Pricing Greenhouse Gas Emissions

Executive summary

The risks of climate change need to be contained and this urgently requires accelerating the transition to net-zero greenhouse gas (GHG) emissions. Pursuing the net-zero transition will also help to reduce dependence on fossil fuels, which can reduce exposure to energy price shocks in the future. A successful transition to net-zero GHG emissions requires policy packages that deliver affordable access to low and zero carbon options for households and businesses.

Pricing Greenhouse Gas Emissions: Turning Climate Targets into Climate Action tracks how explicit carbon prices, energy taxes, and subsidies that lower pre-tax energy prices, have evolved between 2018 and 2021. This is an important subset of the policy instruments that can accelerate the transition to net-zero. All instruments considered either directly change the cost of emitting GHGs or change electricity prices. Reforming these instruments can play an important role in meeting climate targets, leading to cleaner air and water, while improving public finances.

The report covers 71 countries, which together account for approximately 80% of global GHG emissions and energy use. Explicit carbon prices, as well as energy taxes and subsidies, are detailed by country, sector, product and instrument. The use of a common methodology ensures comparability across countries. Summary indicators facilitate cross‑country comparisons and help policy makers keep track of progress made and identify opportunities for reform.

The Taxing Energy Use and Effective Carbon Rates database underpinning the newly established OECD series on Carbon Pricing and Energy Taxation is designed to track long run developments in energy taxation and carbon pricing. The tax rates for the 2021 stocktake are those applicable on 1 April 2021. Since then, several countries have taken measures to shield consumers and businesses from the impact of the sharp increases in pre-tax energy prices, including through significant reductions in energy tax rates. While the report does not seek to comprehensively cover all of these measures, orders of magnitude are shown and policy options are discussed.

Key findings

As part of their efforts to cut greenhouse gas (GHG) emissions, countries have increased their use of carbon pricing through taxes or emissions trading systems, with coverage increasing across countries and sectors in 2021

In 2021, more than 40% of GHG emissions were covered by carbon prices, up from 32% in 2018, with average carbon prices from emissions trading systems and carbon taxes more than doubling to reach EUR 4 per tonne of CO₂e over the same period. The report finds that countries adapt their emissions reduction strategies to their specific circumstances, with some relying on carbon pricing more than others. Even though not all countries focus on carbon pricing as part of their climate mitigation policies, carbon prices increased in 47 of the 71 countries covered in the report in 2021.

The increasing divergence over the extent that countries rely on carbon pricing highlights the importance of improved data and analysis to obtain a more complete picture of countries’ climate mitigation strategies, beyond carbon pricing. This OECD’s Inclusive Forum on Carbon Mitigation Approaches seeks to contribute to building the required evidence and analysis..

The report also finds that:

• More than 40% of GHG emissions in the 71 countries covered in the report face net positive carbon prices – up from 32% in 2018. This increase is the result of the introduction or extension of explicit carbon pricing mechanisms in several countries, including Canada, China and Germany.

• Carbon price developments have diverged across countries in 2021, with prices rising further in countries with the highest net carbon prices in 2018. In these countries, changes were mostly driven by the rise of explicit carbon prices (i.e. carbon taxes and permit prices in emissions trading systems). In contrast, in general, increases in net carbon prices were less common in countries where prices were relatively low in 2018.

• Permit prices related to emissions trading systems have increased in countries covered by the European Union ETS (EU ETS), but also in Canada, New Zealand and the United Kingdom. In addition to the EU ETS, Germany launched an additional national ETS for heating and transport fuels in 2021.

• Carbon tax changes also played a role in the carbon price divergence, with the introduction of new carbon taxes (Luxembourg in 2021, Iceland in 2020 for fluorinated gases), increases in carbon tax rates (e.g. Finland, Iceland, Ireland and Norway) or the phasing out of carbon tax exemptions (e.g. Portugal and Sweden).

• In Canada, the increase in explicit carbon prices stems from the increasing stringency of the national minimum standards of the federal benchmark, enforceable through the introduction of the federal carbon pollution pricing backstop system.

Net carbon prices often remain low outside of the transport and building sectors, but inter-country heterogeneity is large. The industry and electricity sectors are no exception in this regard.

• Where emissions from industry and electricity are priced, this is usually through emissions trading systems or carbon taxes. While many emissions remain unpriced, some emitters now face substantial carbon prices, especially in Europe.

• The highest net carbon prices tend to result from relatively high fuel taxes in the road sector.

• Negative carbon prices from fossil fuel subsidies are most common in the agriculture and fisheries sector, followed by road transport and the buildings sector.

Increasing effective carbon prices could raise substantial revenues, while cutting emissions. Revenues from carbon pricing can play an important role during the net-zero transition where there will be substantial adjustment costs.

• This report estimates that countries could be able to raise an amount equivalent to approximately 2.2% of GDP on average if they were to raise carbon prices to EUR 120 per tonne of CO₂ – a mid-range estimate of carbon prices required by 2030.

• The revenue potential from increasing effective carbon prices to the EUR 120 carbon benchmark differs substantially across countries. Some would raise revenues of less than 0.3% of GDP (Costa Rica, Denmark, Switzerland and Uganda), while others could raise revenues in excess of 5% of GDP (e.g. India, Kyrgyzstan and South Africa).

Key insights for policy makers

Drawing upon these key findings, the report provides insights to support policy makers as they grapple with the challenge of transitioning to net-zero GHG emissions.

Countries need to deploy a wide-range of policy instruments to overcome the barriers to the transition to net-zero in ways that fit their circumstances. Progressively increasing carbon prices while phasing out fossil fuel subsidies, can help countries to implement more ambitious, effective and efficient climate policy. These policy approaches will be particularly powerful when combined with policies that support the supply of low and zero-carbon technologies and infrastructures.

While this report shows that countries have been making progress, there is a long way to go if carbon pricing is to live up to its full potential.

• Carbon prices - net of fossil fuel subsidies - are zero or negative for almost 60% of GHG emissions.

• Where carbon prices are net positive, price levels are rarely high enough to drive a successful transition to net-zero.

• Measures taken in response to recent energy price hikes have reduced net carbon prices substantially.

Energy tax cuts in response to the recent energy price shock have been large and widespread, with reductions amounting to EUR 50/tCO₂ or more in many cases. In the long-run, pursuing the net-zero transition will help to reduce dependence on fossil fuels, which can reduce exposure to energy price shocks in the future. In the short and medium run, there is a strong case for shielding the most vulnerable from the impact of higher energy prices as a necessary precondition of building support for the low carbon transition.

While it is understandable that the immediate response of governments has been to provide price support, where further measures are needed they could be better targeted through income support and by making low carbon options more widely available.

Conclusions

Progress is being made with carbon pricing. Climate mitigation policy approaches and levels of stringency nevertheless continue to differ across jurisdictions. Differences in the use of carbon pricing increased between 2018 and 2021. These differences can amplify concerns over competitiveness and carbon leakage for carbon-intensive and trade-exposed sectors.

Regardless of the extent to which countries currently rely on carbon pricing, getting to net-zero GHG emissions by mid-century will require a range of policy instruments that are mutually reinforcing. The policy mix will vary from country to country depending on its specific circumstances.

For all countries, there is a need to build trust that the transition to net zero GHG emissions can be achieved in a socially cohesive way. This challenge is magnified in a context of sharply rising energy prices driven by external shocks. Recent experience has shown that protecting the most vulnerable from high energy prices is a necessary precondition for building climate policy support in the long run. In the face of an energy price shock, policies to moderate prices, e.g. through tax cuts, may be suitable to provide fast relief. However, if such high prices persist, shifting to targeted income support over time will help maintain price signals and help strengthen the incentives to reduce fossil fuel use.