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Annex A. A brief description of climate policies
1. This section describes and expands on the content of Table 5 “Assessment criteria for climate policies”, analysing how each climate policy fares along the assessment criteria: shortterm (i.e. static) minimisation of abatement costs; medium-long term (i.e. dynamic) minimisation of abatement costs; administrative costs; ability to deal with uncertainty; reallocation and distributional concerns; political economy and public acceptability; and fiscal revenues and expenditures.
Greenhouse gas tax 2. Imposing a price on greenhouse gas (GHG) emissions through a tax proportional to the carbon content of a good or service is a highly cost-effective way to reduce emissions. A broadbased greenhouse gas tax presents a low trade-off between economic activity and pollution, equalising abatement costs across firms and eliciting cost-effective behavioural responses from consumers and producers. A stable and predictable GHG tax also enhances long-term incentives to innovate and deploy low-emission technologies so as to reduce the tax burden. However, GHG taxes, as they are currently applied in many countries, have a narrow base as they apply to certain sectors, emissions, and fossil fuels (see Chapter 3 in OECD (2019[1]) for a discussion). 3. One main drawback of the GHG tax concerns, in some cases, high administrative costs, i.e. the cost associated with tax assessment, collection, and enforcement. Upstream GHG taxes applied on fuel imports have low administrative costs as they can be applied to the volume of the fuel. However, for downstream GHG taxes, administrative costs tend to be much higher as the number of agents liable to pay the tax is large (e.g. taxation at the industrial point of emission release). Difficulties in measuring the tax base also raise administrative costs. For instance, methane emissions in animal farming cannot be measured but only roughly estimated from several factors (the animals’ diet, manure storage, use of pasture). 4. The political and social acceptability of GHG carbon taxes is an additional challenge. GHG taxes increase the price of products and services and are highly visible, eliciting strong opposition from a large share of the population. Before considering their revenue use, the impact of the tax on prices is likely to be regressive, raising distributional concerns. GHG taxes can also reduce firms’ international competitiveness and engender job losses and stranded assets (in the short term), further reducing the political support for such an instrument. 5. A predictable carbon path can largely reduce these effects by aligning long-term investments with climate change goals. In principle, compensatory measures can offset GHG taxes’ regressive effect and negative impact on competitiveness. The additional tax revenues GHG taxes would generate could help to fund such compensatory measures. Yet, these measures have proved difficult to design and implement. For instance, in France, since its introduction in 2014, less than a quarter of the carbon tax revenues have been used to finance
