Taxes on polluting fuels too low to expedite a shift to clean energy, OECD says

About 70% of energy-related CO2 emissions from advanced and emerging economies are untaxed

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Taxes on pollution from energy sources in 44 countries that account for more than 80 per cent of global emissions are not high enough to force a reduction of risks and address the ever-rising threat of climate change.

About 70 per cent of CO2 emissions from energy sources within the advanced and emerging economies are entirely untaxed, giving these countries little incentive to switch to clean energy, according to a new OECD report titled 'Taxing Energy Use 2019.'

"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,” OECD secretary-general Angel Gurría, said. “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.”

Taxing polluting sources of energy is an effective way to curb emissions that harm the earth and human health, plus the income generated can be used to ease the low-carbon transition for vulnerable households. Taxes on coal, which is behind almost half of CO2 emissions from fossil fuels, is zero or close to zero in most countries. Taxes are often higher on natural gas, which is cleaner than coal. For international flights and shipping, fuel taxes are zero, meaning long-haul frequent flyers and cargo shipping firms are not paying their fair share, according to the OECD report.

Across the 44 countries studied in the report, 97 per cent of energy-related CO2 emissions, apart from road transport, are taxed "far below" the levels that would reflect damage to the environment, it said.

"Adjusting taxes, along with state subsidies and investment, is vital to encourage a shift to low-carbon energy, transport, industry and agriculture," the report said.

Given the difficulties in making big changes without hurting industries or communities, the new OECD study is looking at factoring in the potential synergies and trade-offs between emission reduction goals and the broader societal objectives such as better health and jobs that can increase the incentives for swift action to cut emissions.

"Focusing on goals like clean air, healthy eating, accessibility of services and employment and inclusive fiscal reform could make it easier to introduce changes that will end up accelerating the low-carbon transition while improving lives," it said.

In July, Mr Gurria urged governments to address the growing anger, especially among the younger generations, at some countries that are falling behind on decarbonising economies even as emissions from energy are at an all-time high.

Improving tax policy, so it gives a fair chance to low-carbon technologies, would also help shift investment into greener options, the report noted.

The OECD study has looked at three types of tax on energy  - excise taxes on fuels, carbon taxes and taxes on electricity use - in areas such as power and heat generation, industry and transport.

The governments, the report said, will have to ensure that any tax rises should 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, it said.