April 16, 2021
IMF and OECD release joint report on carbon pricing
On 7 April 2021, the International Monetary Fund (the IMF) and the Organisation for Economic Co-operation and Development (OECD) released a joint report, Tax Policy and Climate Change (the Report), discussing the current and potential use of carbon pricing and actions that jurisdictions can take to advance global coordination of a climate solution. The Report was drafted to inform discussions at the second meeting of the G20 Finance Ministers and Central Bank Governors under the Italian Presidency on the role of greenhouse gas emissions pricing in climate change mitigation policy packages.
The Report was jointly published under the responsibility of the Managing Director of the IMF and the Secretary-General of the OECD. The Report indicates that opinions expressed and arguments employed in it do not necessarily reflect the official views of the IMF or the OECD or of the governments of their respective member countries. It contains the following six sections:
It also includes three appendices, detailing global and G20 commitments, the carbon pricing score and BCA design choices and alternatives.
The Report, addressed to the G20 Finance Ministers and Central Bank Governors, opens with a discussion of the need for climate pricing to meet the goals of the 2015 Paris Agreement and states that current emissions commitments and policies are not sufficient to meet those goals.
The Report describes greenhouse gas pricing, including carbon pricing, “as an indispensable tool in any cost-effective climate change mitigation strategy,” and details the strengths of carbon pricing. Such strengths are described as including the appeal to both firms and households to both reduce greenhouse gas emissions and increase green energy use, encouragement of private investment in clean technologies, more flexibility than regulatory approaches, long-range effectiveness and increased government revenue.
Noting that G20 members account for more than 80% of global carbon emissions, the Report asserts that G20 Finance Ministers are well positioned to advance climate pricing as well as other appropriate environmental policies. The Report suggests multiple actions that the Ministers could take to do so, including:
The Report’s stocktake of the current carbon pricing landscape states that carbon pricing signals, including carbon taxes, fuel excise taxes. De facto carbon taxes and prices resulting from emissions trading systems are too low and poorly aligned with fuel’s carbon content. Across all countries, effective carbon rates vary significantly from under €5/tCO2 for electricity and industry to €90/tCO2 for road transport, with the average carbon rate for all sectors at less than €20/tCO2. However, according to the Report, carbon pricing is gaining momentum across the European Union, with South Korea, China and New Zealand also having put in place comprehensive pricing schemes. The Report highlights the positive impacts of carbon pricing, including significant revenue gains and domestic environmental and health benefits.
The Report lists six key elements of a comprehensive mitigation strategy, including regulations or feebates, public investment in technology, equitable use of carbon pricing revenues, protective measures for vulnerable groups, industrial competitiveness assistance and pricing of other emissions. The Report identifies widely divergent national carbon pricing ambitions as a driver for countries considering unilateral measures. BCAs is one of such policy options considered for preventing carbon leakage and protecting loss of competitiveness of domestic firms. The Report also discusses potential challenges and items to consider in designing them effectively.
Efforts to address the current gap between carbon prices and national policy ambitions could lead to more stringent carbon pricing measures. This Report is the latest in a growing number of climate, energy, and carbon policy papers focused on the need for governments and businesses to work together in reducing greenhouse gas emissions and the complexity of the policy measures. Carbon pricing, including carbon tax, is widely touted by economists and policymakers as an efficient tool in reducing emissions while raising revenue to drive innovation and offset regressivity.
The implementation of carbon pricing measures has economy-wide implications, impacting all industries and consumers. As green policy measures continue to proliferate, it is important for businesses to model the impact of existing carbon regimes, likely proposals, and the interplay between unilateral measures in the form of BCAs and to factor the impacts into their sustainability transformation plans.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Belastingadviseurs LLP, Rotterdam
Ernst & Young Belastingadviseurs LLP, Amsterdam
Ernst & Young LLP (United Kingdom), London
Ernst & Young LLP (United States), Washington, DC