Developing countries could raise much-needed public revenues, while cutting emissions and air pollution, by making better use of energy taxes and reducing energy subsidies, according to a new OECD report.
Taxing Energy Use for Sustainable Development: Opportunities for energy tax and subsidy reforms in selected developing and emerging economies examines energy taxation in 15 developing and emerging economies in Africa, Asia and Latin America and the Caribbean. The report finds that well-designed energy and carbon taxes can strengthen efforts to improve domestic revenue mobilisation. While the revenue potential varies across countries, the report finds that, on average, the countries could generate revenue equivalent to around 1% of GDP if they set carbon rates on fossil fuels equivalent to EUR 30 per tonne of CO2.
Energy tax and subsidy reform is key to achieving the triple objectives of decarbonisation, domestic revenue mobilisation, and access to affordable energy. Developing and emerging economies battling to recover from the COVID-19 crisis with much lower tax revenues than advanced economies would benefit from better-designed energy taxes accompanied by targeted support to low-income groups. Tax-to-GDP ratios in the 15 countries studied average just 19% compared to 34% across OECD countries.
None of the 15 countries applies an explicit carbon price or uses CO2 emissions trading systems. To support poor households, fossil fuels used for heating, cooking and lighting are often taxed at low rates or subsidised, yet this weighs on public finances and in some cases can encourage excessive fuel use. In four of the 15 countries, the cost to public finances of energy subsidies exceeds income from energy taxes. Reducing subsidies, which tend to benefit wealthier consumers, and improving tax design could provide additional revenues for more targeted support to enhance energy access and affordability.
Source OECD
