Taxes on motor fuels that emit high levels of carbon dioxide and other substances when burned are too low in many countries to encourage a shift to less-polluting alternatives, a new study for the Organization for Economic Cooperation and Development concludes. It found that 70% of energy-related CO2 emissions from advanced and emerging economies are entirely untaxed, offering little incentive for those countries to move to cleaner energy.
“We know we need to burn less fossil fuel, but when taxes on the most polluting fuels are zero or close to zero, there is little incentive to change,” said Angel Gurria, secretary-general of the Paris-based organization of largely energy consuming countries.
“Energy taxes are not the sole solution, but we can’t curb climate change without them. They should be applied fairly and used to improve well-being and ease the energy transition for vulnerable groups,” Gurria said.
The report, Taxing Energy Use 2019, found that in 44 countries accounting for more than 80% of the world’s energy emissions, taxes on polluting energy sources are set nowhere near the levels many experts say are necessary.
Motor fuel taxes are relatively high yet rarely fully reflect the cost of environmental harm, especially with some road transport sectors offered preferential rates, it said.
Taxes on coal—which is behind almost half of CO2 emissions from energy sources—are zero or close to zero in most countries, the study said. Taxes are often higher on natural gas, which is cleaner. For international flights and shipping, fuel taxes are zero, meaning long-haul frequent flyers and cargo shipping firms are not paying their fair share, it noted.
Only four countries—Denmark, the Netherlands, Norway, and Switzerland—tax nonroad energy above €30/tonne of CO2, which the study considered a low-end estimate of the carbon emissions’ global climate costs. Several countries have even lowered energy taxes in recent years, it pointed out.
The report looked at three types of energy levies—excise taxes on fuels, carbon taxes, and taxes on electricity use—in areas such as power and heat generation, industrial manufacturing, and transportation.
Mitigating impacts
The report said that governments should ensure any tax hikes resulting from reforms do not hurt vulnerable households, businesses, or workers. Extra revenues can be used for social purposes such as lowering income taxes, increasing spending on infrastructure or health, or funding direct transfers to households, it said.
The report said that a new strand of OECD work shows how factoring in potential trade-offs between emissions reduction goals and broader societal objectives such as reducing income taxes can increase the incentives for swift actions to cut emissions.