OECD’s bad news on carbon tax is hopelessly optimistic

Layers of bad news: OECD says carbon pricing is far too low to fight global warming – an 80% shortfall! But peel back the layers and the story is much worse. The cost of carbon they use for that calculation is seriously low-balled, so the real shortfall should be much higher. And then, deep in the OECD report, we learn that the benefits of motor fuel tax are double-counted – it seems we already needed that money to pay for costs of traffic congestion, local air pollution, and people run over by cars, so there’s little, if anything, left for carbon pollution. Then, following up the OECD’s sources for that double-counting calculation we see that this, too, is understated – it completely ignores the multiplier effects of driving & damage from chasing pedestrians and cyclists off the road. And, finally, if we pay for all that environmental damage with fuel tax, who pays for the roads themselves?

The carbon pricing report is undoubtedly put together by people with a great concern about global warming and effective climate policy, and they’re delivering some bad news. Yet it is hard not to see it as an example of what Kevin Anderson (@kevinclimate) has described: that most of the policy and advocacy and even the science of climate change is presented in colossally over-optimistic scenarios. Let’s peel back the layers to see how that works.Here’s the initial bad news from the OECD:

The report’s headline is that in 2015 taxes on greenhouse gases fell 79.5% short of what they would need to be to bring global warming under control. But the gap was 83% in 2012, so maybe there’s progress – not fast enough to save civilization but progress nonetheless?

Look first at the carbon price being used – a rather modest 30 Euro per ton climate damage from carbon – probably far too low. Carbon pricing involves a lot of assumptions and educated guesses, but prudence would require at least doubling that 30 Euro price, which would make the shortfall more like 90%.

Now a large share of what the OECD is counting as carbon taxes are taxes on fuels for road transport – gasoline and diesel. Although the report talks about “carbon taxes”, it makes clear that with very rare exceptions the only sector in which tax rates come close to meeting the environmental cost of carbon, is for motor fuel. In much of the world fuel for electricity generation is also taxed, but at far lower rates.

But. As the authors of the report point out (see Box 1 on p. 52 of the report), there are other external costs of road transport, like time lost from traffic congestion and the health effects of local air pollution. The same fuel tax can’t pay for both damage due to global warming and local environmental damage – it would be simple double counting. The authors of the OECD report know that and are clearly concerned by it, but it’s not taken into account in their headline figure. The fact is that in many countries with low fuel taxes – the United States included – the costs of congestion, local air pollution and accidents would more than eat up “carbon” tax revenues from fuel and leave nothing for abatement of carbon emissions. So even if we were to accept the low-balled 30 Euro cost of carbon, the headline of a 79.5% shortfall is hopelessly optimistic.

But there’s more. The report’s calculation of the external costs from driving is sourced to another OECD report, which in turn sources the calculation to an as-yet-unpublished OECD working paper, and also to a journal article by Santos (2017). Santos follows the method in the manual prepared by Maibach et al (2008). If we consult the Maibach handbook we see that the cost of traffic congestion is reckoned to come from certain effects – lost time and increased pollution – from slowing down motorized transport. Health effects from auto transport due to local air pollution and to accidents are also recognized.

But there is no recognition of the way in which motorized transport chases others – pedestrians and cyclists – off the road. If a car runs over you, that’s a cost, but if you avoid crossing the road on foot to avoid being run over, the limits on your mobility are not a cost. Nor are the well documented adverse health effects of not using active transport. If other people’s car use discourages you from walking or cycling, the damage to your health is a cost of driving.

Similarly, the multiplier effects of using road transport are not addressed. If I drive a car and because I’m on the road you are less likely to ride a bike, then you are also more likely to drive, and that creates additional external costs. If I drive a car to an out of town shopping center I contribute to the decline of local retail services, again making it more likely that you will drive. If I drive a car I will slow down not only other cars but also buses: the cost to bus passengers of lost time is reckoned as a cost of congestion, but the consequent reluctance of people to ride buses, further degradation of bus transport (less revenue, higher costs due to delays) and induced traffic (I’m not riding that bus, so I’m driving) are not taken into account.

The costs of road transport that are not addressed even in the footnotes of the OECD analysis or in its sources, are serious costs. And they circle around to raise carbon pollution still more: driving begets driving, all of which begets CO2.

Even if you didn’t care at all about local air pollution or the health effects of inactivity and were concerned only with global warming, it remains that if you want to reduce CO2 you need to get a grip on the way car use feeds itself and creates unsustainable patterns of human settlement. Translating this into monetary costs is not easy (for a good run at it, see Litman 2009). Nor is it clear that carbon pricing – or indeed, any kind of pricing – would be a good overall way to control these costs: land use planning and the provision of public services – buses, bike lanes, quality urban public space – are at least as important as making drivers pay for the damage they do. But the damage is being done, and if you’re going to say you are accounting for the costs of road transport, you should face up to them.

So the cost of carbon emissions is low-balled at 30 Euros; the headline figure ignores the additional external costs of motor transport; when those costs are acknowledged, the figures used fail to take into account many important external costs of motor transport.

All of that, and we still haven’t faced the fact that many people, when they pay taxes on motor fuel, are under the impression that they are paying for building and maintaining roads. So we are not only low-balling the carbon cost and then double counting the offsetting benefits of fuel taxes, we are ignoring the considerable public expense that goes into building and fixing the infrastructure for motor transport (to say nothing of the direct carbon cost from all of that building and fixing).

Is there a term for very bad news which is deludedly optimistic?



Litman, Todd Alexander. 2009. Transportation Cost and Benefit Analysis: Techniques, Estimates and Implications. 2nd ed. Victoria, BC: Victoria Transport Policy Institute.
Maibach et al., 2008Maibach, M., Schreyer, C., Sutter, D., van Essen, H.P., Boon, B.H., Smokers, R., Schroten, A., Doll, C., Pawlowska, B., Bak, M., 2008. Handbook on Estimation of External Costs in the Transport Sector, Internalisation Measures and Policies for All External Cost of Transport (IMPACT), Version 1.1, Delft, CE, commissioned by European Commission DG TREN, CE Delft, The Netherlands, February. <ec.europa.eu/transport/themes/sustainable/doc/2008_costs_handbook.pdf>
Santos, Georgina. 2017. “Road Fuel Taxes in Europe: Do They Internalize Road Transport Externalities?” Transport Policy 53 (January): 120–34. https://doi.org/10.1016/j.tranpol.2016.09.009.

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