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 

The Ripple Effect: Water-Energy-Food Nexus

Click to find out more about the Global Forum on Environment
Click to find out more about the Global Forum on Environment

Today’s post is by Naazia Ebrahim of the OECD Environment Directorate

In Rule of Experts: Egypt, Techno-Politics, Modernity, Timothy Mitchell tells how in 1942, an epidemic of gambiae malaria in Egypt was caused by a perfect storm of interactions between rivers, dams, fertilisers, food webs, and the influences of World War II. It began with the building of the Aswan Dam and its storage reservoirs around the Nile, which provided the anopheles mosquito with new breeding spots. Thanks to the dams, basin irrigation was replaced by perennial irrigation, encouraging a denser population of humans who no longer needed to disperse to avoid flooding. Government protectionism on behalf of the sugarcane industry then helped it expand at the expense of food-growing lands, while new irrigation techniques led to reduced soil fertility. When ammonia was diverted from fertilizer to explosives manufacturing for World War II, the resulting malnourishment and closely populated settlements created an easy target for this particularly social mosquito.

Splitting technological, agricultural, epidemiological, and geopolitical considerations into separate boxes led at least in part to the epidemic. The engineers building the dam could never have imagined the ripple effects their work created. But today, we know better (well, somewhat at least: it’s worth noting that deforestation has been strongly linked to the Ebola epidemic). And, with studies estimating that the global demand for water, energy, and food will increase by 55%, 80%, and 60% respectively by 2050, those ripple effects are going to be all the more critical – especially between these three areas .

Risks in one sector often correlate with risks in the others – but equally often, decreasing the risk in one sector causes it to increase dramatically in others. Figuring out how to provide enough water for wheat farming, hydropower generation, and maintaining local ecosystems, while still decreasing carbon emissions, is not an easy task.

The world is facing unprecedented stresses, and we are going to need an unprecedented response. We’re doing our best to help create that response at the OECD. Next week we’re hosting a forum on the nexus between water, energy and food. We’re looking forward to discussing (with senior private sector leaders, policy experts and government officials) ways to manage these trade-offs, co-ordinate planning across sectors, anticipate unexpected developments, engage business, and minimise risks across all three sectors. If we get it right, there’s potential for huge collaborative gains.

During all this work, it’s worth remembering that the malaria epidemic was often framed as one of intelligence versus nature. But intelligence and technological advancement were not created through externally imposed “solutions”. Rather, they were developed iteratively by engaging and interacting with the challenges. We have no doubt that the same will be true here.

Useful links

OECD work on Biodiversity, water and natural resource management

Expo 2012 in Yeosu, Korea: The Blue Economy

Click to see the “Living Ocean and Coast” theme of Expo 2012

How much are the oceans worth? Somewhere between $16 and $54 trillion a year according to this report. It may be more, nobody really knows, although Wealth Accounting and Valuation of Ecosystem Services (WAVES), a global partnership of developed and developing countries, international organisations, NGOs and academics, is hoping to find out over the next few years.

The Global Partnership for the Oceans cites figures for some parts of the ocean. Coral reefs for instance provide services to humans worth $172 billion annually. Fisheries are even more lucrative, with seafood sales at $190 billion a year for the catches alone, before the value added by processing. You could add another $50 billion if the fisheries were managed efficiently, according to a World Bank study quoted in Rebuilding Fisheries, a new OECD publication launched this week during OECD Day at Expo 2012 in Yeosu, Korea.

One statistic you’ll see quoted in most discussions about the oceans’ importance is that they cover 71% of the Earth’s surface. What’s less well-known is that the oceans supply almost 99% of the “living space” for our planet’s creatures, far more than the vertical strip of soil and sky we usually think about when biodiversity is mentioned. Very few humans live for long in this space, but two-thirds of us are within 100 km of the sea,  so coastal cities feature prominently in discussions of the blue economy (and in the data visualization tool our colleagues at the OECD Factblog developed for the Expo).

The theme of Expo 2012 is the “blue economy” – the various activities taking place on, under or near the ocean. As one of the world’s leading shipbuilding, trading and fishing nations, Korea has a vested interest in using ocean resources in a sustainable way. However, the aim of the exhibition, and the OECD’s contribution to it, is to show that the oceans are vital for all of us. On a global scale, for example, they regulate the world’s climate and provide 16% of the animal proteins we consume. They are important sources of oil and gas, and increasingly of renewable energies too.

Unfortunately, our attitudes have changed little from earlier times when it made sense to talk of “the infinite oceans”. Now, 85% of ocean fisheries are fully exploited, over exploited or depleted. Fertilizer run-off and fossil-fuel use have created 405 oxygen-starved dead zones worldwide, compared with 49 in the 1960s, covering a total area the size of the UK. While we’re making geographical comparisons, the “Great Pacific Garbage Patch” drifting around the North Pacific Subtropical Gyre, known as covers the ocean with plastic debris over an area as big as Texas. And according to some reports, just 15 of the world’s biggest ships may now emit as much pollution as all the world’s 760m cars.

None of these problems can be solved in isolation from the others, nor from a variety of external influences. Fisheries reform for instance can influence and be influenced by labour policy, regional development, environmental legislation, taxes, and tourism, and that’s just on a national scale. A similar list could be drawn up for any ocean-related issue, prompting OECD Deputy Secretary-General Yves Leterme to call for “a more holistic policy perspective to the management of the oceans, their uses and resources” in Yeosu. Leterme and the President of the Korea Maritime Institute (KMI), Dr.Hak-So Kim signed a Statement of Intent between the two organisations which underlines their intention to strengthen co-operation on work related to the future of the blue economy.

The Blue Economy – click to watch the video

Greening the global energy system

Today’s post is from Dana Krechowicz, Research Associate at Sustainable Prosperity, Ottawa, Canada

Energy is the foundation of our modern lives, providing us with mobility, comfort and convenience, and powering the economy. Although the carbon-intensity of energy production varies from country to country, the current energy system is a significant contributor to CO2 emissions (accounting for 84% of global global greenhouse gas [GHG] emissions). It’s clear that a fundamental transformation is required in the way we produce, deliver and consume energy to reduce its carbon-intensity. But given the energy sector’s size, complexity, path dependency and reliance on long-lived assets, how do we get there? This question is at the heart of the climate change dilemma.

Following the release of the 2011 World Energy Outlook, the IEA and OECD have released a joint report Green Growth Studies: Energy . This study draws on the IEA’s work on global energy trends and predictions to outline the necessary policy interventions to redirect the global energy system onto a greener path.

A comprehensive green growth strategy for the energy sector will take into account the inter-relationships between economic sectors, transport systems, land-use patterns, social welfare and environmental integrity. A range of mutually reinforcing policies is required, which address market failures and barriers, and create the enabling policy framework for large-scale private sector investment.

Governments play an important role in fostering innovation and supporting the scaling up of deployment of existing and emerging technologies in the energy sector, since many low-carbon technologies currently are more costly than fossil fuels, although their costs are declining. In fact, to achieve a 50% reduction in CO2 emissions, government funding for research and development in low-carbon technology needs to be two to five times higher than current levels.

Government support for specific technologies needs to be tailored according to the stage of technology development, which can be categorized as promising, technically proven, close to competitive and competitive. On one end of the scale, for emerging technologies, governments can provide financial support for research and large-scale demonstration; at the other end, more mature and competitive technologies need governments to help tackle market, informational and other barriers to large-scale deployment.

Broadly, the key policies that are required to set the framework for the transformation of the energy sector include:

  • Set enabling conditions to make markets work.
  • Eliminate fossil fuel subsidies.
  • Provide price signals for environmental externalities (e.g. carbon).
  • Radically improve energy efficiency.
  • Foster innovation and green technology policy.

The energy revolution that is needed can be characterized by improved energy efficiency, widespread introduction of carbon capture and storage, increased deployment of renewable energy, continued fuel switching, and support for new and enabling technologies.

A large-scale transformation of the global energy sector is possible, though it will require significant investment. Global emissions could be halved by 2050, using existing and emerging technologies, with additional new investment of $46 trillion. It is vital for governments to create the enabling policy framework to catalyze private sector investment in the transition to a low-carbon energy sector. It is cheaper in the long-run to act now, as every dollar of energy sector investment not spent before 2020 will require an additional $4.3 to be spent after 2020 to compensate for increased GHG emissions by building zero-carbon plants and infrastructure by 2035.

Without decisive action, existing and emerging low-carbon technologies won’t be deployed on the scale necessary to make large reductions in GHG emissions, due to the entrenchment of fossil fuels.

Investments in a new energy strategy would however pay dividends in areas other than cliumate too. The report finds that the transition to a low-carbon energy system is likely to have a positive impact on employment in the energy sector because renewables tend to be more labour-intensive that fossil fuel-based energy. Increased deployment of solar phtovoltaics would yield the largest number of jobs, with strong growth also expected in the energy efficiency, geothermal and solar thermal sectors.

Useful links

OECD work on green growth 

World Energy Outlook: Locking ourselves in to an unsustainable future

The neighbour of a friend has a plan to supply cheap, sustainably-sourced energy using a combination of tidal power and electric eels. I can’t tell you the details because he doesn’t want the big oil companies to steal his idea, but he’s not the only one promoting crackpot schemes to fuel the world economy. The latest World Energy Outlook 2011 published today by our colleagues at the IEA describes a number of insecure, inefficient and downright dangerous approaches, known as the “business as usual” scenario.

A couple of examples: subsidies that encourage wasteful consumption of fossil fuels jumped to over $400 billion last year, and despite promises to increase energy efficiency, global energy intensity worsened for the second straight year.

Fukushima and the turmoil in the Middle East have cast doubts on the reliability of energy supply, while the sovereign debt crisis has both distracted government attention from energy policy and limited their means of intervention. That doesn’t look promising for attempts to limit global warming. The IEA warns that at present rates, emissions are consistent with a long-term average temperature increase of more than 3.5°C, and that without new policies “we are on an even more dangerous track, for a temperature increase of 6°C or more.”

Four-fifths of the total energy-related CO2 emissions permissible by 2035 in the so-called 450 Scenario for limiting global warming are already “locked-in” by existing capital stock – power plants, buildings, factories, and so on. (it’s called 450 because it means limiting the long-term concentration of greenhouse gases in the Earth’s atmosphere to 450 parts per million of CO2 equivalent.)

Without stringent new action by 2017, the energy-related infrastructure then in place will generate all the CO2 emissions allowed in the 450 Scenario up to 2035, leaving no room for additional power plants, factories and other infrastructure unless they are zero-carbon, which would be extremely costly.

Delaying action is a false economy: for every $1 of investment avoided in the power sector before 2020, an additional $4.3 would need to be spent after 2020 to compensate for the increased emissions.

All of this would be of only theoretical interest to the 1.3 billion people without access to electricity if they weren’t concentrated in poor countries that are likely to suffer most from climate change. Lack of access to cheap, safe power doesn’t just hold back development, it can kill you. As we pointed out in this post last year, if nothing is done, household air pollution from the use of biomass in inefficient stoves will lead to over 1.5 million premature deaths per year, over 4000 a day. Many of them are young children who are at home all day, breathing in the pollution from the stove.

It wouldn’t cost a fortune to provide access. Around $9 billion was invested globally to provide first access last year, but $48 billion, needs to be invested each year if universal access is to be achieved by 2030. It sounds a lot, but that’s only around 3% of total energy investment to 2030.

A change of policy could help too. Only 8% of the subsidies to fossil-fuel consumption in 2010 reached the poorest 20% of the population.

Here’s the IEA’s Chief Economist Fatih Birol presenting the main points of the Outlook:

If you can’t see the video, click here

Want a better life? Put your mind to it.

Everybody thinks on occasion about how life might be improved.  But working towards that better life means solving a certain number of knotty problems.   What do you think should be tackled first? Complex answers to this simple poll are much appreciated- just put them in the comments section.  Now, put your minds to it!

Jolly Green Giant

Aviation endangers biodiversity. And vice-versa in this case.

Towards the end of the 1933 King Kong movie, one of the pilots sent to kill the upwardly mobile but soon to be downwardly plummeting ape helpfully points out the target to his dimwitted gunner, who otherwise may not have recognised the world’s most famous skyscraper and the world’s most infamous monkey.

The movie has been interpreted as everything from a parable of the Great Depression to a return of the repressed, but everyone agrees that the Empire State Building, completed two years before the film, was an inspired choice for the final symbolic showdown.

The building itself embodies the rivalry between its main financer, John Jakob Raskob, creator of General Motors, and rival automaker Walter Chrysler, whose Chrysler Building had been the world’s tallest building.

But it was also intended to represent modernity, and the architects actually carried out a long-term forecasting exercise to make sure the design would meet the needs of future generations.

Today, this could no doubt be presented in terms of sustainability, as could a just-completed $20 million retrofit to make it more energy efficient and environmentally friendly. The new approach uses technology (such as better insulation and continuous monitoring and control of temperature and other conditions) as well as changes in tenants’ behaviour, such as moving desks to allow in more daylight or not over-using air conditioning.

Payback time for the retrofit is calculated at around three years and it is expected to reduce the building’s carbon footprint by 100,000 tonnes over 15 years – the equivalent of taking 20,000 cars off the road.

The “sustainability” incorporated in the original thinking was there to make sure the building remained a good business proposition for many decades to come. Likewise, the latest changes were carried out: “not because it’s the right thing to do, but because it makes business sense. If we don’t reduce our energy consumption, we will lose money and be less competitive against China, India, Brazil and the other expanding economies” according to owner Anthony Malkin, speaking to the The Guardian.

This echoes the thinking behind the OECD’s Green Growth Strategy: “Together with innovation, going green can be a long-term driver for economic growth, through, for example, investing in renewable energy and improved efficiency in the use of energy and materials”.

The green growth link will take you to a number of resources, including an interim report published in May. The Green Growth Strategy Synthesis Report to be presented to the 2011 OECD Ministerial Council Meeting will propose tools and recommendations to help governments identify the policies for the most efficient shift to greener growth.

Energy is obviously a major aspect of this, and with IEA projections  showing that cities will consume nearly 75% of world energy in 2030 compared with around 66% today, the Empire State Building’s example is worth following. The Guardian article claims that if just a fifth of the largest buildings in America replicated the Empire State Building’s performance, it would save 2.3 billion tonnes of carbon emissions, equivalent to the amount of greenhouse gas pollution produced by the whole of Russia each year.

Useful links

Interim Report of the Green Growth Strategy: Implementing our Commitment for a Sustainable Future

Declaration on Green Growth adopted at the Meeting of the Council at Ministerial Level on 25 June 2009

Green Growth: Overcoming the Crisis and Beyond

From Grim to Green – OECD Messages on Green Growth