The report, Taxing Energy Use 2018 is based on OECD’s Taxing Energy Use database, a unique dataset to compare coverage and magnitude of specific taxes on energy use across 42 OECD and G20 economies (representing approximately 80% of global energy use), six sectors and five main fuel types. The report assesses the magnitude and coverage of taxes on energy use in 2015, and considers change between 2012 and 2015.

The main findings are:

• Energy taxes are strongly heterogeneous, so are poorly described by country averages;

• almost all taxes are too low from an environmental point of view;

• taxes on coal often equal zero or nearly so;

• taxes in road transport are much higher than taxes in other sectors, but still are too low to cover external costs in nearly all cases;

• taxes tend to be higher where GDP per capita is higher but there are notable exceptions to this pattern; and

• fuel taxes increased between 2012 and 2015 in some large countries, and first steps towards removing lower tax rates on diesel compared to gasoline are taken, but apart from that there are no signs that the polluter pays principle determines the energy tax landscape more strongly in 2015 than in 2012.

Emissions trading systems, which are not discussed in this publication, but are included in the OECD’s Effective Carbon Rates, are having little impact on this broad picture.

Comparing taxes between 2012 and 2015 yields a disconcerting result. Efforts have been made, or are underway, in several jurisdictions to apply the ‘polluter-pays’ principle, but on the whole progress towards the more effective use of taxes to cut harmful emissions is slow and piecemeal. Governments should do more and better.

—OECD Secretary-General Angel Gurría

Meaningful tax rate increases have largely been limited to the road sector. In road transport, 97% of emissions are taxed. The report found that the share of emissions taxed above climate costs increased from 46% in 2012 to 50% in 2015, and rates exceed €50 per tCO₂ for 47% of emissions in 2015, compared to 37% in 2012. However, other negative side-effects suggest that taxes are at best approaching the right level in a few countries, but remain well below them in most. These changes mainly result from fuel tax reforms in China, India and Mexico, the report said.

In the non-road sectors, which collectively account for 95% of carbon emissions from energy use, 81% of emissions are untaxed, and rates are below a truly low-end estimate of climate costs of EUR 30 per tCO₂ for 97% of emissions. Between 2012 and 2015, effective tax rates decline perceptibly in real terms in around half of the countries studied, implying small and probably unintentional steps away from the polluter pays principle.

—“Taxing Energy Use 2018”

Coal, characterized by high levels of harmful emissions and accounting for almost half of carbon emissions from energy use in the 42 countries, is taxed at the lowest rates or fully untaxed in almost all countries.

While the intense debate on carbon taxation has sparked action in some countries, actual carbon tax rates remain low. Carbon tax coverage increased from 1% to 6% in 2015, but carbon taxes reflect climate costs for just 0.3% of emissions. Excise taxes dominate overall tax rates by far.

In sum, apart from transport fuel tax increases in some large low to middle income economies, and some first steps towards aligning diesel taxes with gasoline taxes, there is no structural change to the pattern of taxes on energy use between 2012 and 2015. This is disconcerting, particularly because improving the environment and climate effectiveness of taxes on energy use is fully compatible with more effective pursuit of the other policy objectives that have shaped current taxation patterns. If and when compensation for higher energy costs is deemed necessary, lower tax rates or exemptions are not the way to provide it – targeted transfers, that maintain the environmental integrity of market-based instruments, are superior by far.

—“Taxing Energy Use 2018”

Aligning energy prices with the costs of climate change and air pollution is a core element of cost-effective policy, and vast improvements are urgently needed. While in some cases compensation for higher energy costs faced by households or firms may be deemed necessary, especially to those more vulnerable, lower tax rates or exemptions are not the way to provide it—targeted transfers should be favored.

—Angel Gurría