Unlocking the Carbon Pricing Puzzle: Global Metrics and Their Impact

October 3, 20230

In a groundbreaking release on September 8, 2023, The Platform for Collaboration on Tax (PCT), a collaborative initiative comprised of the International Monetary Fund (IMF), the Organisation for Economic Co-operation and Development (OECD), the United Nations (UN), and the World Bank Group, presented a transformative report on carbon pricing metrics. This critical publication seeks to empower policymakers, businesses, and stakeholders by shedding light on the diverse and evolving landscape of carbon pricing metrics, ultimately aiding in informed decision-making. 


Growing Need for Carbon Pricing Metrics 

Over the past three decades, the adoption of carbon pricing instruments has steadily grown. In 2022 alone, 68 carbon pricing instruments were actively in use, according to the World Bank. Interestingly, traditional fuel (excise) taxes, which have a longer history, wider coverage, and, in some regions, higher magnitude than explicit carbon pricing mechanisms, have played a substantial role. For instance, in 2018, fuel taxes accounted for a staggering 93% of Effective Carbon Rates (ECR) in OECD countries, as per OECD data in 2021. 


This surge in carbon pricing instruments coincides with the development of a wide array of carbon pricing metrics. Over the last decade, international organizations have played a pivotal role in creating metrics that provide insights into the current state, trends, and progress of carbon pricing initiatives. These metrics serve as crucial tools for policymakers, businesses, and stakeholders as they navigate the complex realm of carbon pricing. 


Diverse Metrics, Unified Purpose 

The richness of this metric landscape offers distinct perspectives on various forms of carbon pricing, including direct and indirect approaches, positive and negative pricing, but it also risks confusion due to variations in instrument coverage, geographical scope, and methodologies. While some metrics concentrate on direct carbon pricing, others also incorporate indirect carbon pricing. Furthermore, disparities exist in the methodologies employed. 


The primary objective of the report is to facilitate the comparison of these diverse metrics, with a specific focus on the metrics of the PCT’s Partner Institutions—IMF, OECD, UN, and the World Bank Group. This initiative is part of the PCT’s broader commitment to collaboration on resource mobilization, combining the expertise of these four organizations to address contemporary tax issues. Importantly, the report not only examines the metrics developed by these partner institutions but also analyzes other carbon pricing metrics, providing a comprehensive view of the landscape. 


Understanding Convergence through Diversity 

Over the last decade, PCT Partners, along with academic and civil society institutions, have developed an array of carbon pricing definitions and metrics. The OECD’s “Taxing Energy Use” (TEU) series, launched in 2013, reports on tax-based carbon prices, while the “Effective Carbon Rates” (ECR) tracking, initiated by OECD in 2016, compiles the total cost of carbon emissions due to taxes (carbon and fuel taxes) and emissions trading. Meanwhile, the International Energy Agency (IEA) estimates fossil fuel subsidies through a price gap approach, and the IMF measures and tracks efficient fossil fuel prices and subsidies implied by charging fuel prices below efficiency levels. 


The World Bank monitors explicit carbon prices (emissions trading and carbon taxes) through its annual publication, “States and Trends of Carbon Pricing.” Additionally, the UN published the “Handbook on Carbon Taxation for Developing Countries” in 2021, offering practical guidance for countries considering the introduction of a carbon tax. 


These metrics, developed by various organizations, differ in policy and country coverage, instrument types, and terminology. However, a deeper analysis reveals unifying concepts and convergence among these metrics. Despite the apparent diversity, all PCT Partner metrics consider both explicit and implicit forms of carbon pricing, highlighting their complementarity. 


A Crucial Message: Carbon Pricing Signals are Insufficient 

Perhaps the most critical revelation of the report is the unanimous message from PCT Partners: existing carbon pricing signals fall short of what is needed. Energy prices are out of sync with the true costs associated with climate, environmental, and health impacts. These price signals are notably inconsistent with the carbon content of fuels, where the most polluting fuels often bear the lowest carbon price rates. 


The report draws attention to significant gaps in carbon pricing. According to OECD data, in 2018-2021, approximately 59.3% of greenhouse gas emissions were not subject to a positive carbon price, suggesting ample room for improvement. The World Bank underscores that, while direct carbon prices have reached record highs in many countries, less than 4% of global emissions are currently covered by direct carbon pricing mechanisms aligned with 2030 targets. The IMF emphasizes the importance of aligning energy prices with efficient fuel pricing levels, and the UN stresses the need to harmonize fuel taxes with carbon content, eliminate fuel subsidies, and align fiscal policies with global sustainability commitments. 


Forging a Sustainable Path Forward 

The PCT’s report on carbon pricing metrics not only exemplifies a milestone in international taxation but also serves as an indispensable resource for tax professionals, investors, and organizations committed to addressing pressing global challenges. It underscores the urgency of aligning energy pricing with the true costs of carbon emissions and sends a resounding message that the current state of carbon pricing is far from sufficient. The path forward necessitates a comprehensive approach that encompasses the removal of fossil fuel subsidies, the enhancement of direct carbon prices, and the alignment of fuel tax rates with the carbon content of fuels—an endeavor that demands international cooperation and collective commitment to achieving net-zero targets. 


In today’s interconnected global landscape, the intersection of sustainability, ESG principles, and international tax has become a pivotal point of focus. The revelations in the PCT’s landmark report on carbon pricing metrics illuminate not only the pressing need for tax reform but also the crucial role that tax policies play in achieving sustainability objectives on a worldwide scale. It underscores the imperative for nations to align their tax structures with environmental and social goals, incentivizing sustainable practices while fostering international cooperation in the fight against climate change. As we advocate for more effective carbon pricing and international tax frameworks, we recognize that these efforts are not mutually exclusive but rather mutually reinforcing. A sustainable, equitable, and environmentally responsible global economy hinges on the harmonious integration of tax and ESG considerations. This fusion of tax and sustainability principles marks a profound shift in how we approach international tax policy, ultimately shaping a future where responsible tax practices contribute significantly to a more sustainable world. 


For those interested in exploring the report further, you can access it here.


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