This chapter provides the context and motivation for the analysis of energy and carbon taxes. It also contains an overview of the main results for 44 OECD and Selected Partner Economies. In addition, the chapter discusses the methodology used to calculate effective energy tax rates (per GJ) and effective carbon tax rates (per tonne of CO2).
Taxing Energy Use 2019
Using Taxes for Climate Action
Taxing Energy Use
1. Introduction and methodology
Abstract
Introduction
Global energy consumption rose strongly in 2018, and so did energy-related CO2 emissions, which increased by 1.7% – a new all-time high (IEA, 2019[1]). This is disconcerting as meeting the goals of the Paris Agreement will require deep decarbonisation (UNEP, 2018[2]). The economic tools to prevent the climate crisis from worsening are readily available. Specifically, energy and carbon taxes, as well as other price-based instruments such as emissions trading systems, have what it takes to make polluters pay for the cost energy use imposes on society, and drive deep decarbonisation at the lowest possible cost to society. Regrettably, however, these tools have not yet been deployed to their full potential (OECD, 2018[3]).
Well-designed systems of energy taxation encourage citizens and investors to favour clean over polluting energy sources. Energy and carbon taxes can equally prevent excessive energy use – where the social costs of energy use exceed their private benefits. In particular, fuel excise and carbon taxes are simple and cost-effective tools to curb dangerous climate change – even though the political economy of carbon pricing can be challenging (Jenkins, 2014[4]; Sallee, 2019[5]). Energy and carbon taxes also contribute to limiting health damage from local pollution, which is a pertinent policy concern in an urbanising world. In addition, taxes on energy use are a major source of government revenue, which could increase in importance during the transition to zero-carbon economies.
Taxing Energy Use (TEU) 2019 presents a snapshot of where countries stand in deploying energy and carbon taxes to their full potential, tracks progress made, and makes actionable recommendations on how governments could do better. The report presents new and original data on energy taxes in 44 OECD countries and Selected Partner Economies, and in international aviation and maritime transport. In total, TEU 2019 covers taxes on around 80% of global energy use. TEU 2019 extends and refines the TEU methodology developed in OECD (2013[6]), OECD (2015[7]) and OECD (2018[8]). In line with previous editions of TEU, this publication reports results including emissions from the combustion of biofuels Annex 1.C).
TEU 2019 shows that too many polluters do not pay the energy and carbon taxes needed to avoid excessive environmental and health damage. To assess to what extent energy and carbon taxes provide incentives to reduce energy-related carbon emissions, TEU relies on a low-end carbon benchmark of EUR 30 per tonne of CO2 (OECD, 2018[3]). This benchmark is unlikely to reflect the climate damage caused by a tonne of CO2 emitted at present, or to be sufficient to meet the objectives of the Paris Agreement. However, even compared against this low-end carbon benchmark, countries fall short of taxing energy use in line with what climate considerations alone would suggest.
The level of carbon prices needed to meet the objectives of the Paris Agreement is generally considered to be higher than the low-end benchmark of EUR 30 used in this study. Notably, the High Level Commission on Carbon Prices has estimated that carbon prices would need to be at least USD 40-80/tCO2e by 2020 and USD 50-100/tCO2e by 2030 in order for emissions to decrease in line with the goals of the Paris Agreement, assuming favourable complementary policies (High-Level Commission on Carbon Prices, 2017[9]).
Since the last edition of Taxing Energy Use, a number of countries have introduced explicit carbon taxes, which have improved the strength of carbon price signals. Other countries are considering following suit. Against this background, TEU 2019 analyses the design of existing carbon taxes, and provides some guidance on how to move forward with carbon taxes.
A priority area for improved carbon price signals is aviation and maritime transport, where emissions are on the rise. TEU 2019 consequently extends coverage to also include international transport (aviation and maritime). International aviation and maritime transport are included as if they were countries because a universally accepted methodology as to how this energy use should be allocated to individual countries remains to be established.1 In addition, representing international aviation and maritime transport as virtual countries is a convenient way of showing the relative importance of the sector. This allows progress made in exposing such energy use to carbon price signals and providing incentives for cleaner mobility choices to be monitored.
States and provinces play an increasingly important role in energy taxation. For the first time, this edition therefore also analyses the state of energy taxation at the subnational level, which is particularly relevant for Canada and the United States.
Electrifying final energy consumption could contribute to decarbonising energy use (IEA, 2018[10]) – provided that electricity generation itself is decarbonised. Against this background, the report models electricity taxes with greater granularity than previous releases, enabling a detailed discussion of the promises and perils of electricity taxes in the age of decarbonisation.
TEU 2019 is structured as follows. The remainder of Chapter 1 discusses the methodology. Chapter 2 analyses energy price signals across all forms of energy use, paying special attention to whether energy and carbon taxes favour low- and zero-carbon energy sources over more polluting options. Chapter 3 focuses on combustible energy sources, and establishes the extent to which carbon price signals are aligned with a low-end carbon benchmark. The chapter also discusses the differential tax treatment of coal and natural gas, carbon tax design, and the taxation of aviation and maritime transport.
Methodology
Taxing Energy Use (TEU) 2019 estimates how 43 OECD and G20 countries, as well as Colombia, tax energy use as at 1 July 2018.2 Together, these countries represent more than 80% of global energy use.
TEU provides information on all specific taxes on energy use.3 Specific taxes on energy use comprise carbon taxes (“explicit carbon taxes”), as well as excise taxes on fuels (“fuel excise taxes”) and on the consumption of electricity (“electricity excise taxes”).4 Table 1.1. provides definitions of these specific taxes
Table 1.1. Tax types
Note: Taxes are compulsory, unrequited payments, in cash or in kind, made by institutional units to government units (OECD, 2001[11]). Permit prices that result from emissions trading systems are not covered in TEU, but are included in OECD’s Effective Carbon Rates (2018[3]) publication.
When certain energy users benefit from a full or partial refund of these taxes (e.g. for excise taxes on fuels used in commercial heavy-duty vehicles), tax rates are adjusted for the refund. Annex 1.A provides further details on which taxes are included in Taxing Energy Use and why.
Matching
The OECD Secretariat assigns the 2018 tax rates to the latest available information on energy use that is adapted from IEA (2018[12]), World Energy Statistics and Balances. The latest energy use data that were available at the time of production of the present report date from 2016. TEU 2019 thus does not take recent changes in energy use patterns into account. However, energy use tends to change slowly over time – as long as no major price changes or technological shifts take place. In most instances, 2016 data on energy use should be a good approximation of energy use in 2018.
Energy use is split across 59 energy products, and the secretariat assigns applicable tax rates to each of the energy products listed in Table 1.2. Electricity taxes are attributed to the share of the associated primary energy use that is transformed into electricity.
Table 1.2. Energy sources
Note: Own classification. Energy products are defined as in IEA (2018[12]), World Energy Statistics and Balances.
Conversion
TEU converts all tax rates into effective energy tax rates per gigajoule (GJ) based on the energy content of the taxed products.5 This approach allows tax rates to be aggregated across energy sources and energy users (Chapter 2).
TEU additionally converts fuel excise and explicit carbon taxes into effective carbon tax rates per tonne of CO2 based on the carbon content of these fuels (Chapter 3). In line with previous editions of Taxing Energy Use and Effective Carbon Rates (OECD, 2018[3]; OECD, 2016[13]) this publication reports results including emissions from the combustion of biofuels. Annex 1.C discusses the implications of the combustion approach and presents graphs excluding emissions from biofuels to facilitate comparisons with inventories reported under the UN Framework Convention on Climate Change (UNFCCC).
Official OECD exchange rates are used to express the all tax rates in euros. When comparing tax rates across time, TEU uses official OECD country-specific annual inflation data to convert 2015 rates into 2018 local prices.
Categorisation and ordering
TEU presents data in a way that is comparable across countries. Therefore, TEU categorises energy products in the same way for all countries (see Table 1.2. ). The table also shows how energy categories are ordered throughout the report. Fossil fuel use comes first – ordered by the average carbon content per GJ of each energy category – followed by other combustible fuels (non-renewable waste and biofuels), and non-combustible energy sources.
TEU presents the distribution of taxes across six economic sectors, as tax rates on energy products tend to vary substantially depending on where energy products are used. Table 1.3. shows how TEU defines these economic sectors. Notice that energy use is allocated to the sector where the primary energy is consumed. The primary energy use associated with electricity generation is, for instance, allocated to the electricity sector, even if the electricity is consumed by households.
Table 1.3. Energy use by sector
Note: Own classification based on information on energy flows contained in IEA (2018[12]), World Energy Statistics and Balances.
Subnational taxes
In most countries, taxes on energy use are set at the national level. However, there are exceptions to this rule, including Canada and the United States, where taxes on energy use are also set at the subnational level. To be able to assign subnational taxes to the corresponding tax base, it is required to split up countries’ energy base by subnational jurisdiction, because the IEA’s energy balances only report energy use data for the country level. Wherever possible, TEU relies on energy data from official sources. Nevertheless, coverage at the subnational level requires a larger number of simplifying assumptions than at the federal level.
The OECD Secretariat does not necessarily cover those subnational taxes where revenues from subnational taxes on energy use amount to less than 20% of a country’s total revenue from taxes on energy use. The secretariat relies on the expert judgement of the delegates to the OECD Joint Meeting of Tax and Environment Exports to decide whether a country’s subnational taxes should be included.
Annex 1.A. Tax details
Where taxes on energy use are quoted as a percentage of the sales price (ad-valorem taxes), publicly available price information is used to translate ad-valorem rates into per‑unit rates. Converting ad valorem taxes into per‑unit taxes allows the calculation of effective tax rates on energy and carbon terms across different bases, but the calculated unit taxes are contingent upon observed prices.
TEU does not include value added taxes (VAT) or sales taxes. The reason is that VAT and sales taxes generally apply equally to a wide range of goods and do not change relative prices between energy sources or factors of production. Specifically, VAT or sales taxes do not make fossil fuels more expensive than other energy sources as long as they are applied uniformly. However, where an energy product is subject, for example, to a concessionary rate of VAT, the concession does affect relative prices (OECD, 2015[7]).
TEU generally does not cover tax expenditures or subsidies that operate through the income tax system, such as tax credits for alternative fuels or tax-deductible commuting expenses.
Some countries also apply production taxes on the extraction or harnessing of energy resources (e.g. severance taxes on oil extraction). Since such supply-side measures are not directly linked to domestic energy use, TEU does not cover these taxes.
Also excluded are taxes that that may be correlated with energy use but that are not imposed directly on the energy product (such as vehicle taxes and taxes on emissions such as NOX and SOX) unless they have a fixed relationship to fuel volume (emissions-based carbon taxes, see Chapter 3).
Given the scope of the analysis, TEU does not cover certain very small details of tax bases and rates. Country-specific simplifying assumptions are discussed in online country notes.
Annex 1.B. Electricity and heating
Electricity and heating differ from most of the other energy forms in that they are secondary energy products that must be generated by use of some other energy source. Some countries tax the energy products from which electricity and heating are generated, whereas others, especially European countries, tax electricity (and sometimes heating) output – typically electricity consumption by end users. A few countries, notably Japan, tax both inputs and outputs of electricity.6
For combustible energy sources (e.g. coal or natural gas), TEU shows the energy content of the primary energy that is used to generate electricity and heating domestically rather than of the electricity or heating itself. For these energy products, a substantial part of primary energy content is lost in the conversion process (thermal waste). TEU reports this thermal waste because it is part of the tax base. A carbon tax, for instance, also “applies” to thermal waste because even though the energy is wasted, it is equally associated with CO2 emissions.
For non-combustible energy sources, TEU follows the “physical content method” from the IEA’s energy balances and works with “primary energy equivalents”. The method measures the primary energy equivalent at the first point downstream in the production process for which multiple energy uses are practical. This means that hydro, wind and solar become ‘energy products’ in the statistical sense at the point of generation of electricity, and that their ‘primary energy equivalent’ is computed as the electricity generated in the plant, while the kinetic energy of the wind or the water does not enter the ‘energy balance’, although being ‘energy’ in a scientific sense. (Millard and Quadrelli, 2017[14])
Specifically, the energy content reported in TEU is thus either based on the heat released in the production process (nuclear, solar thermal, geothermal) or based on the electricity output that is generated after the energy input (solar radiation, the potential and kinetic energy of water) is converted into electricity. In the latter case, the energy content of electricity inputs and outputs is identical – by construction there are no conversion losses.7
Annex 1.C. CO2 emissions from the combustion of biofuels
This annex explains why the emission base in Taxing Energy Use is different from UNFCCC inventories, and presents alternative results excluding emissions from biofuels from the base.
Combusting biofuels releases CO2 and other pollutants into the atmosphere. However, if sustainably sourced, biofuels may be carbon-neutral over the lifecycle because the biomass feedstocks have previously absorbed a similar amount of CO2 from the atmosphere. As discussed in OECD (2018[8]; OECD, 2018[3]), the assumption of carbon neutrality from a lifecycle perspective is increasingly challenged in the scientific literature.
In line with previous editions of Taxing Energy Use (OECD, 2013[6]; OECD, 2015[7]) (OECD, 2018[8]) as well as of Effective Carbon Rates (OECD, 2016[13]; OECD, 2018[3]), this report uses a combustion approach and includes emissions from the combustion of biofuels in the emissions base (see Chapter 3). This means that CO2 emissions from the combustion of biofuels are treated in the same way as CO2 emissions from the combustion of fossil fuels.
By contrast, CO2 emissions from the combustion of biofuels are considered zero in the greenhouse gas inventories reported under the UN Framework Convention on Climate Change (UNFCCC). The emissions and sinks from biomass are instead accounted for as net changes in carbon stocks included in the annual reporting on Land Use, Land Use Change and Forestry (LULUCF). As Taxing Energy Use only considers emissions from energy use, it cannot account for emissions induced by the use of biofuels in a separate category for agriculture, forestry and other land use.
As a result, emission bases from Taxing Energy Use and Effective Carbon Rates are not directly comparable with the energy-related emissions that are reported in the UNFCCC inventories. To avoid confusion, this report therefore includes a note on the treatment of biofuels under each figure that includes CO2 emissions from biofuels.
To facilitate comparisons with UNFCCC inventories, the remainder of this Annex reports alternative figures where emissions from biofuels are excluded. This exercise is limited to those figures from the main report where biofuel emissions are relevant and where biofuel emissions are not shown separately from fossil-fuel emissions.
Annex Figure 1.C.1. Distribution of effective fossil carbon tax rates across CO2 emissions for 44 OECD countries and Selected Partner Economies and international transport
Note: This figure excludes emissions from biofuels, but is otherwise equivalent to Figure 3.1 (Chapter 3). Tax rates applicable on 1 July 2018. CO2 emissions are calculated based on energy use data for 2016 from IEA (2018), World Energy Statistics and Balances. The vertical axis is cut off at EUR 300, but the share of emissions priced higher is negligible.
Annex Figure 1.C.2. Effective fossil carbon rates by country
Note: This figure excludes emissions from biofuels, and does not show 2015 rates, but is otherwise equivalent to Figure 3.2 (Chapter 3). 2018 tax rates as applicable on 1 July 2018. CO2 emissions are calculated based on energy use data for 2016 from IEA (2018), World Energy Statistics and Balances. The scale of the horizontal axis differs between Panel A and Panel B.
Annex Figure 1.C.3. Countries with higher effective fossil carbon taxes tend to be less emission intensive
Note: This figure excludes emissions from biofuels, but is otherwise equivalent to Figure 3.3 (Chapter 3). 2018 tax rates as applicable on 1 July 2018. CO2 emissions are calculated based on energy use data for 2016 from IEA (2018), World Energy Statistics and Balances. The output-based GDP is for 2016 and from the OECD National Accounts database. The scales of both horizontal and vertical axes differ between Panel A and Panel B.
Annex Figure 1.C.4. Explicit carbon taxes do not cover all energy-related emissions from fossil fuels
Note: This figure excludes emissions from biofuels, but is otherwise equivalent to Figure 3.7 (Chapter 3). Tax rates as applicable on 1 July 2018. CO2 emissions are calculated based on energy use data for 2016 from IEA (2018), World Energy Statistics and Balances. Carbon tax rates are converted into EUR using official OECD exchange rates.
References
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Notes
← 1. Similarly, under the UNFCCC reporting guidelines on annual inventories, emissions from international aviation and maritime transport are reported separately from the national totals.
← 2. This includes all OECD and G20 countries with the exception of Saudi Arabia. Colombia is included because the country was invited to join the OECD in May 2018.
← 3. Tax rates are collected from official sources, such as government websites and the European Commission’s Taxes in Europe Database (http://ec.europa.eu/taxation_customs/tedb); country-specific information was then validated by the delegates to the OECD’s Joint Meeting of Tax and Environment Experts (JMTEE).
← 4. Equivalent taxes on heating would be covered as well. However, the only country in the sample that levies such taxes is Denmark, and there the energy use affected by the tax (industrial waste) is small and not reported in the IEA’s extended energy balances, and hence excluded from TEU.
← 5. TEU generally relies on the standard conversion factors used by the International Energy Agency. When IEA conversion factors are not available, TEU uses conversion factors provided by JMTEE delegates (mainly for natural gas) or based on desk research.
← 6. Note that part of electricity and heating outputs are consumed by the energy industry own-use or lost during transmission and distribution to end-users. As even broad excise taxes on electricity and heating tend to be levied only on electricity or heating consumption by end users, not the entire output is subject to such taxes.
← 7. This also applies to the special case of electricity imports for which the IEA does not report the underlying energy source.