. If VAT is decomposed into the VAT reduction into an economy-wide pre-tax price component and a taxes-burden component, it is straightforward to note that it will be dominated by a reduction in the former rather than the latter. In conclusion, the VAT burden or reduction is dominated by its economy-wide component.
The OECD’s Energy Support Measures Tracker takes stock of and assesses the budgetary cost of government interventions in response to the energy crisis since February 2021 (Castle et al., 2023[18]). Across 41 countries assessed (all OECD members except Iceland, Hungary and Switzerland, as well as Brazil, Bulgaria, Croatia, India, Romania and South Africa), the estimated cost of announced support measures is about USD 400 billion in 2022 and USD 405 billion in 2023. Measures in the form of energy price support account for about 52% of the total cost over 2022 to 2023, followed by energy-related income (30%). Countries’ relative expenditures on targeted versus untargeted measures demonstrate that certain types of policy measures, notably budgetary transfers, are better suited for addressing specific groups of the population. Only 23% of the estimated costs were spent on targeted measures, as opposed to the 77% spent on untargeted measures, meaning they benefit all households, firms or energy users the same. In most countries, the decision to use untargeted support measures were motivated by the relatively higher administrative burdens of developing and introducing targeted measures, which require various types of information on energy users. Over the course of the period, however, governments shifted to a greater use of income support measures (OECD, 2022[47]). This could reflect the relative ease with which price support measures can be administered (since they are broad-based and do not require identifying and creating channels of distribution to specific groups), or it may be an indication of lessons learned. The trend may indicate that governments changed their policy approach upon evaluating the effectiveness of the two approaches, as well public demands for more targeted measures for the most vulnerable groups of the population.
Survey data collected by the OECD (Dechezleprêtre et al., 2022[48]) during the height of the energy crisis (March 2021 - March 2022) on attitudes toward climate change policies demonstrate that households themselves also have a preference for targeted, means-tested support mechanisms to be incorporated into carbon pricing policy design, rather than broad-based support. Across all countries included in the survey, there is greater support for a carbon tax with cash transfer for the poorest households of the population, versus with cash transfers to all households (Figure 3.10). As described prior, social protection measures are one form of revenue recycling that can be used to improve the public acceptability of carbon and energy pricing policies (Chapter 2). Targeting relief measures to those who will be affected by such policies the most can help policymakers address potential opposition to the implementation of carbon and energy pricing policies.
Support for different types of carbon taxes, in %, by country
Source: (Dechezleprêtre et al., 2022[48]).
In the light of potential future energy price fluctuations, the recent energy crisis demonstrated important considerations in protecting vulnerable households as countries to move to increasing tax rates on energy and decreasing broad-based fossil fuel support measures. To this end, countries need to be able to identify vulnerable households and understand their diverse patterns of energy consumption which differ across countries (OECD, 2023[49]). Further, governments should prioritise measures that provide targeted relief to vulnerable households, rather than broad-based support in the form of fossil fuel or energy subsidies.
While fossil fuel subsidies can support low-income households, they do so in an economically inefficient way, encouraging emission-intensive energy consumption and reduces the fiscal room for alternative effective policy actions. Phasing down fossil fuel subsidies requires careful considerations to protect households from high energy prices. Steep price hikes resulting from a rapid and deep cut to fossil fuel subsidies can severely impact the socio-economic wellbeing of low-income households. Thus, the phase out of broad-based fossil fuel support to promote the transition to a low-carbon energy sector must be incremental with sufficient incentives for low-carbon investment while building robust social protection systems.
On a broader scale, the energy crisis prompted a duality of responses from governments as they sought to address the challenge of both, ensuring energy affordability and enhance energy supply security. The energy crisis promoted a surge in electricity and fossil fuel subsidies to protect households from soaring energy prices. To ensure short-term energy security of energy supply, it led to a scramble to secure fossil fuel resources, as well as investments in fossil fuel extraction and distribution infrastructure to diversify supply chains. At the same time the energy crisis re-emphasised the imperative to transition to locally-deployed, renewable energy technologies and decrease the dependence fossil fuel imports for both environmental and energy security reasons. Between 2022 and 2023, global clean energy investment increased by 17% (BloombergNEF, 2024[50]) and in 2024, global investments in clean energy reach about USD 2 trillion, twice as much as fossil fuels (IEA, 2024[51]). This sets the scene for long-term structural changes to the economy that result from shifts in the composition of global energy supply which have important implications for energy tax bases.
3.5.1. Rapidly transitioning energy systems boost the share of electricity in energy end-use
Despite the turmoil the global energy crisis created in 2022 in the energy sector, it has substantially accelerated clean energy transitions, as governments have responded with stronger policies to improve energy security using low-carbon sources. About 500 GW of renewables electricity generation capacity were built worldwide in 2023. While in 2020 only one in 25 cars sold was an electric vehicle, this number surged to one in five in 2023. Heat pump sales in Europe grew by 40% in 2022, contributing to a switch from natural gas to electricity in buildings (IEA, 2023[52]). Further, the global energy crisis may be able to pave the way for phasing down of fossil fuel use: The IEA estimated that the momentum behind clean energy transitions around the world is sufficient for global oil, natural gas, and coal demand to peak before 2030 (IEA, 2023[1]). Representing two sides of the same coin, these developments bring about fuel switching in the energy demand of an unprecedented speed and scale: from combustible fossil fuels to electricity.
In 2022, global final energy consumption consisted of 38% oil, 20% electricity, coal and natural gas 30%. The industry sector consumed 38%, followed by buildings (30%) and transport (26%). Figure 3.11 shows that in all IEA scenarios, the share of fossil fuels in global demand is set to decline, while electricity consumption surges. In the IEA’s Stated Policies Scenario (STEPS), the share of fossil fuel consumption decreases to about 55% as electricity demand increases by 80% to nearly 160 TJ by 2050. While global fossil fuel demand remains stable until 2050, consumption trends differ by region, with strong demand reductions the United States and the European Union. In the IEA’s Announced Pledges Scenario (APS), illustrating the extent to which announced 2030 climate targets and longer-term net zero or carbon neutrality pledges, changes are more pronounced. Driven by climate action in Europe and the United States and the carbon neutrality pledges of India and China, electricity consumption exceeds oil demand before 2040 and accounts for more than 40% of global final energy consumption in 2050. In absolute terms, fossil fuel use drops by nearly 45% below 2022 levels, with oil demand contributing to more than half of the reduction. In the IEA’s most ambitious Net Zero Emissions by 2050 Scenario (NZE), electricity consumption would surpass oil demand before 2035, accounting for more than half of the final energy consumption (IEA, 2023[1]).
Global final energy consumption by energy source and IEA scenario, 2022-2050
Note: The IEA models three scenarios for the global energy sector. The Stated Policies Scenario (STEPS) gives a sense of the energy system progression, based on a detailed review of the current policy landscape and provides a conservative benchmark for the future by not taking for granted that governments will achieve all announced climate ambitions. The Announced Pledges Scenario (APS) illustrates the extent to which announced ambitions and targets can deliver the emissions reductions needed to achieve net zero emissions by 2050. The Net Zero Emissions by 2050 Scenario (NZE Scenario) is a normative scenario that shows a pathway for the global energy sector to achieve net zero CO2 emissions by 2050. (IEA, 2023[3])
Source: Based on (IEA, 2023[4]), Figure 3.4.
3.5.2. Fuel switching towards electricity requires reforms of energy taxes
Taxes on energy use are an important source of government revenue
Energy use is an important tax base for government revenues. Fuels used in road transport or electricity in residential buildings are essential commodities for most households, making their consumption relatively stable to price shocks and as a result, a reliable tax base in the medium-term.5 Taxes on energy use accounted on average for 3.2% of fiscal revenues in OECD countries in 2021. While total revenues from energy taxes have been increasing, their average share in the total tax revenues has declined down from 5.3% in 2016 (Elgouacem et al., 2019[53]).
Fuel excise taxes on road transport fuels (gasoline and diesel) account for more than 45% of total revenues from carbon pricing and specific energy taxes. This is because, except for road transport, most of fossil fuel energy uses are either untaxed or taxed at low or reduced rates. International aviation and sea transport are not taxed. Off-road transport (including agricultural transport) is usually taxed at lower rates.
Switching consumption towards clean energy sources transitions potential tax bases
Achieving national pledges and targets to reach net zero emissions mid-century requires a strong reduction of oil, natural gas and coal consumption in nearly all major regions around the world. In the next decade, the decline is particularly pronounced in advanced economies in Europe, the United States, Japan and Korea where fossil fuel consumption has already peaked (IEA, 2023[1]). Advanced economies, in particular European countries have adopted wide-ranging measures to tax energy use and price emissions and levy the highest effective rates (Figure 3.4). Consequently, a shift away from fossil fuel use to low-carbon sources such as renewable electricity, will see a substantial decrease in public revenues from fuel excise taxes and carbon prices in the long-run. The speed of transition away from fossil fuels to electricity differs by end-use sector. It is well underway in the road transport sector where some governments already face substantial fuel excise tax revenue losses due to a declining demand of diesel and gasoline. While countries with high effective fuel excise rates are expected to face substantial tax revenue losses in the medium to long term, the transition to low-carbon energy sources such as electricity also can have positive fiscal impacts for countries that subsidise fossil fuels or are depending on imports of commodities, in particular petroleum products.
The transition away from combustibles increases electricity consumption while gradually building a new energy tax base across all end-use sectors. Examples besides the rise in electric vehicle sales are the uptake of heat pumps to replace natural gas boilers in buildings or the electrification of industrial processes. Bringing to light the importance of electricity use in industrial activities, governments in the European Union have started using reductions of levies and taxes to adjust the electricity price to steer industrial competitiveness (McWilliams et al., 2024[54]). The power sector has also begun decarbonising. Phasing down the use of coal and natural gas reduces fuel excise tax revenues but builds a potential tax base in the future: renewable electricity. As the first country in the world, Norway has adopted in 2022, electricity input taxes on renewables. The country’s electricity mix consists to 98% on hydro- and wind power. An additional Excise Duty on Power (High-Price Contribution) was introduced from September 2022 to October 2023 due to high electricity prices in the energy crisis. It applied to electricity generated by hydro and wind power plants of a monthly average price above NOK 0.7/kWh. Further the Onshore Wind Power Tax of NOK 0.023/kWh generated (2024) has been introduced in July 2022 and applies to wind power plant operators subject to licensing. Generated revenues are circulated back to the municipalities that build onshore wind power to create an incentive for further deployment and act as a compensation of negative local impacts (Norwegian Tax Administration, 2024[55]).
3.5.3. Managing revenue impacts of rapid road transport electrification
In many countries, fuel excise taxes on gasoline and diesel are an important source of revenue for governments. On the other hand, the deployment of electric vehicles is well under way in major markets, boosted by subsidies and other measures. Transitioning vehicle fleets from models with an internal combustion engine to electric ones may significantly reduce revenues under current tax systems as additional revenue from electricity taxes tends to be insufficient to cover the loss. Governments need to consider how to reform their road transport related taxes to compensate revenue losses. Vehicle taxes and distance-based road user charges are important options for this (OECD and ITF, 2019[56]).
A surge in electric vehicles increases electricity use while displacing oil consumption
Over the past years, strong government support to decarbonise the road transport sector created a growing demand for electric vehicles. Many countries offered subsidies and exemptions from common vehicle taxes for electric vehicles, effectively decreasing the purchase price. Other countries allowed electric vehicles to use bus lanes and granted favourable parking conditions, making the use of these models more attractive. In addition, more stringent fuel economy standards increase fuel efficiency requirements and help electric vehicles become more attractive relative to their petroleum-fuelled counterparts with an internal combustion engine (ICE). Finally, national, and local governments consider adopting an ICE sales ban: Norway decided to phase out new ICE sales by 2025, while Israel and Singapore plan a ban for 2030. The EU and UK decided to ban ICE vehicles in 2035, while California (US) and Québec (Canada) envisage to only allow the registration of battery EVs or plug-in hybrids (ICCT, 2021[57]; European Parliament, 2023[58]).
Sales in electric models increased across all vehicle types. In 2023, nearly 14 million new electric cars were registered globally, a 35% year-on-year increase. Electric cars accounted for 18% of all cars sold, up from only 2% in 2018. However, sales are still concentrated in three major markets: China made up for nearly 60% of these sales, Europe for almost 25% and the US for 10%, while other countries such as India or Japan are still catching up. Globally, almost 50 000 electric buses were sold in 2023, about 3% of total bus sales, however, a few countries such as Belgium, Norway, Switzerland and China achieved sales shares above 50%. Also, sales of electric trucks increased 35% between 2022 and 2023. Total sales of electric trucks surpassed electric buses for the first time, with China remaining the leading market, accounting for 70% of global sales (IEA, 2024[59]).
The rapidly growing vehicle fleet consumes an increasing amount of electricity when charging. The global EV fleet consumed about 130 TWh of electricity in 2023, about 0.5% of total final electricity demand. The share of electric vehicles in electricity demand is expected to increase. The IEA estimates that electricity consumption in road transport could increase to 2200 TWh in the STEPS and to 2700 TWh in the APS by 2035, accounting for less than 10% of global electricity consumption as other energy sectors electrify as well. In the US and Europe, the share of vehicles in electricity consumption increases from about 1% to 14% by 2035 in the STEPS and 15-16% in the APS. China increases its share from 0.7% in 2023 to nearly 7% in both scenarios, but its electric vehicle fleet continues to account for the largest consumption compared to other regions (IEA, 2024[59]).
At the same time, electric vehicles also reduce the need for petroleum products. Assuming every electric vehicle sold replaces the sale of a comparable vehicle with an internal combustion engine, charging this electric vehicle with electricity also displaces the diesel or gasoline consumption of the replaced ICE vehicle, accounting for differences in fuel economy. Excluding two- and three-wheelers, the IEA estimates that the global electric vehicle fleet displaced more than 0.8 million barrels per day (mb/d) in 2023. China accounted for 45% of displaced oil demand, followed by Europe (25%) and the US (21%). Displaced oil consumption could raise to nearly 11-12 md/b by 2035 (IEA, 2024[60]).
Revenue impacts of road transport electrification – balancing between losses and potential
Road transport electrification brings about substantial tax revenue losses from fuel excise taxes and carbon prices on automotive gasoline and diesel that is not consumed due to fuel switching. In 2023, governments around the world faced revenue losses of about EUR 13 billion due to displaced oil consumption from electric cars, vans, buses and trucks. With an accelerating deployment of electric vehicles in all regions around the world, revenue losses are rapidly increasing in the next decade. Assuming no changes in rates of specific energy taxes and carbon prices, total revenue losses could amount to EUR 76 billion in 2030 and more than EUR 155 billion in 2035 (Figure 3.12). Nonetheless, in Europe, India, China and the USA, revenue losses continue to account for less than 1.0% of national government revenues in 2023. As diesel is taxed at lower rates than gasoline in most parts of the world, it accounts for about 15% of the tax revenue losses. Although China leads the global EV stock expansion, Europe incurs more than half of the revenue losses as its taxes on gasoline and diesel are about three times as high as in other regions and the uptake of electric vehicles is already well underway. By 2030, Europe faces losses of share in revenue losses of nearly EUR 35 billion, accounting for about 45% total revenue losses. However, as a share of GDP,6 China’s and India’s revenue losses remain below 0.15% of GDP and Europe increases to about 0.25% of GDP in 2035.
EER revenue losses through displaced oil consumption by electric vehicles by region, 2023 – 2035
Note: Data on displaced oil consumption stems from the IEA, Global EV Outlook 2024, APS (IEA, 2024[60]). Data contains trucks, buses, vans and cars (excluding two- and three-wheelers) for Europe, China, India, the USA and the rest of the world. GDP figures are IMF (2023[61]) as a share of country-level GDP assuming 2023 levels throughout. See Section 1.3 “Methodologies for in-depth analysis” in Chapter 1 that includes a detailed description of the methodology.
Source: Authors’ calculation.
Tax revenue losses can occur both on a national level and subnational level. The CPET database has included, since 2018, US state-level taxes for road transport fuels. As a result, aggregated revenue losses from fuel excise taxes across US states amounted to EUR 1 billion in 2023 and are estimated to increase to a cumulative EUR 23 billion by 2035. Revenue losses are unevenly distributed across states, depending on the EV uptake and level of tax rates. In California (US), the frontrunner in EV deployment, revenue from the state’s gasoline and diesel excise tax as well as a diesel sales tax could decrease by USD 5.71 billion annually over the next decade (LAO, 2023[62]). However, as the CPET database does not systematically track subnational tax policies across all countries, global fuel excise tax revenue losses from displaced oil consumption may be higher. For instance, in India taxes on petroleum products at the state level accounted for 3% to 12% of net revenue receipts in 2020 (IEA; Indian NITI Aayog, 2023[63]). Furthermore, the rapid electrification of two- and three-wheelers will further decrease gasoline consumption and related revenues, in particular in emerging economies such as India and Indonesia. Finally, gasoline and diesel consumption does not only decrease because of displaced oil demand from electric vehicles but also due to fuel economy improvements in vehicles with an internal combustion engine.
Electrifying road transport also has positive fiscal impacts, which cannot fully compensate petroleum-related tax revenue losses. Increased electricity consumption through the uptake of electric vehicles has generated less than EUR 1 billion through Effective Energy Rates on electricity and could increase up to EUR 8 billion in 2035. Due to relatively high carbon prices and electricity excise taxes, Europe generates about 75% of these revenues. In addition to net changes in energy tax revenues, oil-importing countries can benefit from reduced import requirements. Analysis shows that if India is to achieve its national target, a 30% sales share of electric vehicles in 2030, the country could save USD 14 billion annually on crude oil imports, about 15% of its total spending on these imports (Harikumar, Jain and Soman, 2022[64]). Furthermore, estimates show that electrifying Rwanda’s entire motorcycle fleet could lead to net revenue losses from energy taxes of RWF 6 billion annually but would simultaneously save RWF 23 billion in fuel import costs (Sudmant, Kalisa and Bower, 2020[65]).
Revenues from fuel excise taxes are often used to finance road infrastructure such as road construction and maintenance or transportation programmes. Looming revenue losses are risking reducing amount and quality of services. For instance, Maryland (US) proposed cutting 8% (USD 2 billion) from its state transportation budget for 2024 amid an expected structural deficit (Brey, 2023[66]). Thus, governments need to find new ways to secure funds and fill estimated gaps from fuel tax revenue losses.
Jurisdictions have begun phasing down subsidies and preferential tax rates for electric vehicles and adopt distance-based road charges
With increased shares of electric models in total vehicle sales, governments around the world have started to adjust their policies to compensate for revenue shortfalls from fuel excise taxes on petroleum products used in road transport. Governments in countries with a substantial uptake of EVs tend to first phase out increasingly expensive purchase subsidies, then reduce beneficial tax treatment and finally start to levy new charges on the adoption and use of electric vehicles. The reform of taxes and charges often does not imply a transition in tax bases from petroleum products to electricity but a shift from energy taxes towards other pricing mechanisms such as vehicles taxes and distance-based road use charges.
Reforming the national system of taxes and charges does not only serve to mitigate revenue losses but also to increase public acceptability of the clean energy transition. As the share of EVs on the road increases, charging EV users to contribute to the maintenance of road infrastructure and upkeep of public transport increases the perception of fairness and equity within the population (Smyth and Chu, 2024[67]).
Norway has successfully scaled up EV sales over the past two decades and is today in the middle of phasing out all support. In Norway, EVs accounted for 82.4% of all vehicle sales in 2023, up from 64.5% in 2021 and expects the sales share to further increase to 95% during 2024 (Nordic EV Summit, 2024[68]). Electric car sales reached 96% in June 2023 (Marx, 2023[69]). Since 1990, Norway boosted its road transport electrification with a generous, broad policy package but with raising sales, the fiscal burden of these measures dramatically increased. As a reaction to this, Norway revoked full exemptions from charges road tolls, on ferries and free municipal parking in 2017. Between 2021 and 2023, it phased out the exemption of annual road tax fees, its purchase taxes and the value-added tax of 25% (Norwegian EV Association, 2024[70]).
China shifted its main policy instruments to promote the uptake of EVs from purchase subsidies to purchase tax exemptions in 2023, which will gradually be phased out until 2027. The countries main purchase subsidy for electric vehicles, the New Energy Vehicles 3 (NEVs) has officially ended as of 2023, leaving vehicle manufacturers without support from national subsidies for EV purchases that have facilitated market’s expansion for more than a decade. China’s national government had gradually scaled back purchase subsidies in the past few years before fully discontinuing them at the end of 2022 (ICCT, 2023[71]). At the same time, China extended in June 2023 its exemptions of low-carbon vehicles from the vehicle purchase tax, making preferential tax rates the key policy instrument to promote the uptake of electric vehicles. In 2024 and 2025, low-carbon vehicles sold in China benefit from a purchase tax exemption up to CNY 30 000 (about USD 4 170), afterwards the exemption is halved until 2027 (Interesse, 2023[72]; People’s Republic of China Ministry of Finance, 2024[73]). About 90% of existing low-carbon vehicle models continue to benefit from reduced rates or exemptions from the purchase tax under the new technical requirements applicable in June 2024 (Global Times, 2023[74]).
The US increased overall support for electric vehicles until 2023 as the criteria established by the Inflation Reduction Act have pushed EV sales. The revised qualifications for the Clean Vehicle Tax Credit, alongside EV price cuts, meant that some popular models became eligible for credits in 2023. As of 2024, however, new guidance for the tax credits means the number of eligible models has fallen to less than 30 from about 45 (IEA, 2024[59]; US Department of the Treasury, 2023[75]). At the state level, governments start to phase out beneficial tax treatments for EVs, introduce new charges or raise fuel excise taxes to manage increasing revenue losses. About 30 US states have started imposing annual registration fees on electric vehicles, which amount in eight to more than USD 200 per year (Lee and Aton, 2023[76]). While such fees help to recover revenue losses from displaced fuel consumption, assessment found that Texas’ USD 200 fee is more than twice the amount needed to replace the gas tax for an ICE vehicle. Missouri’s fee is scheduled to grow 20% per year and will be three times the comparable fuel tax by 2025 (Preston, 2022[77]).
New Zealand, Israel and Iceland recently introduced a distance-based road use charge. New Zealand expanded in April 2024 its distance-based road use charges to also include electric and plug-in hybrid vehicles to compensate for fuel excise tax revenues required to finance road maintenance. Owners of light electric vehicles face charges of NZD 76 (USD 46) per 1000 km, a fee in line with equivalent diesel-powered vehicles. Plug-in hybrid owners must pay NZD 38 per 1000 km, a lower charge because they already pay tax on fuel (Smyth and Chu, 2024[67]; New Zealand Ministry of Transport, 2024[78]). Iceland introduced a new per-kilometre charge in 2024, affecting electric, plug-in hybrid, and hydrogen vehicles, in addition to revoking its exemption of electric vehicles from the value-added tax. The kilometre charge is paid monthly through the Iceland official online platform for public services (Government of Iceland, 2024[79]). Similarly, Israel approved in January 2024 a new usage tax on kilometres travelled, which will apply to EVs and plug-in hybrids as of 2026 to compensate for lost revenues from excise duty on gasoline and diesel (Ben-Gedalyahu, 2024[80]).
While reforms of electricity excise taxes do not play a dominant role, more and more jurisdictions directly implement fees on electricity consumption at public charging stations to raise revenue explicitly from drivers of electric vehicles and send price signal to moderate electricity demand from charging. In Europe, most countries levy consumption fees on public charging stations (European Commission, 2024[81]). In the US, six states have begun levying such fees in 2023 and 2024 (Glenn, 2024[82]).
Governments around the world are not just seeing changes in tax base erosion, but are beginning to experience the largest structural shifts in energy supply and use since the industrial revolution of the 18th and 19th centuries. This is primarily driven by diverse changes across the world economy to reduce, and eventually reach, net-zero emissions driven by a complex web of climate and energy policies. This report provides indicators for assessing the progress of some of these climate policies through the pricing of emissions and taxation of energy use. It illustrates with these indicators that the progress in carbon pricing has slowed with the share of emissions covered by a positive price remaining stable since 2021, modest increases in explicit carbon rates, and large reductions in overall net effective rates due to responses to the shock of the energy crisis in 2022. In energy taxation, the Net EER also decreased due to the large contribution of fuel excise tax rates in the indicator. However, the report outlines that progress is being made in preparation for the next phase of pricing emissions and energy through the introduction and development of new carbon pricing instruments – predominantly ETSs, considerations in divergent climate policy stringencies across economies, and the consequences from the electrification transition underway. Together, these indicators and developments represent a global stocktake of the current state of pricing of greenhouse gas emissions and taxation of energy use. As the world looks to 2030 targets and beyond, it is preparing for the increased stringency that will be needed to meet future climate goals – the world is gearing up to bring emissions down.
References
[43] Agnolucci, P. et al. (2023), “Measuring Total Carbon Pricing”, The World Bank Research Observer, https://doi.org/10.1093/wbro/lkad009.
[80] Ben-Gedalyahu, D. (2024), Mileage tax will apply to plug-ins, https://en.globes.co.il/en/article-mileage-tax-will-apply-to-plug-ins-1001468179 (accessed on 24 June 2024).
[50] BloombergNEF (2024), Global Clean Energy Investment Jumps 17%, Hits $1.8 Trillion in 2023, BloombergNEF, https://news.bloomberglaw.com/environment-and-energy/global-clean-energy-investment-hit-record-1-8-trillion-in-2023.
[13] Borne, É. (2022), Relatif au chèque énergie pour les ménages chauffés au fioul domestique [Relating to the energy check for households heated with domestic fuel oil], https://www.legifrance.gouv.fr/jorf/id/JORFTEXT000046528171 (accessed on 17 June 2024).
[66] Brey, J. (2023), “Maryland Budget Cuts Spell More Trouble for Transit”, Governing, https://www.governing.com/transportation/maryland-budget-cuts-spell-more-trouble-for-transit#:~:text=In%20Brief%3A-,Maryland%20Gov.,expansions%2C%20maintenance%20and%20transit%20service. (accessed on 24 June 2024).
[18] Castle, C. et al. (2023), “Aiming better: government support for households and firms during the energy crisis”, OECD Economic Policy Paper, No. 32, OECD Publishing, Paris.
[11] Central Government of Netherlands (2022), Kabinet vergoedt vanaf 1 november kosten energie-intensief mkb [The government will reimburse energy-intensive SME costs from November 1], Central Government of Netherlands, https://www.rijksoverheid.nl/actueel/nieuws/2022/10/14/kabinet-vergoedt-vanaf-1-november-kosten-energie-intensief-mkb (accessed on 17 June 2024).
[38] Danish Ministry of Finance (2022), Lempelse af elafgift til minimumssats i seks måneder, Denmark’s Ministry of Finance, https://fm.dk/media/26367/faktaark_lempelse-af-elafgift-til-minimumssats-i-seks-maaneder.pdf.
[48] Dechezleprêtre, A. et al. (2022), “Fighting climate change: International attitudes toward climate policies”, OECD Economics Department Working Papers, No. 1714, OECD Publishing, Paris, https://doi.org/10.1787/3406f29a-en.
[36] Dori, O. (2024), Gasoline price rises sharply as gov’t ends excise subsidy, Globes, https://en.globes.co.il/en/article-gasoline-price-rises-sharply-as-govt-ends-excise-subsidy-1001466628.
[30] Ekathimerini (2023), Gov’t extends power bill subsidies for households, farmers in November, https://www.ekathimerini.com/news/1223271/govt-extends-power-bill-subsidies-for-households-farmers-in-november/.
[29] Ekathimerini (2023), Greece’s electricity bill state subsidies for August, https://www.ekathimerini.com/economy/1216307/greeces-electricity-bill-state-subsidies-for-august/.
[53] Elgouacem, A. et al. (2019), “The fiscal implications of the low-carbon transition”, OECD Green Growth Papers No 2020/01, OECD Publishing, https://doi.org/10.1787/6cea13aa-en.
[10] Enerdata (2022), Spain will cut VAT on gas from 21% to 5% starting in October 2022, Enerdata, https://www.enerdata.net/publications/daily-energy-news/spain-will-cut-vat-gas-21-5-starting-october-2022.html (accessed on 6 June 2024).
[81] European Commission (2024), Electric Vehicle Recharging Prices, https://alternative-fuels-observatory.ec.europa.eu/consumer-portal/electric-vehicle-recharging-prices (accessed on 24 June 2024).
[58] European Parliament (2023), EU ban on the sale of new petrol and diesel cars from 2035 explained, https://www.europarl.europa.eu/topics/en/article/20221019STO44572/eu-ban-on-sale-of-new-petrol-and-diesel-cars-from-2035-explained (accessed on 24 June 2024).
[16] German Press and Information Office (2024), Mehr Chancen und mehr Respekt [More Chances and More Respect], German Press and Information Office of the Federal Government, https://www.bundesregierung.de/breg-de/schwerpunkte/entlastung-fuer-deutschland/buergergeld-2125010 (accessed on 6 June 2024).
[82] Glenn, P. (2024), The State of EV Taxation: Which States Tax, Incentivize, or Both, EV Life, https://evlife.co/blog/which-states-tax-evs (accessed on 24 June 2024).
[74] Global Times (2023), Over 90% of NEVs in China to continue to enjoy purchase tax breaks under new tech requirements, https://www.globaltimes.cn/page/202312/1303411.shtml (accessed on 24 June 2024).
[25] Government of France (2024), TPE/PME : les aides pour faire face à la hausse des prix de l’énergie, https://www.economie.gouv.fr/entreprises/tpe-pme-aides-hausse-prix-energie.
[26] Government of France (2023), Programme de Stabilité, Government of France.
[24] Government of France (2022), Décret n° 2022-423 du 25 mars 2022 relatif à l’aide exceptionnelle à l’acquisition de carburants, https://www.legifrance.gouv.fr/jorf/id/JORFTEXT000045410518.
[31] Government of Greece (2023), Draft Budgetary Plan 2024, https://economy-finance.ec.europa.eu/system/files/2023-10/2024_dbp_el_en.pdf.
[79] Government of Iceland (2024), Kilometer fee for electric, hydrogen and plug-in hybrid cars, https://island.is/en/kilometer-fee (accessed on 24 June 2024).
[32] Government of Lithuania (2023), 2024 Lithuanian Draft Budgetary Plan, https://finmin.lrv.lt/media/viesa/saugykla/2024/1/dPHsAFBCFvE.pdf.
[7] Guan, Y. et al. (2023), “Burden of the global energy price crisis on households”, Nature Energy 2023 8:3, Vol. 8/3, pp. 304-316, https://doi.org/10.1038/s41560-023-01209-8.
[64] Harikumar, A., H. Jain and A. Soman (2022), India’s Electric Vehicle Transition: Managing Fuel Tax Revenue Loss, CEEW, https://www.ceew.in/sites/default/files/ceew-research-on-recovering-fuel-tax-revenue-loss-from-ev-transition-in-india.pdf (accessed on 24 June 2024).
[71] ICCT (2023), Accelerating new energy vehicle uptake in Chinese cities: A 2023 policy update in a post-subsidy era, International Council on Clean Transportation, https://theicct.org/publication/accelerating-new-energy-vehicle-uptake-in-chinese-cities-2023-policy-update-post-subsidy-era-dec23/ (accessed on 24 June 2024).
[57] ICCT (2021), Fact Sheet 05. Regulatory design elements: Phase-out targets for combustion engine vehicles, International Council on Clean Transportation, https://theicct.org/wp-content/uploads/2021/12/eu-co2-FS5-jun2021.pdf (accessed on 24 June 2024).
[46] IEA (2024), “End-use prices: Energy prices in national currency per toe”, IEA Energy Prices and Taxes Statistics (database), https://doi.org/10.1787/data-00440-en (accessed on 10 May 2024).
[59] IEA (2024), Global EV Outlook 2024, https://www.iea.org/reports/global-ev-outlook-2024.
[60] IEA (2024), Global EV Outlook 2024 Data (database), International Energy Agency, Paris, https://www.iea.org/reports/global-ev-outlook-2024 (accessed on 24 June 2024).
[45] IEA (2024), “Transport sector detailed data and indicators”, IEA Energy Efficiency Indicators (database), https://doi.org/10.1787/57cc7c07-en (accessed on 10 May 2024).
[51] IEA (2024), World Energy Investment 2024, IEA, https://www.iea.org/reports/world-energy-investment-2024.
[3] IEA (2023), Global Energy and Climate Model, IEA, https://www.iea.org/reports/global-energy-and-climate-model.
[52] IEA (2023), Global heat pump sales continue double-digit growth, International Energy Agency, https://www.iea.org/commentaries/global-heat-pump-sales-continue-double-digit-growth (accessed on 24 June 2024).
[1] IEA (2023), Terms and Conditions, http://www.iea.org/terms (accessed on 6 June 2024).
[39] IEA (2023), “World energy balances (Edition 2023)”, IEA World Energy Statistics and Balances (database), https://doi.org/10.1787/4a0c7aae-en (accessed on 8 July 2024).
[4] IEA (2023), World Energy Outlook 2023, https://www.iea.org/reports/world-energy-outlook-2023 (accessed on 6 June 2024).
[5] IEA (2023), World Energy Statistics and Balances, https://www.oecd-ilibrary.org/energy/data/iea-world-energy-statistics-and-balances/world-energy-balances-edition-2023_4a0c7aae-en (accessed on 10 June 2024).
[63] IEA; Indian NITI Aayog (2023), Transitioning India’s Road Transport Sector, https://www.iea.org/reports/transitioning-indias-road-transport-sector.
[72] Interesse, G. (2023), China Extends NEV Tax Reduction and Exemption Policy to 2027, China Briefing, https://www.china-briefing.com/news/china-extends-nev-tax-reduction-and-exemption-policy-to-2027/ (accessed on 24 June 2024).
[61] International Monetary Fund (2023), World Economic Outlook 2023: Navigating Global Divergences.
[35] Irish Department of Finance (2024), Budget 2024: Tax Policy Changes, Ireland’s Department of Finance, https://www.gov.ie/en/publication/de3d4-budget-2024-taxation-measures/.
[37] Israeli Ministry of Finance (2023), Signed decrees to extend the effectuality of the tax reduction on coal, https://www.gov.il/en/pages/press_23012023.
[12] Italian Official Gazette (2022), Misure urgenti per contrastare gli effetti economici e umanitari della crisi ucraina [Urgent measures to counter the economic and humanitarian effects of the Ukrainian crisis], https://www.gazzettaufficiale.it/eli/id/2022/03/21/22G00032/SG (accessed on 17 June 2024).
[33] Japanese Ministry of Economy, Trade and Industry (2024), Press Conference by Minister Saito (Excerpt), https://www.meti.go.jp/english/speeches/press_conferences/2024/0628001.html.
[34] Koshoji, H. (2024), Japan cuts fuel subsidy for Feb 15-21 on weak crude oil prices, S&P Global, https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/oil/021524-japan-cuts-fuel-subsidy-for-feb-15-21-on-weak-crude-oil-prices.
[62] LAO (2023), Assessing California’s Climate Policies—Implications for State Transportation Funding and Programs, California Legislative Analysist’s Office, https://lao.ca.gov/Publications/Report/4821 (accessed on 24 June 2024).
[76] Lee, M. and A. Aton (2023), Electric cars face ‘punitive’ fees, new restrictions in many states, Politico, https://www.politico.com/news/2023/08/17/punitive-texas-other-states-roadblocks-ev-transition-00110125 (accessed on 24 June 2024).
[69] Marx, W. (2023), Norway Struggles to Pull the Plug on EV Subsidies, https://www.bloomberg.com/news/articles/2023-07-26/norway-pulls-the-plug-on-ev-tax-incentives-and-subsidies (accessed on 24 June 2024).
[54] McWilliams, B. et al. (2024), Europe’s under-the-radar industrial policy: intervention in electricity pricing, https://www.bruegel.org/policy-brief/europes-under-radar-industrial-policy-intervention-electricity-pricing (accessed on 24 June 2024).
[78] New Zealand Ministry of Transport (2024), Road User Charges system, https://www.transport.govt.nz/area-of-interest/revenue/road-user-charges-system#:~:text=RUC%20is%20a%20distance%20charging,some%20trailers%2C%20must%20pay%20RUC. (accessed on 24 June 2024).
[68] Nordic EV Summit (2024), 4 out of 5 new cars in Norway are now fully electric, https://nordicevs.no/evs-continue-to-dominate-norwegian-car-sales-in-2023-4-out-of-5-new-cars-now-fully-electric/#:~:text=NEARLY%20100%25%20ELECTRIC%3A%20Fast%20charging,car%20sales%20in%20the%20market. (accessed on 24 June 2024).
[70] Norwegian EV Association (2024), Norwegian EV Policy, https://elbil.no/english/norwegian-ev-policy/ (accessed on 24 June 2024).
[55] Norwegian Tax Administration (2024), Excise duty on onshore wind energy, https://www.skatteetaten.no/en/business-and-organisation/vat-and-duties/excise-duties/about-the-excise-duties/excise-duty-on-onshore-wind-energy/.
[8] OECD (2024), OECD Employment Outlook 2024, OECD, Paris, https://www.oecd.org/en/publications/oecd-employment-outlook-2024_ac8b3538-en.html.
[49] OECD (2023), How Green is Household Behaviour?: Sustainable Choices in a Time of Interlocking Crises, OECD Studies on Environmental Policy and Household Behaviour, OECD Publishing, Paris, https://doi.org/10.1787/2bbbb663-en.
[28] OECD (2023), OECD Economic Surveys: Greece 2023, OECD, Paris, https://www.oecd-ilibrary.org/economics/oecd-economic-surveys-greece-2023_c5f11cd5-en.
[27] OECD (2023), OECD Inventory of Support Measures for Fossil Fuels 2023, OECD Publishing, Paris, https://doi.org/10.1787/87dc4a55-en.
[6] OECD (2022), OECD Economic Outlook, Volume 2022 Issue 2, OECD Publishing, Paris, https://doi.org/10.1787/f6da2159-en.
[47] OECD (2022), Tax Policy Reforms 2022: OECD and Selected Partner Economies, OECD Publishing, Paris, https://doi.org/10.1787/067c593d-en.
[2] OECD (2015), Taxing Energy Use 2015: OECD and Selected Partner Economies, OECD Publishing, Paris, https://doi.org/10.1787/9789264232334-en.
[44] OECD (forthcoming), Consumption Tax Trends 2024: VAT/GST and Excise Rates, Trends and Policy Issues, OECD Publishing, Paris.
[42] OECD/KIPF (2014), The Distributional Effects of Consumption Taxes in OECD Countries, OECD Tax Policy Studies, No. 22, OECD Publishing, Paris, https://doi.org/10.1787/9789264224520-en.
[56] OECD and ITF (2019), Tax Revenue Implications of Decarbonising Road Transport: Scenarios for Slovenia, OECD Publishing, Paris, https://doi.org/10.1787/87b39a2f-en.
[15] Parliament of Canada (2022), An Act to amend the Income Tax Act (temporary enhancement to the Goods and Services Tax/Harmonized Sales Tax credit), https://www.parl.ca/legisinfo/en/bill/44-1/c-30 (accessed on 17 June 2024).
[73] People’s Republic of China Ministry of Finance (2024), Announcement No. 10 of 2023 of the Ministry of Finance (Announcement on the extension and optimization of the vehicle purchase tax exemption policy for new energy vehicles), People’s Republic of China Ministry of Finance.
[14] Polish Chancellery of the Prime Minister (2022), We have frozen costs of electricity for Poles for 2023., Website of the Republic of Poland, https://www.gov.pl/web/primeminister/We-have-frozen-costs-of-electricity-for-Poles-for-2023 (accessed on 17 June 2024).
[77] Preston, B. (2022), High Registration Fees Hamper Adoption of Electric Vehicles, https://www.consumerreports.org/cars/hybrids-evs/high-registration-fees-hamper-adoption-of-electric-vehicles-a2396438631/ (accessed on 24 June 2024).
[40] Sgaravatti, G. et al. (2021), National fiscal policy responses to the energy crisis, Bruegel Datasets, https://www.bruegel.org/dataset/national-policies-shield-consumers-rising-energy-prices (accessed on 6 June 2024).
[67] Smyth, J. and A. Chu (2024), “Governments slap taxes on EVs as $110bn fuel duty shortfall looms”, Financial Times, https://www.ft.com/content/9e4e38af-acb6-426b-9cd5-5f7e938d4443.
[65] Sudmant, A., E. Kalisa and J. Bower (2020), The impact of scaling up electric motorbikes in Rwanda, International Growth Center, https://www.theigc.org/sites/default/files/2020/08/Sudmant-et-al-2020-policy-brief_v2.pdf (accessed on 24 June 2024).
[20] UK Government (2023), Energy Bill Relief Scheme: help for businesses and other non-domestic customers, https://www.gov.uk/guidance/energy-bill-relief-scheme-help-for-businesses-and-other-non-domestic-customers.
[19] UK Government (2023), Energy Bills Discount Scheme, https://www.gov.uk/guidance/energy-bills-discount-scheme.
[22] UK Government (2022), Support for energy bills - the council tax rebate 2022-23: billing authority guidance, https://www.gov.uk/government/publications/the-council-tax-rebate-2022-23-billing-authority-guidance/support-for-energy-bills-the-council-tax-rebate-2022-23-billing-authority-guidance.
[23] UK Office for Budget Responsibility (2024), Economic and Fiscal Outlook, https://obr.uk/efo/economic-and-fiscal-outlook-march-2024/.
[21] UK Parliament (2024), Gas and electricity prices during the ‘energy crisis’ and beyond, https://commonslibrary.parliament.uk/research-briefings/cbp-9714/.
[17] UK Treasury (2022), Energy Profits Levy Factsheet, https://www.gov.uk/government/publications/cost-of-living-support/energy-profits-levy-factsheet-26-may-2022 (accessed on 6 June 2024).
[75] US Department of the Treasury (2023), Treasury Releases Proposed Guidance to Continue U.S. Manufacturing Boom in Batteries and Clean Vehicles, Strengthen Energy Security, https://home.treasury.gov/news/press-releases/jy1939 (accessed on 24 June 2024).
[41] Van Dender, K. et al. (2022), “Why governments should target support amidst high energy prices”, Policy Responses: Ukraine, OECD Publishing , Paris, https://www.iea.org/reports/oil- (accessed on 6 June 2024).
[9] VRT NWS (2022), Big fall in the price of petrol and diesel, VRT NWS, https://www.vrt.be/vrtnws/en/2022/03/18/big-fall-in-the-price-of-petrol-and-diesel/ (accessed on 6 June 2024).
← 1. The tax rates for this edition reflect rates applicable on 1 April 2023, while ETS permit price reflect changes over the course of 2023.
← 2. Electricity can be subject to multiple different taxes, charges and fees. The CPET database only models electricity excise taxes as these consistently apply to electricity use on pre-tax, end-use prices. Other charges and fees are not necessarily applied to pre-tax, end-use prices but are fixed costs associated with the provision of electricity. Further, many fixed costs associated with the provision of electricity, e.g. for network infrastructure, are recuperated at the margin (though network tariffs that are charged on a volumetric basis).
← 3. The division is based on the World Bank’s country classification (Table A.3. World Bank Country Classification). High-income economies are those with a GNI per capita of USD 13 846 or more in 2022.
← 4. While reductions in fuel excise tax rates are effectively subsidising the use of a specific fuel (e.g. gasoline or diesel), they are reflected in the Net EER as lowering rates of fuel excise taxes. In contrast, fossil fuel subsidies in form of budgetary transfers feed into the Net ECR as a negative price component.
← 5. Energy products have a relatively low own price elasticity of demand. The own price-elasticity is measured by the extent to which a percentage increase in the price of a good leads to percentage decrease in the demand for it.
← 6. GDP projections used in this analysis follow assumption of the IEA Global EV Outlook 2024 (IEA, 2024[60]).