Carbon pricing is a cost-effective way of reducing emissions, providing incentives for households and businesses to reduce carbon-intensive energy use and shift to cleaner fuels, while also mobilising government revenue. Yet across the 72 countries covered in the latest OECD’s Effective Carbon Rates report, 58% of greenhouse gas emissions are unpriced and only 7% are subject to a carbon price at a level equivalent to the costs of CO₂ emissions to society (EUR 60 per tonne of CO₂). That said, the carbon pricing dynamic is strong, as shown by a doubling in the share of emissions covered by Emissions Trading Systems (ETSs) from 13% to 27% in the last few years.
Tax and the environment
Taxing sources of environmental pollution and greenhouse gas emissions is an efficient and effective way to combat climate change, biodiversity loss and pollution. Environmental taxes can also contribute to revenue mobilisation and redistribution. The OECD’s data and analysis help to ensure that green taxes encourage environmentally friendly choices and support broader tax policy goals of fair and sustainable economic growth.
Key messages
Taxing more polluting forms of energy use at higher effective rates, net of subsidies, can shift demand towards cleaner energy sources. Effective carbon rates are generally poorly aligned with climate costs. Incentives for reducing fossil fuel use are affected by the relative tax treatment of fossil fuels relative to other energy sources that do not emit greenhouse gases. Detailed data on energy taxes, including fuel excise taxes, carbon taxes, electricity taxes, and energy subsidies in the Net Effective Energy Rates dataset indicate particularly low rates on some fuels, including coal.
Consistent with the principles of the multilateral climate policy architecture as set out in the Paris Agreement, countries use or plan to use a widely varied set of emissions reduction policies – both market-based and non-market based – as tailored to different national circumstances. To achieve the shared global objective of net zero emissions, the key challenge is to optimise the combined global impact of all these individual emissions reduction efforts. This is what the IFCMA helps to facilitate through data and information sharing, mutual learning and inclusive multilateral dialogue.
Context
The distribution of effective carbon rates shows a large share of low rates and a narrow tail of highly priced emissions
In 2021, 42% of the more than 40 billion tonnes of GHG emissions produced across 72 countries were priced. Only 16% of emissions exceeded the EUR 30 per tonne benchmark, 7% were priced at EUR 60 or higher, and less than 4% at EUR 120 or above. Effective Carbon Rates (ECRs) also vary significantly across sectors. The road transport sector faced the highest implicit carbon prices, mainly through fuel taxes. The industry sector, despite contributing over a quarter of total emissions, has 72% of its emissions unpriced, with only 7.5% priced above EUR 30 per tonne of CO₂. In the electricity sector, 73% of emissions have a positive carbon price, though most rates are between EUR 5 and 30 per tonne. In contrast, 64% of the buildings sector's emissions remain unpriced, with 17% above EUR 30. Other greenhouse gases, including methane and nitrous oxide, have the lowest ECRs, with 96% of emissions unpriced, highlighting the heterogeneity in carbon pricing across different gases.
Distribution of Effective Carbon Rates in 2021 - OECD (2023), Effective Carbon Rates 2023: Pricing Greenhouse Gas Emissions through Taxes and Emissions Trading, OECD Series on Carbon Pricing and Energy Taxation, OECD Publishing, Paris.
Jurisdictions are pursuing tax policy reform to better align with environmental objectives
Environmental challenges such as climate change, air pollution, waste, and water management are key concerns for governments. Greenhouse gases contribute to climate change, and air pollution affects human health and the environment significantly. Water pollution escalates treatment costs and degrades its quality, exacerbating water scarcity issues. Waste disposal in landfills and raw material extraction damage ecosystems and generate emissions.
CTPA’s country and jurisdiction-specific work evaluates how the tax systems align with environmental tax policy principles, emphasizing managing external costs and alignment with environmental objectives. Recommendations focus on strategic reforms in emissions, water usage, waste, and the circular economy, aligning taxation with environmental sustainability goals.
Taxes and subsidies on energy use - Average effective energy rates, by product category, 71 countries, 2021 - OECD (2022), Pricing Greenhouse Gas Emissions: Turning Climate Targets into Climate Action, OECD Series on Carbon Pricing and Energy Taxation, OECD Publishing, Paris.
Environmental tax policy should be integrated into broader tax policy reform strategies
In most countries surveyed in the Net Effective Energy Rates dataset, energy taxes exceed subsidies, resulting in net positive contributions to public finances and domestic resource mobilisation. The median net energy tax revenues amount to 1% of GDP, higher in OECD countries, exceeding 3% of GDP in some cases. However, in some oil-producing nations, subsidies can outweigh taxes, burdening finances.
The magnitude and composition of energy tax revenues is likely to change as the transition to a low-carbon economy accelerates. Some of the existing tax bases are expected to erode over time. The road transport sector is of particular relevance, as it is an important source of fuel excise tax revenues in many countries, a tax base under pressure through fleet electrification.
Taxes and subsidies on energy use - Net energy tax revenues estimates, 2021 - OECD (2022), Pricing Greenhouse Gas Emissions: Turning Climate Targets into Climate Action, OECD Series on Carbon Pricing and Energy Taxation, OECD Publishing, Paris.
