Taxes on polluting fuels ‘too low to encourage shift to low-carbon alternatives’: OECD

Some 70% of energy-related carbon dioxide (CO2) emissions from advanced and emerging economies are entirely untaxed, offering little incentive to move to cleaner energy, according to a new report from the Organisation for Economic Co-operation and Development (OECD).

The report: Taxing Energy Use 2019 highlights how in 44 G20 and OECD countries – accounting for over 80% of global energy emissions  – taxes on polluting sources of energy are not set anywhere near the levels needed to reduce the risks and impacts of climate change and air pollution. 

The study found that road transport is the only area where taxes are relatively high, yet even then the taxes do not fully reflect the cost of environmental harm, especially with some road transport sectors offered preferential rates.

Outside of road transport, only four countries – Denmark, the Netherlands, Norway and Switzerland – tax non-road energy above the report’s low-end carbon benchmark price of €30 per tonne of CO2.

According to the report, 97% of energy-related CO2 emissions are taxed far below levels that would reflect damage to the environment. This includes taxes on coal, which are zero or close to zero in most countries studied, despite coal being responsible for almost half of CO2 emissions from energy.

Conversely, 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 do not currently pay their fair share.  

‘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 OECD Secretary-General Angel Gurría. ‘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.’

According to the OECD, adjusting taxes, along with state subsidies and investment, is vital to encourage a shift to low-carbon energy, transport, industry and agriculture. The report says improving tax policy so it gives a fair chance to low-carbon technologies would help shift investment to greener options.

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