Carbon taxes are spreading, but caps are becoming looser, OECD finds

From 2018 to 2023, the share of greenhouse gas (GHG) emissions subject to a carbon tax or emissions trading scheme (ETS) has risen from 15 per cent to almost 27 per cent, a new OECD report has found.

The report, Effective Carbon Rates 2025: Recent trends in taxes on energy use and carbon pricing, covered 79 countries that together accounted for 82 per cent of global GHG emissions.

Emissions trading schemes have emerged as the main carbon pricing instrument in the high-emitting industry and electricity sectors, the OECD found. While carbon taxes remained stable at 5 per cent of GHG emissions, ETS coverage more than doubled from 10 per cent to 22 per cent from 2018 to 2023.

As of 2023, over 50 countries had implemented some form of carbon pricing instrument, including carbon taxes and emissions trading schemes, the OECD found. The report predicted that the expansion of the Chinese national ETS to cover aluminium, cement, and steel could boost global ETS coverage to 29 per cent in 2024.

However, the OECD also found that the design of ETS was evolving. Many countries were setting emissions targets based on the carbon intensity of production, rather than imposing a fixed cap on carbon emissions, the OECD found. The share of intensity-based schemes expanded from 2 out of 20 in 2018 to 12 out of 34 in 2023.

The growth of intensity-based systems means that 70 per cent of emissions covered by ETSs in 2023 were not subject to a fixed emissions cap, the OECD found.

“Intensity-based systems do not set a limit on emissions; rather, covered emissions are allowed to vary with production and the limit implicitly applies to emission intensities,” the report read.

In 2023, more than half (68 per cent) of ETSs allowed companies to use carbon credits for compliance, and 97 per cent permitted banking, or holding onto unused emissions allowances for use or sale in a future period. These broader compliance options also had the effect of relaxing ETS caps, the OECD noted.

Fuel excise taxes also continued to be a major contributor to global effective carbon rates (ECRs). Almost half (44 per cent) of GHG emissions faced either a carbon tax, an ETS or a fuel excise tax in 2023, up from 33 per cent in 2018.

Following its policy analysis, the OECD concluded that carbon pricing policies were expanding in scope and jurisdiction, but were becoming increasingly “diverse and flexible” to support differing policy objectives.