On 25 January 2021 the OECD issued a document entitled Taxing Energy Use for Sustainable Development: Opportunities for energy tax and subsidy reforms in selected developing and emerging economies.
The report looks at energy taxation in a sample of fifteen developing countries located in Africa, Asia and Latin America and the Caribbean. The countries in the sample are Côte d’Ivoire, Egypt, Ghana, Kenya, Morocco, Nigeria, Uganda, the Philippines, Sri Lanka, Costa Rica, Dominican Republic, Ecuador, Guatemala, Jamaica and Uruguay.
Improved Taxing Energy
The report notes that developing countries could introduced improved taxes on energy, together with reduced energy subsidies, to help them raise more tax revenue and reduce carbon emissions. Generally, these countries could on average raise revenue amounting to around 1% of GDP if the rate of carbon tax imposed on fossil fuels could be set at the equivalent of EUR 30 per tonne of carbon dioxide.
With a combination of energy taxes and reform to energy subsidies countries can achieve decarbonisation and access to affordable energy while raising more domestic revenue. In the wake of the economic crisis resulting from the pandemic developing countries have much lower tax revenues than developed economies and could raise revenue from improved taxes accompanied by targeted support for low-income groups. For example it is noted that the tax-to-GDP ratios in the sample countries averaged 19% in the period studied. This compares to an average tax to GDP ratio of 34% in OECD countries.
Improved carbon taxing could raise revenue from energy
In the sample countries there is no use of an explicit carbon price or carbon emissions trading. Generally fossil fuels used in heating and cooking were taxed at low rates or subsidised, to help low-income groups, but this policy can be costly for the government and can encourage excessive use of fossil fuels. The report points out that in four of the sampled countries the cost to the government of energy subsidies exceeded the income. Improved design of carbon taxes could raise revenue to support targeted subsidies to help affordable access to energy by lower income households.
Carbon emissions are not taxed
The report notes that in the sampled countries around 83% of energy-related carbon emissions are not taxed at all. Countries therefore need to better align their tax policy with energy targets and reduce the negative externalities arising from the use. Of the fifteen sample countries, thirteen already have experience with the imposition of fuel excise taxes, and this would facilitate the administrative aspects of implementing improved carbon taxes.
By introducing carbon pricing and phasing out fossil fuel subsidies developing countries can encourage infrastructure investments that are in line with a low carbon path of economic development. Energy taxes are also difficult to avoid and can therefore help to combat the informal economy.