8 ENV/WKP(2022)3
Executive Summary
This paper discusses the role of carbon pricing in a sustainable recovery from COVID-19. Governments’ recovery packages put in place to address the economic and social consequences of COVID-19 will have significant effects on national emission trajectories of greenhouse gas (GHG) emissions. These recovery packages will thus affect the cost and likelihood of countries achieving their short-term and long-term climate goals. Recovery packages that ‘build back better’ would not only increase the chances of meeting both national and international climate goals, but also other important societal goals such as the Sustainable Development Goals. Carbon pricing as defined in this paper, i.e. emissions trading schemes (ETS), carbon, fuel excise or aviation taxes1 or reforms of fossil fuel support (FFS), could help to contribute to countries’ actions towards COVID-19 recovery and in reaching climate goals as it guides consumption and investment decisions towards low-carbon alternatives. Carbon pricing has a number of advantages and limitations, but the price levels and coverage of carbon pricing are too low to be in line with the goals of the Paris Agreement. Indeed, only 45% of carbon dioxide (CO2) emissions from the OECD and G20 countries were priced in 2018 despite some progress in recent years. FFS (i.e. a reduced carbon price) in 2020 was more than seven times higher than the global revenue from carbon taxes and ETS. Carbon pricing can reduce GHG emissions in a costeffective way and can raise revenues, which could help countries support vulnerable population groups, reduce other distortive taxes, or reduce public debt. Carbon pricing is also associated with both positive short-term (e.g. improved public health) and long-term effects (e.g. increased innovation). Carbon pricing alone is, however, not sufficient. Other policies (e.g. innovation policies, support for low-carbon alternatives and infrastructure investments) are necessary to increase carbon pricing’s effectiveness and acceptability and to address other market failures (e.g. knowledge externalities, asymmetric or limited information). In 37 out of 47 OECD and G20 countries, carbon pricing policies changed between January 2020 (i.e. the start of the pandemic) and August 2021.2 Some policy changes were significant (e.g. the implementation of China’s national ETS, covering 40% of national CO2 emissions), others were less so, or their level of emissions coverage unclear. Some countries changed carbon pricing provisions for a timelimited period only, while other changes were introduced on a more permanent basis. Carbon pricing changes were either enacted as part of governments’ COVID-19 rescue and recovery measures (e.g. many changes in FFS and aviation taxes) or were planned before but implemented during the pandemic (most changes in ETS, fuel or carbon taxes). In these 47 countries, there were 44 policy changes with an expected positive climate effect (climate-positive) and 55 changes with a negative one (climate-negative). The majority of the policy 1
Aviation taxes or levies (e.g. passenger duty taxes or airport parking or usage fees) do not explicitly price carbon, but they increase the price of flying and can thus be interpreted as proxy for carbon pricing. The suitability as well as the political acceptability of carbon pricing as a policy tool is likely to vary by country as well as by sector. 2
This paper tracks policy changes – i.e. deliberate changes of the coverage and/or pricing levels of carbon pricing instruments - that were planned or implemented from the start of the pandemic (January 2020) to August 2021 in 47 OECD and G20 countries.
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