OECD Report Highlights Global Expansion of Carbon Pricing

On 14 November 2024, the Organisation for Economic Co-operation and Development (OECD), a forum and knowledge hub for data, analysis and best practices in public policy, published the report Pricing Greenhouse Gas Emissions 2024 on the future of carbon pricing. ClearBlue reviews this report below:

The report estimates that emissions trading schemes (ETSs) are going to expand globally, increasing from covering 27% of CO2 emissions to 34% over the next five years.

It tracks the evolution of carbon pricing instruments and energy taxation policies between 2021 and 2023 across 79 countries, covering 82% of global greenhouse gas (GHG) emissions, and provides key insights into the progress and challenges of implementing carbon pricing mechanisms and subsidies to reduce emissions and transition toward net-zero emissions by 2030.

Key Findings:

1. Stalled Progress Amidst Energy Crisis: Although some countries introduced new carbon pricing mechanisms or expanded existing systems, overall progress has slowed since 2021. The report attribute this slowdown primarily to the global energy crisis in 2022, which led to increases in fossil fuel subsidies and reductions or exemptions in energy taxes. Explicit carbon prices (e.g., ETSs and carbon taxes) showed modest increases.
   
   
2. Carbon Pricing Coverage: In 2023, 42% of global emissions were subject to a positive Net Effective Carbon Rate (Net ECR), combining carbon taxes, ETSs, and fuel excise taxes. However, only 27% of emissions were covered by explicit carbon prices, with fuel excise taxes covering an additional 23%. The Net ECR declined from EUR 17.9/tCO₂e in 2021 to EUR 14.0/tCO₂e in 2023, largely due to reductions in fuel excise tax rates and increased fossil fuel subsidies.
   
   
3. Future Carbon Pricing Developments: Over the next five years, carbon pricing is expected to expand, with ETSs likely becoming more widespread. New systems and expansions are expected to increase global emissions coverage by 7%. Additionally, there is a growing focus on including more complex sectors, such as waste incineration, beyond industrials in carbon pricing systems.
   
   
4. Sector-Specific Trends: Road transport fuels continue to bear the highest Net ECR, despite a significant 24% reduction between 2021 and 2023. Meanwhile, low-carbon electricity sources, such as solar, wind, and nuclear, have benefited from subsidies, resulting in the lowest Net EERs.
   
   
5. Carbon Leakage and Border Carbon Adjustments: To mitigate carbon leakage concerns, countries are increasingly exploring policies such as Carbon Border Adjustment Mechanisms (CBAMs) and free allocation of allowances. These mechanisms aim to reduce the impact of carbon pricing disparities across borders, especially as countries navigate the changing landscape of international trade and emissions reductions.

The report emphasizes that while carbon pricing and energy taxation are essential for achieving climate goals, their implementation remains uneven and vulnerable to external shocks like the energy crisis. Governments are increasingly adopting a mix of policy instruments, including carbon pricing, subsidies, and border adjustments, to navigate these challenges. Moving forward, greater international coordination will be necessary to address issues like carbon leakage and ensure the effectiveness of global climate policies. In North America, compliance carbon markets are likely to play a pivotal role in achieving climate targets.