The anticipated decline in fossil fuel prices over the coming years may provide an opportunity to scale up carbon pricing in sectors where coverage is currently low and uneven, Trend reports with reference to the International Monetary Fund (IMF).
"If international fossil fuel prices decline (as implied by futures markets), it would become possible to extend the coverage and raise the level of carbon pricing, without increasing retail energy prices relative to their recently experienced levels. The scope for raising road fuel taxes may be limited, as these taxes are already high in most countries. When weighting fuels by their carbon content and not adjusting for behavioral responses, the implicit and explicit carbon price on road fuels is about €200-500 per ton CO2 (though high taxes are justified by non-climate externalities like local air pollution, traffic congestion, and accidents). In contrast, implicit and explicit carbon prices of building fuels are lower: indeed, residential gas is subsidized in 10 EU countries," reads the IMF report.
The report reveals that once gas prices normalize, carbon prices can be introduced either in the form of national carbon taxes or ETSs (e.g., as in Germany or Sweden) or in the form of an EU-wide ETS for buildings and transport (as envisaged in the Fit for 55 plan), starting at low levels and increasing gradually over time.
"Scaling up carbon pricing will have to go hand-in-hand with support for vulnerable households. Mitigation strategies should include reinforcing non-pricing measures like regulations, fiscal incentives, and public support. Non-pricing sectoral instruments promote fewer behavioral responses to reduce emissions than carbon pricing,40 but they can have greater social acceptability, as they avoid significant increases in energy prices. The EU and individual countries already have in place a range of sectoral targets (e.g., for renewable generation shares, electric vehicle sale shares, emissions requirements for new and existing buildings) and non-pricing policies to implement them (e.g., feed-in tariffs, renewable portfolio standards, energy efficiency and CO2 emissions rate standards, or public support for insulation and building retrofits). Given the goal of enhancing energy security and the uncertain path of emissions in Europe in the near term, governments should incorporate sectoral approaches into their strategies for reducing fossil fuel reliance," says IMF.