Pricing

Carbon
POLICY PERSPECTIVES
2013
There has been a huge amount of taxing and regulating
around carbon, but the outcome has been far from
optimal. Countries are pricing carbon in a multitude of
ways sometimes too high, but often too low. This is a
chaotic landscape that sends no clear signal, and must be
addressed.
Angel Gurra, OECD Secretary-General

OECD POLICY PERSPECTIVES PRICING CARBON - 1

PRICING CARBON
KEY MESSAGES
There is a strong need for more ambitious policies to address climate
change. Given the size of the problem, we cannot afford inefcient
policies: least-cost solutions are needed to keep carbon prices as low
as possible.
However, current explicit prices that are put on carbon by means of
taxes or emissions trading systems are generally much lower than
those needed to limit the global average temperature increase to 2C
above pre-industrial levels.
Nevertheless, economic instruments like taxes and emission trading
systems have been shown to be the most cost-effective instruments
to limit greenhouse gas emissions by a signicant margin. They could
be even more cost-effective if their design was improved. Frequent
exemptions for various energy products (e.g. coal) and different uses
(e.g. aviation, agriculture and energy-intensive sectors) should be
scaled back; the taxes on diesel should be set at least as high as the
taxes for petrol; and total caps in emission trading systems should
be made stricter, and permits auctioned.
Many other policy instruments in current use, such as subsidies for
biofuels and feed-in tariffs for renewables, implicitly entail very high
costs for abating carbon emissions. Some are intended to achieve
other policy goals, such as energy security or developing cleaner
technologies. Their cost-effectiveness in achieving these goals should
be carefully assessed, taking into account their interactions with other
policy instruments. If they are not cost-effective in these respects,
consideration should be given to phasing out the use of these
instruments and expanding the use of economic instruments.
Governments also need to reform the estimated USD 55-90 billion
of support provided each year to fossil fuel exploration, production
and consumption in OECD countries and the USD 523 billion in
energy subsidies in developing countries. While the stated objective of
subsidies for consumers are often for social reasons, they are usually
poorly targeted, expensive, often highly regressive and ultimately
undermine climate policy action.
To achieve the 2C goal, ambitious mitigation actions and non-
negligible carbon prices need to start now. Delaying actions until after
2020 would mean steeper emissions cuts thereafter to catch up and
higher carbon prices. Carbon prices fall rapidly once carbon markets
in different jurisdictions are linked or more sectors and gases are
included. Carbon prices needed to meet the same goal would need to
be higher if energy technology options become constrained.
Limiting emissions of CO
2
and other greenhouse
gases (GHGs) is vital in order to reduce the risks of
major future changes to the climate. In this context,
carbon pricing is a central issue. However, this term
can have several different meanings:
Placing an explicit price on GHG emissions,
either by establishing taxes on the carbon
content of various fuels or on the emissions
of other GHGs, or by setting up an emission
trading system where the price of GHG emission
allowances represent the carbon price.
Placing an implicit price on carbon following
the application of any other type of policy
instrument that has an intended or unintended
impact on GHG emissions.
Placing a negative price on carbon, i.e.
subsidising actions that lead to emissions of
carbon dioxides in the form of subsidies or
support to fossil-fuel production or use.
The climate change challenge
we face is so enormous that we
cannot afford inefcient policies:
countries need the most cost-
effective policy instruments.
2 - OECD POLICY PERSPECTIVES PRICING CARBON
1
Introduction
This Policy Perspectives brochure gives an overview of
recent OECD ndings on each of these forms of carbon
pricing. It documents the current use of different types
of carbon pricing and fossil fuel support, and nally
considers carbon prices for different policy approaches
that will be needed to reach internationally agreed goals
to limit climate change. The overall conclusion is that
explicit and implicit carbon prices vary considerably, both
within and across countries.
Emissions trading
The largest carbon emission trading system in operation
is the European Unions Emission Trading System (EU
ETS). It has established an upper limit on the total
emissions from installations in selected sectors (e.g.
electricity generation; oil reneries; the iron & steel, pulp
& paper, cement and aluminium sectors, intra-Union
aviation). In part due to the current economic crisis, the
prices of emission allowances are currently low (around
EUR 5 per tonne of CO
2
in early September 2013). In the
most recent phase of the scheme, an increasing share of
allowances is being auctioned.
Another large trading system has been established in
California, United States. It was recently agreed to link
the Californian trading system with its counterpart in
Quebec, Canada from 1 January 2014. In an auction that
took place in May 2013, the clearing price for allowances
for 2013 emissions was USD 14 per tonne of CO
2
.
New Zealand has a nation-wide GHG emission trading
system, Korea is preparing to implement one, and Chile
is considering whether to establish one. Tokyo, Japan
operates a local GHG emission trading system. China
has recently introduced 7 local or regional pilot emission
trading schemes.
1. OECDs database on instruments used for environmental policy provides a lot of
information on relevant taxes and trading systems; see www.oecd.org/env/policies/database.
2. OECD (2012), OECD Environmental Outlook to 2050: The Consequences of Inaction,
OECD Publishing.doi: http://dx.doi.org/10.1787/9789264122246-en.
OECD POLICY PERSPECTIVES PRICING CARBON - 3
2
Explicit carbon pricing
An increasing number of countries use carbon taxes
or emission trading systems to put a price on carbon
and thereby reduce their emissions. Carbon taxes put
an explicit price on a unit of carbon and the revenues
generated can be used for example, to lower distortive
taxes or to reduce public budget decits. The amount
of carbon that will be abated under carbon taxes is
generally uncertain. In emission trading systems, the
amount of carbon to be abated is xed, but the price
of carbon can uctuate in order to meet that objective.
Emissions trading systems can also generate public
revenues, but only if emission permits are auctioned
and not distributed for free. Both of these approaches,
in principle, can promote a cost-effective achievement
of given abatement objectives but the practical design
of the taxes and trading systems in current use often
leaves signicant scope for improvement.
1
The OECDs
Environmental Outlook to 2050 contains an overview of
carbon pricing systems in place in different countries.
2
There is a direct link between the carbon content of a
given fuel and the CO
2
emissions that will result from
combustion of that fuel. This suggests that from a climate
perspective, the tax rates applied to different fossil fuels
should be set at a rate based on their carbon content.
However, available information shows that instead of
applying the same rate, countries apply different tax rates
per unit of carbon to different fuels, and/or to different
uses of a given fuel.
Figure 1 illustrates all taxes on fossil fuels, including
carbon taxes as well as various excise taxes for six
Northern European countries. Each of these countries
apply taxes that are explicitly labelled as carbon taxes
and they are shown as the bottom parts of each vertical
bar for each fuel in question, with signicant variations
within and among most of the six countries.
3
In most cases, countries also apply other taxes on the
same fuels, and the distinction between the carbon
element and the other elements in the total taxes that
are levied on a given fuel is somewhat arbitrary. In
Figure 1, these other taxes are shown by the upper parts
of (most of) the vertical bars.
In addition to the countries shown in Figure 1, several
other jurisdictions apply explicit carbon taxes, including
Slovenia, Japan and the provinces of British Columbia and
Quebec in Canada.
Australia introduced a carbon tax in 1 July 2012, with
the intention of transforming it to an emission trading
system after three years. In July 2013, the Australian
Government proposed to convert the tax into a trading
system after two years instead. After a general election
in September 2013 where the outgoing government lost
its majority in the Parliament, the tax is likely to be
abolished.
A key point is that it is the sum of all the tax elements
that will affect peoples use of the fuels and the related
CO
2
emissions; the names applied to the different taxes
are not important in this regard. Figure 1 illustrates
how it can be misleading to only consider the carbon
element of the taxes: Whereas Sweden has much higher
CO
2
taxes than the other 5 countries shown in the graph,
the total taxes on at least petrol and diesel do not stand
out as being particularly high.
Figure 1. Comparison of carbon taxes and other
taxes on selected fuels, EUR per tonne of CO
2
3. Figure 1 shows the main tax rates applied to the different fuels, but in several countries
there are (normally) lower rates for products used in certain sectors, etc. The rates shown for
heating oils are those that apply to the household sector.
4. OECD (2013a), Taxing Energy Use: A Graphical Analysis, OECD Publishing.doi: http://
dx.doi.org/10.1787/9789264183933-en.
Source: The OECD database on instruments used for environmental policy.
Notes: Other taxes include taxes levied on a per-volume or per-weight basis but does not
include ad valorem taxes, such as VAT.
4 - OECD POLICY PERSPECTIVES PRICING CARBON OECD POLICY PERSPECTIVES PRICING CARBON - 5
Carbon taxes
0
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100
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300
350
Denmark Finland Iceland Ireland Norway Sweden
E
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p
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t
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o
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C
O
2
Diesel
Petrol
Natural gas
Coal
Heating oil
Taxes on energy use
Figure 1 aggregates the various taxes applied to selected
fuels in the 6 countries included. The totals are an
estimate of the implicit carbon prices applied to those
fuels.
The OECD report, Taxing Energy Use: A Graphical Analysis,
4

provides detailed maps of the energy taxes applied
in all OECD countries, with the tax rates expressed as
implicit rates per tonne CO
2
and alternately, per unit of
energy content. Figure 2 presents CO
2
emissions on the
horizontal axis and the related tax rates on the vertical
axes, distinguishing between three broad categories
of energy use: transport; heating and process use; and
electricity.
As in most countries, energy products used in transport
(mainly gasoline and diesel) are taxed signicantly more
than energy products used for heating or process use,
or to generate electricity (with an exception regarding
residential electricity use in Denmark). This is linked to
the broader range of policy goals that governments may
aim to address in the transport sector compared to other
areas of energy use. While the combustion of fossil fuel
emits CO
2
and certain air pollutants regardless of use,
fuels used in road transport also contribute to other
externalities, such as congestion, trafc accidents and
noise, which may have an even higher social cost than
these emissions.
In the absence of road pricing, which may be the best
approach, road fuel consumption may be a rough proxy
for these other external costs, since fuel use is correlated
with distance driven. In addition, a number of countries
formally or informally earmark road fuel taxes to fund
road construction and maintenance, or use motor fuel
taxes as a source of revenue more generally.
4 - OECD POLICY PERSPECTIVES PRICING CARBON OECD POLICY PERSPECTIVES PRICING CARBON - 5
Figure 2. Taxation of energy in the OECD area on a carbon content basis
Source: OECD (2013b), Climate and Carbon: Aligning Prices and Policies, OECD Environment Policy Papers, No. 1, OECD Publishing. doi: http://dx.doi.org/10.1787/5k3z11hjg6r7-en.
3
Implicit carbon pricing
Any type of policy that affects GHG emissions will implicitly dene a carbon price. This section summarises some of
the ndings of recent OECD studies that have analysed implicit carbon pricing.
6 - OECD POLICY PERSPECTIVES PRICING CARBON OECD POLICY PERSPECTIVES PRICING CARBON - 7
Taxing Energy Use: A Graphical Analysis also allows
comparisons of the implicit tax rates applied to different
percentiles of total CO
2
emissions. In Figure 3, effective
tax rates for a few selected countries are presented from
the lowest to the highest tax rate. The horizontal axis
presents the proportion of the tax base (in tonnes of
CO
2
), while the vertical axis presents the corresponding
effective tax rate on carbon. The graph shows the rates at
which different fractions are taxed.
The graph highlights the wide variance in effective tax
rates on carbon both within and across OECD economies.
In general, the highest levels on the right side of these
proles represent the tax rates applied on transportation
fuels.
Figure 3. Effective tax rates on a carbon-emission
basis in selected countries
Source: OECD (2013a), Taxing Energy Use: A Graphical Analysis, OECD Publishing.
doi: http://dx.doi.org/10.1787/9789264183933-en.
Within the heating and process use category, many
countries tax energy products used for industrial or
energy transformation purposes at lower rates than the
same energy products used for residential or commercial
purposes. This is often motivated by the interest of not
undermining industrial competitiveness. In a number
of other countries, however, the reverse holds, and
energy used in industry and power generation is taxed
at a higher rate than in the residential and commercial
sectors. This is often linked to concerns about the social
impacts of high energy prices and the desire to protect
poorer households. However, policies that reduce energy
prices for particular sectors can distort energy use in
an environmentally damaging manner, and there are
usually better mechanisms for addressing the concerns
motivating these policies. For example, it is usually
more effective from an environmental point of view to
preserve the price signal sent by fuel taxes and address
the impacts on industry or low-income families by more
direct means, such as cash transfers that do not directly
subsidise energy use.
The third category shown in each country prole is
electricity generation. Electricity is a secondary energy
product generated from some primary energy source,
like natural gas, coal or wind. To take account of this,
the maps show the fuels used to generate electricity.
This enables both the primary energy production and
the signicant amount of energy lost in converting
fossil energy into electricity to be captured. Countries
tax electricity in two ways: by taxing the fuels used to
generate electricity, and/or by taxing the consumption
of electricity. The country proles take into account
both types of tax. Where the consumption of electricity
is taxed, the effective tax rates are calculated as if the
electricity tax were an implicit tax on the underlying
fuels used to make electricity, according to their relative
proportions in the mix of primary energy used for
electricity generation in the particular country.
AUS
ISR
SWE
JPN
USA
DEU
0
50
100
150
200
250
300
350
400
450
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
EUR per tonne CO
2
Proportion of all energy use in each country (tonnes of CO
2
)
5. Some policy instruments, such as subsidies to fossil fuels, can contribute to increasing
GHG emissions. The implicit carbon prices are in such cases negative. These are discussed
further in the section below.
6. The book uses a methodology developed in a 2011 report by the Australian Productivity
Commission, Carbon Emission Policies in Key Economies, cf. www.pc.gov.au/projects/study/
carbon-prices/report.
6 - OECD POLICY PERSPECTIVES PRICING CARBON
Comparing implicit carbon
pricing via different types of
policy instruments
Not just taxes, but any sort of policy instrument that
intentionally or unintentionally has an impact on CO
2

emissions, will implicitly establish a carbon price; that
is, the cost to society of abating a tonne of CO
2
using this
instrument.
5

Another 2013 OECD publication, Effective Carbon Prices,
estimated the costs to society of a broad range of
policy instruments applied in electricity generation,
road transport, pulp & paper and cement, as well as
households domestic energy use in selected countries;
the amount of CO
2
eq emission reduction each of the
instruments contributed to; and, hence, the cost per
tonne of CO
2
eq per instrument.
6
The report provides a snapshot of the post-policy
situation compared to a counterfactual snapshot
of no policy. It gives an indication of the relative
incentives to abate carbon in 2010 within and across
the countries examined. In spite of methodological and
data limitations, the differences in magnitude of the
abatement incentives are sufciently large to provide
a good level of condence about the lessons to be
drawn about the cost-effectiveness of different policy
instruments in abating GHG emissions.
The 2013 OECD publication, Effective Carbon Prices found
large differences in effective carbon prices:
1. Within a given sector, across the countries covered.
2. Across the different sectors, within each of the
countries.
3. Across the different instrument types, across all the
countries covered.
In many respects, the last two ndings are the most
interesting and robust. There are a number of caveats
that should be kept in mind when analysing the
estimates. However, while there may be some uncertainty
regarding the ranking of carbon prices within a given
sector across countries, it is very unlikely that any caveat
could explain away the latter two main ndings and
they do not seem very sensitive to the exact year of study.
OECD POLICY PERSPECTIVES PRICING CARBON - 7
While carbon pricing via carbon taxes
and emission trading systems is more
visible, the costs to society of reducing
greenhouse gas emissions via other
types of policy instruments can be many
times higher.
Proportion of all energy use in each country (tonnes of CO
2
)
OECD POLICY PERSPECTIVES PRICING CARBON - 9
Source: OECD (2013c), Effective Carbon Prices, OECD Publishing.
doi: http://dx.doi.org/10.1787/9789264196964-en.
Note: Ranges shown for some countries reect different choices about assumptions used in the estimates. All the Other
regulations covered in the electricity generation sector are renewable portfolio standards.
Figure 4. Estimated average effective carbon prices in the
electricity sector, by instrument type
2010 EUR per tonne of CO
2
abated
8 - OECD POLICY PERSPECTIVES PRICING CARBON
Figure 4 shows the average effective
carbon prices in the electricity sector, by
instrument type. It clearly demonstrates
that feed-in tariffs and various (other)
subsidy schemes entail the highest
costs to society per tonne of CO
2
eq
abated, in some cases by a considerable
margin. Trading systems dominate the
low-cost part of the graph.
Even if motor fuel taxes were not
introduced with the aim of reducing
greenhouse gas emissions, they in
practice do so at a much lower cost
per tonne abated than any other policy
instrument.
-100 0 100 200 300 400 500 600 700
2010 EUR per tonne of CO
2
abated
GBR Feed-in tariff, PV
KOR One Million Green Homes programme
GBR Feed-in tariff, wind
KOR Regional Deployment Subsidy programme
KOR General Deployment Subsidy programme
CHN Jiangsu PV feed-in tariffs
KOR Feed-in tariffs
ESP Premiums for renewable energy generation
JPN National PV capital subsidies
JPN Tokyo PV capital subsidies
JPN Solar PV feed-in tariffs
GBR Feed-in tariff, hydroelectricity
GBR Feed-in tariff, anaerobic digestion
JPN Renewable Portfolio Standards
JPN Promoting the local introduction of new energy
JPN Supporting new energy operators (debt guarantee)
GBR Feed-in tariff, micro CHP
GBR Renewable energy certificate scheme
CHN Golden Sun demonstration scheme
GBR Feed-in tariff, existing micro-generators
GER Renewable Energy Sources Act (feed-in tariffs)
GBR Climate Change Levy exemption, renewables
CHN Subsidy for solar PV in buildings
FRA Feed-in tariffs
EST Renewable Energy and Cogeneration Support
AUS Renewable energy certificates (RECs)
CHN Biomass feed-in tariffs
DNK EU ETS Indirect subsidy to renewable energy
DNK Subsidies for renewable energy generation
GER Feed-in tariff for combined heat and power
CHN Wind feed-in tariffs
CHN Value added tax exemption for wind power
GBR EU ETS, coal-to-gas substitution
BRA Feed-in tariff: biomass
BRA Feed-in tariff: wind
GBR Climate Change Levy exemption, CHP
FRA EU ETS Supply-side effect
GER EU ETS, fuel switching
DNK EU ETS coal-to-gas switching
AUS Queensland Gas Scheme (certificate trading)
BRA Feed-in tariff: small hydro
EST Increased electricity prices from several policies
NZL ETS
KOR Korea Certified Emission Reduction Scheme
AUS Greenhouse Gas Reduction Scheme
CHN Large Substitute for Small Programme
775
800
Other subsidies
Taxes
Tax preferences
Trading systems Feed-in tariffs
Other regulations
OECD POLICY PERSPECTIVES PRICING CARBON - 9 8 - OECD POLICY PERSPECTIVES PRICING CARBON
Figure 5. Estimated effective carbon prices in the road
transport sector, by instrument
Source: OECD (2013c), Effective Carbon Prices, OECD Publishing.
doi: http://dx.doi.org/10.1787/9789264196964-en.
Note: Ranges shown for some countries reect different choices about assumptions used in the estimates.
Figure 5 shows the estimated
effective carbon prices in the road
transport sector by instrument type.
With a few exceptions, fuel taxes
dominate the low-cost, bottom side
of the graph. Tax preferences,
Capital subsidies and Other
regulations all entail higher costs to
society per tonne of CO
2
abated and
in many cases, very substantially so.
The lower effective price of abating
carbon achieved by taxes and
emission trading systems compared
with other instrument categories
can be explained by their higher cost
effectiveness.
With the exception of a support
scheme for electrical vehicles in
Estonia, policies promoting biofuels
were the most costly policies
for abating CO
2
in the transport
sector. The calculations probably
underestimate the cost involved,
inter alia because indirect land-use
changes related to the production of
biofuels were not taken into account.
2010 EUR per tonne CO
2
abated
200 0 400 600 800 1 000 1 200
EST Support for electric vehicles
DNK Biofuel mandate Impact on diesel prices
DNK Biofuel mandate Impact on petrol prices
USA Biofuel policies
JPN Biofuel tax preferences Ethanol
KOR Biofuel tax rebate
CHN Tax preferences Biodiesel
AUS Ethanol production grants
NZL Fuel tax exemption Ethanol
GER Tax exemption and fuel mandate Ethanol
GBR Renewable Transport Fuels Obligation Ethanol
GBR Renewable Transport Fuels Obligation Biodiesel
BRA Fuel mandate Biodiesel
BRA Fuel mandate Anhydrous ethanol
GER Tax exemption and fuel mandate Biodiesel
BRA Fuel mandate Hydrous ethanol
FRA Biofuel tax preferences Ethanol
RUS Petrol taxes
GER Tax exemption and fuel mandate Vegetable oil
RUS Diesel taxes
AUS Cleaner Fuels Grants Scheme
NZL Grants scheme Biodiesel
DNK Petrol taxes
GBR Petrol taxes
GER Petrol taxes
ESP Petrol taxes Leaded
ESP Petrol taxes Unleaded, 97 octane or more
FRA Petrol taxes
ESP Petrol taxes Unleaded, other
GBR Diesel taxes
FRA Biofuel tax preferences Biodiesel
KOR Petrol taxes
JPN Petrol taxes
RUS Fuel levy exemption Bioethanol
DNK Diesel taxes
FRA Diesel taxes
EST Petrol taxes
GER Diesel taxes
ESP Diesel taxes
EST Diesel taxes
GBR LPG taxes
NZL Petrol taxes
KOR Diesel taxes
CHL Petrol taxes
JPN Diesel taxes
AUS Petrol taxes
KOR LPG taxes
AUS Diesel taxes
BRA Petrol taxes
RUS Fuel levy exemption Biodiesel
GER LPG taxes
JPN LPG taxes
CHN Fuel taxes
NZL LPG taxes
USA Petrol taxes
FRA LPG taxes
USA LPG taxes
USA Diesel taxes
CHL Diesel taxes
BRA Diesel taxes
ESP Boethanol taxes
NZL Diesel taxes
Taxes Tax preferences Other subsidies Other regulations
1 532
1 613
1 205
OECD POLICY PERSPECTIVES PRICING CARBON - 11 10 - OECD POLICY PERSPECTIVES PRICING CARBON
Figure 6. Estimated effective carbon prices in the different
sectors, by country, 2010 EUR per tonne of CO
2
abated
Source: OECD (2013c), Effective Carbon Prices, OECD Publishing. doi: http://dx.doi.org/10.1787/9789264196964-en.
7. The bars in Figure 6 represent weighted averages of the effective carbon prices found for different instruments applied in a given sector in the different
countries. The amounts of abatement that each instrument is estimated to have contributed are used as weights in the calculation of the averages. The
bars on the far right end of the graph show weighted averages of these averages, calculated across the countries for which effective carbon prices have
een calculated, using emissions in the various sectors in the given countries as weights.
Figure 6 illustrates another important nding of the
study; namely that very large differences in the effective
carbon prices were found across different sectors of the
economy.
7
In all the countries, the effective carbon prices
in the two industrial sectors studied (pulp and paper, and
cement) are a small fraction of those in the other sectors.
This may be linked to concerns about loss of international
competitiveness.
From an economic point of view, reducing carbon
emissions would be more efcient if different sectors
faced similar abatement incentives. In addition, costs
would be reduced if the most cost-effective types of policy
instruments to limit CO
2
emissions were applied. The
recent empirical analysis conducted by OECD suggests
that many of the policy instruments applied to reduce
carbon emissions are cost-ineffective.
It may be debated that some policy instruments, for
example subsidies for house insulation were not intended
primarily to abate carbon emissions, and, that as a
result, judging their performance in terms of costs
per tonne of CO
2
abated is unfair. Clearly the objective
of the policy instrument is an important consideration
in judging its effectiveness. However, all policies which
have an impact on CO
2
emissions were included in the
analysis. For some of the instruments with very high
effective carbon prices (e.g. measures put in place to
promote biofuels and other renewable energy sources),
carbon abatement has indeed been one of the main
arguments applied in public debates in favour of their
introduction.
0
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Electricity generation
Road transport
Pulp & paper
Cement
Households
OECD POLICY PERSPECTIVES PRICING CARBON - 11 10 - OECD POLICY PERSPECTIVES PRICING CARBON
Explicit and implicit carbon pricing policy measures do
not operate in a vacuum. OECD work shows a wide range
of budgetary transfers and tax expenditures in place
that encourage the production and use of fossil fuels.
As a result, governments often have a policy package
that explicitly and implicitly puts a positive price on
carbon on the one hand, while pursuing mechanisms
that subsidise fossil fuel production and use on the other.
Such policy arrangements are not mutually supportive
and can signicantly undermine the effectiveness of
overall climate policies. This argues strongly in favour of
removing fossil fuel subsidies, which would also have the
benet of reducing public spending and increasing tax
revenues. Over time, such reforms contribute to a shift
away from fossil-fuelintensive activities and towards
low-carbon technologies.
IEA estimates that fossil fuel consumption subsidies in
developing and emerging economies amounted to
USD 523 billion in 2011. The OECD (2013b) has identied
over 550 individual support mechanisms that directly
or indirectly encourage the production or consumption
of fossil fuels across OECD countries. Producer support
mechanisms include: i) government intervention in
market mechanisms to alter costs or prices; ii) transfers
of funds to producers; iii) reduction, rebate or removal of
certain taxes; and iv) the government assuming part of
the production risk. Examples of consumption support
include direct transfers, tax relief, and rebates on energy
products. A few country examples of consumption and
production support mechanisms are summarised in
Box 1.
Box 1. Examples of consumption and production support to fossil fuels
Mexico Consumption support in Mexico is provided through a oating excise tax on transport fuels. The tax rate is designed to
respond to changes in international benchmark prices, so that when international prices increase, the tax rates for diesel and gasoline
decrease, and even become negative (i.e. a subsidy) when oil prices are particularly high. For example, when the cost of crude oil
in 2008 averaged USD 100 per barrel, the total value of consumer support amounted to MXN 223 billion (USD 20 billion) or around
1.8% of GDP. In response to the governments strategy to cut greenhouse gases by 50% by 2050 compared to the 2000 baseline,
efforts are underway to better target energy subsidies and bring prices in line with costs. A new cash-transfer scheme was intro-
duced to help poor households cover their energy needs, which is considered less distortionary than the oating excise tax. The
2013 Fiscal Reform proposed by the Mexican President includes the phase-out of gasoline subsidies, and electricity subsidies are
being examined closely through the Energy Reform proposals.
Poland In Poland the coal industry receives the majority of the government support available to the energy sector. Over the period
1999 to 2011, that support exceeded PLN 25 billion (USD 7 billion). During the communist era, the coal industry benetted from
various social benets for coal miners and the regulation of coal prices. During the economic transition in the 1990s, the coal sector
was gradually restructured through a series of capacity-adjustment programmes that brought about the closure of unprotable mines
and reduced the level of employment in the coal sector. These programmes, however, failed to bring about an effective restructuring
of the sector. Since 2011, in line with EU Council regulations, government support has been limited to the closure of mines, the
treatment of health damages sustained by miners, and environmental liabilities related to past mining.
Sweden Producer support measures in Sweden are negligible since it only produces a small amount (about 1.2 million tonnes of coal
equivalent) of peat for energy use; oil, natural-gas and coal are imported. Sweden, however, does provide consumer support through
exemptions and reductions from energy- and CO
2
-taxes for particular users and uses of fossil fuels. In 2011, this amounted to about
SEK 19.1 billion (USD 2.9 billion). It is estimated that 69% of the tax exemptions were linked to the consumption of diesel that is
taxed at a lower rate than gasoline for transport purposes. Plans are underway to review the support mechanisms in order to reduce
government tax expenditures.
Source: OECD (2013d), An OECD-Wide Inventory of Support to Fossil-Fuel Production or Use, OECD Publishing, Paris, available at: www.oecd.org/iea-oecd-ffss.
4
Support to fossil-fuel production or use
12 - OECD POLICY PERSPECTIVES PRICING CARBON OECD POLICY PERSPECTIVES PRICING CARBON - 13
Consumer measures accounted for two thirds of total
support over the 2005-11 period, though there remain
considerable differences at the country level reecting
countries resource endowments, tax rates and other
factors. For example, producer support remains
signicant in many countries that possess abundant
fossil resources while several other OECD countries are
large consumers of fossil fuels and do not produce any
signicant amounts of coal or hydrocarbons (e.g. France,
Italy, Japan and Sweden). Overall, almost half of the
measures listed in the OECD inventory directly target the
end-use of fossil fuels while around a third benet fossil-
fuel extraction, with only a few supporting intermediate
stages of the supply chain (i.e. transportation, rening
and processing).
Despite the arguments in favour of reforming or
eliminating special tax exemptions or outright fossil-fuel
subsidies, it is in practice politically challenging to do
so. This is in part due to the strong lobbying capacity of
large companies benetting from such exceptions, but
also because of the potentially negative impacts reform
can have on vulnerable households.
While the evidence clearly shows that subsidies to fossil
fuel consumption are generally poorly targeted, and thus
the majority of the subsidy tends to accrue to high or
middle income households, potential impacts of reforms
on poor households still need to be addressed.
Experience from countries that have successfully reduced
fossil fuel and electricity subsidies show four common
strategies for success (IEA/OPEC/OECD/World Bank, 2011):
Increase the availability and transparency of support
data to facilitate an informed debate between parties
in favour of and against such policies. Good data can
also support peer review processes and encourage
compliance with future subsidy reforms.
Provide carefully targeted, temporary and
transparent nancial support to vulnerable groups
during the transition period.
Where possible, integrate taxation and fossil fuel
reforms in broader structural reforms.
Demonstrate the governments commitment to
compensate vulnerable groups and to use freed-
up public funds in a benecial way. This can be
achieved through broad communication strategies,
appropriate timing of subsidy removal, and
implementation of compensatory social policies.
The overall value of the support mechanisms identied
in the OECD inventory is estimated between USD 55 and
USD 90 billion a year for the period 2005-11. Petroleum
products (i.e. crude oil and its derivative products)
have generally been the primary beneciaries of these
measures, accounting for about two-thirds of the
total. This reects the importance of oil in the OECDs
total primary energy supply and the relatively higher
taxes that are generally levied on rened oil products.
The 2008 peak in Figure 7 can in part be explained by
transfers provided through Mexicos oating tax, as the
international oil price reached a high of USD 140 per
barrel.
Figure 7. Support to fossil fuels in OECD
countries by year and type of fuel
Source: OECD (2013a), Taxing Energy Use: A Graphical Analysis, OECD Publishing.
doi: http://dx.doi.org/10.1787/9789264183933-en.
0
20 000
40 000
60 000
80 000
100 000
2005 2006 2007 2008 2009 2010 2011
Coal Petroleum Natural Gas
Millions of current USD
12 - OECD POLICY PERSPECTIVES PRICING CARBON OECD POLICY PERSPECTIVES PRICING CARBON - 13
The above sections focussed on the empirical evidence
on carbon pricing in OECD and other countries. Looking
forward, what carbon pricing will be needed in the future
to tackle climate change? The international agreements
on climate change under the United Nations Framework
Convention on Climate Change (UNFCCC) recognised
the need for deep cuts in global GHG emissions in
order to limit the global average temperature increase
to 2 degrees Celsius (2C) above pre-industrial levels.
Research suggests that if the world could stabilise GHG
concentrations at 450 ppm CO
2
eq, the chance of keeping
the global temperature increase under 2C would be
between 40% and 60%.
Using model-based simulations to estimate carbon prices
to achieve certain climate mitigation goals can provide
the relative costs and benets of different policy actions.
The OECD Environmental Outlook to 2050
8
analysed
three hypothetical scenarios that could keep GHG
concentrations at the end of the 21st century below 450
ppm. The 450 Core scenario assumes full exibility in the
timing of emission reductions up to the year 2100, and
the use of mitigation options including biomass energy
with carbon capture and storage (CCS) known as BECCS.
It further assumes that global co-operation is achieved
for tackling climate change, and thus emission reduction
is implemented through a fully harmonised carbon
market that encompasses all regions, sectors and gases.
As all least-cost mitigation options are included, this
scenario acts as the cost-effective reference point against
which to compare the other scenarios. The 450 Accelerated
Action scenario assumes greater mitigation efforts in the
rst half of the century, and less reliance on unproven
emissions reduction technologies (like BECCS) in later
decades. The 450 Delayed Action scenario reects the
current situation in that the level of mitigation is limited
to the high end of the pledges that countries made in the
Copenhagen Accord and Cancn Agreements (with strict
land-use accounting rules and no use of surplus emission
credits from the Kyoto Protocol commitment period).
This leads to less mitigation in the rst half of this
century compared to the 450 Core scenario, and signicant
additional mitigation efforts will have to be made after
2020 to catch up. It also assumes that the various
domestic carbon markets are not linked until 2020.
8. OECD (2012), OECD Environmental Outlook to 2050: The Consequences of Inaction, OECD Publishing. doi: http://dx.doi.org/10.1787/9789264122246-en.
9. Clarke et al. (2009), International climate policy architectures: overview of the EMF 22 international scenarios, Energy Economics 31 (2), S64-S81.
5
Using carbon pricing to achieve international
climate policy objectives
14 - OECD POLICY PERSPECTIVES PRICING CARBON OECD POLICY PERSPECTIVES PRICING CARBON - 15
The OECDs model-based analysis projects rapidly
increasing carbon prices in these scenarios to keep
GHG concentrations below 450 ppm at the end of the
21st century. In the least-cost 450 Core scenario, curbing
global emissions beyond 2020 would require a carbon
price increasing to USD 325 per tonne of CO
2
eq in 2050
(in constant 2010 USD PPP exchange rates). The larger
mitigation efforts in the 450 Accelerated Action scenario
imply lower environmental risks but higher carbon prices
than the 450 Core scenario, at least in the rst decades.
By 2030, carbon prices would be about 50% higher in the
450 Accelerated Action scenario than in the 450 Core. In the
450 Delayed Action scenario, carbon prices vary between
regions until 2020, ranging from zero for regions that do
not have a binding pledge to more than USD 50 per tonne
of CO
2
eq for the combined Japan and Korea region. These
numbers depend on a number of crucial but uncertain
assumptions about the interpretation of the pledges
countries have made.
Without the possibility to trade permits, many low-cost
mitigation options would remain unexploited, driving
up the economic costs in the 450 Delayed Action scenario
relative to the 450 Core scenario. In the longer run (to 2050),
the 450 Delayed Action scenario requires more ambitious
mitigation efforts to bring concentration levels back down
to the 450 ppm target before the end of the century. For
countries with an initially low carbon price, this implies a
very rapid increase from 2020 onwards, whereas for other
regions, the transition is a bit smoother. Nonetheless, by
2050, the global carbon price is higher in this scenario
compared to the other two scenarios.
Clarke et al. (2009)
9
compare carbon prices across a range
of different models for harmonised scenarios, including
450 ppm stabilisation scenarios. The report shows a
range of global carbon prices in 2020 of USD 15263 (2005
USD). Also noteworthy is that many models were not
able to simulate a 450 ppm stabilisation scenario without
temporary overshooting of the target, or with incomplete
participation. Clarke et al. noted that the exclusion of
models that were not successful in producing the more
challenging climate-action cases inherently biases the
reported carbon prices and economic costs downward.
However, more recent model comparison exercises
(Kriegler et al., 2013) suggest that most model simulations
by different modelling groups are able to project 450 ppm
stabilisation scenarios.
10
One way to keep mitigation costs as low as possible
is through the linking of carbon markets. The OECD
report Addressing the competitiveness and carbon
leakage impacts arising from multiple carbon markets:
a modelling assessment illustrates how direct linking
of carbon markets can ensure that all low-cost options
are exploited.
11
By harmonising carbon prices, relatively
expensive reduction options in certain regions are
replaced by relatively low-cost options in other regions.
This result can also be reached through indirect linking,
where several emission trading schemes allow credits
from a common pool of offsets. A second way to keep
carbon prices as low as possible is to include more sectors
and gases in the mitigation policy. Table 1 illustrates how
carbon prices fall rapidly once carbon markets are linked
or more sectors and gases are included.
Table 1. Carbon prices in acting Annex I and OECD countries in multiple carbon markets scenarios
2020, USD 2007 per tonne of CO
2
eq
Region Partial Offsets Link Offsets &
Link
Incl. Agri. Incl. Fin.
Dem.
Incl. Non-
CO
2
gases
All
sources
Australia & New
Zealand 75 44 40 24 74 60 35 18
Canada 117 76 40 24 112 79 57 36
EU & EFTA 86 55 40 24 83 52 28 17
Japan & Korea 259 159 40 24 257 187 178 124
Other European
Annex I countries 21 14 40 24 21 11 3 2
Russia 0 0 40 24 0 0 0 0
USA 64 41 40 24 59 47 26 19
Average, all acting 114 72 40 24 111 81 60 41
Source: Lanzi, E., et al. (2013), "Addressing Competitiveness and Carbon Leakage Impacts Arising from Multiple Carbon Markets: A Modelling Assessment",
OECD Environment Working Papers, No. 58, OECD Publishing. doi: http://dx.doi.org/10.1787/5k40ggjj7z8v-en.
Note: World carbon prices for each of the scenarios are calculated as an average over acting countries, and weighted by emission reductions. As these carbon
prices are based on different base years for exchange rates, they cannot directly be compared to the carbon prices reported in the Environmental Outlook to 2050.
10. Kriegler, Weyant, Blanford et al. (2013), The role of
technology for achieving climate policy objectives: overview of
the EMF 27 study on technology and climate policy strategies,
Climatic Change, forthcoming.
14 - OECD POLICY PERSPECTIVES PRICING CARBON OECD POLICY PERSPECTIVES PRICING CARBON - 15
11. Lanzi, E., et al. (2013), Addressing Competitiveness and Carbon Leakage Impacts
Arising from Multiple Carbon Markets: A Modelling Assessment, OECD Environment Working
Papers, No. 58, OECD Publishing. doi: http://dx.doi.org/10.1787/5k40ggjj7z8v-en.
The reference point for the analysis behind
Table 1 is a stylised hypothetical Partial policy scenario
where only a smaller group of countries act, and with
some types of emissions excluded. This scenario is
based on the pledges made by Annex I countries in the
Copenhagen Accord; international permit trading is not
allowed. All the scenarios in Table 1 are based on the
Partial policy scenario, but either add linking options or
include certain sectors or gases. The Offsets scenario
includes indirect linking of carbon markets through the
use of a common offset scheme. By assumption, only
sectors in non-acting countries that are covered by ETS
in acting countries are considered as eligible sources
for offsets, with a cap on equal to 20% of the emissions
reduction in the Partial scenario. The second response
policy considered is a direct linking (Link scenario) among
the domestic ETSs of acting countries, where regulated
entities can trade emission allowances with another. The
allocation of allowances across participating countries
corresponds to the domestic targets dened in the Partial
scenario. These policy responses are implemented in the
model in a stylised way, since the model cannot consider
all frictions that are present in the markets, etc.
The Incl. Agri. scenario includes emissions from the
agricultural sectors; similarly, nal demand emissions
(emission related to households and government) are
included in the scenario Incl. Fin. Dem. Finally, the most
inclusive scenario (All sources) includes all emission
sources and sectors in the climate policy. A crucial
assumption in all these scenarios is that the same
economy-wide emission reduction needs to be achieved,
i.e. any low-cost mitigation efforts by sectors or gases
that are excluded in the Partial scenario need to be
compensated by increased efforts in reducing the
emission sources that are covered by the scheme.
Sensitivity analysis on the availability of different
technology options for the Environmental Outlooks
450 Accelerated Action scenario shows that, to keep the
cost of mitigation as well as carbon prices low, multiple
technology options are needed in transformation
pathways towards a carbon-free energy system (using
nuclear energy and carbon capture and storage (CCS),
and speeding-up technology developments for energy
efciency and renewables). Limiting any of these
technology options would lead to higher carbon prices, as
illustrated in Figure 8 using the ENV-Linkages model. The
450 scenario (all technologies) refers to the 450 Accelerated
Action scenario, where all technologies are available
for keeping mitigation costs as low as possible (within
boundaries set by capacity constraints). Compared to the
default assumptions in the 450 Accelerated Action scenario,
the Low efciency and renewables scenario assumes
less energy-efciency improvement in energy use in
production, and slower increases in renewable energy
production. The Nuclear phase-out scenario assumes that
after 2020, no new nuclear unit will be built, so that the
world total nuclear capacity by 2050 will be reduced
because of the natural retirement of existing plants.
Finally, the No CCS scenario assumes no greater use
of CCS technologies beyond the levels projected in the
Baseline. Kriegler et al. (2013) present similar scenario
analysis for a much wider group of models.
Table 1. Carbon prices in acting Annex I and OECD countries in multiple carbon markets scenarios
2020, USD 2007 per tonne of CO
2
eq
Region Partial Offsets Link Offsets &
Link
Incl. Agri. Incl. Fin.
Dem.
Incl. Non-
CO
2
gases
All
sources
Australia & New
Zealand 75 44 40 24 74 60 35 18
Canada 117 76 40 24 112 79 57 36
EU & EFTA 86 55 40 24 83 52 28 17
Japan & Korea 259 159 40 24 257 187 178 124
Other European
Annex I countries 21 14 40 24 21 11 3 2
Russia 0 0 40 24 0 0 0 0
USA 64 41 40 24 59 47 26 19
Average, all acting 114 72 40 24 111 81 60 41
Source: Lanzi, E., et al. (2013), "Addressing Competitiveness and Carbon Leakage Impacts Arising from Multiple Carbon Markets: A Modelling Assessment",
OECD Environment Working Papers, No. 58, OECD Publishing. doi: http://dx.doi.org/10.1787/5k40ggjj7z8v-en.
Note: World carbon prices for each of the scenarios are calculated as an average over acting countries, and weighted by emission reductions. As these carbon
prices are based on different base years for exchange rates, they cannot directly be compared to the carbon prices reported in the Environmental Outlook to 2050.
Figure 8. Economic impacts of technology choices for the 450 Accelerated Action scenario
Source: OECD (2012), OECD Environmental Outlook to 2050: The Consequences of Inaction, OECD Publishing. doi: http://dx.doi.org/10.1787/9789264122246-en.
Notes: OECD-A1 = the group of OECD countries that are also part of Annex I of the Kyoto Protocol.
RestA1 = rest of Annex I countries not included in the OECD group
BIICS = Brazil, India, Indonesia, China and South Africa
ROW= rest of the world
0
-5
-10
-15
-20
-25
-30
600
500
400
300
200
100
0
1 600
1 550
1 500
1 450
1 400
1 350
1 300
9 200
9 100
9 000
8 900
8 800
8 700
8 600
10 800
10 600
10 400
10 200
10 000
9 800
9 600
9 400
17 500
17 000
16 500
16 000
15 500
15 000
14 500
100
80
60
40
20
0
100
80
60
40
20
0
100
80
60
40
20
0
100
80
60
40
20
0
Rest of the world
OECD AI
World
Russia and rest of AI
% impact on real income in 2050 Carbon price in 2050 (USD/tCO
2
e)
Panel A. Economic impacts of the technology choices in 2050
Electricity generation (right axis) Renewables
Foss w/o CCS Foss w/CCS Nuclear
% share in the power mix Electricity generation (TWh)
Panel B. Changes in the energy system in 2050
OECD AI Russia and rest of AI
% share in the power mix Electricity generation (TWh)
% share in the power mix Electricity generation (TWh)
% share in the power mix Electricity generation (TWh)
Rest of BRIICS Rest of the world
450 scenario
(all technologies)
Low efficiency
and renewables
Nuclear phase-out No CCS
450 scenario
(all
technologies)
Low
efficiency
and
renewables
Nuclear
phase-out
No CCS 450 scenario
(all
technologies)
Low
efficiency
and
renewables
Nuclear
phase-out
No CCS
450 scenario
(all
technologies)
Low
efficiency
and
renewables
Nuclear
phase-out
No CCS 450 scenario
(all
technologies)
Low
efficiency
and
renewables
Nuclear
phase-out
No CCS
Carbon price (right axis)
Rest of BRIICS
16 - OECD POLICY PERSPECTIVES PRICING CARBON OECD POLICY PERSPECTIVES PRICING CARBON - 17
Ambitious mitigation actions and non-negligible
carbon prices are needed starting now to limit the
global average temperature increase to 2 degrees
Celsius (2C) above pre-industrial levels at least cost.
Given the size of the problem, we cannot afford
inefcient policies: least-cost solutions and market-
based instruments are needed to keep carbon prices
as low as possible.
Delaying actions until after 2020 would mean steeper
emissions cuts thereafter to catch up and higher
carbon prices.
Carbon prices fall rapidly once carbon markets in
different jurisdictions are linked or more sectors and
gases are included.
Carbon prices needed to meet the same goal would
need to be higher if energy technology options
become constrained.
It should be stressed, however, that in such modelling
exercises, the projected carbon prices are relatively
sensitive to model assumptions regarding baseline
emission developments; developments in the energy
system, including on improvements in energy efciency;
and the speed with which households and rms can alter
their behaviour in light of the higher carbon pricing. This
sensitivity is not least due to the fact that carbon prices
reect the situation at the margin (i.e. the marginal
cost of emission reductions), whereas other indicators
of climate costs, such as real income losses, reect an
aggregated cost of emission reductions. Figure 8
illustrates this: cost of mitigation in terms of reduction
in global real income is particularly detrimental; for
slow developments of energy efciency and renewable
power technologies, whereas a lack of availability of
CCS increases carbon prices most. In sum, model-based
simulations of different mitigation pathways in the
coming decades indicate that:
Relevant OECD References
OECD (2012), OECD Environmental Outlook to 2050: The Consequences of Inaction, OECD
Publishing. doi: http://dx.doi.org/10.1787/9789264122246-en.
OECD (2013a), Taxing Energy Use: A Graphical Analysis, OECD Publishing.
doi: http://dx.doi.org/10.1787/9789264183933-en.
OECD (2013b), Climate and Carbon: Aligning Prices and Policies,
OECD Environment Policy Papers, No. 1, OECD Publishing.
doi: http://dx.doi.org/10.1787/5k3z11hjg6r7-en.
OECD (2013c), Effective Carbon Prices, OECD Publishing.
doi: http://dx.doi.org/10.1787/9789264196964-en.
OECD (2013d), An OECD-Wide Inventory of Support to Fossil-Fuel Production or Use, OECD
Publishing, Paris, available at: www.oecd.org/iea-oecd-ffss.
OECD (2013e), Inventory of Estimated Budgetary Support and Tax Expenditures for Fossil
Fuels 2013, OECD Publishing. doi: http://dx.doi.org/10.1787/9789264187610-en.
Lanzi, E., et al. (2013), Addressing Competitiveness and Carbon Leakage Impacts Arising
from Multiple Carbon Markets: A Modelling Assessment, OECD Environment Working
Papers, No. 58, OECD Publishing. doi: http://dx.doi.org/10.1787/5k40ggjj7z8v-en.
OECD Contact
BRAATHEN Nils Axel, ENV/EPI, Nils-Axel.BRAATHEN@oecd.org
For more information:
www.oecd.org/env/tools-evaluation/carbon-prices.htm
16 - OECD POLICY PERSPECTIVES PRICING CARBON OECD POLICY PERSPECTIVES PRICING CARBON - 17
For more information:
www.oecd.org/env/tools-evaluation/carbon-prices.htm