43


Chapter 6.


Bridging the gap: Fiscal reforms for the low-carbon transition


Lead authors: Matthias Kalkuhl (Mercator Research Institute on Global Commons and Climate Change (MCC) and University of Potsdam), Brigitte Knopf (Mercator Research Institute on Global Commons and Climate Change (MCC)) and Kurt Van Dender (Organisation for Economic Co-operation and Development (OECD)1


Contributing authors: Harro van Asselt (University of Eastern Finland), David Klenert (Joint Research Centre, European Commission), Ruben Lubowski (Environmental Defense Fund), Tobias S. Schmidt (ETH Zürich), Bjarne Steffen (ETH Zürich)


6.1 Introduction


Fiscal policies can affect fossil fuel prices and therefore infl uence carbon emissions and investments in the energy sector. However, current price signals from excise taxes and carbon pricing are too low and inconsistent to encourage strong and cost-effective mitigation. In some countries, and for some fuels, carbon prices are even negative due to high fi nancial support for fossil fuels. This chapter assesses the fi scal policy gap between current fi scal policy and its potential for reducing carbon emissions and collecting public revenue. It provides country examples and further considerations of how to overcome this gap.


6.2 The current state of fi scal policies and their potential for the low-carbon transition


6.2.1 Carbon pricing


Increasing the price of carbon emissions through carbon taxes or emissions trading systems (ETS) is a core element of climate policy. Before 2005, hardly any emissions were covered by carbon taxes or trading systems (World Bank and Ecofys, 2018). Coverage increased to about 5 percent of global greenhouse gas (GHG) emissions between 2005 and 2010, primarily because of the introduction of the European Union’s ETS. Between 2010 and 2018, coverage has risen to about 15 percent of global emissions, with 51 carbon pricing initiatives now installed or scheduled. If China implements carbon pricing as announced, coverage would rise to about 20 percent of global GHG emissions.


Effective carbon rates are policy-induced increases in (relative) fossil fuel prices, expressed per tonne of CO2


While coverage, price levels, and coordination and cooperation efforts are increasing, carbon prices are often low and inconsistent, as illustrated in fi gure 6.1. This depicts the distribution of carbon rates for energy use across all sectors and fuels for 42 Organization for Economic Cooperation and Development (OECD) and G20 countries, which together represent 80 percent of global CO2


emissions from energy use (OECD, 2018b). .


They include carbon taxes and permit prices related to existing ETS, as well as excise taxes on energy.


Figure 6.1: Effective carbon rates on energy use across 42 OECD and G20 countries (estimate for 2018) and the minimum carbon price range needed in 2020 for the 2°C target.


200


140 160 180


120


100 80 60 40 20 0


0%


Effective Carbon Rate


€34 - 68 10% 20% 30%


2020 Minimum carbon price range for the 2°C target


40% CO2-emissions from energy use Only about 10% of emissions


For almost 50% of emissions, the effective carbon rate is zero.


are priced at a level consistent with the 2°C target.


emissions for 42 OECD and G20 countries, representing 80 percent of global CO2 emissions. Carbon rates include carbon taxes, permit prices related to existing ETS


Note: This fi gure shows the distribution of effective carbon rates over energy-related CO2


and excise taxes on energy (also including those not motivated by a climate policy objective). Source: OECD, 2018b and own illustration.


50%


60%


70%


80%


90%


100%


1 Opinions expressed are those of the authors and not of the institutions that they are affi liated with. We would like to thank Assia Elgouacem (OECD), Ottmar Edenhofer (MCC), Michael Jakob (MCC) and Ian Parry (IMF) for their input and comments. We would also like to thank Sarah Beyer and Zeljana Ana Grulovic for their assistance.


Effective carbon rate (€/tCO2)


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