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P R W P 10486

Measuring Total Carbon Pricing

Paolo Agnolucci

Carolyn Fischer

Dirk Heine

Mariza Montes de Oca Leon

Joseph Pryor

Kathleen Patroni

Stéphane Hallegatte

Development Research Group

Equitable Growth, Finance and Institutions Practice Group &

Sustainable Development Practice Group

June 2023

Public Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure Authorized

Produced by the Research Support Team

Abstract

e Policy Research Working Paper Series disseminates the ndings of work in progress to encourage the exchange of ideas about development

issues. An objective of the series is to get the ndings out quickly, even if the presentations are less than fully polished. e papers carry the

names of the authors and should be cited accordingly. e ndings, interpretations, and conclusions expressed in this paper are entirely those

of the authors. ey do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and

its aliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

P R W P 10486

While countries increasingly commit to pricing greenhouse

gases directly through carbon taxes or emissions trading

systems, indirect forms of carbon pricing—such as fuel

excise taxes and fuel subsidy reforms—remain important

factors aecting the mitigation incentives in an economy.

Taken together, how can policy makers think about the

overall price signal for carbon emissions and the incentive it

creates? is paper develops a methodology for calculating

a total carbon price applied to carbon emissions in a sector,

fuel, or the whole economy. It recognizes that rarely is a

single carbon price applied across an economy; many direct

carbon pricing instruments target specic sectors or even

fuels, much like indirect taxes on fossil fuels; and carbon

and fuel taxes can be substituted one for another. Tracking

progress on carbon pricing thus requires following both

kinds of price interventions, their coverage, and specic

exemptions. is inclusive total carbon pricing measure

can facilitate progress in discussions on minimum carbon

price commitments and inform assessments of the pricing

of carbon embodied in traded goods. Calculations across

142 countries from 1991 to 2021 indicate that although

direct carbon pricing now covers roughly a quarter of global

emissions, the global total carbon price is not that much

higher than it was in 1994 when the United Nations Frame-

work Convention on Climate Change entered into force.

Indirect carbon pricing still comprises the lion’s share of the

global total carbon price, and it has stagnated. Taking these

policy measures into account reveals that many develop-

ing countries—particularly net fuel importers—contribute

substantially to global carbon pricing. Tackling fuel subsidy

reform and pricing coal and natural gas emissions more fully

would have a profound eect on aligning carbon prices

across countries and sectors and with their climate costs.

is paper is a product of the Development Research Group, Development Economics; the Equitable Growth, Finance

and Institutions Practice Group; and the Sustainable Development Practice Group. It is part of a larger eort by the

World Bank to provide open access to its research and make a contribution to development policy discussions around the

world. Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/prwp. e authors may

be contacted at cph@worldbank.org.

Measuring Total Carbon Pricing*

Paolo Agnolucci,† Carolyn Fischer,‡ Dirk Heine,§ Mariza Montes de Oca

Leon,** Joseph Pryor,5 Kathleen Patroni,†† and Stéphane Hallegatte‡‡

Abstract

While countries increasingly commit to pricing greenhouse gases directly through carbon taxes or

emissions trading systems, indirect forms of carbon pricing—such as fuel excise taxes and fuel

subsidy reforms—remain important factors affecting the mitigation incentives in an economy.

Taken together, how can policy makers think about the overall price signal for carbon emissions

and the incentive it creates? This paper develops a methodology for calculating a total carbon price

applied to carbon emissions in a sector, fuel, or the whole economy. It recognizes that rarely is a

single carbon price applied across an economy; many direct carbon pricing instruments target

specific sectors or even fuels, much like indirect taxes on fossil fuels; and carbon and fuel taxes

can be substituted one for another. Tracking progress on carbon pricing thus requires following

both kinds of price interventions, their coverage, and specific exemptions. This inclusive total

carbon pricing measure can facilitate progress in discussions on minimum carbon price

commitments and inform assessments of the pricing of carbon embodied in traded goods.

Calculations across 142 countries from 1991 to 2021 indicate that although direct carbon pricing

now covers roughly a quarter of global emissions, the global total carbon price is not that much

higher than it was in 1994 when the United Nations Framework Convention on Climate Change

entered into force. Indirect carbon pricing still comprises the lion’s share of the global total carbon

price, and it has stagnated. Taking these policy measures into account reveals that many developing

countries—particularly net fuel importers—contribute substantially to global carbon pricing.

Tackling fuel subsidy reform and pricing coal and natural gas emissions more fully would have a

profound effect on aligning carbon prices across countries and sectors and with their climate costs.

Keywords: climate change, emissions trading, carbon tax, fiscal instruments, fuel subsidies

JEL codes: H23, Q58, D62

* This working paper features the technical appendix for the forthcoming version in the World Bank Research Observer.

† World Bank Development Economics Prospects Group; University College London, Institute for Sustainable

Resources

‡ World Bank Development Economics Research Group

§ World Bank Macroeconomics, Trade and Investment Global Practice

** International Monetary Fund, German Institute for Economic Research

†† World Bank Climate Change Group

‡‡ World Bank Sustainable Development Vice Presidency

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PolicyResearchWorkingPaper10486MeasuringTotalCarbonPricingPaoloAgnolucciCarolynFischerDirkHeineMarizaMontesdeOcaLeonJosephPryorKathleenPatroniStéphaneHallegatteDevelopmentResearchGroupEquitableGrowth,FinanceandInstitutionsPracticeGroup&SustainableDevelopmentPracticeGroupJune2023PublicDisclosureAuthorizedPublicDisclosureAuthorizedPublicDisclosureAuthorizedPublicDisclosureAuthorizedProducedbytheResearchSupportTeamAbstractThePolicyResearchWorkingPaperSeriesdisseminatesthefindingsofworkinprogresstoencouragetheexchangeofideasaboutdevelopmentissues.Anobjectiveoftheseriesistogetthefindingsoutquickly,evenifthepresentationsarelessthanfullypolished.Thepaperscarrythenamesoftheauthorsandshouldbecitedaccordingly.Thefindings,interpretations,andconclusionsexpressedinthispaperareentirelythoseoftheauthors.TheydonotnecessarilyrepresenttheviewsoftheInternationalBankforReconstructionandDevelopment/WorldBankanditsaffiliatedorganizations,orthoseoftheExecutiveDirectorsoftheWorldBankorthegovernmentstheyrepresent.PolicyResearchWorkingPaper10486Whilecountriesincreasinglycommittopricinggreenhousegasesdirectlythroughcarbontaxesoremissionstradingsystems,indirectformsofcarbonpricing—suchasfuelexcisetaxesandfuelsubsidyreforms—remainimportantfactorsaffectingthemitigationincentivesinaneconomy.Takentogether,howcanpolicymakersthinkabouttheoverallpricesignalforcarbonemissionsandtheincentiveitcreates?Thispaperdevelopsamethodologyforcalculatingatotalcarbonpriceappliedtocarbonemissionsinasector,fuel,orthewholeeconomy.Itrecognizesthatrarelyisasinglecarbonpriceappliedacrossaneconomy;manydirectcarbonpricinginstrumentstargetspecificsectorsorevenfuels,muchlikeindirecttaxesonfossilfuels;andcarbonandfueltaxescanbesubstitutedoneforanother.Trackingprogressoncarbonpricingthusrequiresfollowingbothkindsofpriceinterventions,theircoverage,andspecificexemptions.Thisinclusivetotalcarbonpricingmeasurecanfacilitateprogressindiscussionsonminimumcarbonpricecommitmentsandinformassessmentsofthepricingofcarbonembodiedintradedgoods.Calculationsacross142countriesfrom1991to2021indicatethatalthoughdirectcarbonpricingnowcoversroughlyaquarterofglobalemissions,theglobaltotalcarbonpriceisnotthatmuchhigherthanitwasin1994whentheUnitedNationsFrame-workConventiononClimateChangeenteredintoforce.Indirectcarbonpricingstillcomprisesthelion’sshareoftheglobaltotalcarbonprice,andithasstagnated.Takingthesepolicymeasuresintoaccountrevealsthatmanydevelop-ingcountries—particularlynetfuelimporters—contributesubstantiallytoglobalcarbonpricing.Tacklingfuelsubsidyreformandpricingcoalandnaturalgasemissionsmorefullywouldhaveaprofoundeffectonaligningcarbonpricesacrosscountriesandsectorsandwiththeirclimatecosts.ThispaperisaproductoftheDevelopmentResearchGroup,DevelopmentEconomics;theEquitableGrowth,FinanceandInstitutionsPracticeGroup;andtheSustainableDevelopmentPracticeGroup.ItispartofalargereffortbytheWorldBanktoprovideopenaccesstoitsresearchandmakeacontributiontodevelopmentpolicydiscussionsaroundtheworld.PolicyResearchWorkingPapersarealsopostedontheWebathttp://www.worldbank.org/prwp.Theauthorsmaybecontactedatcph@worldbank.org.MeasuringTotalCarbonPricingPaoloAgnolucci,†CarolynFischer,‡DirkHeine,§MarizaMontesdeOcaLeon,JosephPryor,5KathleenPatroni,††andStéphaneHallegatte‡‡AbstractWhilecountriesincreasinglycommittopricinggreenhousegasesdirectlythroughcarbontaxesoremissionstradingsystems,indirectformsofcarbonpricing—suchasfuelexcisetaxesandfuelsubsidyreforms—remainimportantfactorsaffectingthemitigationincentivesinaneconomy.Takentogether,howcanpolicymakersthinkabouttheoverallpricesignalforcarbonemissionsandtheincentiveitcreates?Thispaperdevelopsamethodologyforcalculatingatotalcarbonpriceappliedtocarbonemissionsinasector,fuel,orthewholeeconomy.Itrecognizesthatrarelyisasinglecarbonpriceappliedacrossaneconomy;manydirectcarbonpricinginstrumentstargetspecificsectorsorevenfuels,muchlikeindirecttaxesonfossilfuels;andcarbonandfueltaxescanbesubstitutedoneforanother.Trackingprogressoncarbonpricingthusrequiresfollowingbothkindsofpriceinterventions,theircoverage,andspecificexemptions.Thisinclusivetotalcarbonpricingmeasurecanfacilitateprogressindiscussionsonminimumcarbonpricecommitmentsandinformassessmentsofthepricingofcarbonembodiedintradedgoods.Calculationsacross142countriesfrom1991to2021indicatethatalthoughdirectcarbonpricingnowcoversroughlyaquarterofglobalemissions,theglobaltotalcarbonpriceisnotthatmuchhigherthanitwasin1994whentheUnitedNationsFrameworkConventiononClimateChangeenteredintoforce.Indirectcarbonpricingstillcomprisesthelion’sshareoftheglobaltotalcarbonprice,andithasstagnated.Takingthesepolicymeasuresintoaccountrevealsthatmanydevelopingcountries—particularlynetfuelimporters—contributesubstantiallytoglobalcarbonpricing.Tacklingfuelsubsidyreformandpricingcoalandnaturalgasemissionsmorefullywouldhaveaprofoundeffectonaligningcarbonpricesacrosscountriesandsectorsandwiththeirclimatecosts.Keywords:climatechange,emissionstrading,carbontax,fiscalinstruments,fuelsubsidiesJELcodes:H23,Q58,D62ThisworkingpaperfeaturesthetechnicalappendixfortheforthcomingversionintheWorldBankResearchObserver.†WorldBankDevelopmentEconomicsProspectsGroup;UniversityCollegeLondon,InstituteforSustainableResources‡WorldBankDevelopmentEconomicsResearchGroup§WorldBankMacroeconomics,TradeandInvestmentGlobalPracticeInternationalMonetaryFund,GermanInstituteforEconomicResearch††WorldBankClimateChangeGroup‡‡WorldBankSustainableDevelopmentVicePresidency1.Introduction...................................................................................................................................12.Climatepolicyinstrumentsandtotalcarbonpricing...............................................................43.Totalcarbonpricingindicator.....................................................................................................94.Dataandcurrenttotalcarbonprice(TCP)implementation.................................................104.1.Fuelconsumptionandemissionsdata......................................................................114.2.Directcarbonpricingdata..........................................................................................114.3.Indirectcarbonpricingdata.......................................................................................124.4.Exchangeratedata.......................................................................................................145.Trendsintotalcarbonpricing...................................................................................................145.1.Globaltrends................................................................................................................145.2.TCPacrossfuelsandsectors.....................................................................................175.3.HowfarhavewecomesincetheFrameworkConvention?.................................186.Sensitivitytoassumptionsanddirectionsforimprovement.................................................196.1.Exchangerates.............................................................................................................196.2.Datalimitationsandtrade-offs..................................................................................206.3.Pricingmarginalversusaveragecarbon...................................................................216.4.Effectiveness-weightedtotalcarbonpricing............................................................226.5.Othergreenhousegasemissions...............................................................................236.6.Otherpricinginstruments..........................................................................................237.Conclusions..................................................................................................................................248.Acknowledgments.......................................................................................................................259.References....................................................................................................................................26AppendixA.Methodology......................................................................................................................30A1.Estimatingemissionscoverageofpoliciesbyfuelandsector.......................................30A2.Determinethepointofregulationforeachfuel-subsector-mechanism......................31AppendixB.Analyticalrepresentation..................................................................................................32B1.Totalcarbonprice(TCP)andfirmincentives.................................................................32B2.Sector-specifictotalcarbonprice(TCP)...........................................................................33B3.Fuel-specifictotalcarbonprice(TCP)..............................................................................33B4.Country-leveltotalcarbonprice(TCP)............................................................................34AppendixC.Groupingofeconomiesbytype......................................................................................3511.IntroductionCarbonpricingisanessentialpolicyformitigatingclimatechange(Sternetal.2022).Itsignalstomarketsthesocietalcostofemittinggreenhousegases(GHGs),creatingfinancialincentivestoabateemissions,reducefossilfuelconsumption,andinnovatelow-carbonproductsandprocesses.Carbonpricingisfundamentaltowardimplementingthepolluterpaysprinciple—theeconomicprincipleenshrinedinPrinciple16oftheRioDeclarationonEnvironmentandDevelopmentof1992thatthecostsofpollutionanditsabatementshouldbebornebythoseemittingit.However,thereisnosingleformofcarbonpricing:designsdiffersignificantlyacrossspace,reflectingjurisdiction-specificcharacteristicsandpolicyobjectives.Thisheterogeneityposeschallengesforpolicycomparisonand,therefore,requirescomprehensivemetricsforstandardizing,aggregating,andcontrastingcarbonpricingefforts.Tohelpovercomethesechallenges,thispaperproposesanewmethodologyforcalculatingcarbonprices,theTotalCarbonPrice(TCP),whichcanbeusedtounderstandthefullpolicy-relatedpricesignalaffectingthecombustionofCO2-emittingfuels.Todate,mostofthefocusoncarbonpricinghasfollowedanarrowsetofpolicyinstruments,namelycarbontaxesandemissionstradingsystems(ETSs)(WorldBank2022,ICAP2023).TheTCPisdesignedtorecognizethemultiplebuildingblocksforaligningthefinancialcostsoffossilfuelcombustionandcarbon-intensiveprocesseswiththeirclimatecosts.Thesecomponentsincludenotonlythesewell-trackeddirectcarbonpricingpolicies,butalsoindirectcarbonpricingpoliciessuchasexcisetaxeson(andsubsidiesto)fossilfuels.Directcarbonpricingpoliciesimposeacostexpressedasamonetaryunitpertonofcarbondioxideequivalent,CO2e,whichisthenreflectedintherelativepricesofproductsandservices.Theiradvantageisinsendingaconsistentprice-per-tonsignalacrossabroadrangeofmarketactors.Indirectcarbonpricingpoliciesimposeacostonspecificcarbon-containingenergysources;althoughnotfullyalignedwiththecarboncontentacrossfuels,theseinterventionsnonethelessinfluencetherelativepricesofproductsandservicesandcontributetothenetpricesignal.1Bothtypesofinterventionscanthushelpimplementthepolluterpaysprincipleinwaysthatnon-pricingpoliciesorabatementsubsidiescannot.Recognizingthatmanydirectcarbonpricingpoliciesareappliedtoanarrowsetofsectorsorfuels—limitingtheextenttowhichcarbonpricingisappliedconsistentlythroughouttheeconomy—onequicklyfindsthatthedistinctionbetweenthesedirectandindirectbuildingblocksbecomesblurred.Indeed,agrowingbodyofworkobservesthatcarbontaxesandemissionstradingareonlyafractionofthecarboncostsimposedongoods(AldyandPizer;Cahartetal.,2022;Dolphinetal.,2020;OECD2021).Otherpolicies,suchasthenetfueltaxburden,canprovidethesameincentivedeliveredbydirectcarbonpricing,andotherenergytaxreformsoftenaccompanytheintroduction1Theframeworkproposedhereusesthetermsdirectandindirect,asopposedto“explicit”and“implicit”,becausethelatterhasbeenusedintheliteraturetorefertoseveraldifferentconceptsaffectingtheclarityoftheterm.Thisincludesshadowcostsofregulation,indirectcarbonpricingemergingfromfueltaxes(aswedohere),ortothecarbon-priceequivalentsrequiredtoachievethesamereductionsasrenewableenergypolicies.ofcarbonpricing.Focusingexclusivelyondirectcarbonpricesthenprovidesanincompletepictureofthelevelandthechangeinthebroaderpriceincentives.Examplesaboundacrossalltypesofcountriesandlevelsofdevelopment.Indonesiaannouncedin2022planstointroduceacarbontax(WorldBank,2022b),yetinMay2022,theparliamentapprovedanincreaseinenergysubsidies(Reuters,2022).Incontrast,Mexicophasedoutconsumptionsubsidiesongasolineanddieselandintroducedfueltaxesandcarbontaxes(Muñoz-Piña,MontesdeOca,andRivera2022).In2022,globalfossilfuelconsumptionsubsidiesdoubledcomparedto2021levelsandreachedall-timehighs,asgovernmentssoughttoshieldconsumersanddomesticpricesfromvolatileinternationalprices(IEA,2023;MutaandErdogan,2023).FocusingonlyondirectpricingwouldunderestimatetheoverallpricesignalinMexicoandoverestimateitinIndonesiaandinseveralEuropeancountries.Notinfrequently,thefiscalcarbonpriceburdenisreallocatedacrossinstrumentsratherthanaltered;failingtoaccountforindirectpricingpoliciescanthenresultinmisleadingassessmentoftheeffectsofadirectcarbonprice.Forexample,whenSwedenintroduceditscarbontaxin1991,itsimultaneouslyreducedfueltaxes.Similarly,whenUruguayintroduceditscarbontaxin2022,itsimultaneouslyreduceditsfueltaxongasoline(AdministraciónNacionaldeCombustibles2021).Abroaderperspectiveoncarbonpricingwoulddeemthischangeneutraltototalcarbonpricing,whileanarrowviewwouldcelebratethenewcarbontax.TheobjectiveoftheTCPistoprovideacomprehensivepictureoftheextenttowhicheconomiespricethesocialcostofGHGemissionsacrosscountries,sectors,andfuels.Themetricwillincreasetheinformationalbasefortheacademicandpolicydiscussionssurroundingcarbonpricingcomparability,minimumcarbonpricecommitments,andrulestounderstandtheincentivesunderfuturecarbonborderadjustmentmechanisms.Toachievetheseaims,theTCPneedstoreflectnotonlypricesortaxratesbutalsoeffectivecoverage,becausemanycarbonpricingsystemsonlycoveremissionsfromspecificenergy-intensiveindustries2orinstallationsaboveminimumemissionsthresholds.TheTCPshouldalsoreflecteffectiverates,netofspecialexemptions3andreducedrates,becausespecialprovisionsforspecificsectorsmayerodethepricesignal.Finally,theTCPshouldbetransparentandeasilyverifiable,requiringusingpubliclyavailabledataandminimizingmodeling,particularlywhereassumptionsarenoteasilyverifiable.Differentapproacheshavebeentakenintheliteraturetomeasurecarbonpricing.Twomainmethodologicalchoicescanbehighlighted:1)theselectionoftheinstrumentstobeincorporatedinthemetric,and2)themethodtocalculatetheprices.Selectioncannarrowlyfocusondirectcarbonpricinginstruments,broadentointegrateindirectcarbonpricing,orevenextendtoawiderdefinitionincorporatingotherinstruments.Earlytrackersofcarbonpriceshavefocusedondirectcarbonpricing.Forinstance,everyyearsince2013,theWorldBankState&TrendsofCarbon2InthecaseofCO2andtheindustrialsectors,thisincludesoilrefineries,steelworks,ironproduction,aluminum,metals,cement,lime,glass,ceramics,pulp,paper,cardboard,acids,andbulkorganicchemicals.3Notethatwhilesomeexemptionsfallunderthecoveragecategory,othersactasfreeallocationaffectingtheaverage(insteadofthemarginal)carbonprice;alastsetofexemptionsshowupasreducedrates(whenashareofafirms’emissionsisexemptfromthetax).Pricingreportskeymetrics4forETSsandcarbontaxes.TheWorldCarbonPricingdatabase(Dolphinetal.,2020,Dolphin,2022)isanotherexampleofadirectcarbonpricingmetriccomplementingState&Trendsbyprovidinganaverage(emissions-weighted)carbonpricemetricbothatthesectorandeconomy-widelevels.Otherapproacheshaveattemptedtoconsideramuchwiderscopeofpolicies,albeitattheriskofextendingthemeaningofcarbonpricingbeyonditslogicalscope.Cahartetal.(2022)proposeaweightedaverageofincentivescreatedbyseventypesofmarket-basedpolicies,includingrenewableportfoliostandards,feed-in-tariffs,andlow-carbonfuelstandards.Manyoftheseadditionalpoliciesinfluencetherelativepricesofcleanenergysources.Still,renewableenergypoliciesdonotlevycostsonordistinguishamongpollutingsources,weakeningtheircontributiontoatruecarbonpricingsignal.Anotherapproachtocalculating“implicit”carbonpriceshasbeentodivideexpendituresassociatedwithapolicybysomeestimateofavoidedemissions,resultinginameasureofaveragecosts(MarcantoniniandEllerman,2014).Suchstudiespointoutthatlesscomprehensiveordirectclimatepolicies(likethosefocusedonrenewableenergy)resultinhigherpricesduetohighercosts,whichshouldnotbeinterpretedasgreaterambition.IMF(2022),bycontrast,proposetoincorporateavarietyofpricingandnon-pricingpoliciesbycalculatingthecarbonpricethatwoulddelivertheequivalentamountofreductions,butthismethodintendstocalculateameasureofambitionratherthancarboncostalignment.Incorporatinganextensivesetofinstrumentsintoacarbonpricingmetricrisksmisrepresentingotherpoliciesasveryexpensive(orambitious)vis-à-viscarbonpricing,whichcanbemisleadingastotheirvalue,sincemanysuchpoliciesprimarilytargetothermarketfailures(e.g.,technologymarketfailuresorinformationbarriers).5Tofocusonpoliciesthatmoresquarelyimplementthepolluterpaysprincipleforclimatechange,thispaperproposesataxonomytoidentifytheinstrumentsdeliveringcarbonpricingforinclusionintheTCP.Theresultisabroaderviewthanthefirstmetricsfordirectcarbonpricing,whileavoidingexpansionintonon-pricingpoliciesorpoliciesthatincentivizenewtechnologieswithoutdisincentivizingpollutingbehavior.Asecondmethodologicalchoicedealswiththecomputationoftheindirectcarbonpricesanditinvolvesoneoftwoapproaches:bottom-up(viastatutoryreview)ortop-down(viainferencefromenergypricedata).Thebottom-uporstatutoryapproachrequirescollecting,reviewing,andprocessingtaxdatafromreviewsofofficialdocuments,includinglegislationandothergovernmentreports.TheOECD’sEffectiveCarbonRates(ECR)takesthisapproachtoestimatethetotalemissionspriceresultingfromtaxes(carbonandnetfueltaxes)andemissionstradingfor44OECDandG20countries.However,relyingonstatutoryreviews,thedataareavailableonlyforselectedyears(2018and2021)andalimitednumberofdevelopingcountries(OECD,2021).Bottom-upreviewsareonerous,anddocumentationisnotreadilyavailableformanydeveloping4State&TrendskeymetricsrelatingtocarbontaxesandETSsincludethecarbonpriceineachjurisdiction,globalcarbonrevenuescollected,andtheproportionofglobalGHGemissionscoveredbycarbontaxesandETSs.5Forexample,policiessupportingelectricvehiclesmayimplyanabatementcostofseveralhundreddollarspertonofCO2.However,theycanstillbecost-effectiveiftheyproperlyaddressinnovationmarketfailuresandbarrierstoadoption.countries.Thetop-downorinferenceapproachinvolvescalculatingthetaxratesimpliedbythegapbetweensupplycostsandretailprices.Thissecondapproachenablesabroadercoverageforregionsandperiods,asdataaremorereadilyavailable;however,totheextentthatpricesareobservedimperfectly,theapproachcanbelessaccurate.TheTCP,ascalculatedinthispaper,initiallyusesthetop-downapproachtocoverasmanycountriesaspossibleoveralongperiod.However,asmoreinformationbecomesavailable,theTCPwillgraduallymovetoabottom-upimplementation.Followingthismethodology,theTCPoffersacomprehensivemetric(includingdirect,indirect,positive,andnegativecarbonprices)thatcanbecomputedattheglobal,country,sector,andfuellevelforover140countriesfrom1991to2021.Severalimportantfindingscanbehighlighted.First,onlylimitedprogresshasbeenmadesinceinternationalclimatenegotiationsbegan30yearsago,whichshouldbeawakeupcalltoscale-upcarbonpricing(asakeyelementofapolicymix)iftheworldistoreduceemissionsbetweenone-quartertoone-halfoverthenextdecadeinlinewiththegoalsoftheParisAgreement.Second,whilethenumberofdirectcarbonpricinginstrumentshasincreasedsteadilyoverthelastdecade(WorldBank,2022),thedirectcomponentcontinuestobeasmallshareoftotalcarbonpricingtodate.Bycontrast,indirectformsofcarbonpricingarewidespreadacrossallcontinents,coveranimportantshareofglobalemissions,andatsignificantratespercontentofCO2;however,theyhavenotbeenrisingnoticeably.Third,indirectcarbonpricingisnotevenlyspreadacrossfossilfuels:ratesarehighestandmostpervasiveamongtransportationfuels,whileTCPsforindustryandespeciallythepowersectorsremainremarkablylow.Norisindirectcarbonpricingevenlyspreadacrosscountries.Higher-incomecountriesrelymoreheavilyonindirectfueltaxesthanlower-incomecountries,andnetindirectcarbonpricingisweakestamongfuelexporters,indicatingthatenergysubsidiesstillplayanimportantroleinweakeningcarbonpricingincentives.Byrevealingthedominantroleofindirectcarbonpricingmeasures,theanalysisunderscoresthattheevolutionofcarbonpricingincentivescannotbeassessedwithoutthem.Anexclusivefocusondirectcarbonpricinginstrumentsoverlookslargecontributionsbynetfueltaxestowardpricingcarbon,particularlyinnon-industrialsectors,andcontributionsmadebymanydevelopingcountries,whicharelesslikelytohavedirectinstrumentsbutmayhavehighlevelsofindirectcarbonpricing.Trackingindirectpricingisalsoimportanttoavoidoverstatingtheeffectofdirectcarbonprices,becausecarbontaxesappliedtofuelsarecommonlyintroducedinconjunctionwithbroaderenergytaxreformthatfeaturesoffsettingtaxreductions—andonoccasiontheyhavesimplyreplacedexistingfuelexcisetaxes.Finally,weconcludethatpolicyconsiderationsunrelatedtoclimatechangearedrivingtotalcarbonpricinglevels:TCPshavebeenpositivesincebeforeclimatechangewasaninternationalpriority.Takingpre-existingindirecttaxesintoaccount,wedonotobserveagreaterincreaseincarbonpricingamonghigherincomecountriesthanlowerincomecountriesduringtheperiodofclimatenegotiations,asonemightexpectinthespiritofcommonbutdifferentiatedresponsibilities.2.ClimatepolicyinstrumentsandtotalcarbonpricingIdentifyingtheinstrumentsdeliveringcarbonpricingisanessentialfirststepinmeasuringtotalcarbonpricing.Thissectionproposesaframeworktounderstandandcategorizesuchinstruments,elaboratingonPryoretal.(2023).Westartbydistinguishingpricingfromnon-pricingpoliciesandthenfurthercategorizebytargetormotive(seeTable1).Pricingpoliciesareinstrumentsprovidingacontinuousfinancialincentive—nototherwiseincludedinthemarketprice—fortargetedbehavior,includingtaxes,tradablepermits,andsubsidies.Non-pricinginstrumentsfallintoabroadercategory,comprisingpollutioncontrolmandates,non-tradablestandards,efficiencystandards,publicinfrastructureinvestment,mandatesfortheuseorphase-outofspecifictechnologies,andpoliciesaddressinginformationalmarketfailures,suchasproductlabelingandinformationdisclosure.Suchnon-pricingpoliciesarenaturallyoutofforthescopeofbuildingacarbonpricingmetric.However,itshouldbeunderscoredthatnon-carbon-pricingpoliciescanbedesiredinadditiontocarbonpricing,6astheycanaddressothermarketfailuresthatcarbonpricingisunabletotackledirectly(Fischeretal.,2012;FischerandNewell,2008).7Evenwherethesepoliciesmaybeaskedtosubstituteforpricingpolicies,categorizingthemastantamounttocarbonpricingwouldbothmisrepresentincentivesandundervaluetheirprimaryroleascomplementarypoliciestohelpdecarbonizeeconomies.Policiescanalsobecategorizedbasedonthemarketfailuretheyareprimarilygearedfortargeting,suchas(i)unpricedclimateandotherenvironmentalexternalities8;(ii)information,behavioral,andfinancialbarriers;and(iii)technologymarketfailures.Weincludeamong“carbonpricingpolicies”thoseprimarilyaddressingtheunpricedcarbonexternalitybyaccountingforthesocialcosts(orbenefits)ofemissionsassociatedwiththeproductionorconsumptionofagood,irrespectiveofthestatedobjectiveofthepolicy.Wefurtherdistinguishbetweendirectcarbonpricing—wherepaymentsaredirectlylinkedtoactualemissions—andindirectcarbonpricing,whichisappliedtocarbon-intensiveinputsviafuelexcisetaxesandsubsidiesaffectingfinalenergyconsumers.9TheresultfromthisapproachisshowninTable1.6Yet,inasecond-bestworldofunderpricedemissions,thesepoliciesareimplementedassubstitutesinmanycountries,whichcomesatanefficiencycost.7Whilecarbonpricingalsocreatesincentivestoadoptgreenertechnologies,itislessabletodirectlyaddressbehavioralandfinancialbarriersordeepertechnologymarketfailures.8Energytaxesmaybeintroducedtoaddressotherenvironmentalexternalitiessuchasthoseresultingfromunderpricingforlocalairpollution,congestionandroadaccidents.Similarly,energytaxesmaybeintroducedforotherrevenueraisingconsiderations,includingtofinanceothergovernmentpriorities(e.g.,inthe1980sChileintroducedfueltaxestofinancereconstruction(incl.ofroads)afterthedevastatingearthquake).9WeacknowledgethatsomecarbontaxesareimplementedasindirecttaxesbutincludedasdirectcarbonpricinginstrumentsintheStateandTrendsofCarbonPricing(WB2022b,2023b)becausetheyarecalledcarbontaxes.Wherethesetaxesarecalculatedinproportiontocarboncontentandappliedacrossmultiplefuelsandsectors,theyfallintothespiritofdirectcarbonpricinginthistaxonomy.Othersaremoreanalogoustoindirectcarbonpricingaswedescribeit,whichiswhyatotalcarbonpricingmetricissoimportant.Table1.Taxonomyofclimateinstruments127Directcarbonpricingincludescarbontaxesandemissiontradingsystems(ETSs),whichmayincludecap-and-tradeschemes(mass-basedtrading)ortradableperformancestandards(TPSs)(rate-basedtrading),17aswellascertaincarboncreditingmechanisms.Thesemechanismsalllevyacostdirectlyonemissionsorinproportiontothecarboncontentofaproduct,typicallyemission-intensiveinputs.Byapplyingaconsistentpricepertonofcarbondioxideequivalent(CO2e)acrossmultiplesources,directcarbonpricingcontributestoequalizingmarginalabatementcostsacrossemissionssources,whichminimizesthetotalcostsofclimatechangemitigation.IncorporatingthemarginalcarbonpricesarisingfromcarbontaxesandETSsintotheTCPisstraightforwardbutdependsoncoverage.IfanETSorcarbontaxcoversonlyasmallshareofacountry’semissions,weightingbycoveragetranslatesthisnominalpriceintoalowTCPfigure.OtherdirectcarbonpricinginstrumentscanbemorechallengingtoincludeintheTCP.Forexample,carboncreditingmechanismstypicallyinvolvevoluntarytransactions,andrelevantcoverageandpricedataarenotavailable,sotheyareexcluded.18WithaTPS(orevenaCATwith100%grandparenting),allcreditsareallocatedratherthanauctionedandtradescanremainprivate;withoutpublictradingonsecondarymarketsorabindingpricefloororceiling,themarketpricesmaynotbeclearlyrevealed.TheseETSsareincludedwiththebestavailablepricinginformationintheStateandTrendsofCarbonPricing(WB2023b).19IndirectCarbonPricingincludesfuelexcisetaxes,fuelsubsidies,andvalue-addedtax(VAT)deviations(arisingifVATratesonfuelsarebelowthestandardVATrate).Thesepolicyinstrumentsplayapartinpricingcarbonbecausetheyaffecthowmarketpricesoffuelsalignwiththeirsocialcosts,includingtheirenvironmentaldamages.However,sincethetaxorsubsidyratesaretypicallyfuel-specificandsetaccordingtoavarietyofmotives,20theirdegreeofalignmentwithclimatecostsistypicallylimitedandlessefficientthanbroad-baseddirectcarbonpricing.Fuelmixesalsovarysignificantlybysector,sotheimplicationsforcarbonpricingincentivesarealsosectorspecific.Inthecaseoffuelexcisetaxes,thepricesignalarisesviaaflatmonetaryamountperphysicalunitofthegood(e.g.,USD/liter),whichcanbeeffortlesslytranslatedintoacarbonrate(e.g.,USD/tCO2)usingthecarboncontentofthefuel.Whilefuelexcisetaxessendapositiveindirectcarbonpricesignal,fuelsubsidiesconstitutenegativecarbonpricing.SincetheTCPmeasures17ATPSallocatesemissionallowancesinproportiontooutputusingaperformancebenchmarkandisaformofemissionstradingfunctionallyequivalenttocombiningacarbonpricewithanoutput-basedrebate(Fischer2001,Fischer2019,Parry2014).18Carboncreditingmechanismsareasubsidyforclimatechangemitigationactivitiesratherthanapriceonemissions.19ExamplesincludeOutput-BasedPricingSystemsinCanadaorChina’sETS.20Examplesincluderevenueraising,energysecurity,roaduserfees,andpoliticalordistributionalaims.8carbonpricingfordomesticemissions,onlysubsidiesforfuelconsumption(asopposedtoproduction)areincluded.21Value-addedtaxesthemselvesarenotpartoftheTCP;asacross-the-boardconsumptiontaxes,theydonotaffectrelativeprices.However,insomecountries,value-addedtaxesarenotappliedatthesameratetofuelsastheyareappliedtoothergoods,creatingaformofsubsidy(indicatedasVATdeviationshenceforth).Becausethispracticereducesfuelconsumptionpricesandinfluencesrelativeprices,VATdeviationsareconsideredaformof(negative)indirectcarbonpricing.Duetotheeaseofconversionbetweenfuelunitsandcarboncontent,includingindirectcarbonpricingestimatesispossiblewithnocomplexmodelingactivitiesrequired.Themainchallengeisthat,becauseexcisetaxescanvarybysectororconsumertype,specificinformationisneededfortrackingtheirimpactdownstream.However,asisdiscussednext,thesesametechniquesarerequiredfortrackingdirectcarbonpricingimpactsup-ordownstream.Differencesandsimilaritiesbetweendirectandindirectcarbonpricing.Thecoretheoreticaldifferencebetweendirectandindirectcarbonpricesrelatestowhetherthepriceisconsistentacrossemissionsources,althoughthisdifferenceismuchlessstarkinpracticecomparedtowhattheyareintheory.Atoneendofthespectrum,adirectcarbonpricingsystemtreatsallemissionsequally(i.e.,withauniformcarbonprice)acrosstheentireeconomy.Attheotherendwouldbeasetoffueltaxationsystemsthatpricefuelsoractivitiesatdifferentrates(e.g.,combustionoffuelusedforroadtransportationcomparedtoindustrialapplications).Mostjurisdictionswithcarbonpricessitinthemiddleofthisspectrum.Manydirectcarbonpricingpoliciesapplynonuniformlyacrosssectorsorgroupsintheeconomy,suchasintermsofcoverage(e.g.,bytargetingonlycertainsectorsorexemptingcertainactivities)ortheappliedcarbonprice(e.g.,throughdifferentcarbontaxratesortradingsystemfeatures).Forexample,theEUETScoversonlypowerandindustrialsectors,withaseparatepartiallylinkedsystemforaviation.ArgentinaandMexicohaveintroducedcarbontaxeswithvaryingcarbontaxratesacrossfuels,independentofthecarboncontentofeachfuel.Whilegovernmentsmaycallthesepolicies“carbontaxes,”theyareclosertothedefinitionofindirectcarbonpricing,astheoverallcarbonpriceisnotdirectlyproportionaltoemissions.Thisspectrumofhowpoliciesaredesignedandimplementedunderscorestheneedtoincludebothdirectandindirectpricinginacomprehensiveframework,asdiscussedintheintroduction.Thispointraisesanothertopicofdebate:shouldthefocusoftheTCPbeonlevelsorchanges?Thequestionisimportant,giventhedominanceofexcisetaxesontransportationfuelsandwidespreadrelianceonthemforraisingrevenuesandfundingroadinfrastructuresincebefore21Productionsubsidesaffectmarginaldomesticcarbonpricingifthesubsidizedfuelisacommoditytradedinaglobalmarketandthemarketshareofthesubsidizingcountryislargeintheglobalmarket.Aproductionsubsidytoalocallytradedfuelwillaffectthemarginalpriceinthatmarket.Inthecaseofgloballytradedfuels,aprice-takercountrysubsidizingagloballytradedfuelwillhavenoimpacton(international)marginalpricesand,therefore,totaloutput.ThisisreflectedinTable1,wherefuelsubsidyreformintheproductionsectorisclassifiedashavingeitheranindirectornocarbonpricingsignal.However,thereisanambitiontoincorporateandextendthescopeoftheindirectcarbonpricingmetricasmoredatabecomesavailable.9climatechangebecameanurgentissue.Anargumentcanbemadethatsomeportionofthesetaxesareroaduserfeesorinternalizingotherexternalities—suchascongestion,localairpollution,orenergysecurityconcerns—towhichthecostofcarbonshouldbeadditional(Parryetal.,2014).TheTCPmeasureallowsfortheanalysisofbothperspectives.3.TotalcarbonpricingindicatorTooperationalizetheconceptofatotalcarbonprice,metricsareneededtoreflectthefull(directandindirect)net(positiveminusnegative)carbonpricesignalaffectingemissionsortheconsumptionofemissions-intensivefuelsataspecificlevelofanalysis,e.g.,inasector,inacountryorglobally.TheformulasfortheTCPindicatorsarepresentedinAppendixB.Whilethisanalysisfocusesonemissionsfromcarbon-intensivefuels,potentialextensionstotheTCPandalternativeweightingstrategiesarediscussedinSection7.Conceptually,theTCPcanbegroundedontheincentivesfacedbyafirmthatusesfuelandnon-fuelinputsofproductionandissubjecttopayingacarbonpriceforitsdirectemissions.Aprofit-maximizingfirmwouldequalizeitsmarginalbenefitsandcostsofadditionalfuelandnon-fuelinputs(SeeAppendixB);whenthecostsofusingemission-intensiveinputsrise,thefirmisincentivizedtoeconomizeonthem.Forthefirm,themarginalcostsofeachinputareinfluencedbytheintermediate(fuel)inputcostsandthedirectemissionscosts.Whenafirmissubjecttodirectcarbonpricing,thedirectCO2pricinginfluencestherelativecostsofinputsinproportiontotheirincrementalemissions.Ontheotherhand,indirectCO2pricingaffectsinputcostsviathepricetothefirm,whichincludestheupstreamsupplycostandanettaxwedgecorrespondingtothefueltaxesnetofsubsidiesperunitoffuelpaidbythefirm.Theaccumulatednettaxwedges,weightedbythefirm’suseoffuelsandtheirCO2intensity,representtheindirectcomponentoftheTCP.Asector-specificTCPmeasuresthecumulativedownstreamweightofcarbonpricingpoliciesforagivensector.Ideally,thecomputationofasector-specificTCPrequiresknowledgeofthelevelofdirectcarbonprices,directemissionscoverage,differentialtreatmentwithinasector,22andthesector-specificindirectcarbontaxes,includingmanyarisingupstream.Inthispaper,foreachcountryandyear,wecalculateasector-specificTCPasthesumoftwocomponents:theaveragepriceappliedtodirectemissions(accountingforcoverageasdescribedinAppendixB)andtheindirecttaxpaymentsperunitoffuel-relatedemissions,whichreliesonthenettaxwedgeasdescribedabove(SeeAppendixB).23Whenaggregatingacrossfuelstocomputethevaluefora22Forexample,manyETSsystemshaveminimumthresholdsforcoverage;inthesecases,ETS-coveredfirmsmaythenbeexemptfromfuelchargesthatareimposedonsmallerfirmsoutsidetheETS.23Thecalculationintendstocapturetheaveragepricepaidbyincrementalemissions.Thecarbonpriceappliedonaveragetoembodiedemissionswouldneedtoreflectfreeallocationandrebatesthatdependonfactorslikeoutputorproductioncapacity.10specificsector,theTCPcanpointoutdifferencesinthelevelofcarbonpricingacrosssectorsoftheeconomy,perhapsreflectingotherpolicyprioritiesorconcernsrelatedtointernationalcompetitivenessandaffordability.Afuel-specificTCPaggregatestheneteffectofcarbonpricingupstreamtothefuellevel.Calculatingitinvolvessummingtwocomponents:aweightedaverageofindirect(net)taxburdenandadownstreamfuel-relateddirectemissionspayment(SeeAppendixB).Calculatingthefirstcomponentcanberelativelystraightforward,sinceindirecttaxesarefuel-specific,althoughsector-specificexemptionsanddeviationsmustbeaccountedfor.24Further,CO2emissionsfromfossilfuelcombustionaremainlydeterminedbythefuel’schemicalproperties,sotheemissionsratestendtobestableacrossconsumptionlevels.Inthiscase,thedistinctionbetweenmarginalandaverageemissionsratesislikelytobesmall.Oneexceptionisthatsomefuelconsumedmaynotbecombusted,aswithnaturalgasasaninputtofertilizer.25Acountry-levelTCPcanbecalculatedbyaggregatingeitheracrosssectorsoracrossfuels.Aggregatingacrossfuelsinvolvesweightingthecarbonpricinginterventionsaccordingtothefuel-relatedemissionsshares,usingenergyconsumptionandemissionsfactorinformation.Finally,followingasimilarlogic,TCPestimatesfromthecountrylevelcanbeusedtocreateaggregatesatregional(e.g.,countryincomegroup)orgloballevels,usingrelevantemissionssharesasweights.Section6showsexamplesofglobal,country,sector,andfuel-levelestimationsoftheTCP.4.Dataandcurrenttotalcarbonprice(TCP)implementationComputationoftheTCPrequiresdatarelatedtonominalratesofthefiscalinstrumentsandpolicies,aswellastheamountofemissionseachrateisappliedto.TheempiricalapplicationsoftheTCPdiscussedinthispaperarefocusedonCO2emissionsfromcombustionprocesses,ratherthantotalgreenhousegasemissions,duetodataavailabilityandeaseofquantification.Thedatasetusedinthisstudyincludesinformationoncarbontaxesandemissionstradingsystems,fuelexcisetaxes,energyconsumptionsubsidiesandVATdeviationsforcoal,diesel,gasoline,kerosene,LPG,naturalgas,andotheroilproductsconsumedintheindustrial,power,residential,publicadministrationandservices,andtransportsectors.Thedatasetincludes142countries,withobservationsrangingbetween1991and2021althoughdataareavailableforashorterrangeinsomecases.AsweimplementacomparisonoftheTCPacrosslevelsofper-capitaincomeandfossilfueltradingstatus,wealsoneeddataonthesetwovariables.ThisdatasetallowsustocomputetheTCPattheglobalandnationallevelsandforspecificsectorsandfuelstoassesshowthefiscalburdenisallocatedacrossthesetwodimensions.Fiscalinstrumentsappliedtoelectricity24Forexample,taxesonfinalenergyconsumptionmaydifferfromthoseforenergyusedinproducingintermediategoods.25Fossilfuelsconsumedfornon-energyusesarehowevernotincludedintheimplementationofthetotalcarbonpriceinsections5and6.11consumptionarenotincludedforconsistencyanddatalimitationsreasons.26FinallyaswecomparethefindingfromtheTCPtothosefromtheneteffectivecarbonrates,dataonthesemetricsfor2021aretakenfromOECD(2022).4.1.FuelconsumptionandemissionsdataDatafromenergybalancespublishedinIEA(2022)asemployedinWorldBank(henceforthWB)(2023a)areusedtodeterminetheamountoffuelaffectedbyeachcarbonpricinginstrument.Fromthisdataset,wesourceconsumptionoffossilfuelsacrosseachsector:1)industrial,272)power,3)residential;4)servicesandpublicadministration;and5)transportsectors.28Itisimportanttomentionthatthesumofthesefivesectorsdoesnotcoverallfossilfuelcombustedinthewholeeconomy.Forexample,emissionsfromaviationarenotincorporatedinthetransportsector.Inparticular,theIEAdatasetprovidesinformationaboutthefuelconsumptionineachsectorforthefollowingfuels:1)coal;2)diesel,3)gasoline;4)kerosene;5)LPG;and6)naturalgas29(IEA,2022).CO2emissionsfactorsusedtocomputeemissionsfromfuelconsumptionareobtainedfromWB(2023a).DatafornetimportsandexportsoffossilfuelshavebeensourcedfromIEA(2022).30ThisenergyandemissionsdataallowscalculatingtheTCPforeachcountryandyearatthenational,sector,andfuellevels.4.2.DirectcarbonpricingdataDatafordirectcarbonpricesaretakenfromWB(2022a),whichcontainsnominalratesandcoverageforeachcarbontaxandemissionstradingschemeatthejurisdictionlevel.However,itdoesnotprovidequantitativeestimatesforsupportmeasures,suchasfreeallocationofallowances26First,anelectricitytaxincentivizesconservationbutdoesnotdistinguishamongfuelsourceswithrespecttotheircarbonintensity;therefore,itismoreappropriatelyconsideredtoaddressbehavioralortechnologymarketfailuresrelatedtoenergyefficiency.Furthermore,electricitypricedataisnotreadilyavailableacrossallcountriesanddeterminingareferencesupplycostisproblematicduetoahostofotherfactors,suchastariff-settingregulations,marketstructure,interventionsfromthegovernmentandpositiveexternalitiesarisingfromelectricityaccessandwiderelectrification.Finally,aselectricityisageneratedformofenergyratherthanaprimaryfuelsource,thecarbonpriceequivalentofagivenelectricitytaxwoulddifferdependingonthecountries’averagecarbonintensities,whichdifferinwaysthataremorecomplicatedtocalculate.27Theindustrialsectorincludessubsectorsrelatedto:1)cement;2)construction;3)foodandforestry,4)ironandsteel;5)machinery;6)miningandchemicals;7)non-ferrousmetals;and8)othermanufacturingsectors.ItexcludesconsumptionrelatedtoenergytransformationencompassingthefollowingIEAflows:1)transformationprocesses;2)transfers,includingpipelines;3)energyindustryownuse;4)distributionallosses,and5)astatisticaldifference(WB2023a).28Thetransportsectorincludesthreesubsectors:1)domesticshipping;2)railways,and3)roads.Eachcategoryincludesconsumptionrelatedtobothfreightandpassengertraffic.29DetailedinformationonIEAflowsincorporatedineachitemofthefueltaxonomyusedherecanbefoundinWB(2023a).ConsumptiondataareexpressedinthousandTonsofOilEquivalent(kTOE).30Thisvariableismeasuredbytheflows“CrudeoilandNGLimports”and“CrudeoilandNGLexports”sothatameasureofnetexports(exportsnetofimports)canbeeasilycomputed.12inETSs.31AsWB(2022a)onlyprovidescoverageestimatesatthejurisdictionlevel,theproportionofacountry’semissionsfromeachsectorandfuelcoveredbyeachETSandcarbontaxwereestimatedbasedoninstrument-specificcoveragepolicies(seeAppendixA).4.3.IndirectcarbonpricingdataAsdataonstatutorynominalratesforfuelexcisetaxesandsubsidies,asusedbyOECD(2021),arenoteasilyaccessibleforallcountriesincludedintheTCP,muchlessonanannualbasis,aproxyfornetfueltaxesiscomputedforeachspecificfuel-sectorcombinationfollowingtheprice-gapapproach(Kosmo,1987,LarsenandShah,1992:Coadyetal.,2019).Themethodcalculatesthenetfueltaxbycomparingdataforsupplycosts,andretailpricesnetofVATandupstreamcarbonpricesthatarereflectedintheretailpriceasfollows:netfueltax=retailprice–supplycost–VATpayments–upstreamcarbonpriceThesourcedataaredrawnfromanupdatedversionofthedatasetinParryetal.,(2021)andWB(2023a),whichincludesinformation,disaggregatedbyfuelandbysector,on:•Theretailprice,anaverageend-userpricepaidbyfinalusersinthecorrespondingsectororforthewholeeconomy,whichincorporatesallapplicabletaxesandsubsidies,includingVATpayments.Forexample,thisistheaveragepriceforgasoline‘atthepump’.•Supplycost,anaveragecostincludingallproduction,transformation,transportationanddistributioncostsandprofitsbutexcludingtaxes,asdiscussedbelow.Itincludesproducersubsidiestotheextenttowhichtheyarereflectedinthesupplycostbyproducers.VATrates,includingthestandardVATrateineachcountryandthereducedratesgrantedtospecificfuelsforalimitedsetofend-uses.TheeffectiveVATrateonenergyconsumedintheindustrial,powergeneration,andservicesectorsiszerobecausetheseusersreclaimpaidVAT.Theoutputofthesesectors,e.g.,theelectricityproducedbythepowersector,carriesVATwhenconsumedbyhouseholds.RetailpricesAnnualaverageretailpricesarewidelyavailableforcoal,naturalgas,andelectricityataneconomywidelevel,aswellasdisaggregatedbymainend-user—industrial,residential,andpowergeneration.However,forotherfuels(e.g.,gasolineanddiesel)onlyeconomywideannualaverageretailpricesareavailable(Parryetal,2021).ThedatasetfromParryetal.,(2021)doesnotincludespatiallyspecificfuelprices.Accordingly,retailpricesforsomefuelsaretakenfromIMFandWorldBankcountrydeskdatasets.Forcaseswheresuchdatawasnotavailable,theyuseasimpleaverageacrossvariousthird-partysources,includingEurostat,IEA,WorldBankDoingBusinessIndicators,GlobalPetrolPricesRetailEnergyPriceData,andEnerdataGlobalEnergy&CO231Whendifferentcarbontaxratesareappliedinthesectortheycover,thispaperusesthehighestrateinthecomputationoftheTCPasWB(2022a)doesnotprovidequantitativeestimatesofemissionscoveredbyeachspecifictaxrate.13Data,asdiscussedinAnnexBofParryetal.,(2021).Missingdatafornaturalgasandcoalusedinthepowergenerationsectorwerefilledbyusingpricesintheindustrialsector,andviceversa.Wheredataaremissingforbothsectors,Parryetal.,(2021)assumetheretailfuelpriceisequaltothesupplycostplusanyknowntaxes,includingimportduties(weightedbytheshareoftheimportedfuel)andpre-retailtaxes(suchasanupstreamcarbontax).32SupplycostsTorepresentsupplycosts,thedatabasereliesheavilyonimportpriceinformation,supplementedbyestimatesorassumptionsofappropriatemarkups.Supplypriceincludesmark-upsforwithin-countrytransportation,distribution,marketing,andmargins,withhighermarginsforresidentialusersthanforindustrialpowergeneration(followingUSEIA,2021andEuropeanCommission,2018).Inthecaseoffinishedpetroleumproducts,supplycostsconsistoftheport(orhub)pricesfromIEA(2021),withcountriesmappedtoeithertheUnitedStates,NorthwesternEurope,orSingapore.Parryetal.,(2021)priceLPGata30%discounttogasoline,takingasareferencethedifferencebetweengasolineandLPGpre-taxpricesforunsubsidizedEuropeanmarkets.ItisimportanttohighlightthatLPGpricesmayvaryconsiderablywithincountriesduetothesizeofthecylinders,localmarketconditions,andlocaldeliveryarrangements.Kojima(2021)notesthatsellingLPGinsmallquantitiesmakesthefuelmoreaffordable–intermsofexpenditureperpurchase–butiscostlierforeachkgsold.Theauthorpointsoutthatmarketswithnopricecontrolshavesettledoncylinderslargerthan10kg,tostrikeabalancebetweenaffordabilityandsupplycost.Parryetal.,(2021)alsodiscussestheshippinganddistributionmarginsappliedforallcountries,namely$0.15-$0.22perliter–basedontheaverageofunsubsidizedOECDcountries.Anadditional$0.10perliterisaddedtoland-lockedandsmall-islanddevelopingcountries.Inthecaseofnaturalgas,supplycostsarebasedonhub,importornet-backexportpriceswithupwardadjustmentsfortransportationanddistribution.Domesticnaturalgaspriceswereavailableforlargenaturalgasmarkets(e.g.,mostEuropeanandSouthandEastAsiancountries),33whilecountrieswithmissingdomesticpricesweremappedtoaspecificregionalhubprice(eithertheUS,NetherlandsTTF,orNortheastAsianLNG).Inthecaseofcoal,Parryetal.,(2021)documentthemethodsusedtoinfertheexportorimport-paritypricewithmark-upsfortransportation,processing,anddistributionreflectingthetypeofuser(power,industrial,andresidentialsector)andextentofdomesticproduction.Forelectricity,supplycostswereprovidedbyIMFcountrydesksorcalculatedusingtheCPATmodel(WB2023a).VATdeviationsTheVATcomponentisassessedbysourcingtheVAT(inpriceperunitofenergy)appliedtoaspecificfuel(containedintheIMFdatabase).Likeinthecaseofretailpriceandsupplycosts,the32Thisscenarioisfairlycommon,occurringinabout50%ofcasesforcoal,40%forgas,10%forgasolineanddiesel,and30%forLPGandkerosene.33InthecaseofLNGexporterswithoutawell-functioningdomesticnaturalgasmarket,acountry-specificliquefactionandshippingfeewasdeductedtonet-backpricesfromdeliveryabroad(Parryetal.,2021).14datasetusedinthisstudydoesnotincludewithincountryVATreceipts,thereforenottakingintoaccountthatthesamefuelcanbesubjecttodifferentratesacrossadministrativeunitsandlocationsofacountry.Thisisparticularlyrelevantincountrieswithpricesvaryinggreatlyacrosssub-nationaljurisdictions.VATratesfromtheIMFdatabasearealsousedtocomputeVATdeviations,asthedifferencebetweentheoverallVATrateandtheVATrateapplyingtoaspecificfuel.4.4.ExchangeratedataCountriesimplementcarbonpricingintheirlocalcurrenciesand,toallowcomparabilityacrossjurisdictions,carbonpricesareoftenconvertedtotheirUSDequivalentsbyusingmarketexchangerates(MER)(WorldBank,2022).AnalternativetousingMERsusingpurchasingpowerparities(PPP).Forcarbonpricing,thechoicebetweenMERandPPPcanbeinformedbytheaimofthecomparison.WhentheaimistoexaminetheburdenonhouseholdsandfirmsPPPsaremorepropriate,astheyallowtoincorporatedifferencesinpurchasingpowerandreallivingstandards(AldyandPizer,2016,Blanchet,2017).Whentheaimistounderstandhowleveltheplayingfieldisinthecontextoftradedgoods(e.g.,embodiedcarbon),MERaremoreappropriate(AldyandPizer,2016).ThispaperfirstpresentsestimatesinusingMER,butalsousesPPPforsensitivityanalysisinSection7.AconversionfactorfromconstantMERU.S.dollarstointernationaldollarsisobtainedbydividingGDPdataexpressedininternationaldollars(seriesNY.GDP.MKTP.PP.KDintheWorldBankWorldDevelopmentIndicators(WDI))byGDPdataexpressedconstantU.S.dollars(seriesNY.GDP.MKTP.KDintheWorldBankWDI).5.TrendsintotalcarbonpricingAggregateTCPdatacanbeusedtoevaluatethestatusofandtrendsincarbonpricingworldwide,acrosscountrytypes,sectors,andfuels.Thefollowingresultspointatseverallessons:First,TCPhasshownlimitedprogresssincetheearlyinternationalclimatenegotiationsof30yearsago.Second,despiteprogress,directcarbonpricingremainsasmallshareoftotalcarbonpricing.Moreemissionsarecoveredathigherratesbyindirectformsofcarbonpricing.Third,indirectcarbonpricingisdominatedbytransportationfueltaxes(andsubsidies);carbonpricingforindustryandespeciallythepowersectorremainsremarkablylow.Fourth,netindirectcarbonpricingisweakestamongfuelexporters.Finally,whilehigher-incomecountrieshavehigherindirect(andtherebytotal)carbonpricinglevelsthanlower-incomecountries,theirTCPshavenotincreasednoticeablymorecomparedtocountriesinlowerincomecategories.5.1.GlobaltrendsFigure1presentstheglobalaggregateTCP,itscomponents,andtheirvariationacrosscountriestounderstandhowdifferentcircumstanceshaveinfluencedcarbonpricing.WefollowVagliasindi(2012),whopointsoutthatstructuralandeconomiccountrycharacteristicscorrelatewithcountries’levelsofenergytaxorsubsidypolicies.Accordingly,wesplitthecountriesbasedon151.thelevelofeconomicdevelopment:Low-incomeandLower-middle-income,indicatedas“LLMICs”andUpper-middle-incomeandHigh-incomecountries,indicatedas“UMHICs”;and2.theaccesstonationalenergysources:netexportersandnetimportersofoilandnaturalgas.Wethereforeendupwithfourgroups:LLMICsthatarenetexportersoverthetimerange,LLMICsthatarenetimporters,UMHICsthataremainlynetimporters,andUMHICsthatarenetimporters.Countrycontributionstocross-countryTCPaggregationsareweightedbyemissions.Thelargestemitters,ChinaandtheUS,aswellasmostEUmemberstates,bothfallintotheUMHICcategory.(FullclassificationsaregiveninAppendixC).Globally,weobserveslowprogressontotalcarbonpricingoverthelast30years.Theuseofdirectcarbonpricinginstrumentshasgrownovertime,buttheystillcoveronlyaquarterofglobalemissionsandapplyrelativelylowrates,resultinginasmallcontributiontotheTCP.Bycontrast,in2021,87%oftheTCPstemmedfromtheindirectpricingcomponent,whichshowsasmallupwardtrend,albeitwithadownturnin2021.ThelowerpanelofFigure1revealsstrikingdifferencesamongthefourcountrycategories.LLMICshavenegligibledirectcarbonpricingandlowerindirectcarbonpricesthanUMHICs.Netenergyexportersinbothcategorieshavesignificantlylowerindirectcarbonpricesthantheirnet-importingpeers.Inparticular,netexportingLLMICshaveonaveragebeennetsubsidizersoffossil-fuelemissionsattherateofUSD25/tCO2inthelastfiveyears.Fortheothergroups,theTCPispositiveinthelast5yearsofthesample,withanaverageofUSD10/tCO2inimportingLLMICs,USD25/tCO2inexportingUMHICs,andUSD42/tCO2inimportingUMHICs.ThelowerlevelsofenergytaxationinLLMICsmayresultfromconstraintsintheinstitutionalandtaxationcapacity(includingtheabilitytominimizetaxevasions)ratherthanbeingadeliberatepolicychoice.Inallcases,thelevelandpatternoftheTCPiscloselyassociatedwiththepatternofenergytaxation,althoughdirectcarbonpricingbecomesnoticeableamongtheUMHICs.16Figure1.GlobalTCPanditscomponentsin2021dollars.OnlytheICPisshownwhenitidenticallyoverlapswiththeTCP.ThelistofcountriesbelongingtoeachofthefourgroupsisshowninAppendixC.Figure2illustrateskeytrendsindirectcarbonpricing,distinguishingbetweenpolicyprices(theaverageofthepricesappliedtoemissionsweightedbytheemissioncoveredbyeachinstrument)andeffectiveprices(theaveragerateofdirectcarbonpricingofallemissions).TheleftpanelofFigure2showsthatwhereinstrumentsareinplace,carbonpolicypriceshaverangedfromUSD10to45pertCO2.Thenumberofcarbontaxeshassteadilyincreasedsincethe1990s,yettheaveragecarbontaxrateshaveconsistentlybeenbetweenUSD30and45pertCO2.Thefluctuationsoccurredasnewcarbontaxesemergedwithlowrates,whilelong-standingcarbontaxesincreasedtheirhighrates.TheETSratesshowmuchmorevariability,initiallyduetotherelativelysmallnumberofschemesandthemorevolatilenatureofemissionsmarkets.Thespikein2021isduetotheintroductionofafewschemes.China’snationalETS,launchedin2021,increasedglobalemissionscoverageby7.4%.Additionally,afewcarbonpricinginitiativeswithrelativelyhighcarbonpricesemergedinthatyear,suchasGermany’snationalETSforheatingandtransportfuels,whereallowancessoldforaboutUSD30/tCO2.WhenplottingtheeffectiveratesintherightpaneofFigure2,adifferentmessageemerges:Globaldirectcarbonpricesremainlowduetolimitedcoverage,althoughtheyhavebeenrisingasthatcoveragehasexpanded,reachingUSD3/tCO2in2021.Forexample,ETSscoverjust16%ofglobalemissionsin2021,with8%coveredjustbyChina’snationalETS.17Figure2.Policyprices(leftpanel)andeffective(rightpanel)globalrateofdirectcarbonpricingin2021dollars.TherightpanelofFigure2highlightsthatdirectcarbonpricinginstrumentsareunlikely,ontheirown,todelivertheambitioustargetsoftheParisAgreement.Ouranalysis,therefore,supportsthedecisionatCOP26on“acceleratingeffortstowardsthe[…]phase-outofinefficientfossilfuelsubsidies”,thefirstnegotiatedreferencestoendingfossilfuelsubsidiesintheUNFCCC’s26-yearhistory(UNClimateChangeConferenceUK2021).Similarly,fueltaxationhasaclearroletohelplimitGHGemissionsasdiscussednext,aswellasforotherpoliciesinthepolicymix.5.2.TCPacrossfuelsandsectorsFigure3illustrateshowtheTCPvariesacrossfuelsandsectors.Itshowsthatliquidfuels(dieselandgasoline)havethehighestpricesonembodiedcarbon,thankstohighindirecttaxes;asaresult,thetransportsectorhasthehighestTCP,followedbyservices,wheretransportationfuelscomprisealargeshareoftheirenergyconsumption.Thelowcarbonpriceoncoallargelyarisesfromdirectcarbonpricinginstrumentsappliedtothepowersector;althoughtheyhavebeenincreasing,thatsectorisalsosubjecttoindirectfueltaxesonnaturalgas,whichriseandfallinthesample.Industryandresidentialconsumersuseabroadermixoffuels,andtheirTCPsreflecttheunderlyingtrends.Thesedivergencesrevealpotentialopportunitiestobroadentheapplicationandincreasethestringencyofcarbonpricinginstrumentstoaccesslowercostabatement,particularlyinnon-transportsectors.18Figure3.TrendsinglobalTCPbysectorandfuel.5.3.HowfarhavewecomesincetheFrameworkConvention?TheUnitedNationsFrameworkConventiononClimateChangeenteredintoforcein1994.Fromthispointforward,therewasaglobalagreementtotakeclimatechangeseriously.Atthatpoint,asidefromahandfulofpoliciesinNordiccountries,directcarbonpricinghadyettodevelop.However,substantialindirecttaxationofcarbon-emittingfuelswasalreadyinplace.Thesetaxesweremotivatedbymanyfactors,includinggeneralrevenuecollection,earmarkedfundingforbuildingroadsortransmissionnetworks(userfees),orenergysecurity.Figure4takesstockofhowtotalcarbonpricinghaschangedcomparedto1994.Weseelimitedbutoverallpositiveprogressglobally,andthatthemagnitudeofchangesinindirectcarbonpricinghasnotbeenthatdifferentfromthatindirectcarbonpricing(althoughithasbeenmorevariable).Whenwecompareacrosscountrytypes,exceptingLLMICexporters,wenowseelittledifferenceintheevolutionoftheTCPbetweendevelopinganddevelopedcountries,particularlyinrecentyears.Inotherwords,UMHICshavenotraisedtheirTCPsnoticeablymorethanLLMICimporters.WhileUMHICexportershadoveralllowerTCPlevelsthanUMHICimporters(Figure4),hereweseelittledifferencebetweentheminthechangeinTCPsincetheFrameworkConvention.However,amongLLMICexportersadeteriorationintheTCPisnoticeable(thoughhighlyvolatile).19Figure4.ChangesinglobalTCPanditscomponentscomparedtothelevelsin1994.6.Sensitivitytoassumptionsanddirectionsforimprovement6.1.ExchangeratesAsdiscussedinsection4,theappropriatechoiceoftheexchangeratetoconvertcarbonpricesdenominatedinlocalcurrencytoUSdollarsdependsontheaimofthecomparison.MERareappropriateinthecontextoftradedgoodsandwhenthepurposeistounderstandhowleveltheplayingfieldis;bycontrast,PPPsarerecommendedwhenexaminingtheburdenonhouseholdsandfirms.ThispaperusesMERasadefaultforallplots.However,themaindifferencesandconsequencesofbothapproachesmeritdiscussion.AnestimationoftheTCPusingPPPswilladjustforpurchasingparity,amplifyingcarbonpricesimposedinlower-incomecountries.OnemightexpectthePPPmethodtoincreasetheoverallassessmentofcarbonpricingrelativetousingMER.However,intheaggregate,theTCPcalculatedviaPPPsgiveslowerpricesthantheonecalculatedusingMER,asseeninthetopgraphofFigure5.TheintuitionisthatPPPamplifiesnotonlycarbonpricesbutalsofuelsubsidies,asseeninthebottomhalfofFigure5,wherethePPPapproachtendstoincreasetheTCPamongnetfuelimportersbutdecreaseitamongfuelexporters.20Figure5.ComparisonofTCPwithpurchasingpowerparity(PPP)versusmarketexchangerates(MER)6.2.Datalimitationsandtrade-offsAsdiscussedinSection4.2,theprice-gapapproachtocalculatingindirectemissionspricinghasbenefitsintermsofenergydataavailabilitybutchallengesforinterpretingestimatedgapsasaccuratemeasuresofgovernmentfiscalinterventions.KojimaandKoplow(2015)pointoutthatcalculatingadjustedreferencepricesmayrequirededicatedstudiestakingintoaccountdiversitywithinacountry,especiallylargecountriessuchasBrazilorChina,intermsoflocation-specificcostsoftransportation,storage,distribution,andretailing,butalsoexemptionsandthresholdswhichcanbegrantedtospecificusersorusesofacertainfuel.Itisalsotruethatpoliciesboostingdomesticprices,suchasmarketpricesupport,wouldherebeinterpretedasequivalenttoataxonenergyiftheyleadtoanincreaseinretailprice(KojimaandKoplow2015).Afinalpointisrelatedtothefactthatretailpricesoffossilfuelsareaffectedbycompetitioninthemarket:producerswithmarketpowerwilltendtohavehighermarkupsovertheirsupplycosts.Whenusingthepricegapmethodology,highermarkupsinconcentratedmarketswillbemisinterpretedashigherindirecttaxes,eventhoughthehigherretailpriceisnotduetotheimpositionofanypolicyinstrument.ThefollowingfigurecomparestheTCPresultsusingthepresentprice-gapmethodologyforindirectcarbonpricingwiththeOECD(2022)effectivecarbonrate(ECR)methodology,whichreliedondeskreviewsoffuelexcisetaxesandconsumptionsubsidies.TheECRstudycoversanarrowersetofcountries,butagoodnumberofnon-OECDcountriesisavailablefor2021.ForOECDcountries,theresultsseemgenerallywellaligned,butwithsomeimportantvariations.Inmorecases,theTCPseemstooverstatethecontributionofindirectcarbonpricing,relativetowhatcanbedocumentedbypolicyreview.However,forsomecountries—particularlytheless21affluentmembers—theTCPestimatesarewellbelowtheECR,evenchangingsigns.Fornon-OECDcountries,thesignscorrelatewell(therearefewcaseswithapositiveECRandnegativeTCP,orvice-versa),butthelevelsarehighlyvariable.Forthesereasons,wehesitatetocompareresultsforindividualcountries.Aconcertedandcoordinateddatacollectioneffortusingcomparablemethodologieswouldbevaluableforconsistentcomparisonsacrossawiderangeofcountriesandforimprovingthecalibrationanduseofprice-gapmethods.Figure6.ComparisonbetweenthenetEffectiveCarbonRate(ECR)andtheTCP.6.3.PricingmarginalversusaveragecarbonTheTCPestimatedinthispaperreflectsthemarginalcarbonprice—theeffectivepricepaidbyanadditionaltonofCO2combusted.Anaturalextensionwouldbetoestimateatotalaveragecarbonprice—thetotalcarbonpaymentspertonofemissions.Bothmeasurestakeemissionscoverageintoaccount,butanaveragecarbonpricewouldalsoaccountforthefreeallocationofemissionallowances,inframarginaltaxexemptions,andoutput-basedrebatesorbenchmarks.Theseprovisionsdriveawedgebetweenmarginalandaverageemissionsprices,becauseemitters’netcarbonpaymentsreflectonlyashareofthevalueoftheirtotalemissions.Suchmeasuresarecommonlyusedindirectcarbonpricingschemes,inparticularforindustrialemittersthatarehighlytradeexposed,asawaytorelievecompetitivepressures(FischerandFox2012),ortolimitconsumerpriceincreases(FischerandPizer2019).However,freelyallocatedallowancescanreducetheeffectivenessofthemarginalcarbonprice.Ifthefullembodiedcarboncostsarenotpassedon,consumerslackincentivestoengageinconservationortopurchasealternativelow-22carbonproducts.Freeallocationcanalsocreatewindfallprofitsandreducethecostpressuresthatdrivefirmstoinvestincleantechnologies(FluesandVanDender,2017;OECD,2021).Averagecarbonpricingisthusanimportantindicatorforunderstandingfullcarboncostalignment.Itwillalsobeessentialfortheimplementationofbordercarbonadjustmentpolicies,whichseektoensurethatallcarbonembodiedincoveredgoodsispricedatthesameleveldomestically.Inotherwords,averageandnotmarginalemissionsareadjustedattheborder,meaningthatcreditsforcarbonpricinginotherjurisdictionswillbebasedonaverageandnotmarginalcarbonprices(Cosbeyetal.2019).6.4.Effectiveness-weightedtotalcarbonpricingTheTCPmeasuresthe(price)incentive,butitisnotnecessarilyagoodindicatorofthetriggeredmitigationoutcomes.TheTCP,asimplementedinthisarticle,usesasimpleweightingsystemofemissionssharestounderstandtheaverage(marginal)pricefacedbyemissionsinaneconomy,sector,orfuel.Thecurrentgenerationofcarbonpricingmeasures—suchastheWorldCarbonPricing(Dolphin,2022)database,theEffectiveCarbonRates(OECD,2021),andthemeasurepresentedhere—arefocusedonproducingadescriptivemeasureofthecarbonpriceratherthanonthemoredifficultendeavorofassessingthedecarbonizationimpactsofthecarbon.Ifthegoalisanindicatoroftheenvironmentaleffectivenessofcarbonpricing,alternativeweightingoffuel-andsector-specificcarbonpricingcanbeusedtobetterpredicttheimpactonemissions.Mitigationelasticity34–thepercentagechangeinCO2emissionsasaresponsetoapercentagechangeintheCO2price–islikelytodifferacrossinstruments,countries,sectors,andfuels.Factorsthoughttoinfluencethesizeofmitigationelasticityincludethelevel,varianceanduncertaintyoftheCO2price,35thesaliencyandtransparencyoftheinstrumentusedtodelivercarbonpricing,36theinstrument’sfuelandsectorcoverage,theavailabilityofsubstitutestothefuelaffectedbycarbonpricing,andthesizeoftheabatementcosts.Forexample,theresponsetochangesincarbontaxesorexcisedutiesmaydifferfromchangesinfuelprices.Uponfuturedataavailability,weightingcouldbeimplementedbyinstrument-sector,orinstrument-sector-fuel.34Ifthesizeofmitigationelasticityisnotconstant,lowercarbonpricesassociatedwithhigherelasticitiesmightdeliverlargerCO2savingsthanhighercarbonpricesassociatedwithactivitiesthathavelimitedmitigationactions(andthereforelowerelasticities).Analternativeweightingsystemcouldconsiderfuelorsector-specificresponseelasticitiestocalculateanindicator,althoughsomeconsiderationwouldhavetobegiventoshort-versuslong-runeffects.35Highpricevariancemaysystematicallyaffectabatementdecisionsandfirminvestmentdecisions.Pricevarianceanduncertaintyaregenerallyhigherunderemissionstradingthanundercarbontaxes.AldyandArmitage(2022)showthatcost-effectivenessisaffectedbyETSallowancepriceuncertaintyandfirm-specificforecasterrors.36Chettyetal.(2009)findthateconomicagentsunderreacttotaxes(ingeneral)thatarenotsalientduetoinattentionandimperfectoptimization,whileBernardandKichian(2018)findempiricalevidenceofthecarbontax’ssaliencyeffectonBritishColumbia’sdieseldemand.Moregenerally,theresponsetochangesincarbontaxesorexcisedutiesmaydifferfromchangesinfuelprices(Andersson,2019;DavisandKillian2011;RiversandSchaufele,2015).236.5.OthergreenhousegasemissionsThispaperestimatestheTCPonCO2emissionsfromthecombustionoffossilfuels.ExtensionsofthisworkwillconsidertheroleofotherGHGemissionsinsettingaTCP.ThecurrentestimationdoesnotincludeotherGHGemissions,includingmethane,nitrousoxidefromagriculture,fugitiveemissionsfromminingactivities,wasteandindustrialprocesses,andnon-fuelcombustionfromindustrialprocesses.Emissionsfromlandusechangeandforestry(LUCF)emissionsalsoaplayaprominentroleinmanyjurisdictions.TheTCPcouldthusbeextendedtocoveranydirectpricingofLUCFemissions—suchasthroughREDD+credittrading—aswellasindirectfiscalincentivesfordeforestation-drivingcommodities.UnsustainableagriculturalproductionisresponsibleforCO2emissionsassociatedwithdeforestationandforestdegradation.Moreover,40%ofglobaldeforestationiscommodity-driven(GlobalForestWatch,2023;Honosumaetal.,2022).37Fiscalincentivestodeforestation-drivingcommoditiescanplaceanindirectpriceonCO2emissions.Forinstance,inputagricultural(coupled)subsidiescangenerateaperverseincentivetoincreasedeforestationandCO2emissions(BarbierandBurgees,1994;Leruth,ParisandRuzicka,2001)and,forthisreason,maybecategorizedasnegativeindirectcarbonpricing.Incontrast,commoditytaxesthatvaryaccordingtothesustainabilityoftheproductiongeneratetherightincentivesforsustainablepracticesandindirectlysetapositiveindirectcarbonpriceontheemissionsassociatedwiththecommodity’sproduction(Heine,HaydeandFaure,2021).Calculatingtheindirectcarbonpricingemergingfrompricingincentivesappliedtodeforestation-drivingcommoditiescouldbeacrucialextensiontothemeasurementoftheTCP.6.6.OtherpricinginstrumentsThecurrentTCPreflectscarbonpricingonemissionsreleasedinagivencountry.However,interestisgrowinginthepricingoftheconsumptionofemissionsembodiedintradedgoods.TheEuropeanUnionisintheprocessofimplementingacarbonborderadjustmentmechanism(CBAM)toimposeETS-alignedpricesontheemissionsassociatedwithimportsfromcoveredsectors.WhiletheCBAMaimstoadjustforaveragedirectcarbonprices,interestisgrowinginleveragingtradepolicymoregenerallytoreflectthecarboncostsoftradedgoods.Currently,thestructureoftariffsandnon-tariffbarriers(NTB)leadsthemtofallmoreheavilyonproductsfromrelativelycleanindustriesthanoncarbon-intensivegoods(Shapiro,2021).ThistradepolicybiascanbeinterpretedasanunderpricingofCO2thatreaches$500-800billiondollarseachyear(ibid).Betterconsiderationofthepricingofcarbonembodiedintradeisthusanexcitingavenueforpotentialextensionstototalcarbonpricingindicators.37GrowingdataavailabilityallowsforCO2emissionsfromdeforestationtobemappedtospecificcommodities(Escobaretal.,2020;Pendriletal.2019,McFarland,etal.,2015).Forinstance,cattlemeatandoilseedproductsgeneratedmorethan600MtCO2ein2010-2014.247.ConclusionsMeasuringcarbonpricingisnecessarytounderstandalleconomicactors’incentivestoreduceGHGemissions.Anincreasingnumberofcontributionsintheliteraturehighlightthatcarbonpricingisimplementedinvariousforms,bothdirectlythroughETSorcarbontaxesandindirectlythroughpricinginstrumentssuchasfueltaxesandfossilfuelsubsidyreform.TheTCPproposedinthispapersummarizesacomprehensivecarbonpricesignalaffectingtheconsumptionoffossilfuelsviadirectandindirectcarbonprices.Whileidentifyingandobtainingdataondirectcarbonpricingisrelativelystraightforward,definingandmeasuringanindirectcarbonpriceismorecomplex.Thispaperlaysoutaframeworkguidingthedefinitionofindirectcarbonpricing.Policiesthatprovideapricingincentivethataddressestheunpricedcarbonexternalitycanbetranslatedintoacarbonprice,evenwhentheyareprimarilyadoptedforothersocio-economicobjectives.Therefore,indirectcarbonpricingconsistsofinstrumentsthatchangethepriceofcarbon-intensivegoodsinwaysthatchangeboththeabsoluteandrelativepricesofthosegoods.Althoughindirectcarbonpricinginstrumentsarenotdesignedtoalignpriceswithcarboncontentsacrossfuels,meaningtheymayvaryacrosscoveredsourcesofGHGs,manydirectcarbonpricinginstrumentsarealsoappliednarrowly,missingopportunitiestoequalizemarginalabatementcostsacrosssectorsandfuels.Understandingthecumulativeweightofbothdirectandindirectcarbonpricingisthusnecessarytojudgeprogress.Tomeasureindirectcarbonpricing,includingfossilfuelsubsidies,thispaperleveragesenergyprice,consumption,andsupplycostdatawithglobalcoverage.Combiningdirectandindirectcarbonpricingdataandweightingbyemissions,acomprehensivecarbonpricingmetric—theTCP—iscalculatedatthegloballevelandfor142countriesyearlyfrom1991to2021.Estimatesarepresentedforgroupsofcountriesfromdifferentlevelsofeconomicdevelopmentandenergyexportingstatusaswellasbyfuelandsector.ThefindingshighlightlimitedglobalprogressincarbonpricingoverthelastthreedecadessincetheFrameworkConventionenteredintoforce.Whilethenumberofdirectcarbonpricinginstrumentshasincreasedsteadilyoverthelastdecade,indirectcarbonpricingofCO2emissionsfromfuelcombustionshowsclosetonoprogressoverthisperiod,withtheglobalaverageofcarbonratesin2021notfarfromthoseinthe1990s.Indirectcarbonpriceinstrumentscoverasignificantshareofglobalemissionsandarepricedathigherratesthantheirdirectcounterparts.Therefore,indirectcarbonpricingrepresentsover85%oftotalcarbonpricing.Ontheotherhand,whileprogressondirectcarbonpricingcontinues(intermsofuptakeandpricelevels),itcoversarelativelysmallshareoftotalglobalemissionsandatlowerratesthanindirectcarbonpricing.Transportemissionsarepricedthehighestamongallsectors,withratesreachingroughlyUSD110tCO2in2021,followedbytheservicesectoratUSD32tCO2,thenextlargestuserofhighlytaxedtransportationfuels.Bycontrast,indirectcarbonpricingonnaturalgasandcarbon-intensivecoal—anddirectcarbonpricingfortheirindustrialusers—remainlow.Theseinsightshighlightopportunitiesforfuturecarbonpricingreformsandalignment.TheresultsconfirmpreviousresultsforOECDcountriesandsomemajoreconomies(OECD,2021)andbringnewinsightsabouttherolesplayedbydevelopingcountriesincarbonpricing.25TheurgencyoffocusingonacomprehensivemeasureofcarbonpricingliketheTCPisheightenedbytherecentsurgeinfossilfuelsubsidies,whichwouldnotbeconsideredbyindicatorsfocusingondirectcarbonpricing.Priorto2021,energysubsidieshadbeen,somewhatunsteadily,declining.In2020,lowcrudeoilpricesandlowerconsumptiondeliveredrecordlowfossilfuelsubsidies.However,tightsupplyconditionsintheenergymarketaftertheCOVID-19pandemicandthesubsequentUkrainianwarcausedinternationalenergypricestoriseandsubsidiesalongwiththem,asgovernmentsindevelopedanddevelopingcountriessoughttoshieldconsumersbyartificiallykeepingdomesticpriceslow(insteadoforinadditiontodirectlysupportingpurchasingpowerviaprice-decoupledincomesupport)(IEA,2023).Fromabout$150billionin2020,energysubsidiesmorethandoubledin2021,andin2022morethandoubledagaintoabout$700billion,accordingtothemostrecentestimates(IEA,2023).Ouranalysisreflectsonlytheincreaseinenergysubsidiesoccurringin2021,asevidencedbytheglobalTCPvaluedecreasinginthatyear(seeFigure1),sothemostrecentsurgeinenergysubsidiesinnotincorporatedinouranalysis.Ifcomputedbasedontheindirectanddirectcarbonpricesprevailingin2022,thevalueoftheTCPwouldbesignificantlywatereddownbythedoublingofthesubsidiestakingplaceinthatyear,furthereliminatinganyprogressmadeinthecarbonpricingarenainthelast20years.Acknowledgingthestagnationofcarbonpricinggloballycanbeafirststeptowardredoublingeffortstoalignmarketincentiveswithclimaterealities.Thefindingsstresstheurgentneedofintensifyingeffortsforanelevatedcarbonpricinguptakeandatlevelsthataresufficienttoalignwiththesocialcostofcarbon.Theyalsounderscoretheneedforincreasingtheemissionscoverageoftotalcarbonpricingandaligningcarbonratesacrosssectorswithinaneconomy.Moreover,toavoidthatprogressondirectcarbonpricingisundonebybacktrackinginindirectcarbonpricing,indirectpricingmayrequiremoreattentioninglobalclimatepolicyefforts.Furtherrecognizingtheimportanceandmultiplicityofmotivesforindirectcarbonpricinginstrumentssuggeststhatadvisoryprogramsoncarbonpricingwouldbenefitfromalsohighlightingnon-climatereasonstosupportchange(HeineandBlack,2019).Theproposedmetricsrepresentonepossibleapproachindicatingthestatusanddevelopmentsofcarbonpricingincentives,andseveraldimensionsforextensionsandimprovements,alsowithdatacollection,arehighlighted.Theseindicatorsprovidevaluableinsightsforjudgingprogressoncarboncostalignment,akeycomponentfordrivingprivateinvestmentandclimate-cognizantdecisionmaking;however,totalcarbonpricingmetricsshouldnotbeviewedasmeasuresofambitionormitigationeffortacrossjurisdictions.Meetingtheclimatechallengeinvolvesarangeofactivitiesandinterventions,addressingmarket,behavioral,informational,andtechnicalbarrierstoproducetransformationalchange.Abroaderview,includingbutnotlimitedtopricingmetrics,isneededtounderstandhoweffectivelycountriesarerespondingtotheclimatemitigationchallenge.8.AcknowledgmentsTheauthorsaregratefultoWorldBankcolleagues,inparticularAartKraas,forfeedbackonearlierdraftsandtoSimonBlack,IanParry,andNateVernonfromIMFandAssiaElgouacemandKurtvanDenderfromOECDfordataandinsightfuldiscussions.269.ReferencesAldy,J.E.,andS.Armitage.2022.“TheWelfareImplicationsofCarbonPriceCertainty.”JournaloftheAssociationofEnvironmentalandResourceEconomists.(9),5.Aldy,J.E.andPizer,W.A.,2016.“Alternativemetricsforcomparingdomesticclimatechangemitigationeffortsandtheemerginginternationalclimatepolicyarchitecture.”ReviewofEnvironmentalEconomicsandPolicy10(1):3–24.Andersson,J.2019.“CarbonTaxesandCO2Emissions:SwedenasaCaseStudy.”AmericanEconomicJournal:EconomicPolicy,11,1–30.AdministraciónNacionaldeCombustibles,AlcoholesyPortland(ANCAP).2021.“ComposicióndePrecioyComparaciónURSEA..”Administ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es(generallytheWorldBank’sStateandTrendsofCarbonPricing,wherepossibleaccountingonlyforCO2emissionstoalignwiththeIEAdatasetusedforthisanalysis.Note:ThisdiffersfromtheOECDapproach,whichdeterminescoveragebysectors(wherepossibleusingabottom-upapproach)andappliesaconstant%coveragetoeachfuelwithinthesector.Step5:ConvertemissionscoverageintoacoveragefactorThefinalemissionscoveragevolumefiguresisconvertedbacktoacoveragefactorvforeachfuelandsector,foruseinthecalculationsdescribedinSection4ofthispaper:vfp=ΣfFEsfp/Σfesfcorvsp=ΣsFEsfp/ΣsesfcA2.Determinethepointofregulationforeachfuel-subsector-mechanismEachfuel-subsector-mechanismisallocatedapointofregulationrelativetothepointofcombustionbasedonthecharacteristicsoftheCPIusingthefollowingthreecategories:•Upstream:ifchargedbeforeemissionsarereleasedtotheatmosphere,e.g.,paidbydistributorsandimportersoffuels.•Pointsource:ifchargedatthepointofcombustion,e.g.,appliedtopowerplants.•Downstream:ifchargedafteremissionsarereleasedtotheatmosphere,e.g.,paidbyimportersoffinishedproductswithcoveredembeddedemissions.Thisisgenerallydeterminedbasedonfuelorsector,similartoassigningbasicpercentagecoverage.Wherethereisaninconsistencybetweenthepointofregulationforafuelandsubsector,additionalresearchisundertakentoestablishthespecificpointofregulationforthatsector-fuel-instrument.32AppendixB.AnalyticalrepresentationB1.Totalcarbonprice(TCP)andfirmincentivesTogroundourcalculationsoftheTCP,westartbyconsideringtheincentivesofacompetitivefirmmakingdecisionsbasedontheprevailingmarketpricesandpolicyinterventions.Firmihasoutput𝑞𝑞𝑖𝑖,whichisafunctionofitsnon-fuelproductioninputs(vector𝐗𝐗𝑖𝑖)anditsconsumptionofdifferentfuels(vector𝐅𝐅𝐅𝐅𝑖𝑖).Itreceivesprice𝑃𝑃𝑖𝑖foritsgood,andpayspricexipforitsnon-fuelproductioninputoftypex,xiX,andforitsconsumptionoffueltypef,fiFC,ithasunitinputcostsoffic,inclusiveofanypolicyinterventions.Thefirmhasdirectemissions𝑒𝑒𝑖𝑖𝑖𝑖𝑖𝑖(𝐅𝐅𝐅𝐅𝑖𝑖𝑖𝑖𝑖𝑖,𝐗𝐗𝑖𝑖𝑖𝑖𝑖𝑖),alsoafunctionofitsinputchoices,anditissubjecttopayadirectcarbonprice𝜏𝜏𝑖𝑖pertCO2onthecoveredshareviofitsemissions.Itmayalsoreceivefreeallocationsthataregrand-parented(G)andfixedorrebatedinproportiontoitsoutputequalwithaunitvalue,iibτwherebiisoftenabenchmarkemissionsallocation.Theresultingprofitsiπare()revenuesdirectemissionscostsnetoffreeallocationnon-fuelinputcostsfuelinputcosts(,)(,)(,)xxffiiiiiiiiiiiiiiiiiiixfPqpXcFCveGbqπτ=−−−−−∑∑FCXFCXFCX(1)Aprofit-maximizingfirmwouldequalizeitsmarginalbenefitsandcostsofadditionalfuelandnon-fuelinputs:();().fiiiiiiiiffiixiiiiiiiixxiiqePbcvFCFCqePbpvXXττττ∂∂+=+∂∂∂∂+=+∂∂(2)Theright-handsidesreflectthemarginalcostsofeachinput,whichareinfluencedbothbytheintermediateinputcostsandthedirectemissionscosts.DirectCO2pricinginfluencestherelativecostsofinputsinproportiontotheirincrementalemissionscontribution.IndirectCO2pricingaffectsinputcostsviafic,thepricetothefirm,whichcanincludetherelevantupstreamsupplycost,fiSC,andthenettaxwedgefi∆,correspondingtothefueltaxesnetofsubsidiesperunitoffuelpaidbythefirmorpasseddownfromupstreamvendorliabilities.Itwillbethisnettaxwedgefi∆thatwewillattempttocalculatefrombothasector-andfuel-specificstandpointforeachcountry.Fromaproductpricingperspective,thevalueoftheoutput-basedallocationorrebateraisesthevalueofmarginalproducttothefirm(asseenontheleft-handside),butitdoesnotdistorttherelativemarginalcostsofinputs.Fixedallocationsdonotinfluencemarginaldecisions.Thefirmperspectiveisalsousefulforconsideringtheeffectofpoliciesonaverageoperatingcoststothefirm,whichmustbepassedalongthroughhigherproductpricesfortheconsumerinthelongrun.Theseaveragecarbonpricingcosts(ACP)are33(,)(,)(,)ffiiiiiiiiifiiiiiiFCeACPvbqqτ=∆+−∑FCXFCXFCX(3)thatis,thesumoftheindirecttaxburdenoffossilfuelconsumptionperunitofoutput,plusthedirecttaxoncoveredemissionsoverthebenchmarkallocationperunitofoutput.ThisACPisthusameasureofaverageembodiedcarboncostsinaproduct,whichistheprimaryindicatorofcompetitivenesseffectsofclimatepolicies.Forouraggregatemeasuresoftotalcarbonpricing,however,weareinterestedintheextentofcarbonpricingperunitofemissionsonthemargin,whichistheprimarydriverofincentivestoreduceemissions.Thesemeasuresmustbeconstructedwithoutfirm-leveldata,andsowillrelyonsector-orfuel-specificaveragesforthemarginalemissionsfactorsandpolicyinformation.B2.Sector-specifictotalcarbonprice(TCP)Asector-specificTCPmeasuresthecumulativedownstreamweightofcarbonpricingpoliciesforagivensector.Foreachcountrycandyeart,wecalculateasector-specificTCPthatcanberepresentedasaveragepricefordirectemissionsindirecttaxpaymentsperunitoffuel-relatedemissionsffssfsssffssfFCTCPvFCτµ∆=+∑∑(4)wherefs∆isthepricegap(calculatednetfueltaxburden)forfuelfinsectors,fsµisthefuel’semissionsfactor;FCisitsconsumptionoffueltypef,andsvisthecoveragefactorfordirectemissionspricingregulation.38B3.Fuel-specifictotalcarbonprice(TCP)Afuel-specifictotalcarbonpriceaggregatestheneteffectofcarbonpricingupstreamtothefuellevel.Afuel-specificTCPcanthusberepresentedas38Notethatthesecondtermfortheindirecttaxburdenisequivalentoftheweightedsumofthefuel-specifictaxperunitofemissionsperunitoffuel,wheretheweightsarethefuel’semissionssharesforthesector:/.ffffssfffssssjjfffssssjfFCFCFCFCµµµµ∆∆=∑∑∑∑34indirecttaxpaymentsdownstreamfuel-relatedperunitoftotalfuel-directemissionspaymentsspecificemissionsperunitofemissionsffffssssssfssffffssssssFCvFCTCPFCFCτµµµ∆=+∑∑∑∑(5)wherefs∆isthepricegap(calculatednetfueltaxburden)forfuelfinsectors,fsµisthefuel’semissionsfactor;andsvisthecoveragefactor.B4.Country-leveltotalcarbonprice(TCP)Calculatingacountry-levelTCP,wecaneitheraggregateacrosssectorsoracrossfuels.Aggregatingacrossfuels,involvesweightingcarbonpricingmeasuresaccordingtothefuel-relatedemissionssharesasfollows:indirecttaxpaymentsdownstreamdirectemissionsperunitoftotalfuel-paymentsperunitspecificemissionsffffssssssfsfscffffssssfsfsFCvFCTCPFCFCτµµµ∆=+∑∑∑∑∑∑∑∑(6)Asector-basedaggregation—weightedbyemissionsshares—maybemorereliable:totaldirecttaxpaymentstotalindirecttaxpaymentsperunitofemissionsperunitofemissionsffssssssfscssssFCveTCPeeτ∆=+∑∑∑∑∑(7)whereesistotalemissionsforthesector.35AppendixC.GroupingofeconomiesbytypeEXPORTINGLLMICSMoroccoMoldovaHungaryAngolaMyanmarMexicoIrelandBeninNicaraguaMalaysiaIcelandBoliviaNepalNorwayIsraelCameroonPakistanOmanItalyCongo,Dem.Rep.PhilippinesQatarJamaicaCongo,Rep.Korea,Dem.People'sRep.SurinameJordanAlgeriaSenegalTurkmenistanJapanEgypt,ArabRep.ElSalvadorIMPORTINGUMHICSKorea,Rep.GhanaTogoArmeniaLebanonIndonesiaTanzaniaAustraliaLithuaniaIran,IslamicRep.UkraineAustriaLuxembourgMongoliaUzbekistanBelgiumLatviaMozambiqueZambiaBulgariaMaltaNigeriaZimbabweBahrainMontenegroSudanEXPORTINGUMHICSBosniaandHerzegovinaNamibiaSouthSudanAlbaniaBelarusNetherlandsSyrianArabRepublicUnitedArabEmiratesBotswanaNewZealandTajikistanArgentinaSwitzerlandPanamaTunisiaAzerbaijanChilePeruVenezuela,RBBrazilChinaPolandVietnamBruneiDarussalamCostaRicaPortugalYemen,Rep.CanadaCubaParaguayIMPORTINGLLMICSColombiaCyprusRomaniaBangladeshDenmarkCzechiaSingaporeCôted'IvoireEcuadorGermanySerbiaEritreaEstoniaDominicanRepublicSlovakRepublicEthiopiaGabonSpainSloveniaHondurasUnitedKingdomFinlandSwedenHaitiGuatemalaFranceThailandIndiaIraqGeorgiaTrinidadandTobagoKenyaKazakhstanGibraltarTürkiyeKyrgyzRepublicKuwaitGreeceTaiwan,ChinaCambodiaLibyaGuyanaUruguayLaoPDRRussianFederationHongKongSAR,ChinaUnitedStatesSriLankaSaudiArabiaCroatiaSouthAfrica

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