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OECD Reports Examine Energy Taxation and Fossil Fuel Subsidy Reform Efforts

OECD28 January 2013: The Organisation of Economic Co-operation and Development (OECD) has highlighted the findings of two new OECD reports: "Taxing Energy Use" and "Inventory of Estimated Budgetary Support and Tax Expenditures for Fossil Fuels 2013." "Taxing Energy Use" concludes that variations in tax rates across countries suggest that externalities such as environmental damage are not being accounted for, while "Inventory of Estimated Budgetary Support and Tax Expenditures for Fossil Fuels 2013" outlines progress made in fossil fuel subsidy reform in Germany, Mexico, the US, Poland and Sweden, and recommends strategies for successful subsidy reform.

The report on taxing energy use focuses on the use of an energy tax as a policy instrument for mitigating climate change through an analysis of energy taxation arrangements in all 34 OECD countries. The first part of the report summarizes implications of various effective tax rates across countries, while the second part focuses on individual country profiles regarding energy use and taxation.

Three categories of energy use are analyzed: transport; heating and process use; and electricity. The report indicates that European countries tend to have the highest overall effective tax rates due to the 2003 European Union Energy Taxation Directive, which sets minimum tax rates for a variety of energy commodities. Central European and Asian OECD member countries such as the Czech Republic, Estonia, Hungary, Japan, the Republic of Korea, Poland, the Slovak Republic and Turkey have relatively lower effective tax rates on carbon. Australia, New Zealand, Chile, Canada, Mexico and the US tax transport fuel at much lower rates than the OECD average, except at the provincial level in Canada.

The report finds, furthermore, that overall, gasoline and diesel are taxed significantly higher than energy used for heating or process use or the generation of electricity. It indicates that not all variations in effective tax rates across countries have been fully rationalized and may not reflect externalities such as environmental damage. This suggests that a reexamination may be required to determine whether energy tax reform is required to meet environmental, social and economic goals.

The second publication, the "Inventory of Estimated Budgetary Support and Tax Expenditure for Fossil Fuels 2013," uses data on more than 550 fossil fuel support measures in the 34 OECD member countries. These measures have been valued at around US$55-90 billion per year between 2005 and 2011.

Two-thirds of these subsidies benefited petroleum products, for which the report notes the OECD and other organisations have been urging reform for a number of years. The report explores progress on fossil fuel subsidy reform in Germany, Mexico, the US, Poland and Sweden. The report indicates that successful subsidy reform entails: compensating vulnerable social groups for energy price increases and using ‘freed' public funds in a transparently beneficial way; enhancing the availability and transparency of support data; integrating fossil fuel subsidy reform into broader structural reform; and gaining public support through effective communication and timing subsidy removal appropriately.

A standardized template for reporting measures is also provided in the inventory, which is aimed at encouraging countries to become more transparent in reporting on policy measures that affect fossil-fuel production or use.[OECD Press Release] [Publication: Taxing Energy Use] [Publication: Inventory of Estimated Budgetary Support and Tax Expenditures for Fossil Fuels 2013]