This chapter provides the context and motivation for the analysis of effective carbon rates, which are the total price that applies to CO2 emissions from energy use as a result of market-based instruments (carbon taxes, specific taxes on energy use and price signals from emissions trading systems). The chapter also gives a short overview of the main results for 41 countries which together account for 80% of global carbon emissions from energy use.

This chapter discusses why carbon prices are an effective and low-cost policy tool to reduce emissions. It starts by discussing the environmental effectiveness of carbon prices. This is followed by a brief consideration of why carbon prices allow countries to reach their emissions targets in the cheapest possible way, while at the same time implementing the polluter pays principle and boosting economic benefits. The chapter also discusses climate cost of carbon emissions, and considers carbon pricing in a broader economic context.

This chapter explains the concept of effective carbon rates, and provides an overview of the methodology and data sources used for their estimation. The treatment of emissions from the combustion of biomass, tax expenditures, fossil fuel support and value added taxes is discussed.

This chapter presents the results of the analysis of effective carbon rates. It first discusses the patterns of carbon emissions in the 41 countries included in the analysis. This is followed by an overview of the level of effective carbon rates in the road and non-road sectors, a presentation of the effective carbon rates by country and the composition of effective carbon rates by price instrument, as well as an analysis of effective carbon rates in the five non-road sectors (offroad, industry, agriculture and fisheries, residential and commercial, and electricity). The chapter also discusses the treatment of biomass in the calculations of effective carbon rates. This chapter introduces the “carbon pricing gap”, which measures the extent to which emissions are priced at less than EUR 30 per tonne of CO2, and uses this indicator to consider a counterfactual scenario of carbon pricing. The chapter closes by correlating effective carbon rates with countries’ broader macroeconomic characteristics.

This chapter summarises the results of the analysis of effective carbon rates and draws some conclusions on the distribution of carbon prices across the economy and by sector, and on the composition of effective carbon rates.