“Using Carbon revenues”, new report from the World Bank, AFD and I4CE

23 August 2019 - Blog post - By : Sébastien POSTIC, Phd

The recent proliferation of carbon pricing schemes and the increase in associated prices have led to a significant increase in carbon-related revenues.  As of May 1, 2019, 25 carbon taxes and 26 emissions trading schemes (ETS) were in operation around the world. Jurisdictions covered by one or more explicit carbon prices account for about 60% of global GDP. The revenues associated with these carbon prices have doubled in two years, from $22 billion in 2016 to $44 billion in 2018. This trend is expected to continue in the future, due to increases in 1/ the number of taxes and ETSs, and 2/ the prices imposed by these systems: recent studies suggest that carbon prices around $70/tCO2 could generate revenues equivalent to 1-4 GDP points in 2030, almost everywhere in the world.

 

When used properly, these revenues can combine climate ambition with a wide variety of economic and/or social objectives, and thus contribute to effective communication on the benefits of such policies; history has shown that carbon prices are widely accepted by public policy specialists in the fight against climate change, but are widely mistrusted by the public. In this report, written with the World Bank and AFD, with valuable support from Vivid Economics, I4CE explores the underlying factors for various choices over the use of carbon revenues around the world, to provide a practical guide for decision-makers who are implementing or reassessing their national carbon price.

 

If there is one lesson to be learned from the national experiences examined in this report, it is that carbon revenue use is a highly empirical issue; the optimal use obviously depends very closely on the economic structure of the country involved, but also on its social context, its institutional framework and political forces; there is no universal solution for the use of carbon revenues. Nevertheless, the report focuses on six categories of use, which can be mixed according to the context:

 

  1. Tax reform, to target higher economic growth alongside lower pollution;
  2. Climate mitigation, by encouraging investment in low-carbon technologies;
  3. Pursuit of other development objectives, such as in education and health;
  4. Prevention of carbon leakage, to achieve carbon pricing’s environmental and economic objectives;
  5. Assistance for individuals, households, or businesses affected by carbon costs, through transfers or programs;
  6. Debt reduction, to lessen the debt burden on future generations.

 

The table below summarizes the advantages and limitations of these different revenue uses

 

Revenue use Benefits Limitations
Tax reform  

 

Can improve efficiency of the tax system and have a positive impact on economic growth

 

 

 

Can be less visible than alternative options, and tax cuts require targeting to compensate those affected by carbon price

 

Climate mitigation  

 

Can increase effectiveness of carbon price by addressing market failure

Can further reduce emissions in uncovered sectors

Can lead to greater public acceptance of carbon pricing

 

 

 

Can have high administrative costs relative to alternative revenue use options if existing allocation mechanisms are not in place

 

Pursuit of other development objectives  

 

Offers a cost-effective revenue source for funding development goals given barriers to accessing finance

Can drive public support if spent on issues of high public concern

 

 

 

Can have high administrative costs relative to alternative uses of revenue if existing allocation structures are not in place

 

Prevention of carbon leakage  

 

Reduces the risk of emissions increases in uncovered jurisdictions

Mitigates the negative impact on affected businesses in the short term

Has the potential to increase stakeholder support

 

 

 

Requires identifying sectors for compensation, which can be difficult

Requires careful design to reduce the risk of undermining climate objectives

 

Assistance for individuals, households, or businesses  

 

Can compensate affected individuals, households, or workers

Can have low administrative costs, if allocation structures already exist

 

 

 

Depending on design, can be less visible than alternative options if delivered through existing transfer systems, and therefore may have less public support

 

Debt reduction  

 

Frees up capital and reduces the economic burden of interest payments

 

 

 

Lacks visibility

Does not address short-term objectives

 

 

More information: 

I4CE Contacts
Sébastien POSTIC, Phd
Sébastien POSTIC, Phd
Project Manager – Industry, Energy and Climate Email
To learn more
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