Fiscal policy and green growth

Looking at the whole range of fiscal policy instruments, including taxes, tradable permits, and subsidies, the OECD help countries to better assess the environmental implications of their fiscal policies. The 2021 OECD report Biodiversity, Natural Capital and the Economy estimates environmentally harmful support – which include fossil fuel support - at more than USD 800 billion a year.

The OECD develops in-depth and detailed analyses of the taxation of energy use and the pricing of greenhouse gas emissions, as well as support to the extraction, production and use of fossil fuels. The report on Pricing Greenhouse Gas Emissions: Turning climate targets into climate action, which covers 71 countries that account for approximately 80% of global GHG emissions, finds that more than 40% of GHG emissions were covered by carbon prices in 2021, and that the average Net Effective Carbon Price – the sum of explicit carbon prices and fuel excise taxes, minus fossil fuel subsidies – increased to EUR 17.

The OECD Inventory of Support Measures for Fossil Fuels provides estimates of government measures that encourage fossilfuel production or consumption relative to renewable alternatives. The latest edition of the Inventory includes around 1 500 support measures in 51 OECD, G20 and EU Eastern Partnership economies.

Recent analysis shows that a EUR 10 increase in carbon pricing would decrease CO2 emissions from fossil fuels by 3.7% on average in the long term. Broadening carbon pricing to currently unpriced emissions contributes to two thirds of the modelled effects on emissions and revenues. Also, dynamic simulations stress the importance of complementary policies, such as green technology support measures and regulations, since even large effective carbon rates (about EUR 1000 per tonne by late 2030s) will not suffice to meet net-zero emission targets.

Countries have increased their use of carbon pricing through taxes or emissions trading systems, with coverage increasing across sectors

Road transport (CO2)

Electricity (CO2)

Off-road transport (CO2)

Agriculture (CO2)

Buildings (CO2)

Industry (CO2)

All GHG (CO2e)

Note: All GHG includes both CO2 and non-CO2 emissions. Percentages are rounded to the first decimal place.

Source: OECD (2022) Pricing Greenhouse Gas Emissions: Turning climate targets into climate action, https://doi.org/10.1787/e9778969-en

The Agricultural Policy Monitoring and Evaluation report shows that half of support to agriculture in monitored countries is market distorting, inequitable and harmful to both the environment and global food security. Only one sixth of budgetary support to agriculture globally is spent in ways that are effective in promoting sustainable productivity growth and agricultural resilience.

The OECD is the only international organisation that measures and reports policy effort in the fisheries sector on an annual basis through its Fisheries Support Estimate (FSE) database. Work will be undertaken to better understand the impacts of support to fisheries on overfishing and overcapacity, the two overarching concerns of global action on fisheries subsidies.

Large difference among average tax rates on different fuels

Source: OECD (2022) Pricing Greenhouse Gas Emissions: Turning climate targets into climate action, https://doi.org/10.1787/e9778969-en

The OECD Paris Collaborative on Green Budgeting aims at helping countries to embed climate and other environmental goals within national budgeting frameworks. Currently, more than 50% of OECD countries implement green budgeting and environmentally related tax revenues were at 1.35% of GDP on average among the 38 OECD economies in 2020.

The report Green budgeting: A way forward identifies seven key areas to support the development of green budgeting practices in making progress toward climate and environmental goals. Furthermore, a database with firm-level information on environmentally harmful support to selected industrial sectors (e.g. aluminium, steel, cement, glass and petrochemicals) is also under development.

Contact for more information

Key Publications and websites

• Pricing Greenhouse Gas Emissions: Turning climate targets into climate action (2022)

• Estimating the CO2 Emission and Revenue Effects of Carbon Pricing: New evidence from a Large Cross-country Dataset, OECD Economics Department Working Paper (2022)

• Agricultural Policy Monitoring and Evaluation (2022)

• Green budgeting: A way forward, OECD Journal on Budgeting (2022)

• Tax Revenue Implications of Decarbonising Road Transport: Scenarios for Slovenia, OECD/ITF (2019)

• Taxing vehicles, fuels, and road use: Opportunities for improving transport tax practice, OECD Taxation Working Papers (2019)

• Unintended technology-bias in corporate income taxation: The case of electricity generation in the low-carbon transition, OECD Taxation Working Papers (2018)

• https://www.oecd.org/fossil-fuels/

Kurt Van Dender

Centre for Tax Policy and Administration

E-mail: Kurt.Vandender@oecd.org

Nathalie Girouard

Environment Directorate

E-mail: Nathalie.Girouard@oecd.org

Andrew Blazey

Public Governance Directorate

E-mail: Andrew. Blazey@oecd.org

Claire Delpeuch

Trade and Agriculturate Directorate

E-mail:Claire.Delpeuch@oecd.org