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Webinar Summary 

PCT Ask-an-Expert Webinar #3 – Carbon Pricing Metrics 

On Wednesday September 27th, 2023, the Platform for Collaboration on Tax (PCT) hosted an Ask-an-Expert Webinar to commemorate the launch of the new report, Carbon Pricing Metrics: Analyzing Existing Tools and Databases of Platform for Collaboration on Tax (PCT) Partners. The webinar was the third in the PCT’s Ask-an-Expert Series and was moderated by Susanne Åkerfeldt, Senior Advisor to Sweden’s Ministry of Finance and Co-Coordinator of the UN Subcommittee on Environmental Taxation Issues. In her opening remarks, Åkerfeldt emphasized the growing urgency of ramping up climate change mitigation efforts internationally and the bedrock role of carbon pricing instruments in the broader mitigation policy toolkit. Åkerfeldt also highlighted the practical utility to policymakers of the UN Handbook on Carbon Taxation for Developing Countries, particularly as they consider ways to design, implement, and oversee carbon tax reforms in their home countries.  

After the opening remarks from the Moderator, Ryan Rafaty (Environmental Tax Specialist, Platform for Collaboration on Tax (PCT) Secretariat) provided an overview of the methodology and key findings of the newly published report, Carbon Pricing Metrics: Analyzing Existing Tools and Databases of Platform for Collaboration on Tax (PCT) Partners. Rafaty described the ways in which the new report conducts a comparative analysis of carbon pricing metrics developed and utilized by each PCT Partner organization (IMF, OECD, UN, and World Bank). Several key messages from the report were highlighted, including how (i) carbon pricing metrics can diverge due to technical approaches, geographic coverage, sectoral or temporal scope, and the benchmarks they are compared to; (ii) no single metric can summarize all dimensions of carbon pricing, and therefore understanding the key differences between the metrics is crucial; (iii) all PCT Partners concur that carbon pricing signals to date are insufficient, and that energy prices are poorly aligned with climate, environmental, and health costs; and (iv) strategies to align energy prices with the social cost of carbon need to consider various means of dealing with widespread carbon rate reductions, refunds, exemptions, and freely allocated emission permits, as discussed in the report.  

Following the opening overview of the PCT report, Dora Benedek (Head of Climate Policy Division, Fiscal Affairs Department, IMF) provided a deep-dive into the methodology and key findings of the recently published report, IMF Fossil Fuel Subsidies Data: 2023 Update. Benedek’s presentation emphasized that countries are still not getting energy prices right. For G20 and other selected countries, the IMF report compared retail prices for gasoline and diesel to the estimated full social costs, finding that gasoline and diesel are underpriced in almost all countries. Moreover, despite diesel having larger air pollution, road damage, and climate costs per liter than gasoline, diesel is generally taxed less than gasoline. But as Benedek went on to note, energy gaps are even larger for natural gas and especially coal. Few countries tax coal, despite its very high carbon content and—in many cases—its large contribution to local air pollution and premature deaths. Natural gas emits less carbon dioxide and has negligible local air pollution costs but is mostly untaxed globally and, at times, priced at below supply costs. At the global level, fossil fuel subsidies were USD 7 trillion in 2022, or 7 percent of global GDP. This represented a 40 percent increase from 2020, largely due to the imperfect pass through of international price increases to domestic consumers. Explicit subsidies – which are the direct forms of support governments provide to producers and consumers of fossil fuels – declined slightly from 2015 to 2020 but increased significantly over the past two years from 0.5 trillion in 2020 to 1.3 trillion in 2022. Still, implicit subsidies—primarily the undercharging for environmental costs—accounted for the vast majority of fossil fuel subsidies at about 80 percent of total subsidies in 2022.  

Following the IMF presentation, Joseph Pryor (Senior Climate Change Specialist, World Bank) provided an overview of the World Bank’s State and Trends of Carbon Pricing report as well as the Bank’s Carbon Pricing Dashboard, which reports data and information on direct carbon pricing across countries (the nominal carbon rate and the GHG emissions coverage for each carbon tax and ETS). Pryor discussed how the State and Trends report discusses the importance of indirect carbon pricing, as well as other complementary policy measures, and went on to emphasize that, irrespective of whether a direct or indirect approach to carbon pricing is primarily taken, economy-wide proportionality and consistency (e.g., price uniformity) should be promoted. 

To conclude the initial round of presentations from PCT Partners, Assia Elgouacem (Acting Head of the Tax and Environment Unit, Centre for Tax Policy and Administration, OECD) provided an overview of the methodology and core components of the OECD’s data on “Net Effective Carbon Rates”, with a discussion of plans for future data updates and refinements. Elgouacem also highlighted the functions and growing importance of the OECD’s data-sharing initiative, the Inclusive Forum on Carbon Mitigation Approaches (IFCMA), and the ways in which it will be fostering knowledge exchange to support enhanced climate action in low- and middle-income countries. 

In the second part of the Ask-an-Expert webinar, three national case studies were presented. Marcelo Mena (CEO, Global Methane Hub; Former Vice Minister and Minister of the Environment in Chile from 2014 to 2018) presented a case study of the national experience with carbon pricing reform in Chile, focusing on the role of green taxes on new car sales. Mena documented how Chile’s green vehicle tax generates over 80 million USD, and meanwhile reduced NOx emissions and increased the energy efficiency of the national vehicle fleet significantly from 2015 to 2020. Diesel vehicles that were exempt from the tax did not show any decrease in emissions or increase in average vehicle efficiency, indicating the environmental effectiveness of Chile’s green vehicle tax and the need to phase out remaining tax exemptions.  

In the second case study presentation, Ismail Momoniat (Former Acting Director-General, National Treasury of South Africa) presented on the national experience with carbon pricing reform in South Africa, retracing the “long walk” of 9-13 years that went into implementing a carbon tax. South Africa’s Carbon Tax Bill, implemented on June 1, 2019, phased in the carbon tax rate, starting at a low rate of R120 per ton of CO2 (with currency depreciation, went down from the original USD 12 to under USD 7 per metric ton of CO2). The tax covers about 90 percent of the country’s total GHG emissions (excluding Eskom). However, agriculture, forestry, land use, and waste were excluded, and tax exemptions applied to between 60-95 percent of emissions. Momoniat emphasized that the initially low carbon tax rate combined with the initial widespread use of exemptions were factors that enabled the eventual implementation of the carbon tax, but that it is urgent now to implement further carbon pricing reform that phases out exemptions and phases in higher tax rates so that South Africa’s carbon price reflects the social cost of carbon.  

In the third and final case study presentation, Carlos Muñoz Piña (Research and Data Integrity Director, WRI México; Former Director General for Revenue Policy, Ministry of Finance, Mexico) discussed the national experience with carbon pricing reform in Mexico. Piña described how Mexico's carbon pricing experience – moving from net negative to net positive prices - allows us to understand the policy inertias and equilibriums that allow fossil fuel subsidies to become such a large burden on public finances in the first place, and how can they be decoupled.  As the domestic prices of gasoline, diesel, and LPG were kept artificially low and unresponsive to market signals due to fuel subsidies in Mexico during large periods in the 1990s and 2000s, both citizens and firms began to attribute any price increase to a government failure to act, and this dynamic inhibited significant action. The Mexican government’s choice of gradualist strategies for price increases enabled a sustained five-year phase-out of fuel subsidies, and did so during two distinct administrations. At the same time, institutional changes allowed the country to move into positive carbon taxation territory, both explicitly, as in Mexico’s introduction of an CO2 excise tax, and implicitly, as in its fuel excise tax. A commitment of maintaining the new carbon pricing tax structure by a third incoming administration solidified the strategy.  

The third Ask-an-Expert Webinar concluded with a Q&A session moderated by Susanne Åkerfeldt, who went on to provide concluding remarks and brief reflections on the challenges and opportunities ahead in macro-fiscal climate policy, and how the PCT report and the findings shared during the webinar can provide further rejuvenation to these international efforts.