The Role of Carbon Pricing in the Sustainable Recovery from COVID-19, Daniel Nachtigall - OECD
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Session 3 presentation from the 6th Strategic Dialogue of the Carbon Market Platform, 29-30 June 2021
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The Role of Carbon Pricing in the Sustainable Recovery from COVID-19, Daniel Nachtigall - OECD
- 1. Daniel Nachtigall Economist Environment, Transitions, and Resilience Division Environment Directorate THE ROLE OF CARBON PRICING IN THE SUSTAINABLE RECOVERY FROM COVID-19 Sixth Strategic Dialogue Carbon Market Platform 29 & 30 June 2021
- 2. 2 Outline Carbon pricing in the economic recovery: State of play Rationale for and challenges to carbon pricing related to COVID-19 Carbon pricing design options to mitigate challenges Key takeaways
- 3. 3 Outline Carbon pricing in the economic recovery: State of play Rationale for and challenges to carbon pricing related to COVID-19 Carbon pricing design options to mitigate challenges Key takeaways
- 4. 4 Carbon pricing in the economic recovery State of Play Purpose: Tracking policy changes in carbon pricing since the start of COVID-19 How? Which countries? When? Which instruments? What? 47 OECD & G20 Countries Desk research & country interviews January 2020 – March 2021 ETS, energy, carbon and aviation taxes, reforms to FFS Expected impact on GHG emissions What not? Number of policy changes
- 5. 5 Carbon pricing in the economic recovery State of Play Permanent measure with climate-positive effect Temporary measure with climate-positive effect Temporary measure with climate-negative effect Permanent measure with climate-negative effect No Change C A T E G O R I S A T I O N
- 6. 6 Carbon pricing in the economic recovery State of Play Permanent measure with climate-positive effect Temporary measure with climate-positive effect Temporary measure with climate-negative effect Permanent measure with climate-negative effect No Change C A T E G O R I S A T I O N
- 7. 7 Patterns of climate-positive and negative changes Share of temporary and permanent policy changes by expected climate effect Climate positive 38 changes Permanent Planned pre-COVID Broad scope Climate negative 55 changes Time- limited Planned during COVID Narrow scope Permanent Permanent Temporary Temporary
- 8. 8 Observed trends on carbon pricing during COVID-19 COVID-19 did not derail planned implementation or increase of CP • COVID-19 caused some minor administrative difficulties due to lockdowns • ETS proved durable to the economic impacts Few countries announced new or strengthened CP to date • COVID-19 created some additional challenges (but also rationale) for CP Few countries have explicitly integrated CP into recovery packages
- 9. 9 Outline Carbon pricing in the economic recovery: State of play Rationale for and challenges to carbon pricing related to COVID-19 Carbon pricing design options to mitigate challenges Key takeaways
- 10. Challenges to carbon pricing 10 Rationale for and challenges to carbon pricing related to COVID-19 Recession Unemployment Inequality and poverty Economic hardship for businesses Rationale for carbon pricing Net-Zero Targets Public support for green recovery Need for generating revenues
- 11. 11 Outline Carbon pricing in the economic recovery: State of play Rationale for and challenges to carbon pricing related to COVID-19 Carbon pricing design options to mitigate challenges Key takeaways
- 12. 12 Dimensions and design options for carbon pricing Timing Exemptions Revenue recycling Instruments related to CP Environmental effectiveness Equity and protecting vulnerable groups Economic effects Political acceptability Dimensions Design options
- 13. 13 Outline Carbon pricing in the economic recovery: State of play Rationale for and challenges to carbon pricing related to COVID-19 Carbon pricing design options to mitigate challenges Key takeaways
- 14. 14 Key takeaways State of play and observed trends during COVID-19 • Climate-positive changes were mostly permanent, planned before COVID-19, broader in scope • Climate-negative changes were mostly introduced as time-limited measures, due to COVID-19, narrower in scope • Few countries explicitly integrated carbon pricing in recovery packages to date • Few countries announced new or strengthened carbon pricing schemes to date Challenges, rationale and design options to carbon pricing • COVID-19 brought new challenges to and rationale for carbon pricing • Actual impacts of carbon pricing tend to be less severe than perceived impacts • Design of carbon pricing (e.g. revenue recycling) can mitigate some of the challenges
- 15. Thank you for your attention Contact: Daniel.Nachtigall@OECD.org Jane.Ellis@OECD.org Sofie.Errendal@OECD.org 15 Contact details
Editor's Notes
- Daniel Nachtigall Presenting a short version of our 2021 input to the CMP -> title Long presentation made available last week hope you had the chance to have a look at this. Joint with Jane Ellis and Sofie Errendal Presented the paper in the Working group of the CMP in meeting in April. You received the short discussion paper. Just to let you know In parallel we are preparing a longer working paper that has more details and finalised towards the end of the year Circulate this paper for your comments
- This paper and also the presentation does is the following. First, provide a state of play of carbon pricing: Tracks policy changes in carbon pricing since the start of COVID-19 Second, Identifies additional challenges to and rationale for carbon pricing related to COVID-19 Discuss policy design options to overcome challenges
- Purpose: Tracking policy changes in carbon pricing since the start of COVID-19 How? Desk research Country interviews with selected countries Coverage 47 OECD and G20 countries Between 01-2020 03-2021 Which instruments ETS Energy, carbon and aviation taxes Reforms of FFS What Number of policy changes in carbon pricing that were Implemented or announced in the time period We distinguish permanent and temporary or time-limited We include policy changes regardless of whether they are planned before or during COVID-19 What not Expected impacts on GHG emissions because no data
- 5 different categories: dark green and red: Permanent measure with positive/negative climate effect Light green and red: Temporary measure with positive/negative climate effect White: no change Looking at explicit carbon taxes, ETS and energy taxes First, let me again emphasise that we are looking at changes since the start of the pandemic, not the status quo For example, Finland or Sweden have a carbon tax for a long time, but neither the tax rate nor the coverage has changed since the start of COVID-19 -> that’s why white. Number indicates the number of changes in one country Look at the colour code, Exclusively green and designed to be permanent Majority of them planned before COVID-19, but implemented between 01 2020 and 03 2021
- Fossil fuel subsidies and aviation taxes mostly climate-negative Aviation taxes: mostly related to mitigate impacts of COVID-19 on general aviation industry FFS either to protect industry from low international energy prices or vulnerable household groups from high energy bills due to lockdowns Mostly time-limited (next slide)
- Climate-positive policy changes are 38 changes Permanent More than 90% of climate-positive policy changes are designed to be permanent 80% of climate negative policy changes are designed to be time-limited Planned before Covid-19 (but implemented during Covid-19) Climate negative are mostly governments responses to the pandemic Broader in scope (coverage and price level) For example: Chinese ETS started operating in 2021 covers 40% of China’s GHG emissions
- not derail planned implementation or increase of CP Minor administrative difficulties ETS resilient -> price drops initially, but most of them quickly recovered to pre-crises levels even exceeded the levels in some ETS If we look at new announcement, only few new announcements of CP during Covid-19 Still to early to judge as many countries are still in the midst of the pandemic and recovery As we learned from interviews with country representatives, Challenges (will come back in a bit) Only few countries integrate CP in economic recovery packages Also here, a bit too early, so it remains to be seen what is coming in the next months as countries are still developing their national recovery plans One example is Denmark
- Rationale Drastic increase of net-zero targets, substantial public support for green recovery, need for generating revenues to finance recovery packages or enhance debt sustainability Carbon pricing can help countries progress towards their climate goals, respond to public support for climate mitigation, and help generate revenue. Challenges Covid-19 caused global recession with decreased economic activity and increased unemployment. Covid also increased inequality and poverty and worsened the financial situation of businesses All of this makes it more challenging to implement carbon pricing because carbon pricing is perceived to exacerbate these effects. However, if we look into the academic literature we see that by and large actual impacts of carbon pricing on economic and social outcomes tend to be less severe than perceived impacts Much of the effects also depend on the exact design of carbon pricing
- What are the important dimensions for policy makers to look at related to CP in the recovery just read; all of this influences political acceptability synergies and trade-offs between them depending on carbon pricing design Design options -> without going too much into detail just to give a flavour of the questions we are answering Timing Now or later -> implementing in the midst of the pandemic might not be politically feasible Implementing later would also provide incentives, but how to commit Exemptions Would reduce negative effect on vulnerable population groups or struggling businesses. But would also decrease the effectiveness of the policy in the long-term If at all used, time-bound, well-targeted and phased out successively Revenue recycling Different options, but none of the options ticks all boxes Decrease distortionary taxes -> spur economic development, but ranks low in terms of equity and political acceptability Lump-sum rebate or targeted rebates to vulnerable households -> performs well in terms of equity and political acceptability, but is not as efficient in terms of economic growth There seems to be a clear equity-economic efficiency trade-off Instruments related to carbon pricing -> politically less challenging We discuss a number of other instruments Carbon contract for differences the guarantee of a pre-determined carbon price for investments in abatement capital Germany included this instrument for some industrial sectors in the national recovery and resilience plan
- The carbon pricing policy landscape changed substantially between 01/2020-03/2021 Just read …challenges and reduce barriers to implementing it
- Thanks a lot for your attention. I’m looking forward to the discussion I’ll put the proposed questions for discussion in the chat