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EMISSIONS GAP REPORT 2018 – BRIDGING THE GAP: FISCAL REFORMS FOR THE LOW-CARBON TRANSITION
Excise taxes are by far the largest component of the overall carbon price, although ETS constitute a large share in the electricity sector in most jurisdictions where such systems are in place. Accordingly, revenues from carbon taxes and ETS (US$33 billion [€28 billion]2 in 2017)3
remain much smaller than those of excise
taxes on energy use (ca €421 billion in OECD and G20 countries – Marten and Van Dender, forthcoming). However, excise sales taxes on energy use are often poorly aligned with the carbon content of the tax base. Coal – the most carbon-intensive energy source, and one that also causes significant local environmental damage – is untaxed in most large economies and therefore priced at production cost (Coady et al., 2018). Effective carbon rates tend to be higher for oil products than for other fuels, and they are significantly higher in road transport than in all other sectors.4
Fuel prices in
the European countries with the highest fuel taxes may be high enough to cover non-climate externalities in road transport, including local air pollution, congestion, noise, casualties, and road wear and tear (Santos, 2017; Coady et al., 2018; OECD, 2018a), but they remain too low elsewhere.
the lower end of this range indicates the minimum price level needed to close the emissions gap in order to reach the 2°C target. Figure 6.1 shows that approximately 90 percent of the CO2
[€43–86/tCO2 emissions from energy use are
priced at rates below the lower end: half of the emissions are not priced at all, and an additional 40 percent of emissions are priced at rates below the minimum price level of €34/tCO2
.
Major efforts are needed to increase carbon prices. However, in recent years, progress has been slow, as can be seen from the ‘carbon pricing gap’ indicator (OECD, 2016 and 2018b). The carbon pricing gap measures the positive differences between a €30 carbon rate and applicable rates across all energy use, as a percentage, and therefore considers the extent of emissions priced below €30. Against this rate, the gap is estimated to be 77 percent in 2018, which is approximately 6 percentage points lower than in 2012 and 3 percentage points lower than in 2015. The rate of reduction needs to be much faster to ensure that carbon rates align with the Paris Agreement targets. The significant carbon pricing gap and the slow progress is partly related to political economy issues, i.e. the distribution of climate policy costs and political and behavioural barriers to fiscal reforms. Section 6.3 will discuss the major obstacles and how to address and overcome these.
6.2.2 Fossil fuel subsidies
Budgetary support for fossil fuels usually reduces prices and can create negative carbon prices. This leads to
Current carbon prices fall short of the levels needed for meeting the targets of the Paris Agreement. The High- Level Commission on Carbon Prices (2017) concludes that the explicit carbon price level consistent with the 2°C target is at least US$40–80/tCO2 and US$50–100/tCO2
[€34–68/tCO2 ] by 2020 ] by 2030. Hence,
higher fuel use, GHG emissions and local air pollution. Support includes the direct transfer of funds, market price support (e.g. setting prices that are different from market rates), tax concessions (e.g. exemptions or reductions), in-kind support (e.g. building a railway from a coal mine to a port), credit support (e.g. favourable loans or loan guarantees), below-market insurance rates and caps on liability or preferential government procurement (Steenblik, 2008). Consumer subsidies are mostly used in developing and resource-rich countries. Producer subsidies are found in both developed and developing countries (Bast et al., 2015).
Estimates of fossil fuel subsidy levels differ due to varying coverage and methodologies. In an effort to provide a consistent figure, the International Energy Agency and OECD estimate that subsidies for oil, natural gas and coal amounted to US$373 billion [€319 billion] in 2015, which is 0.5 percent of global gross domestic product (GDP) (OECD, 2018c). Total consumer subsidies declined by 15 percent in 2016 and are currently given to petroleum products (40 percent), electricity (41 percent), natural gas (19 percent) and coal (less than 1 percent) (IEA, 2017). The recent decrease in support is the result of reform efforts and declining global fuel prices. However, this downward trend does not apply to all countries and energy sources; subsidies are increasing for electricity consumption in particular, and in countries including Angola, Azerbaijan, China, Kazakhstan, Malaysia, Mexico and South Africa (IEA, 2017). Rising crude oil prices could drive up subsidies and reverse some reforms.
Reforming fossil fuel subsidies can yield significant public savings. In the Middle East and North Africa (MENA) region, fossil fuel subsidies averaged almost 20 percent of total government spending in the 2013/2014 financial year (El-Katiri and Fattouh, 2017). Similarly, before recent reforms, the share of Indonesia’s government expenditure dedicated to fossil fuel subsidies hovered just below 30 percent, and subsequently dropped to 6 percent (NCE, 2018). Fossil fuel consumer price support disproportionally benefits richer households—the top income quintile on average receives six times more in subsidies than the bottom quintile (Coady et al., 2015). Reducing fossil fuel subsidies therefore leads to more equitable distributional outcomes. Moreover, reducing fossil fuel use by reducing fuel subsidies can improve air quality, public health and economic efficiency.
6.2.3 Emissions reduction potential 2018, increasing from C$35 to C$50 [€24 to €34] per
Better alignment of energy taxes across the carbon content of fuels and increases in carbon prices would, over time, reduce demand for fossil fuels. Strong commitment to announced price paths allows investors to make low-carbon investments with sufficient confidence. For example, the Canadian province of British Columbia implemented a schedule to increase carbon taxes by C$5 [€3] per tCO2
per year as of April
2 For converting currencies into euros, in this chapter we use the average exchange rate between 2014 and 2017 provided by the Federal Reserve Bank of St. Louis. 3 The revenue is lower than the value of the carbon pricing systems (ca US$82 billion [€70 billion]) because substantial shares of tradable permits are allocated for free. 4 The right tail of the distribution curve in figure 6.1 consists almost entirely of road transport rates.
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