14 February 2018: In its report titled, ‘Taxing Energy Use 2018,’ the Organisation for Economic Co-operation and Development (OECD) finds that current energy taxes are not sufficient to effectively address climate change.

The report analyzes the coverage and magnitude of 2015 energy use taxes, and assesses changed between 2012 and 2015. Data is based on the OECD’s ‘Taxing Energy Use’ database, which compares taxes on energy use in 42 OECD and G20 economies, representing 80% of global energy use and associated CO2 emissions.

In 2012-2015, 97% of emissions outside road and transport were either not taxed or taxed below the minimum estimate of climate cost.

The publication finds that, outside the road transport sector, 81% of emissions were untaxed, noting there was almost no change in emissions tax rates between 2012-2015. Overall, tax rates fell short of the €30 low-end estimate of climate cost per tCO2 for 97% of emissions. Though not addressed in this publication, the report notes that emissions trading systems had minimal impact on this broader trend.

Emissions from coal-fired energy generation, which were responsible for nearly half of the carbon emissions associated with energy use in the 42 countries studied, remained untaxed in almost every country. In contrast, taxes on oil products were relatively high, exceeding €100 per tCO2. The share of road sector fuel emissions taxed above climate costs increased from 46%-50% between 2012-2015, driven by fuel tax reforms in China, India and Mexico. Road transport fuel tax rates remained nonetheless below levels required to cover even non-climate external costs, according to the study. Additionally, in all but two countries, taxes on diesel for road use were lower than taxes on gasoline, despite diesel’s known effects on air quality.

The publication also highlights that transport sector fuel taxes generally consisted of excise taxes, rather than carbon taxes. Though carbon tax coverage increased from 1%-6% between 2012-2015, carbon taxes reflected climate costs for only 0.3% of all emissions. The report further finds that in countries that taxed energy use at a higher rate, carbon intensity of GDP was lower. Additionally, energy use tax rates had a tendency to be greater in higher per capita GDP countries, though this was not the case for all wealthier economies.

The report concludes that, aside from increases in transport fuel taxes that occurred in some low to middle income economies, no structural change to taxation patterns on energy use materialized between 2012-2015. It recommends that, if public compensation for higher energy costs is deemed necessary, targeted transfers should be provided rather than lower tax rates or exemptions to maintain the environmental integrity of market-based instruments. [Taxing Energy Use 2018 – OECD Report] [OECD Press Release]