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October 21, 2013
OECD urges explicit and implicit carbon pricing

In conjunction with the release of a policy paper, the Organization for Economic Co-operation and Development (OECD) states bluntly that climate change will not be stemmed unless national governments place a gradually increasing cost on carbon.

“Without a clear policy signal that there is a rising cost of CO2 emissions over time, there will be little incentive for societies to undertake the needed shift away from fossil fuels,” states the OECD in a news release. 

The OECD comprises 34 countries, including the United States, with the stated objective of stimulating economic progress and world trade.

Complete elimination of emissions

The thrust of the paper will not be welcomed by companies in the fossil-fuel industry.  According to OECD Secretary-General Angel Gurría, who introduced the paper, the world’s nations must adopt policies that will lead to the complete elimination of emissions from fossil fuel by the second half of the century.  “We don’t need to see zero net emissions tomorrow, but we will need to be on the pathway,” said Gurría, an economist who formerly held ministerial positions in the government of Mexico, including secretary of finance, and was also president and CEO of several banks. 

“With respect to carbon pricing, we don’t have time to waste,” said Gurría.  “Unlike the financial crisis, we do not have a ‘climate bailout’ option up our sleeves.”

Taxes on energy products, also

The OECD urges that both explicit and implicit prices be placed on carbon.  The following points are made:

  • Explicit carbon-pricing mechanisms, such as carbon taxes and emissions trading systems, are generally more cost-effective than most alternative policy options in creating the incentive for economies to transition toward zero carbon trajectories.  Overcoming political opposition to putting an explicit price on carbon will often require close attention to the distributional and competitiveness implications for the domestic economy. 
  • An implicit price on carbon can also affect a country’s CO2 emissions.  The report states that the most prominent of implicit tools are taxes on energy products that are based on the volume or the energy content of fuels rather than their CO2 emissions.  Standards and regulations that govern the energy use of equipment or processes comprise another set of policy instruments that put an implicit price on carbon. 

Stop subsidies

Gurría also questioned how much impact existing climate policies can have when countries around the world continue to subsidize the exploration, production, and use of fossil fuels.  According to the OECD, governments must reform the US$55 billion to $90 billion of support provided each year to fossil fuel exploration, production, and consumption in OECD countries and the US$523 billion in fuel and energy subsidies in developing countries.  “Coherent carbon pricing must include a reform of such support mechanisms in all countries to create a ‘level playing field’ for low-carbon technologies,” adds the OECD. 

To gain public support, the OECD emphasizes that carbon pricing and carbon reform policies must be set up to promote acceptance by those most vulnerable to energy price increases (e.g., households and energy-intensive businesses).  For example, the OECD notes that most governments tend to recycle the revenue from carbon taxes back to consumers through reductions in income taxes, especially for low-income households most affected by the carbon taxes, or to increase the budget allocation for social services. “This approach can make the tax, and subsequent tax increases, more socially acceptable,” says the OECD.

Information on OECD’s report.


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