Webinar on Carbon Pricing and Fossil Fuel Subsidies Reduction

12 December 2022
TAKEAWAYS

Opening Remarks by Hiranya

• Carbon pricing is a charge for the emissions of carbon dioxide (CO2). Carbon pricing policies
traditionally take two forms: carbon taxes and cap-and-trade programs. A harmonized climate policy
aims to ensure that carbon pricing is implemented alongside the reduction or phasing out of fossil
fuel subsidies, which work like negative carbon taxes because they lower the price of fossil fuels.
• The main issue for many DMs is how they can design and adopt a viable strategy to improve equity
in energy access, and combat climate change by using carbon pricing (including subsidy reform)
while generating revenues?
• ADB has developed a toolkit and roadmap that outlines the key steps, challenges and relevant
country experiences for all three elements of getting carbon prices right.

Presentation on Emissions Trading Systems (ETS) by Rachael Jonassen of George Washington University

• On the advantages and disadvantages of ETS, Carbon Taxes, and Fossil Fuel Subsidy Reform

ETS sets a firm cap on emissions, defines clear emissions reduction trajectory, encourages
innovation by high emitters, creates ability to link within and across borders, is countercyclical, and
generates additional revenue. The downsides are price fluctuates with the market, requires new
systems to be put in place, and impact on emissions can be uncertain if the coverage is not broad
enough.

• The recommended steps from planning for ETS to its implementation are preparation, decision on
the scope, engaging stakeholders, mounting a communication campaign, building capacity, setting
the cap and compliance period, distributing allowances, promoting a well-functioning market,
compliance and oversight, considering flexible mechanisms and alliance building, then
implementation, evaluation, and introducing innovations or improvements.
• Some considerations in adopting ETS over other carbon pricing methods:
o Carbon taxes create a stable price for carbon emissions, utilize existing tax infrastructure,
and generate additional government revenue. However, they can cause short-term
macroeconomic shocks, and the final impact on emissions is uncertain.
o Fossil Fuel Subsidy Reform can free funds for climate change and other priorities. But it can
result in high fuel prices and can negatively impact lower socio-economic groups.

Presentation Carbon Taxation by Mikael Skou Andersen of Aarhus University

• Steps to introduce a carbon tax: Identify mitigation gap and priority sectors; Identify greenhouse
gases for tax base; Assess implications and risks of leakage; Assess distributional impacts; Calibrate
carbon tax rate; Determine scope for reductions or exemptions; Establish support mechanisms for
low‐income households (either by mitigation or compensation); Assess macro‐economic impacts;
Determine institutional oversight; and Establish monitoring for ex‐post evaluation.
• EU's Carbon Border Adjustment Mechanism (CBAM): By 2026, energy intensive goods imported
from countries with no CO2-price will be imposed with CO2-toll. This will potentially reward carbon
pricing.

Presentation on Fossil Fuel Subsidy Reduction (FFSR) by Jacqueline Cottrell, Green Fiscal Policy Specialist

• Benefits of FFSR include reduced burden on government budgets, revenue freed up for pro-poor
public spending, efficiency gains due to reduced distortions, enhanced competitiveness of many
industrial sectors, etc.
• Guide to Fossil Fuel Subsidy Rationalization for DMCs
1) Draw up FFS inventory
2) Analyze how the underlying mechanisms of fossil fuel subsidies influence prices
3) Predict impacts of FFSR and stakeholder mapping
4) Draw up a priority list for reform
5) Finalize a strategic design, including institution building (by depoliticizing fossil fuel pricing,
developing mechanisms for distribution of targeted welfare, designing support measures for
industry, building capacity and consensus within government), and mounting a communication
campaign
6) Draw up monitoring and adjustment
• FFSR is a challenging and politically sensitive process. Rationalization calls for both political will and
in-depth understanding of the political economy of FFS and their reform.
• Many countries subsidize fossil fuels while also introducing carbon pricing, including OECD
countries.
• DMC governments will need to explore which carbon pricing approaches are most likely to be
workable, effective and politically feasible in their specific country context.

Presentation on OECD initiatives in the field of Carbon Pricing & FFSR by Assia Elgouacem, Acting Head
of the Tax and Environment Unit in the Center for Tax Policy, OECD

• Related knowledge products published, and events organized, by OECD include:

o First edition of the new OECD Series on Carbon Pricing and Energy Taxation - Pricing Greenhouse
Gas Emissions: Turning Climate Targets into Climate Action
o Carbon Pricing and Energy Taxation Series
o Inclusive Forum on carbon mitigation approaches
o 7th edition of the Tax Policy Reforms Report - Tax Policy Reforms: OECD & Selected Partner
Economies
o Newly published empirical paper: D'rcangelo, F., et al. (2022), “Estimating the CO2 emission and
revenue effects of carbon pricing: new evidence from a cross-country dataset”