Fossil fuel subsidy inventories vs. net carbon prices: A consistent approach for measuring fossil fuel price incentives

Different reports including the broadly cited OECD fossil fuel subsidy inventory arrive at high monetary values of fossil fuel subsidies and suggest that phasing out these subsidies has a high potential to increase the efficiency of climate policies. We show that the inventory approach gives misleading information about this potential since there is little correlation with net carbon prices that actually reflect the stringency of climate policies. We use data on net fossil fuel taxation from the OECD's Taxing Energy Use report and augment it with data on subsidies and emission permits, to calculate national and sectoral net carbon prices for the top six emitters (China, US, India, Russia, Japan and Germany) and for Poland and Sweden, two European countries perceived as examples of opposing environmental policies. Our results show that in high-income countries, subsidies mainly relate to reduced fuel tax rates for certain uses, so that e.g. Sweden, for which the OECD inventory reports subsidies per ton of CO2 26 times higher than the US, has a 770% higher national net carbon price than the US. While Germany and Russia have similar subsidy levels in the OECD inventory, the national net carbon price in Germany is 50 €/tCO2, while producer subsidies lead to a negative net carbon price of -6€/tCO2 in Russia. Our results illustrate that raising taxes on fossil fuels will often lead to higher reported inventory subsidies. Inventory measures thus give little information about the efficiency of climate policy. Our analysis also shows the large differences in net carbon prices across countries and across sectors within countries. Net carbon prices should replace fossil fuel subsidies in the policy debates and become the basis for national energy tax reforms and international agreements on minimum carbon prices.