The second report in the OECD series on greenhouse gas (GHG) emissions pricing and energy taxation, published in November 2023, “Effective Carbon Rates 2023”, analyses the situation in 72 countries. The aim of this report is to assess emissions trading systems, fuel excise taxes, and carbon taxes in 2021, and track their evolution during 2022 - 2023, taking into account the energy crisis and high inflation rates.
The aim of the analysis is based on the objectives set out in the Paris Agreement, which seeks to keep the global average temperature rise well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5°C.
The climate impact, along with the significant revenues generated from carbon taxation and emissions trading, underscores the critical importance of this issue. From a global perspective, during the period 2020-2021, these revenues reached $56.8 billion, representing approximately 0.07% of the global GDP.
Liviu Gheorghiu Partner, Tax
Agriculture & fisheries, buildings, electricity, industry, and transport: sectors responsible for carbon dioxide emissions from energy consumption
The greenhouse gas (GHG) emissions include carbon dioxide, methane, nitrous oxide, and fluorinated gases.
Out of these, six are responsible for carbon dioxide emissions from energy consumption, namely: agriculture & fisheries, buildings, electricity, industry, and off-road and road transport. The seventh sector includes methane emissions, nitrous oxide, fluorinated gases, and carbon dioxide emissions from industrial use. To achieve the net-zero ESG transition goal, specific policies such as emission pricing, which can generate revenues to support this transition, are necessary.
During 2021, more than half of the greenhouse gas emissions in the analysed countries were not subject to pricing. The report also highlights asymmetries concerning the level of prices, the scope, and pricing mechanisms such as fuel excise taxes, carbon taxes, and emissions trading systems. The data illustrates that fuel excise taxes cover a larger share of emissions and are applied at higher prices compared to carbon taxes and emissions trading systems.
Emissions trading systemsrepresented the primary tool for reducing carbon emissions in 2021
Emissions trading systems are often used to manage emissions from the electricity and industry sectors and represent the primary tool for reducing carbon emissions in 2021. According to the analysed data from the 72 countries included in the report, the scope of these systems saw a significant increase of over 100% in 2021 compared to the fiscal year 2018, as some countries introduced new systems and existing ones expanded.
Liviu added: „The effective tax rates on carbon emissions measure the level of carbon pricing for greenhouse gas emissions. According to the report, during the period 2021–2023, in the context of the energy crisis and the war in Ukraine, which led to various policy changes, the reduction in fuel excise taxes, for example, resulted in similar levels of effective tax rates on carbon emissions in the electricity, industry, and transport sectors. In most of the analysed countries, the effective tax rates on carbon emissions decreased in all sectors during the period under review.”
Over 80% of emission certificates are allocated for free in the electricity and industry sectors
The prices of carbon emission certificates can be subject to increased volatility, given their tradable nature, which can negatively impact investments in decarbonisation technologies. During the analysed period, the average value of certificate prices increased. Additionally, the free allocation of certificates has a significant impact on these investments and on the revenues intended to support the transition to net-zero ESG emissions. For example, in the electricity and industry sectors, over 80% of emission certificates are allocated for free. Conversely, initiatives like the Regional Greenhouse Gas and Massachusetts, targeting the electricity sector, provide a minimum or even zero free certificates.
Alina Ghiță Manager, Tax
Although methane emissions, nitrous oxide emissions, fluorinated gases, and carbon dioxide emissions from industrial use register significant volumes in certain countries, these are only scarcely covered by pricing measures. Addressing these types of emissions poses multiple challenges, including measuring and reporting them, updating policies, and, consequently, pricing instruments to reflect the impact of these emissions.
While greenhouse gas pricing mechanisms are being adopted in an increasing number of jurisdictions, the Report suggests expanding the scope of these pricing instruments to better address the consequences of greenhouse gas emissions. However, going forward, the issue of untaxed emission categories such as methane and fluorinated gases also needs to be addressed. In the long term, it is crucial to support investments in clean technologies to combat climate change and mitigate shocks in the energy market.
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