This report was prepared by the Tax Policy and Statistics division of the OECD’s Centre for Tax Policy and Administration. It is unique in its comprehensive take on effective carbon pricing, integrating price signals that result from fuel excise taxes, carbon taxes and emissions trading systems into effective carbon rates.

The adverse impacts of climate change on human societies and nature are increasingly well-known and highlight the need to accelerate the transition to net-zero greenhouse gas (GHG) emissions, by targeting carbon dioxide (CO2) and other GHGs such as methane, nitrous oxide and fluorinated gases. Cutting and eventually phasing out GHG emissions would limit the adverse impacts from climate change on economies while improving other environmental outcomes such as air and water quality. Delaying the transition towards net zero GHG emissions will maintain dependency on carbon-intensive capital and engender higher future costs. Successfully transitioning to net-zero GHG emissions requires effective mitigation policy packages, which include carbon pricing, a cost-effective policy instrument that also raises revenue that can be deployed to support the transition.

Attaining the 1.5°C or 2°C goals set out by the Paris Agreement requires immediate and global action, as recently stressed by the 2023 Intergovernmental Panel on Climate Change’s Sixth Assessment Report (AR6, IPCC (2023[1])). By absorbing long-wave infrared radiation reflected by the earth's surface, GHG emissions are directly responsible for climate change through global warming. While this is already causing weather and climate extremes worldwide, increased global warming could ultimately result in crossing tipping points beyond which severe and disruptive changes to human society would become irreversible. To face these threats, the objective set out by the Paris Agreement is to keep the increase in the global average temperature to well below 2°C above pre-industrial levels and to preferably limit the increase to 1.5°C above pre-industrial levels. Even if these goals were to be overshot, every incremental degree would escalate risks “and projected adverse impacts and related losses and damages” (IPCC, 2023[1]).

In 2021, 42% of the little over 40 billion tonnes of GHG emissions were priced in the 72 countries considered in this report (Figure 2.1). The distribution is skewed, with about 16% of GHG emissions priced over the EUR 30 benchmark. About 7% of emissions are priced at EUR 60 or more and almost 4% are priced at EUR 120 or more.

Explicit carbon pricing instruments (i.e. emissions trading and carbon taxes) are increasingly being used to price emissions, and in recent years, emissions trading systems (ETSs) have gained importance both in terms of emissions coverage and of carbon price levels. Among the 72 countries considered in this report, ETSs have gone from covering about 13% of carbon dioxide (CO2) emissions from energy use in 2018 to 27% in 2021. This is in large part due to the introduction of new ETSs in Canada, China and Germany within that time span. Since 2021, four new ETSs have been introduced, in Austria and Oregon in 2022 and in Mexico and Washington in 2023 (see section 3.3). The Pilot ETS in Mexico is scheduled to enter its operational phase in 2023. Several other countries or regions across the world are developing new ones (ICAP, 2023[1]). New carbon taxes were introduced in Canada, Luxembourg, the Netherlands and South Africa between 2018 and 2021, but they hardly increased emissions coverage. Permit prices have also risen to levels above those of carbon tax rates. Indeed, permit prices rose in almost all ETSs between 2018 and 2021 and on average they almost increased by half over the period. While the average permit price was almost the same as the average carbon tax rate in 2018, the gap between ETS prices and carbon taxes has widened as carbon tax rates did not follow the same evolution over the following years (see Table 3.1).

The rise in energy prices in the wake of the Covid-19 pandemic recovery in 2021, exacerbated by Russia’s war of aggression against Ukraine in 2022 Long term trends such as underinvestment in natural gas and clean energy supply are also at play (see IEA (2021[13])). has prompted governments worldwide to provide relief to households and businesses. However, the support measures have raised several concerns, including issues of fairness, fiscal costs, effectiveness in staving off inflation and alignment with climate mitigation objectives. Concerns regarding fairness have arisen as higher income households were more likely to benefit from these measures (see, e.g., Ari et al. (2022[1])). Furthermore, the incidence of some support measures has also been cause for concern, since tax reductions generally benefit producers more than consumers when fuel supply is inelastic (see, e.g., OECD (2022[2]), Van Dender and Raj (2022[3])). Another important concern relates to the impact of support measures on price signals. Given the increasing urgency of climate change mitigation, lowering energy prices and in turn carbon prices signals undermines incentives to fulfil net-zero objectives.

This Annex presents Effective Carbon Rates (ECRs) results from Chapter 2 , as well as ETS country and sectoral coverage (see Chapter 3) when accounting for CO2 emissions from biofuel combustion. These emissions represent a non-negligeable share of CO2 emissions from energy use (about 13.5%, see Figure A A.4, Panel A). CO2 emissions from biofuel combustion face low price coverage and levels. Accordingly, when accounting for CO2 emissions from biofuel combustion, 38% of total GHG emissions are priced (Figure A A.1). Coverage decreases in all six sectors responsible for CO2 emissions from energy use, and mostly so in the buildings sector, where the share of emissions facing no carbon price goes from 64% when excluding these emissions, to 81% when including them (Figure A A.2). When accounting for emissions from biofuels, the shares of buildings in total GHG emissions goes up from 6.3% to 10.7%. ECRs in this sector are much lower, as fuel excise taxes often exempt or present lower rates on biofuels (biofuels face the second lowest average ECR after coal, see Figure A A.4, Panel A), especially when used for residential and commercial purposes. ECRs in the industry sector are lower as well, since prices in that sector most stem from emissions trading systems (ETS), which generally do not apply to CO2 emissions from biofuel combustion (except for the German nEHS, which covers biofuels which do not follow certain sustainability criteria) (Figure A A.3). This also explains why ETS coverage is lower in all countries and sectors when accounting for CO2 emissions from biofuel combustion (Figure A A.5, Figure A A.6). This is especially the case for the buildings and industry sector, which is where biofuels are most used (Figure A A.4, Panel B).