Taxing polluting sources of energy can be used as an effective way to reduce emissions that cause damage to the environment, however, 70% of energy-related CO2 emissions from advanced and emerging economies are entirely untaxed.
This is according to OECD’s Taxing Energy Use 2019 report, which shows that for 44 countries, which account for over 80% of 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.
Taxes on road fuel are relatively high yet rarely fully reflect the cost of environmental harm, especially with some road transport sectors offered preferential rates. Taxes on coal – which is behind almost half of CO2 emissions from energy – are zero or close to zero in most countries.
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.
OECD secretary-general Angel Gurría said: “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. 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.”
The report said adjusting taxes, along with state subsidies and investment, is vital to encourage a shift to low-carbon energy, transport, industry and agriculture. It noted that governments should ensure any tax rises resulting from tax reforms do not hurt vulnerable households, firms or workers. Extra tax revenues can be used for social purposes such as lowering income taxes, increasing spending on infrastructure or health, or funding direct transfers to households.