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

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

More information: 

• Full World Bank report “Using Carbon revenues“
• I4CE report: Carbon Tax : France can learn from foreign experiences to move forward