Title page

Contents

ABOUT THE AUTHORS 7

SUMMARY 9

1. INTRODUCTION 15

Climate change: the political context 15

Climate change: the economic context 21

Concluding comments 32

2. PROBLEMS OF CURRENT POLICY, AND ALTERNATIVE FRAMEWORKS 33

Seeking winners and picking losers 33

Seeking to ban losers 36

Taxes and subsidies 38

Coase or Pigou? 40

Carbon trading, Coase or Pigou? 44

Concluding comments 47

3. ENERGY TAXES AND SUBSIDIES: WHY THEY EXIST IN THEORY AND IN PRACTICE 49

The chaotic nature of energy taxes 49

The chaotic nature of energy subsidies 51

4. ENERGY TAXES AND SUBSIDIES IN THE UK AND EUROPE 59

Energy taxes 59

Energy subsidies 65

Net energy subsidies 75

5. FROM GOVERNMENT FAILURE TO A MORE RATIONAL CLIMATE CHANGE POLICY 81

Fuel subsidies and government failure 81

Carbon taxes and global warming 86

Practical applications of carbon pricing 97

An alternative framework for dealing with local externalities 103

Annex: The implicit cost of carbon from taxes and subsidies 105

6. CONCLUSION AND POLICY IMPLICATIONS 111

REFERENCES 118

ABOUT THE IEA 126

Table 1. Some examples of discriminatory energy subsidies 68

Table 2. National policies to shield consumers from rising energy prices 85

Figure 1. Box plots of reported tax rates for key fuels, by EU member state in 2018 62

Figure 2. Taxes on energy sources in the UK and the EU27 (2018) 63

Figure 3. Per capita energy subsidies in Europe and in the G20 in 2018 70

Figure 4. Subsidies by energy sources in the UK and the EU27 (2018) 72

Figure 5. Subsidies by renewable energy technologies in the UK and the EU27 73

Figure 6. Breakdown of incumbents' standard electricity offers for households in capital cities - November/December 2019 74

Figure 7. Net subsidies by energy source in the UK and the EU27 (2018) 76

Figure 8. Net subsidies by renewable energy source in the UK and the EU27 77

Figure 9. Net subsidies after internalisation by energy source in the UK and the EU27 92

Figure 10. Net subsidies after internalisation by renewable energy source in the UK and the EU27 93

Figure 11. Implicit cost of carbon from energy taxes and subsidies in the UK and EU27 107

Figure 12. Implicit cost of carbon from energy taxes and subsidies to renewable energies in the UK and EU27 108