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Taxing energy use

The OECD’s Taxing Energy Use report and methodology provides an analysis of the structure and level of energy taxes in 41 countries, covering the OECD and other selected countries. The report shows, that despite the widespread application of taxes, the average effective tax rate for these countries is 3.27 euros per gigajoule of energy. This leads to a weighted-average tax rate on carbon emissions from energy use of 14.8 euros per tonne of CO2. The figure below shows how this average is translated per fuel type. The graph shows that coal, the most carbon intensive and which accounts for the highest proportion of energy usage, is the product least taxed.

According to the report, at the economy‑wide level, there are large differences in the overall level of taxation across the 41 countries considered, both in energy and in CO2 terms. The highest effective tax rates tend to be seen in countries which are members of the European Union, whose energy tax policy is significantly shaped by the 2003 EU Energy Tax Directive. The economy‑wide effective tax rates mask the diversity of tax rates on different fuels and users of fuels within individual countries and across the 41 countries as a whole. Transport energy is taxed more highly than heating and process energy and energy used for electricity generation. In addition, energy from oil products is taxed more heavily than energy from other sources. Several countries tax coal at very low rates, or do not tax coal at all. Road transport is taxed at higher rates than other uses of energy. Of road use energy, diesel is taxed at lower rates in energy terms than gasoline in 39 of the countries considered, even though diesel is a more carbon intensive product. 

Regardless of the basis on which governments tax energy products, in practice they have often introduced exclusions or preferences to address potentially adverse impacts (real or perceived) of higher energy prices on particular groups of consumers or producers. It is increasingly recognized, however, that such preferences change relative prices in the economy in ways that have negative environmental impacts, lead to a loss of tax revenue, and create hurdles for increased use of alternative energy sources. Such tax expenditures are included in the analysis in as far as they are reported by the country concerned. Embedding the information on reported tax expenditures in the analysis of the taxation of energy use produces information complementary to the OECD’s Inventory of Estimated Budgetary Support and Tax Expenditures for Fossil Fuels which focuses on the value of tax expenditures. It shows that a significant amount of support in the countries analysed is provided through tax expenditures, including reductions in or exemptions from energy taxes.