The U.S. has some of the lowest energy taxes in the developed world

January 31, 2013

Economists often argue that there's an elegant solution to all the pollution caused by our energy use — just tax the stuff.


Everyone does it. Sort of.

A well-designed tax on fossil fuels could, in theory, help curb wasteful use and allow society to recoup the damages wrought by, say, heat-trapping carbon pollution. It's also a way to raise revenue. That's the argument, at least.

But when countries try to put this idea into practice, the reality is often much messier. A big new report from the OECD looks at how developed countries actually tax their energy use and carbon emissions. Here are three notable takeaways:

1) The United States taxes fossil fuels less than just about every other developed country:

Congress does impose an 18.4-cents-per-gallon tax on gasoline and a similar tax on diesel fuel. But that's about it at the federal level. For every ton of fossil-fuel carbon that's emitted inside the United States, the federal government collects just $6.50 in tax revenue.

By contrast, energy taxes are higher just about everywhere else in the developed world. The average among the 34 industrialized nations is about $69 per ton of carbon. In Switzerland, the effective tax on carbon is a staggering $141 per ton.  Some countries do this through broad-based fossil-fuel taxes, while others have a messy array of fees on everything from gasoline to home heating.

(Fair warning, though: The OECD data doesn't include state or local taxes for any country. That makes these comparisons imperfect. Notably, U.S. states and cities levy their own separate taxes on gasoline, adding about 30.3-cents-per-gallon on average, though that would still leave the United States down near the bottom.)

2) On the whole, developed countries tax transportation heavily, while going light on power generation:

This graph shows what types of fossil-fuels get taxed across the industrialized world. Transportation usually gets taxed the heaviest — most countries impose steep fees on gasoline, diesel and other motor fuels. By comparison, electricity and home heating usually get off lightly.

This seems somewhat lopsided — why tax some fossil fuels more heavily than others? Various reasons: For one, gasoline taxes are often used to raise money for roads and highways. What's more, many industrialized countries are leery of raising taxes too steeply on electricity generation, for fear of driving manufacturers abroad.

Yet the OECD report still finds plenty of inefficiencies. For instance, most European countries impose a steeper carbon tax on gasoline than on diesel fuel, even though they're used for the same basic purpose.

3) Countries with high carbon taxes tend to be more efficient in their use of fossil fuels:

No surprise here: Countries with steeper implicit carbon taxes tend to have lower carbon emissions per unit of economic activity. It's not a perfect relationship — the United States is more carbon-efficient than Canada or Finland despite having lower energy taxes. But it generally holds.

Could the United States move higher on this chart? Some economists think so. Eduardo Porter points to a 2008 study estimating that a carbon tax worth $15 per ton could cut U.S. emissions by 14 percent, "as people sought to save energy by driving less, insulating their homes and switching to renewable fuels."

Note that even with a $15/ton carbon tax, the United States would still have some of the lowest effective fossil-fuel taxes in the developed world.

Related: There's also the flip side here. A look at how many parts of the world subsidize fossil-fuel use.

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Dylan Matthews | January 31, 2013