OECD: Taxes on Polluting Fuels Too Low to Combat Climate Change

While Israel imposes the highest taxes on fuels for transportation, according to the organization's report, there is currently no direct environmental-related carbon tax

Water vapor clouds rise from a power plant in Jaenschwalde, Germany, September 30, 2018.
Patrick Pleul/AP

Taxes on fuels that emit greenhouse gases when burned are too low to encourage changing to more environmentally-friendly alternatives to help combat climate change, the Organization for Economic Cooperation and Development said in a report Friday. It said taxes on such fuels cover only 18 percent of carbon dioxide emissions that derive from nontransportation sources, such as industry and energy generation. Israel imposes the highest taxes on fuels for transportation, the report said.

OECD experts found that taxes on coal are almost negligible in most countries, despite being a significant source of carbon dioxide emissions. On average, the fuels with the highest taxes were gasoline and diesel. Taxes are imposed in an attempt to reduce air pollution caused by their use in transportation. In contrast, there are no taxes at all on emissions caused by international air and marine traffic.

The report analyzes taxation policies in 44 countries, including 36 OECD member states. It was presented at an emergency climate conference convened by the UN in New York. The report focuses on analyzing taxation on non-transportation sectors of the economy, which constitute a significant portion of the emission of greenhouse gases, topped by carbon dioxide. 85 percent of the emission of this gas derives from nontransportation sources, but only 18 percent of these emissions are taxed.

Countries tax fuels for a variety of reasons, but in recent years taxes are specifically designed to encourage a reduction in consumption and a transition to alternative energy sources. In some countries there is direct taxation of carbon dioxide emissions, which increases revenue and enables investment in technologies that can avoid such emissions. Another mechanism, operating in European countries, is trading in emissions. An emission quota is set for power stations or industries, and these can trade these quotas. This is supposed to improve efficiency in utilizing these fuels, but the report suggests that this mechanism has little impact on reducing emissions, in comparison to taxation.

Only four of the countries examined (Denmark, India, Norway and Switzerland) had a carbon tax that passed the threshold for being effective by OECD standards, 30 Euros per ton of carbon dioxide. However, this too is lower than what is required and covers only part of the damage caused by emissions. Germany announced a new carbon tax last week, but German scientists claimed it was too low.

In Israel there is taxation on all fuels, but there is no environmental-related carbon tax per se. There are also high taxes on cars and fuel consumption, mainly on diesel. The report found that Israel led the pack among the countries examined, followed by Britain and Switzerland. However, judging by the constant growth in the number of private vehicles and journeys in Israel, it appears that taxation has no real environmental consequences.

“We know we have to burn less fuel, but when taxes on most polluting fuels are miniscule, there is no incentive for change” said OECD Secretary General Angel Gurria. “Taxation is not the only solution, but without it we cannot combat climate change. We have to apply it equitably, which will ease the transition to alternative energy sources,” he said.