Carbon prices are still far too low to prevent climate change

Kurt Van Dender, Centre for Tax Policy and Administration

©Russell R. Scott/Citizenside/AFP

Pricing carbon is one of the surest policy means we know for curbing greenhouse gas emissions and meeting the targets of the Paris Climate Agreement agreed in 2015. Has there been any progress with its implementation since then? Not enough, is the verdict of some of the world’s leading experts.

Some 85% of global emissions are currently not priced, according to a report issued in May 2017 by a High-Level Commission on Carbon Prices, co-chaired by Joseph Stiglitz and Lord Nicholas Stern, both respected figureheads in the fight against climate change. Moreover, about three quarters of the emissions covered by a carbon price are priced below USD 10 per tonne of CO2 (tCO2).

That price is much too low, since according to the report, if we are to achieve the Paris temperature target the explicit carbon-price level should be at least USD 40-80/tCO2 by 2020 and USD 50-100/tCO2 by 2030.

One gap in these numbers is that they do not take into account excise taxes on the likes of transport fuel, heating and energy use more widely, that have virtually the same behavioural impacts as more narrowly defined carbon taxes, and should therefore also lead to reduced emissions.

If these rather commonplace excise taxes on energy use are added into the mix, we can form a broader view of how carbon emissions are currently being priced. To gauge this, we have developed “effective carbon rates”, which are made up of all specific taxes on energy use, carbon taxes, and prices of tradable emission permits. This database, which we presented in our 2016 OECD report on Effective Carbon Rates , calculates effective carbon rates for 41 OECD and G20 countries, covering 80% of global energy use and the associated carbon emissions.

In one sense, the picture that effective carbon rates depict is a little brighter than that presented by Messrs Stiglitz and Stern, as it includes a broader range of taxes, so higher rates. In another and more fundamental sense, the picture actually is a little darker, as effective carbon rates show the enormous size of the challenge we face in battling down greenhouse gas emissions, even when taking a broader view of carbon pricing.

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Indeed, according to our database, 60% of emissions from energy use in the 41 countries are currently not priced (compared with 85% in the commission’s report). However, some 78% of emissions are priced at less that EUR 10/tCO2, which is no less discouraging. So while our more comprehensive estimates indicate that carbon pricing is more widespread than the High Level Commission’s report suggests, they nevertheless reinforce the Commission’s main point that carbon pricing still only plays a very limited role, and that we are a far cry from what is required to reach the Paris Agreement objectives.

The High Level Commission estimates that carbon prices should range between EUR 40 and EUR 80/tCO2 in 2020 for the Paris Agreement targets to have a chance of being met. Currently, effective carbon rates are below EUR 40/tCO2 for 93% of emissions, and are below EUR 80/tCO2 for 95% of emissions. Omitting road transport (where excise taxes are relatively high) from the calculation increases these shares to 99%.

In short, almost no emissions from energy use are priced at levels required to keep global temperature increases below 2 degrees Celsius limit, beyond which climate change could spin out of control. The world’s leaders understood the gravity of this prospect by signing up to the Paris Climate Agreement. It is now critical that they take the policy action needed to meet those goals, and that means increasing carbon prices now.

Related event

COP23 side event: Carbon pricing for the low-carbon transition, 15 November 2017, Bonn, Germany: http://www.oecd.org/tax/tax-and-environment.htm#COP23-tax-env-event.

More about the OECD at COP23: http://www.oecd.org/environment/cc/cop23.htm.

References and links

High-Level Commission on Carbon Prices (2017), Report of the High-Level Commission on Carbon Prices, World Bank, Washington, DC. License: Creative Commons Attribution CC BY 3.0 IGO, https://static1.squarespace.com/static/54ff9c5ce4b0a53decccfb4c/t/59b7f2409f8dce5316811916/1505227332748/CarbonPricing_FullReport.pdf.

Visit: https://www.carbonpricingleadership.org/report-of-the-highlevel-commission-on-carbon-prices.

OECD (2016), Effective Carbon Rates: Pricing CO2 through Taxes and Emissions Trading Systems, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264260115-en.

OECD (2017), Investing in Climate, Investing in Growth, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264273528-en.

Raising revenues through carbon pricing can help the poor to pay for their energy bills


Florens Flues and Kurt Van Dender, OECD Centre for Tax Policy and Administration

A widely heard criticism of carbon pricing is that it will simply hurt the poor. But just like other similar schemes with environmental aims, such as water charging, the opposite is true. It all depends on having the right policies in place.

One very effective policy for reducing air pollution and mitigating risks from climate change, such as storms, floods and sea level rise, is to raise taxes on domestic energy use. In fact, by taking just one-third of the revenues raised through such taxes to fund cash transfers, policy makers would make it easier for households to pay their energy bills, not harder.

The message that higher energy prices are indeed quite compatible with social policy objectives is the main finding from a new OECD working paper, “The impact of energy taxes on the affordability of domestic energy”.

Energy affordability is the ability of households to pay for the necessary levels of electricity and heating. While the concept of being able to pay of one’s bills has intuitive appeal, measuring affordability is challenging in practice.

The paper uses household level data covering 20, mainly European, OECD countries to analyse energy affordability at current energy prices and after a hypothetical, environmentally-related energy tax reform. It compares three indicators, which are based on expenditure shares, relative incomes, and a combination of both for the third (and strictest) indicator. The strict indicator says that households face energy affordability risk if they spend more than 10% of their disposable income on electricity and heating, and their income is less than 60% of the median income.

Energy affordability concerns are manifest at current prices. According to our strict indicator, less than 3% of Swiss households face energy affordability risk, while more than 20% in Hungary do; the median share is around 8%. Low energy affordability also results in utilities cutting off supply to households. More than 100 000 households see their electricity supply cut each year in France, Germany and Spain. In the United Kingdom more than 1.5 million households cut off their electricity supply because they cannot afford to top up pre-pay meters.

In many countries domestic energy prices are rising, partly as a result of charges that finance the expansion of renewable energies. In practice, incentives for renewables often burden poor households, particularly because the poor tend to spend a higher share of their income on electricity and heating than the rich.

Unfortunately, some politicians have used this relationship to argue against stronger emission cuts. It is a blinkered view. Using taxes to make polluters pay for their emissions actually raises revenues that can be used to support households. This has been done to good social effect in Switzerland, for example.

The simulated energy tax reform aligns prices with environmental objectives, and increases energy prices by 11.4% on average for electricity, 15.8% for natural gas, and 5.5% for heating oil. Redistributing a third of the additional revenues resulting from this reform to poor households, by means of an income-tested cash transfer, is sufficient to improve energy affordability according to the three indicators. Under the strict indicator combining expenditure shares and relative incomes , energy affordability risk would decline by more than 10% on average across all countries considered. Uniform transfers are less effective at combatting affordability problems, although affordability would still improve according to the strict indicator.

Mitigating the adverse impacts of higher energy taxes, which are needed to cut harmful carbon emissions and air pollution, on energy affordability, requires no more than one-third of the revenues raised by the higher taxes. The remaining revenue can be used to make the tax mix for other social objectives, or for more inclusive growth.

References and further reading

Flues, F. and A. Thomas  (2015), “The distributional effects of energy taxes”, OECD Taxation Working Papers, No. 23, OECD Publishing, Paris, http://dx.doi.org/10.1787/5js1qwkqqrbv-en.

Flues, Florens, and Kurt van Dender (2017), “The impact of energy taxes on the affordability of domestic energy”, OECD Taxation Working Papers, No. 30, OECD Publishing, Paris, http://dx.doi.org/10.1787/08705547-en.

Kurt, Van Dender (11 October 2016), “Resistance is futile. Higher carbon process needed to guide the transition to carbon neutral growth”, OECD Insights blog, http://oecdinsights.org/2016/10/11/higher-carbon-prices-for-carbon-neutral-growth.

OECD (2016), Effective Carbon Rates: Pricing CO2 through Taxes and Emissions Trading Systems, OECD Publishing, http://dx.doi.org/10.1787/9789264260115-en.

OECD (2015), Taxing Energy Use 2015: OECD and Selected Partner Economies, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264232334-en.

OECD work on taxaxation and the environment: www.oecd.org/tax/tax-policy/tax-and-environment.htm 

China: Black turning green?

Photo courtesy of Jacques Bron

 

Coinciding with the China Development Forum in Beijing, the Insights blog is focusing on China this week 

Viewed from the hilltops of Hong Kong island, the city’s harbour can look as stunning as this. All too often, it looks more like this. Sandstorms in northern China are partly to blame for this week’s record-breaking smog. But smoke and fumes belched out by factories on the Chinese mainland haven’t helped. 

Indeed, across China, sooty skies are a daily and dangerous reminder of the price of economic progress. Four years ago, the World Bank estimated that 16 of the world’s 20 most polluted cities were in China. 

But a strange paradox: Just as China’s skies are turning blacker, its energy production is becoming greener. The country has set itself a target of producing 15% of its energy from renewable sources by 2020, and that goal has unleashed massive investment in green energy, turning China into the world’s biggest market for renewables. The result, as journalist Christina Larson notes, is that “China may soon be simultaneously the greenest and the blackest place on earth.” 

China’s great green push is showing up in several areas of the economy, including the development of a high-speed rail network and huge construction of wind farms – according to some estimates, the country’s wind capacity has doubled every year for the past four years. Investors outside China have taken note: U.S. billionaire Warren Buffet has bought 10% of battery and carmaker BYD, while Hong Kong tycoon Li Ka-shing is taking a stake in another battery maker, Jia Sheng. 

Away from such high-profile names, green power is taking root in other ways. China produces about 10 million electric bicycles and scooters every year. Bus rapid transport, or BRT, a cross between a bus and a metro system, is making inroads in dozens of Chinese cities. And, less officially, shanzhai (“homemade” or “knockoff”) electric cars are becoming a familiar site on the streets of China’s numerous smaller cities. Cheap and cheerful, the cars cost between $2000 and $3000 and can be charged from a regular household socket. 

Inevitably, China’s headlong rush into renewable means mistakes have been made. “When you go to being the No. 1 market in just five years, you can expect a few growing pains,” comments Dr Jiang Lin of the China Sustainable Energy Program in San Francisco. According to some estimates, around 30% of wind turbines are not properly connected to the grid. There have also been problems in choosing the right sites for wind farms, says Dr. Lin, and the entry of so many new operators means too little thought has been given to creating standards. 

“Chinese entrepreneurs are very energetic, but they don’t always think through every detail before acting,” says Dr. Lin. “They’re juggling so many balls in the air that one or two may get dropped.” Nevertheless, he’s confident that the race to go green will allow China to meet its targets and help it become a world leader in renewable energy technologies. “People view this as a brand new market with great potential,” he says, “and the possibility to create intellectual property that can be sold.” 

Useful links 

OECD work on China, including a report on eco-innovation

The OECD’s Chinese-language site – 网站(中文) 

OECD Insights: Sustainable Development 

OECD work on climate change and green growth

IEA work on climate change and transport

China Sustainable Energy Program factsheet 

Photos by Jacques Bron

Subsidising Pollution?

How can we reduce fossil fuel use and make the switch to clean energy?  Debates on fossil fuel dependence and its consequences for the environment have reached a crescendo as COP15 nears its deadline.  But did you know that governments still subsidize the use of fossil fuels?  Helen Mountford of the OECD Environment Directorate, Peter Wooders of the IISD and Dr. Fatih Birol of the IEA explain the importance of dealing with these contradictory policies.

Useful links:

OECD and COP15
The IISD Blog
COP15

Point of view: OECD Analyst reports from Copenhagen


What images come to mind when we hear “Copenhagen”?  Ministers sitting around a table and protesters waving banners?  COP15 is also analysts, scientists, businesses and civil society representatives working together on climate-related initiatives…OECD Analyst Christa Clapp tells us what she is doing at COP15:

“While in Copenhagen, I will be speaking at an event sponsored by Eneco, a Dutch energy company. Eneco is supporting the Luz Verde programme to distribute 30 million compact fluorescent light bulbs in Mexico. This is one of the first “programmatic” Clean Development Mechanism (CDM) projects to be approved. It groups similar disbursed projects together to lower transaction costs to access the carbon market and earn carbon credits. Such projects are a first step towards scaling-up carbon market mechanisms. The OECD is working together with the International Energy Agency to support the Annex I Expert Group, which is a group of climate negotiators, on carbon market issues. Our recent papers focus on the strengths and weaknesses of project-based carbon market mechanisms and scaled-up sector-based approaches.

More than 30 countries are already trading in carbon markets, either at a national or sub-national level. Additional countries are discussing how to design new market instruments and potentially link emission trading systems. Decisions taken in Copenhagen may impact the reach of these carbon markets and how they function. At OECD we are actively exploring how carbon markets might evolve post-Copenhagen, building on our recent Economics of Climate Change Mitigation work, which analyzes how carbon market instruments can be used to build up a global carbon market.

To further explore how carbon markets are expanding and evolving, we are bringing together experts and policy-makers for an OECD Workshop on Carbon Markets in April 2010. This workshop will offer an early post-Copenhagen opportunity to investigate these key questions:

  • How can we build up a global carbon market, for example by increasing the number of countries participating, and through direct linking of emissions trading schemes?
  • How will decisions taken in Copenhagen impact incentives for developing country engagement in carbon markets, including the design of “offset” mechanisms?
  • Under what conditions can cities and sub-national actors access carbon market financing for local low-emission projects?
  • How might voluntary markets evolve as compliance markets grow?