Carbon Pricing and Fossil Fuel Subsidy Rationalization Tool Kit

By Rachael Jonassen, Mikael Skou Andersen, Jacqueline Cottrell and Sandeep Bhattacharya

This tool kit offers a step-by-step guide for economies in Asia and the Pacific looking to design, build, and implement emission trading systems (ETS) to help speed up their transition to a greener, more inclusive future. Using case studies to illustrate best practices and lessons learned by countries including Viet Nam and India, it explains the need to design robust legal frameworks before setting up ETSs. It outlines carbon taxes, analyzes fossil fuel subsidy rationalization, and shows why securing support from stakeholders is key for countries planning to implement ETS programs to help meet their climate targets.

• Language: English
• Publisher: Asian Development Bank
• Release date: Jul 1, 2023
• ISBN: 9789292702199

Book preview

CARBON PRICING AND FOSSIL FUEL SUBSIDY RATIONALIZATION TOOL KIT

Rachael Jonassen, Mikael Skou Andersen, Jacqueline Cottrell, and Sandeep Bhattacharya

JULY 2023

Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO)

© 2023 Asian Development Bank

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Some rights reserved. Published in 2023.

ISBN 978-92-9270-218-2 (print); 978-92-9270-219-9 (electronic); 978-92-9270-220-5 (ebook)

Publication Stock No. TIM230241

DOI: http://dx.doi.org/10.22617/TIM230241

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Cover design by Ross Laccay.

CONTENTS

TABLES, FIGURES, AND BOXES

FOREWORD

The coronavirus disease (COVID-19) pandemic, the Russian invasion of Ukraine, and consequent global supply issues have magnified the gap between the financing needed to achieve the Sustainable Development Goals and available resources, which could widen by 70% from before the pandemic. However, the existence of economic crises does not alter the basic climate challenge or the proper response to it. Even a prolonged global recession would have only a modest impact on the stock of atmospheric greenhouse gas emissions. Raising the cost of emissions remains central to addressing the externality problem at the heart of climate change. The policy action required also remains ambitious. Containing global warming to 2°C or less, for example, would require rapidly implementing a global price of at least $75 per ton of carbon dioxide equivalent by 2030, or a dozen times the current global average of $6 per ton. Even if this is achieved, it still may not guarantee achieving the climate targets unless supported by other containment measures.

In general, Asia and the Pacific has a long track record of using environmental taxes—including excise, sales, and import taxes on fossil fuels and other carbon-intensive products—to mobilize general revenue. This ranges from countries that do not impose any environmental tax to Solomon Islands, where environmental taxes contributed 5.4% of gross domestic product in 2019. Apart from Solomon Islands, countries with the highest revenue generated from environmental taxes in the region are Mongolia at 1.7% of gross domestic product, and Japan, New Zealand, and Fiji at 1.3%.¹ The relationship between carbon pricing and environmental taxes is important as they overlap and complement each other, and experience with environmental taxes can be used to implement carbon taxation strategically. In addition, Kazakhstan, New Zealand, the People’s Republic of China, and the Republic of Korea implement national emission trading systems, with the Republic of Korea being the first country in East Asia to implement a nationwide mandatory emission trading scheme.

A harmonized climate policy architecture should ensure that carbon pricing is implemented in tandem with the removal or phasing out of fossil fuel subsidies. The International Energy Agency estimates that, among the 25 countries dispensing the most in fossil fuel subsidies in 2020, nine are Asian Development Bank (ADB) developing member countries (DMCs).² This indicates that removing existing monetary or financial subsidies for carbon-intensive products such as fossil fuels where they exist should be complementary to imposing a carbon tax.

The main issue for many DMCs contemplating carbon pricing and/or phasing out fossil fuel subsidies is answering the how question: How can DMCs design and adopt a viable strategy to combat climate change by using carbon pricing, including subsidy reform, and in the process perhaps generate revenue and improve equity in energy access and use?

To help DMCs answer this question, ADB has developed this tool kit and road map, which outlines the key steps, challenges, and relevant country experiences for all three elements of getting carbon prices right. Drawing on existing research and