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:
- Tax reform, to target higher economic growth alongside lower pollution;
- Climate mitigation, by encouraging investment in low-carbon technologies;
- Pursuit of other development objectives, such as in education and health;
- Prevention of carbon leakage, to achieve carbon pricing’s environmental and economic objectives;
- Assistance for individuals, households, or businesses affected by carbon costs, through transfers or programs;
- Debt reduction, to lessen the debt burden on future generations.
The table below summarizes the advantages and limitations of these different revenue uses
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
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
Frees up capital and reduces the economic burden of interest payments
Does not address short-term objectives
- Full World Bank report “Using Carbon revenues“
- I4CE report: Carbon Tax : France can learn from foreign experiences to move forward
Sébastien POSTIC, Phd
Project Manager – Industry, Energy and Climate
Sébastien’s research areas mainly focused on carbon pricing and energy transition in development contexts, both in terms of climate efficiency and contribution to the fight against poverty and the reduction of inequalities. He joined I4CE after a Franco-Chilean doctoral thesis dedicated to the development of a regional energy planning tool for South America. He also worked on the evolution of the South American energy matrix in response to the commitments of the Paris Agreement (NDCs), competition between energy and forestry sectors for mitigation in South America, adaptation to climate change (electricity production under uncertain hydrological scenarios), and on the medium-long-term prospects of Smart Grids and Smart Buildings in Europe as part of the European Energy-Climate package.
Sébastien is a graduate engineer from the Ecole Polytechnique, he holds a Master’s Degree in Optimization of Energy Systems from MINES ParisTech and a double doctorate from MINES ParisTech / University of Chile.
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