Almost all energy taxes around the world are too low to be of any meaningful environmental benefit, according to new analysis from the Organisation for Economic Co-operation and Development (OECD).
Compiled using tax data from 42 OECD countries and G20 economies – which together represent around 80 per cent of global energy use and CO2 emissions associated with energy use – the report suggests tax rates on energy use, from fuel duty to pollution pricing, are inadequate the world over.
Despite a major surge in political interest in tackling climate change – driven by rising public and corporate concern, and improvements in scientific modelling between 2012 and 2015 – policymakers have delivered “hardly any change” on tax rates in emissions over the three-year period. “This report clearly shows that energy taxes continue falling well short of their potential to improve environmental and climate outcomes,” the OECD states.
“The results are not in themselves reason for enormous joy,” admits Kurt Van Dender, head of the OECD’s tax and environment division.
Apart from steps forward in a few countries, such as new municipal carbon trading systems or hikes in fuel duty, the overall picture remains largely unchanged, Van Dender told BusinessGreen. “There is lots of debate, lots of initiatives as well at country level and sub-national government level, but if you translate it into the aggregate picture then the conclusion is that it does not look overall like we have a very big shift towards the use of energy taxes as instruments for environment policy or energy policy.”
Much of this is down to a lack of political will. Although countries are starting to introduce more carbon taxes they are simply not pricing emissions high enough, Van Dender explains. Even the UK, largely seen as a leader in emissions reduction, prices carbon at £18 (€20.2) per tonne – well below the €30 per tonne the OECD sees as a minimum for covering the costs of climate and environment negative impacts. Some economists, notably including Lord Nicholas Stern and Joseph Stiglitz, put that price much higher, at £60 (€67) per tonne or more.
Despite research to the contrary, countries “remain nervous” that hiking energy taxes will damage their economic competitiveness and equity performance, Van Dender said. Added to this, some areas of the economy are already pre-disposed to higher taxation due to historic excise charges. For example, oil products, and in particular road transport fuels, are taxed at the highest effective rates globally according to the OECD, while coal is taxed at by far the lowest rates per tonne of CO2. This discrepancy has led to a situation where the highest taxes are not generally applied to the sectors with the greatest environmental impact.
Despite the bad news conatined in the report, there are signs attitudes towards carbon pricing are changing. Reforms to the EU emissions trading scheme has led to a recent rally in carbopn prices across the bloc, pushing the price of emissions allowances above €10 a tonne for the first time in years. New commitments on national carbon taxes are also emerging, most notably from Canada, France, Portugal, Ireland, and Japan, which have all introduced specific taxes on emissions in recent years. France’s plan is particularly ambitious, notes Van Dender – it plans to hit the €30 per tonne minimum in the mid 2020s.
“These things are in place, and if we can maintain momentum under leadership of some countries, such as France, then in one sense all that needs to be done is to increase the rates and increase the coverage,” Van Dender says hopefully.
And given the data set for this study then ends in 2015, might there already be an upswing in carbon tax pricing and coverage underway as a result of the Paris Agreement? Alas, here the optimism takes a nosedive.
“It is certainly correct that partly in the run up to COP21 and after the Paris Agreement that there has been an increase in momentum in discussions of climate policy in general and discussions of carbon pricing as a part of that,” Van Dender admits. “But is the Paris Agreement momentum as we see it now, is going to translate into some structural change in the patterns that we observe in this publication? I think not. There will be some improvements, as we know there are the initiatives in Canada, there’s the ambition in China to go national with the emissions trading system, there is truly high ambition in France… all of these things will have an impact, so things will improve, but I don’t think we will see a trend change yet.”
Rather than relying on political will alone, instead governments should stop thinking of new or higher carbon taxes as purely an environmental policy, says Van Dender. “Part of the answer is to consider carbon pricing, energy taxation, environmental taxation in general, as part of tax policy,” he says. “Tax policy is about raising revenue. We know that in the end the goal is to decarbonise or to reduce carbon emissions – and that would imply eroding the base on which these taxes are levied. But while we are doing this there is quite a bit of revenue potential there.”
Indeed, against a backdrop in many countries of high labour taxes, high levels of national debt and slow income growth, pollution taxes could easily become a significant contributor to national coffers, says Van Dender – and politicians should exploit this more, especially when you consider the potential to hike pollution levies but slash unpopular and distorting income taxes.
“There is a tax base there which is emissions, which is pollution in general, which can help us design good tax policy,” he suggests. “And so there are synergies to be had between good tax policy and good environmental policy. We could be emphasising that synergy a bit more – highlighting the public financing aspects of environmental tax policy would be one way to increase the momentum behind it.”
Given all the enthusiasm for carbon pricing programmes in recent years it seems a little surprising that progress has been so slow. But while the number of initiatives has been growing, their scope is limited and pricing low. Meanwhile, reports of a surge in revenues from carbon taxes are in many cases primarily down to increased pollution rather than higher rates or wider coverage, according to the OECD.
Much of the groundwork is in place, but it seems to drive forward a meaningful price on carbon, what we need is a distinct change in mindset. We need policymakers to start thinking of carbon as a cash cow, an untapped tax base that could fund anything from healthcare to a massive green energy roll out, while allowing for steep cuts in unpopular income taxes. Only then might we start to see carbon pricing delivering meaningfully for both the economy and the planet.