The Climate Action Monitor 2022

3. How far has country climate action progressed in response to the net‑zero challenge?

At COP26, most countries updated their NDCs (Chapter 2). In addition to emission targets, countries also report the measures adopted or planned to achieve their mitigation commitments. As part of the preparation for the first global stocktake exercise, the UNFCCC compiled the principal measures reported by countries in their NDCs (UNFCCC, 2022[1]). For example, 91% of Parties communicated measures in the priority area of energy supply and 74‑82% identified measures in transport; land use, land-use change and forestry (LULUCF); buildings; agriculture and waste (Figure 21).

Despite its broad coverage, the UNFCCC synthesis report on Parties’ NDCs should be complemented by specific data on countries climate action. The UNFCCC report categorises countries’ declared climate actions in a fairly general manner, based on areas of action and self-reporting. However, it lacks granularity to monitor countries progress and a direct mapping of policies to their emissions base or an assessment of their level of stringency.

To support the UNFCCC reporting process, IPAC has carried out a detailed assessment of climate action for 51 countries and the EU. The Climate Actions and Policies Measurement Framework (CAPMF) draws on the UNFCCC effort to identify countries’ declared climate policies (UNFCCC, 2022[1]), but goes further by tracking which policies and policy instruments have actually been adopted and with what level of stringency. For example, it unpacks UNFCCC’s ‘renewable energy generation’ category, providing information on underlying policy instruments such as renewable energy support (feed-in tariffs, auctions, renewable energy portfolio standards) and carbon pricing (carbon taxes, emissions trading schemes).

The CAPMF quantifies empirically the adoption and the stringency of the policies adopted across countries providing essential information to monitor countries’ climate actions (Box 4). Policy stringency is defined as the degree to which climate actions and policies incentivise or enable GHG emissions mitigation at home or abroad. While policy coverage and policy stringency do not measure effectiveness, they are key first steps for its assessment.

Box 4. The OECD’s Climate Actions and Policies Measurement Framework

The OECD’s Climate Actions and Policies Measurement Framework (CAPMF) is a structured and harmonised climate mitigation policy database with 128 policy variables grouped into 57 policy instruments and other climate actions, covering 51 countries and the EU from 2000 to 2020. The CAPMF includes climate mitigation actions and policies, presented in a way that is consistent with the organisation of information on policies and measures used under the UNFCCC (UNFCCC, 2022[1]) and the IPCC frameworks (IPCC, 2022[44]).

The CAPMF covers both climate policies with explicit intent to advance mitigation as well as non-climate policies that are expected to have a positive effect on mitigation. These include sectoral, cross-sectoral and international policies of which market-based instruments (e.g. carbon taxes, subsidies for zero-carbon technologies), non-market-based instruments (e.g. standards, bans) and other climate actions (e.g. short-term and long-term emissions targets, climate governance) are further categorised (Figure 21).

Figure 21. Climate Actions and Policies Measurement Framework

Source: (Nachtigall et al., forthcoming[56]).

Countries’ climate action has expanded but more can be done

Countries have made efforts to strengthen their climate action, but many countries have not adopted the full range of policies available or used setting of the necessary stringency. More can and should be done to achieve the ambitious Paris Agreement targets.

Between 2010 and 2020, IPAC countries have, on average, accelerated their climate action in both policy adoption and stringency (Figure 22). Countries with many policies in place accelerated policy adoption at a relatively higher pace, leading to an increasing gap with countries with relatively low policy adoption. On the other hand, many countries, with previously low policy stringency, did well in terms of strengthening existing policies, leading to a convergence in terms of average policy stringency.

Figure 22. Countries strengthened their climate action between 2010-2020

Source: (Nachtigall et al., forthcoming[56]).

The acceleration of policy adoption varies substantially across countries (Figure 23, Panel A). Looking at the average masks important cross-country differences in policy adoption. Most countries increased the number of adopted policies between 2015 and 2020. For example, Canada adopted 10 additional policies between 2015 and 2020. However, some countries did not expand their policy adoption whereas others even removed policies.

Policy adoption and stringency differs substantially across countries (Figure 23, Panel B). No country has adopted all planned policies. Policy adoption varies between 45 in France to 13 in Peru. Heterogeneity in policy adoption partially reflects countries’ different policy approaches and climate ambition. In an interconnected world, differences in climate ambition and policy adoption can lead to competitive disadvantages for ambitious countries, which ultimately may slow down climate action (see discussion under carbon pricing below).

Figure 23. Policy adoption and its change differs substantially across countries

Source: (Nachtigall et al., forthcoming[56]).

Over the last 20 years, countries have increasingly adopted market-based policy instruments such as carbon pricing or financial support for renewable energy (Figure 24, Panel A). In the early 2000s, these instruments represented less than 30% of adopted policy instruments, but they now represent almost 50%.1 The increasing uptake of market-based instruments has occurred since 2005, primarily driven by the implementation of the EU Emissions Trading System (EU ETS) and other subsequent carbon pricing schemes.

Another issue that stands out is the increasing adoption, around 2013, of policies associated with international commitments, such as country-level targets, climate governance and the development of climate change data and information. Part of this increase was driven by pressure for global climate policy, which increased countries’ governance commitments, and culminated with the Paris Agreement adopted in 2015.

Across all IPAC countries, the increase in policy adoption after 2015 has been particularly focussed on auctioning renewable electricity, carbon pricing as well as bans and phase out of fossil fuel equipment and infrastructure such as coal power plants.

Nevertheless, since countries have different types of emissions, drivers, and economic and social constraints, there is no one-size-fits-all policy approach (Figure 24, Panel B). In fact, these differences reflect the complex interactions between country climate ambitions, pre-existing conditions, political and institutional constraints and social preferences. Countries must choose the best policy mix and instruments for effective climate action in the context of their policy landscape and principal drivers. While some countries (e.g. Portugal) primarily rely on market-based policies, such as carbon pricing under the EU ETS or Feed-inTariffs for renewable energy, others (e.g. Costa Rica) place more emphasis on non‑market-based instruments, such as minimum energy performance standards and bans or phase-outs of fossil-fuel equipment or infrastructure.

Figure 24. Policy mixes varied across time and across countries

Countries with relatively larger policy adoption or higher policy stringency are associated with steeper GHG emissions reductions between 2015-2019 (Figure 25).2 This holds true for total GHG emissions as well as GHG emissions intensity and GHG emissions per capita. This analysis, however, does not imply any causal relationship between policy adoption or policy stringency and GHG emissions reduction. Future work could shed more light on this.

Figure 25. Countries with stronger climate action are associated with steeper emissions reductions, 2020

Source: (Nachtigall et al., forthcoming[56]).

Despite countries’ different policy mixes, all countries have focussed their efforts on two main cross‑cutting climate action areas, which will be discussed as follows:

1. Enabling climate action by establishing emission targets, integrated and multi-level governance, and enabling information. Emission targets provide key short- and long-term signals to citizens and firms about a government’s climate ambition. Short-term and long-term emission targets are implemented through policy packages that tackle different externalities on the road to net-zero.

2. Meeting climate objectives through policy packages, including a diverse set of instruments

a. Non market-based instruments such as regulatory or information instruments are needed to support the adoption of low-carbon technologies that are already cost competitive with high-carbon alternatives.

b. Market-based instruments, including carbon pricing, change behaviour through financial means.

c. Innovation policies enable the development of new, and reduce the costs of advanced, mitigation technologies that are needed to further reduce GHG emissions in the coming decades.

d. Climate finance.

Enabling climate action through emission targets, integrated and multi-level governance, and enabling information

Governments can set ambition and provide credible plans to reach climate goals, building confidence among investors, industry and civil society. Policy commitments and multi-level climate governance are the basis of national climate policy. Although these commitments are not, strictly speaking, policy instruments, they can have a material impact on emissions since they provide signals to firms and households on long-term government plans and, therefore, the future expectation of the implementation of climate policies. In addition, given the long-term investment horizon of GHG-emitting assets and equipment, investors may reassess projects based on the expectations of policy change.

By 2020, most countries have implemented NDCs and net-zero targets (Figure 26). However, fewer countries have supported these commitments by providing accurate climate data, including biennial reports, biennial update reports (BUR) or GHG emissions data (e.g. through National GHG Inventories or the System of Economic and Environmental Accounts), all of which provide the necessary information for an assessment of national climate policy implementation. These data will be essential as countries move from explicit commitments to the effective implementation of policy instruments to achieve their targets.

Figure 26. Targets, governance and climate data policies adopted in IPAC countries in 2020

Source: (Nachtigall et al., forthcoming[56]).

Given the broad impacts of climate change and the cross-sectoral nature of climate policy implementation, the key to coherent climate policy is a concerted whole-of-government effort establishing clear objectives and identifying the key policy frameworks and instruments to support the transition. A comprehensive approach requires governments to mainstream climate objectives and targets at all levels of government. In most countries, this means translating international commitments into national plans at different levels of government – national, sub-national and sectoral – which will require, in most cases, new institutional arrangements. At present, many countries have implemented national inter-ministerial committees, permanent and independent climate advisory bodies or other similar frameworks. In some countries, such as Finland, climate advisory bodies were pivotal in determining the governments’ net-zero target (OECD, 2021[57]). By 2020, 18 IPAC countries had established climate advisory bodies that inform and evaluate countries’ policymaking.

Many countries have developed roadmaps and implementation strategies to support their long-term climate targets. Some have further complemented these with specific national sectoral plans, such as national energy and climate plans. However, although these are important and provide precise information and signals to investors, they should be accompanied by policy packages and instruments that can achieve material change.

Meeting climate objectives through policy packages

Countries implement climate policy objectives, such as NDCs, through policy packages and policy instruments that effectively reduce GHG emissions. This includes instruments that are adopted to intentionally mitigate climate change and those that are adopted for other purposes (e.g. safety, energy affordability) but that have a material effect on GHG emissions. Effective climate policy packages consist of four broad components: non-market-based and market-based instruments, innovation policies and climate finance instruments.

Non-market-based instruments

Non market-based instruments include information instruments, planning frameworks and regulatory instruments. Regulatory instruments establish a mandate to change the behaviour of firms or households through regulation and enforcement. This includes, among others, a pre-determined level of emissions or energy performance standards or even outright bans on some economic activities, inputs or technologies.

Policy adoption of non-market-based instruments varies substantially across countries and sectors (see Table 1). Standards have historically been the key environmental policy approach in most countries, but bans and phase-outs are also increasingly being adopted.

Table 1. Non market-based policy instruments in IPAC countries, 2020

Policy	Number of countries adopting the policy	Share of IPAC countries adopting the policy	Share of global GHG emissions covered by the countries adopting the policy	Sector
Planning for renewables expansion*	44	85%	80%	Electricity
Air emission standards coal power plants	40	77%	77%	Electricity
Bans and phase out on coal power plants	31	60%	12%	Electricity
MEPS for electric motors	47	90%	72%	Industry
Energy efficiency mandates for large consumers	42	81%	80%	Industry
MEPS of appliances	52	100%	80%	Buildings
Mandatory energy labels for appliances	50	96%	80%	Buildings
Building energy codes	46	88%	78%	Buildings
Ban and phase out on fossil fuel heating systems	13	25%	5%	Buildings
Speed limits on motorways	45	87%	77%	Transport
MEPS Transport	40	77%	69%	Transport
Labels for vehicles	41	79%	73%	Transport
Share of rail expenditure on total transport expenditure	32	62%	63%	Transport
Ban and phase out of passengers cars with ICE	14	27%	7%	Transport

Note: MEPS = Minimum energy performance standards, ICE: internal combustion engine.

*: 44 countries that adopted policy instruments related to planning for renewables expansion account for 80% of global GHG emissions. The remaining 8 countries include Estonia, Ireland, Lithuania, Latvia, Luxemburg, Malta, Slovenia.

Source: (Nachtigall et al., forthcoming[56])

Most countries have adopted minimum energy performance standards (MEPS) for electric motors and electric appliances, building codes or fuel efficiency standards for vehicles. In fact, the stringency and adoption of MEPS for electric motors increased substantially in the last decade, notably from 2011, when most European countries adopted these instruments (Figure 27, Panel A). In the electricity sector, 77% of IPAC countries have adopted air emissions standards for coal power plants.

Even though policy adoption of standards is widespread, countries need to strengthen and update standards to ensure the best available technology to reach climate targets. For example, none of the IPAC countries has adopted the highest possible energy performance standard for electric motors, while 8 countries have adopted standards that have only low or medium stringency.

Bans and phase-outs of fossil-fuel equipment or assets are most prevalent in the electricity sector and have been rising in recent years (Figure 27, Panel B). Countries, however, have also started to ban fossil‑fuel equipment on heating (oil and gas boilers) and in transport (passenger cars with internal combustion engines [ICE]), both on a national and sub-national level, though policy adoption is much lower. In August 2022, the US State of California announced that it would ban the sale of passenger cars with ICE from 2035. However, no country has adopted a ban on the advertisement of fossil-fuel companies or economic activities related to high GHG emissions (e.g. air travel, sports utility vehicles) to date, which could prevent companies from greenwashing and luring customers into carbon-intense lifestyles (OECD, 2022[58]).

Therefore, although regulatory policies have been the principal policy approach to deal with environmental issues, countries can and should expand the range of policies that can be adopted, particularly in those sectors where GHG emissions are highest.

Figure 27. Countries increased the use and stringency of non-market based instruments

Note: MEPS = Minimum energy performance standards.

Source: (Nachtigall et al., forthcoming[56]).

Market-based instruments

Market-based instruments (MBIs) are policy instruments that use markets, prices and/or other economic variables to incentivise households and firms to reduce or eliminate environmental externalities. While these instruments directly price the externality of GHG emissions, non-carbon-pricing instruments financially reward low-carbon economic activities or put a price on another externality (e.g. congestion).

Non-carbon-pricing instruments

Policy adoption of non-carbon-pricing instruments varies considerably across countries (see Table 2). Most countries have adopted at least some financing mechanisms to strengthen energy efficiency in buildings or the industry sector, such as preferential loans for building retrofits or loan guarantees to channel finance to low-carbon projects. On a sub-national level, cities in four countries (Italy, Norway, Sweden and the United Kingdom) have adopted congestion charges. While these charges effectively mitigate congestion, they also reduce incentives for car use and, thus, car dependency, promoting the shift towards more sustainable modes of transport.

Most countries use some type of instrument to financially support renewable electricity. For example, of all IPAC countries, 15 use feed-in tariffs, 14 use renewable energy auctions, and 13 use renewable electricity portfolio standards combined with tradable certificates. Some countries also shifted financial support from mature renewable energy technologies, such as solar photovoltaic (PV) and wind, to less mature technologies, including offshore wind, electricity storage, etc. (see “The broader policy landscape” section).

Table 2. Non-carbon pricing MBI’s in IPAC countries

Policy	Number of countries adopting the policy	Share of IPAC countries adopting the policy	Share of global GHG emissions covered by the countries adopting the policy	Sector
Feed-in Tariffs for renewable electricity	15	29%	12%	Electricity
Auctions for renewable electricity	14	27%	60%	Electricity
Renewable electricity portfolio standards with tradable certificates	13	25%	57%	Electricity
Financing mechanisms available for energy efficiency	39	75%	80%	Industry
Financing mechanisms available for energy efficiency	40	77%	79%	Buildings
Congestion charges	4	8%	2%	Transport

Source: (Nachtigall et al., forthcoming[56]).

The support mechanisms for renewable electricity shifted between 2000 and 2020 (Figure 28). Historically, countries primarily used feed-in tariffs or feed-in premiums as instruments to support renewable electricity. In recent years, however, countries have increasingly shifted towards renewable energy auctions, at least for utility-scale projects. While auctions are administratively more complex, they enable policymakers to more effectively determine the renewables expansion path and to materialise budget savings through their inherent price discovery mechanism, making them more attractive to governments (OECD, 2021).

Figure 28. Countries are increasingly shifting towards auctioning renewable energy capacity

Source: (Nachtigall et al., forthcoming[56]).

Carbon pricing and effective carbon rates

Pricing carbon or GHG emissions effectively promotes low-cost mitigation measures (IPCC, 2022[43]). It is generally considered the most economically efficient tool to achieve global GHG emissions reductions, especially if combined with carbon markets that can reduce the costs of climate mitigation (Box 5). The carbon prices deemed to be necessary to achieve the targets of the Paris Agreement range between USD 50 and USD 160 per tonne of carbon dioxide equivalent (tCO₂e) by 2030, provided that an effective policy mix is in place (CPLC, 2017[59]) (Parry, 2021[60]).

Box 5. International carbon markets and co-operative approaches

Linking domestic carbon markets to enable trade in emission reduction obligations has a number of advantages, including reducing global mitigation costs, enhancing climate ambitions and providing finance for developing countries.

Findings from modelling suggest that international carbon markets can reduce global mitigation costs of achieving NDCs by between 58% and 63% compared to countries meeting these targets unilaterally. This would mean savings of between USD 220 to USD 320 billion per year by 2030 (Nachtigall et al., 2021[61]; Akimoto, Sano and Tehrani, 2017[62]; Fujimori et al., 2016[63]; IETA, 2019[64]).

This reduction in costs makes the commitments associated with the NDCs feasible and allows for greater ambitions, establishing even bolder mitigation commitments. For example, reinvesting all savings from global co-operation into climate mitigation could increase emissions removal by up to 50%, equivalent to 5 GtCO₂e in 2030 (IETA, 2019[64]). Moreover, it implies a net transfer of financial resources to those countries that can abate at a lower marginal cost, which is typically developing countries, effectively financing the energy transition.

Some countries and jurisdictions have opted for linking their emissions trading systems, such as the EU Emissions Trading System (EU ETS), the Western Climate Initiative or the Regional Emissions Greenhouse Gas Initiative (RGGI). Alternatively, Article 6 of the Paris Agreement opens the door to co-operative arrangements or country-bilateral agreements on emissions reduction that could expand the carbon market considerably.

Article 6 of the Paris Agreement aims to promote cooperative approaches between countries based on the exchange of internationally transferred mitigation outcomes or ITMOs. It was conceived as a mechanism to promote markets, mainly through tradable linked emission permits or projects inspired by the Clean Development Mechanism (CDM) framework. The idea is that, under this mechanism, countries with the capacity to reduce emissions could sell their excess to those emitters whose abatement costs are higher, thus ensuring that the net reduction of emissions is at a lower total cost. Through this flexible mechanism, GHG emissions can be reduced at lower cost, along with stimulating innovative and cleaner technologies to drive an overall transition to a low-carbon economy in developing countries.

Countries have increasingly adopted carbon pricing, but more needs to be done to reach climate targets. In 2021, there were 64 explicit carbon pricing schemes – i.e. carbon taxes or emissions trading systems (ETS) – in national and sub-national jurisdictions, with 3 being scheduled for implementation (World Bank, 2021[65]). While these 64 pricing schemes covered approximately 21.5% of global GHG emissions, less than 4% of global emissions were covered by a carbon price consistent with the 2°C goal of the Paris Agreement, or USD 40 to USD 80 per tonne of CO₂ (World Bank, 2021[65]).

In addition to explicit carbon pricing, the OECD includes fuel excise taxes in its definition of effective carbon rates due to the linear relationship between fossil-fuel combustion and carbon emissions.3 In fact, the biggest share of carbon pricing can be attributed to fuel excise taxes (Table 3). Considering this broader definition, there has been noticeable, albeit uneven, progress in carbon pricing since 2018. Half of all energy-related carbon emissions in G20 countries were priced in 2021, up from 37% in 2018. The coverage increase was largest for emissions trading systems, with the new Chinese national ETS for the power sector as the main driver.

Table 3. Effective and explicit carbon prices and emissions in G20 and OECD countries, 2021

Instrument	Emissions share 2021, (%)	Average carbon price 2021, (EUR/tCO2)
Priced by emissions trading systems (ETS)	21.7	2.95
Priced by carbon tax	6.7	0.67
Priced by explicit carbon price (ETS, carbon tax)	28.4	3.62
Priced by fuel excise	28.8	15.09
Priced by effective carbon rate	48.7	18.71

Source: (OECD, 2022[11]).

The mix of carbon-pricing instruments varies across sectors (Figure 29). Emissions trading schemes are widespread in the industry and electricity sector, mostly driven by the EU ETS that covers all installations in industry and electricity generation in EU27 countries and Iceland, Liechtenstein and Norway. Few countries use ETS in the building and transport sector. In these sectors, fuel excise taxes are more widespread. New Zealand is the first country to consider implementing an ETS in the agricultural sector and forestry.

Figure 29. Use of carbon-pricing instruments across sectors in IPAC countries, 2020

Note: ETS stands for emissions trading schemes.

Source: (Nachtigall et al., forthcoming[56]).

Carbon price levels and emissions’ coverage differ significantly across sectors (Figure 30). Effective carbon rates cover over 90% of energy-related carbon emissions in the road sector, with an average rate of EUR 88 per tCO₂. Other sectors, such as industry and electricity, cover less than 25%, with average effective rates of EUR 3.8 and EUR 6.36 per tCO₂, respectively.

Figure 30. Carbon price levels and emissions coverage in OECD and G20 countries, 2021

Source: (IPCC, 2022[44]) (OECD, 2021[66]).

Implementing or increasing carbon prices is currently less likely in most countries due to elevated energy prices and the Ukraine war. In fact, most governments have introduced temporary or permanent tax exemptions to alleviate the pressure of high energy prices on households and firms (e.g. France, Germany and Italy). These subsidies add to the uptake of support for fossil fuels that was already observed before the Ukraine war. However, once energy prices return to pre-crisis levels, policy makers should be ready to strengthen carbon pricing where feasible and make it consistent across sectors.

Regardless of the currently high energy prices, implementing or increasing carbon pricing faces problems of political acceptability, notably due to concerns about competitiveness and impacts on vulnerable households. For households, increased prices of carbon-intensive products will affect the cost of energy, food and transport. For firms, a carbon price will increase the cost of carbon-intensive inputs, which may affect firms’ competitiveness. However, to date, concerns about negative short-term effects of carbon pricing on sectors’ international competitiveness have not come to pass, partly because carbon prices levied on industry have been low and subject to exemptions (Venmans, Ellis and Nachtigall, 2020[67]).

In the same vein, carbon prices have also generated concerns over carbon leakage, i.e. the shift of economic activity and emissions from one jurisdiction to another as a result of carbon pricing. This has motivated proposals for a carbon border adjustment mechanism (e.g. from the European Union and Canada) to contain carbon leakage and level the playing field.

Countries can use revenues from carbon pricing to mitigate its negative effects and increase political acceptability. Compensating firms and households for higher energy costs, e.g. shifting taxes off labour and capital and onto fossil fuels, can improve the tax system's economic efficiency (often referred to as the “double dividend”). Using revenues to finance green infrastructure increases both the political acceptability and the effectiveness of carbon pricing (Dechezleprêtre et al., 2022[68]).

Carbon pricing can generate significant revenues. Potential revenues from carbon pricing to meet the Paris Agreement mitigation pledges are substantial – typically around 1‑3% of gross domestic product (GDP) or more in 2030 across G20 countries (Ian W.H. Parry, Victor Mylonas and Nate Vernon, 2018[69]). For carbon-intensive economies, even low levels of carbon pricing can raise significant revenues. A EUR 30 effective carbon price would generate 4‑7% of GDP in China, India and South Africa (Marten and van Dender, 2019[70]).

Fossil-Fuel Production and Consumption Subsidies

The environmental effectiveness of carbon pricing or other non-market measures is hampered by government support for fossil fuels. In 2021, major economies sharply increased their support for the production and consumption of coal, oil and natural gas by hundreds of billions of US dollars, in efforts to protect households and firms from surging energy prices. However, this is at odds with longstanding pledges to phase out inefficient fossil fuel subsidies (OECD-IEA, 2022[71]) (OECD-IEA, 2022[71]).

In 51 major energy producing and consuming countries, that represent 85% of the world’s total energy supply and 88% of CO₂ emissions from fuel combustion, government support for fossil fuels almost doubled to USD 697.2 billion in 2021 compared to the previous year.4 This is almost 10 times the total revenues from carbon taxes and emissions trading schemes of the same year (World Bank 2021). Notably, support for producers increased by 50% from the previous year, reaching USD 64 billion. Those subsidies have partly offset producer losses from domestic price controls as global energy prices surged in late 2021.

In G20 countries, consumer support reached an estimated USD 115 billion, an increase of more than 20% since 2020. Beyond G20 countries, the IEA estimates that consumer fossil fuel subsidies in 42 economies increased to USD 531 billion in 2021, nearly triple their 2020 level.5 Consumption subsidies are anticipated to rise even further in 2022 due to higher fuel prices and energy use. See Figure 31.

Increasing fossil fuel and energy support has been a consequence of higher prices but to deal with the climate emergency and support vulnerable households, they should be replaced with means-tested subsidies and support for the development of low-carbon alternatives. Indeed, support for fossil fuels tends to favour wealthier households that consume more fuel (Van Dender et al., 2022[72]) (Van Dender et al., 2022[72]). Ongoing efforts to enhance transparency on the many ways that governments continue to encourage fossil-fuel production and use is also paramount to align energy security, affordability and climate neutrality in the wake of, and in preparation for, further shocks to the system. On the other hand, countries are increasingly committing and implementing direct mandates to control or regulate fossil fuel use, especially coal.

Figure 31. Fossil fuel support in selected countries

Note: *2021 estimates are temporary. Data are expressed in constant 2021 US dollars.

Source: (OECD, 2021[73])OECD Inventory of Fossil Fuel Support Measures database (2022), IEA analysis.

Innovation policies

Innovation helps to broaden the range and increase the efficiency of low-carbon technology options available to governments and the private sector over time. In the power sector, these options include the next generation of renewable electricity generation technologies, such as building-integrated solar photovoltaic (PV), and carbon capture, utilisation, and storage (CCUS), as well as batteries, energy storage and smart-grid technologies.

In the transport sector, low-carbon vehicles are being developed, including those that run on hydrogen fuel cells, compressed or liquefied gas and biofuels. Electric vehicles are being marketed and are increasingly competitive with traditional combustion engines. In the buildings sector, advanced building materials and energy-efficient, smart home appliances are being developed, and existing technologies are being improved. The industrial sector needs to switch to lower-carbon and alternative fuels for production, make more efficient materials and deploy the best available technologies, including carbon capture utilisation and storage (CCUS) (OECD, 2015[74]). Agriculture needs to enhance both its sustainability and productivity, notably using precision agriculture and big data, genetic innovation and sequestration in soils (IPCC, 2019[75]). (IPCC, 2019[75]).

If properly deployed, technologies that are available on the market today are sufficient to provide nearly all the energy-related emissions reductions required by 2030. However, reaching net‐zero emissions will require the widespread use after 2030 of technologies that are still under development. In 2050, almost 50% of carbon emissions reductions in the IEA’s net-zero scenario will come from technologies currently at the demonstration or prototype stage. This share is even higher in hard-to-abate sectors, such as heavy industry and long‐distance transport (IEA, 2021[76]). (IEA, 2021[76]).

Major innovation efforts are vital in this decade to enable the technologies necessary for net‐zero emissions to reach markets as soon as possible (IEA, 2021[76]) (IEA, 2021[76]). Total public research and development (R&D) spending on low-carbon energy has been increasing in most countries over the last five years (an increase of around 50% in Australia, Mexico, the United States and the European Union; 124% in the United Kingdom; and 18% in Japan between 2015 and 2020). In absolute terms, the United States is the leader in spending on low-carbon technologies, such as renewables, energy efficiency and CCUS, and Japan spends the most on hydrogen and fuel cell technologies (IEA, 2021[77]).

Several other countries have increased their government R&D spending on low-carbon technologies. For example, Belgium and the Czech Republic have more than doubled their budgets for energy efficiency over the last five years. Norway spends the most per unit of GDP, and, like Finland, its highest spending category is energy-efficiency technologies. This is followed by renewables, an area that only Denmark, Korea and Switzerland count as their largest category among the top spenders in relative terms (IEA, 2021[77]).

OECD countries represent the vast majority of worldwide patents on environment-related technologies (80% in 2019, including 26% in European countries, 22% in American countries and 31% in Asian and Oceanic countries) (Figure 32) and clean energy. In 2014‑18, the United States, Europe, Japan, Korea and China registered 90% of clean-energy patents. The share of “high-value” climate change mitigation inventions in all technologies has increased from around 4% in the early 1990s to over 9% more recently (OECD, 2022[11]). Among selected technologies, the increase in filed inventions since 1990 has been more marked for road transport and energy storage. Renewable energy generation technologies increased the fastest up to 2011 (OECD, 2022[11]). While patent data are informative about the production of innovation, they do not indicate whether the owner is actually using the technology protected by the patent. Data on trademark filings can usefully complement patent data by focusing on the commercialisation phase of innovations.

Figure 32. Climate-related inventions

Source: OECD (2022[78])

The proportion of trademarks for climate-related goods and services has grown markedly over the last two decades. The proportion has tripled in the United States and Japan (from 1% to 3%) and has nearly quadrupled in Europe (from 2% to 8%). Interestingly, there is an observed decrease in climate-related patenting since 2012. However, trademarks have picked up in recent years. This suggests that firms have partly switched activities away from R&D toward diffusion and commercialisation. Accelerating the diffusion of available technologies is critical to reaching medium-term carbon emissions reductions, but in the long-run, developing breakthrough technologies that are not yet on the market is also important. An important question for policy is how to accelerate the diffusion of existing low-carbon technologies while reigniting low-carbon innovation in breakthrough technologies.

Private investments for “green” start-ups6 have skyrocketed in the last decade. Venture capital (VC) funding has grown sixfold in a decade, rising from around USD 3 billion in 2010 to USD 18 billion in 2020. After a peak in 2018, global VC investment in green start-ups slightly decreased in 2019 and rebounded in 2020 (Figure 33). This decade-long rise notably benefitted start-ups in low-carbon mobilities and sustainable food and agriculture. Small European countries, like Denmark, Finland, Iceland, Latvia and Switzerland, have also taken their place in the global landscape of green start-ups. However, the share of these types of firms among overall start-ups has remained stable over the last decade (Bioret, Dechezleprêtre and Sarapatkova, forthcoming[79]) (Bioret, Dechezleprêtre and Sarapatkova, forthcoming[79]).

Figure 33. Venture capital for green technologies has surged globally in the latest decade

Source: OECD startup database, Worldwide Patent Statistical Database (PATSTAT) in (Bioret, Dechezleprêtre and Sarapatkova, 2022, forthcoming[80]).

Climate finance instruments

The structural transformation necessary to achieve net-zero emissions in 2050 requires an expansion in capital expenditure fuelled by climate finance. The investment needs for clean energy are estimated at approximately USD 4 trillion annually by 2030. The global economic crisis and increasing energy prices are an opportunity to increase public investment in low-carbon infrastructure to put economies on a low-carbon, climate-resilient development path (OECD, 2015[81]).

An expansion of both private and public sources of finance is needed. Governments must access new revenues to ensure that public finance is available, and implement policies to incentivise private developers to also participate in investment. The IEA estimates that around 70% of clean-energy investment must come from private developers, consumers and financiers.

Green budgeting and the introduction of carbon pricing in the appraisal of investment projects can help governments build a fiscal policy supporting climate action. Green budgeting involves classifying or tagging public expenditure according to its climate relevance. It is a systematic approach to assessing the overall coherence of a budget relative to a country’s climate and environmental objectives (Battersby et al., 2021[82]).

Less than half of 39 countries studied by the OECD were identified as having green budgeting practices in place, while 9 were planning to introduce some of these practices. Finland and Sweden highlight measures that have a clear impact on specific environmental objectives within their budget documents. France, Ireland and Italy tag the budget to identify items with a potential environmental impact (Battersby et al., 2021[82]).

Notes

← 1. Part of the increasing share of market-based instruments is driven by data availability. For example, data on fossil fuel subsidy reform only became available from 2010.

← 2. This analysis uses data on GHG emissions up to 2019 to not confound the results with those of the effects of the COVID-19 pandemic on emissions.

← 3. Effective carbon rates are defined as “the total price that applies to carbon dioxide emissions from energy use as a result of market-based instruments (fuel excise taxes, carbon taxes and carbon emission permit prices)”

← 4. These are the following: Australia, Brazil, Canada, the People’s Republic of China, Germany, France, United Kingdom, Indonesia, India, Italy, Japan, Korea, Mexico, Russian Federation, Republic of Türkiye, United States, South Africa, Algeria, Angola, Argentina,

← 5. The IEA estimate of consumer fossil fuel subsidy identifies 42 economies where there is a lower consumer end-use price of fossil fuels relative to the international reference price. The 42 economies covered in the latest IEA’s estimate are: Algeria, Angola, Argentina, Azerbaijan, Bahrain, Bangladesh, Bolivia, Brunei, PR China, Colombia, Ecuador, Egypt, El ,Salvador, Gabon, Ghana, India, Indonesia, Iraq, Iran, Kazakhstan, Republic of Korea, Kuwait, Libya, Malaysia, Mexico, Nigeria, Oman, Pakistan, Qatar, Russia, Saudi Arabia, South Africa, Sri Lanka, Chinese Taipei, Thailand, Trinidad and Tobago, Turkmenistan, Ukraine, United Arab Emirates, Uzbekistan, Venezuela, and Vietnam.  

← 6. Green start-ups here include start-ups in the sectors of: battery, energy efficiency, low-carbon mobility, clean energy, sustainable food and agriculture, pollution control, waste and circular economy.