Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized TECHNICAL NOTE 16  |  AUGUST 2019 Annex to report: Case studies Using Carbon Revenues TECHNICAL NOTE 16  |  AUGUST 2019 Using Carbon Revenues Annex to report: Case studies 2 Table of contents Abbreviations................................................................................................................................................................................................................................................ 4 1. British Columbia............................................................................................................................................................................................................. 5 2. California............................................................................................................................................................................................................................. 10 3. Chile......................................................................................................................................................................................................................................... 15 4. Colombia............................................................................................................................................................................................................................. 18 5. Côte d’Ivoire..................................................................................................................................................................................................................... 20 6. European Union............................................................................................................................................................................................................ 22 7. France.................................................................................................................................................................................................................................... 26 8. Ghana..................................................................................................................................................................................................................................... 29 9. India.......................................................................................................................................................................................................................................... 31 10. Indonesia............................................................................................................................................................................................................................. 34 11. Iran............................................................................................................................................................................................................................................ 40 12. Ireland.................................................................................................................................................................................................................................... 43 13. Japan...................................................................................................................................................................................................................................... 45 14. Mexico................................................................................................................................................................................................................................... 47 15. Quebec.................................................................................................................................................................................................................................. 51 16. South Africa...................................................................................................................................................................................................................... 54 17. Sweden................................................................................................................................................................................................................................. 56 18. Switzerland........................................................................................................................................................................................................................ 60 TABLE OF CONTENTS 3 Figures Figure A.1. Distribution of uses of British Columbia’s carbon tax revenues, 2008–2018................................................ 7 Figure A.2. Public support for versus opposition to carbon tax in British Columbia, mid-2007 to mid-2012........................................................................................................................................................................................... 8 Figure A.3. Cumulative investments benefiting disadvantaged communities......................................................................... 12 Figure A.4. Process for implementing GGRF investments......................................................................................................................... 13 Figure A.5. Country risk spreads in Chile, 1999–2016..................................................................................................................................... 16 Figure A.6. Use of ETS revenues, 2013–2017 (€  millions)............................................................................................................................ 24 Figure A.7. Domestic use of auction revenues, 2013–2017 (€  billions)........................................................................................... 24 Figure A.8. The impact of fuel subsidies on the benefits accruing to each quintile in Ghana (%)................................................................................................................................................................................................................ 30 Figure A.9. National fossil fuel subsidies in Indonesia, 2011–2016..................................................................................................... 35 Figure A.10. Annual rates of inflation in Iran, 2010–2015, 3-month moving averages......................................................... 41 Figure A.11. Mexican gasoline and diesel taxes and subsidies, as a percentage of GDP............................................ 48 Figure A.12. Quebec’s revenue spending plan, 2013–2020.......................................................................................................................... 52 Figure A.13. Real GDP and domestic CO2e emissions in Sweden, 1990–2016........................................................................ 57 Figure A.14. Development of the Swedish carbon tax at general level and industry level............................................ 58 Tables Table A.1. Carbon tax rates and conversion factors in different fuel types, 2017............................................................ 19 Table A.2. EU ETS auction revenues for the 2013–2017 period........................................................................................................... 23 Table A.3. Carbon component trajectory in the 2015 Energy Transition for Green Growth Act.......................... 27 Table A.4. Carbon component trajectory in the 2018 Finance Act................................................................................................... 27 Table A.5. Social programs associated with fossil fuel subsidy reform in Indonesia .................................................. 37 Table A.6. Forgone revenue as identified in Mexico’s self-review of national fossil fuel subsidies................. 48 Table A.7. Mexico’s carbon tax levied on fuels by type, 2019........................................................................................................ 49 Table A.8. Collection of federal government tax revenue........................................................................................................................ 50 4    TABLE OF CONTENTS Abbreviations AB 32 Global Warming Solutions Act ANAH Agence nationale de l’habitation (France) BLT Bantuan Langsung Tunai (Indonesia) CARB California Air Resources Board CO2 Carbon dioxide ESSF Economic and Social Stabilization Fund (Chile) ETS Emissions trading system EU European Union EU ETS European Union Emissions Trading System FOEN Federal Office for the Environment (Switzerland) FY Fiscal year GDP Gross domestic product GGRF Greenhouse Gas Reduction Fund (California) GHG Greenhouse gas GST Goods and Service Tax LPG Liquid petroleum gas MSR Market Stability Reserve NDC Nationally determined contribution NER New Entrants’ Reserve OECD Organisation for Economic Co-operation and Development PAHAL Pratyaksh Hanstantrit Labh (India) PMR Partnership for Market Readiness PPP Purchasing power parity PRF Pension Reserve Fund (Chile) R&D Research & development SOE State-owned enterprise UNFCCC United Nations Framework Convention on Climate Change VAT Value added tax WCI Western Climate Initiative    TABLE OF CONTENTS 5 1. British Columbia Summary With a wide coverage, a significant price level, substantial revenues recycled to households and businesses, and increasing support over time, British Columbia’s carbon tax has often been described as a “poster child” for carbon pricing. The carbon tax was initially designed to be revenue neutral, even though in practice tax cuts outweighed the identified revenues. The carbon tax rate and subsequent revenues have clearly followed a steady upward trajectory since the tax was introduced in 2008. Returning carbon revenues to households and businesses through tax reductions was key to strengthening support for the carbon tax over time. A robust legal framework was also established so that the provincial Ministry of Finance could report on the use of revenues. Starting in 2018, in addition to tax reductions, revenues were also allocated to green initiatives. GHG emissions (year) 62.3 MtCO2e (2016)a Revenue raising mechanism Carbon tax revenues Start year of the mechanism 2008 Coverage (sectors/fuels) All fossil fuels as well as some combustibles such as tires and peat GHG emissions covered 70%b by the mechanism (%) Institutional constraints (ex ante) Revenue neutrality until the end of 2017 Use of revenue (ex post) 100% to reduce existing taxes, with some revenues allocated to green initiatives starting in 2018 Department responsible Ministry of Finance for the implementation Department responsible Ministry of Finance for the use of revenues Annual revenues (year/period) Can$ 1,255 million, or US$ 932 million (FY 2017/18) a. Environmental Reporting BC, “Trends in Greenhouse Gas Emissions in B.C. (1990–2016),” http://www.env.gov.bc.ca/soe/indicators/ sustainability/ghg-emissions.html. b. World Bank, Carbon Pricing Dashboard, https://carbonpricingdashboard.worldbank.org/map_data (accessed 2019). A “textbook example” of the efficient use of carbon revenues British Columbia introduced its carbon tax in 2008 following the adoption of the province’s Carbon Tax Act. The carbon tax covers around 70 percent of greenhouse gas (GHG) emissions in the province and applies to all fossil fuels purchased or used in British Columbia, with only minor exemptions. Characterized by a wide coverage, a significant price level, substantial revenues recycled to households and businesses, and increasing support over time, British Columbia’s carbon tax has often been described as a “textbook” economic policy (Metcalf 2015) or a “poster child” (Farid et al. 2016) for carbon pricing, showing how a tax on a negative externality can reduce greenhouse gas emissions as well as other taxes. 6    TABLE OF CONTENTS TECHNICAL NOTE 16 - USING CARBON REVENUES – ANNEX TO REPORT: CASE STUDIES One core feature of the carbon tax in its first period of existence was its revenue neutrality. This requirement was eliminated in the 2017 budget and was no longer in effect as of 2018. All revenues generated by the tax were returned to businesses and households through reductions in other taxes and lump-sum payments, so that the tax did not fuel an increase in the province’s budget. The revenues were thus used to lower distortionary income taxes on households and businesses in British Columbia, and support disadvantaged communities, for example, through personal income tax reductions and lump-sum transfers. From 2008 until today, around 60 percent of carbon tax revenues have benefited businesses via corporate tax rate reductions and increased tax credits, while the remainder have been returned to households (Bowen 2015), which has helped make the tax highly progressive (Beck et al. 2015). Public support for the tax grew steadily over time, with approval rates climbing from 40 percent to 65 percent between 2008 and 2012 (Metcalf 2015; Murray and Rivers 2015). Existing reviews show that British Columbia’s carbon tax effectively contributed to diminishing GHG emissions in the province: emissions were found to be 5–15 percent lower than under a business-as-usual scenario (Murray and Rivers 2015). At the same time, there is no evidence that the carbon tax had any significant effect on British Columbia’s economic growth (Fay et al. 2015; Metcalf 2015; Pedersen and Elgie 2015). Since the introduction of the carbon tax, British Columbia has been home to a flourishing clean technology sector, with clean energy investment rates adding up to twice the national average (Harrison 2013). A revenue-neutral approach benefiting both businesses and households  Revenue use appeared as a key element of British Columbia’s carbon tax since the very early design stages in 2008, with a clear up-front objective of reducing existing taxes (Carl and Fedor 2016). The legislation explicitly stated that all tax revenues would be returned to taxpayers, both households and businesses (Beck et al. 2015). If this revenue neutrality constraint was not achieved in a given year, the finance minister’s salary would be cut by 15 percent (Harrison 2013; Pedersen and Elgie 2015). In practice, British Columbia went beyond revenue neutrality: according to the provincial government, the carbon tax generated Can$ 7.3 billion (US$ 6.3 billion) between 2008 and 2016, while associated spending mechanisms led to Can$ 8.9 billion (US$ 7.7 billion) in tax cuts and cash transfers over the same period. Taxes for households were lowered: disadvantaged communities were supported through specific measures, such as the Low Income Climate Action Tax Credit (now called the Climate Action Tax Credit), a reduction in the income tax rates for the poorest households, and specific tax credits targeting rural and climate-vulnerable homeowners (Beck et al. 2015; Murray and Rivers, 2015). Taxes were also lowered for businesses: the provincial corporate income tax rate was reduced, including for small businesses, and the threshold over which companies are required to pay the corporate income tax rate was increased (Ministry of Finance, British Columbia 2017). However, what started as a general tax reform evolved into a fiscal policy with specific objectives starting in 2012. Indeed, a substantial share of the revenues began to be allocated to specific business purposes, with some sectors being explicitly targeted and a growing number of exemptions implemented (figure A.1) (Murray and Rivers 2015). In 2018, the requirement for revenue neutrality was removed to allow some of the additional revenues to be used to fund mitigation measures for large industry and other green initiatives in addition to further enhancements to the Climate Action Tax Credit for low- and modest-income individuals. 1. BRITISH COLUMBIA    TABLE OF CONTENTS 7 FIGURE A.1. Distribution of uses of British Columbia’s carbon tax revenues, 2008–2018 2,000 Carbon revenues in USD million 1,500 1,000 500 0 FY2008.09 FY2009.10 FY2010.11 FY2011.12 FY2012.13 FY2013.14 FY2014.15 FY2015.16 FY2016.17 FY2017.18 Corporate income tax cut Personal income tax cut Targeted personal tax credit Low income tax credit Targeted corporate tax credit Note: The solid line represents revenue from the carbon tax; the bars represent expenditures of carbon tax revenue. Values for FY 2015/16 and beyond are forecasts from the most recent budget. Source: Murray and Rivers 2015, drawing on British Columbia Budget and Fiscal Plans, 2008/09 to 2015/16, www.gov.bc.ca/fin. A predictable and clear trajectory for the carbon revenue framework The price of the carbon tax in British Columbia has followed a clear trajectory. The initial 2008 price of Can$ 10/tCO2e (US$ 8/tCO2e) was increased by Can$ 5 (US$ 4) per year for four years to reach Can$ 30/ tCO2e (US$ 24/tCO2e) in 2012. In April 2018, a further annual price increase of Can$ 5 (US$ 4) over a four- year period was introduced, ultimately to reach Can$ 50/tCO2e (US$ 39/tCO2e) in April 2021 (Ministry of Finance, British Columbia 2017). The government announced and enacted both the 2009–2012 and 2018– 2021 price escalations well in advance, thus providing stakeholders with a predictable, gradual, and clear price trajectory (Komanoff and Gordon 2015). This price increase quadrupled revenues in a relatively short period of time, from Can$ 300  million (US$ 280 million) in fiscal year (FY) 2009/10 to Can$ 1.2 billion (US$ 1.1 billion) in FY 2013/14. Following the new price increase, the Ministry of Finance estimates that revenue will reach Can$ 1.5 billion (US$ 1.1 billion) for FY 2018/19 and Can$ 1.7 billion (US$ 1.3 billion) for FY 2019/20 (Ministry of Finance, British Columbia 2017). From the introduction of the carbon tax through 2012, virtually all of the tax revenues were returned to businesses and households. However, when the tax rate reached Can$ 30/tCO2e (US$ 25/tCO2e) in 2012, revenues began to be directed to support specific sectors (Murray and Rivers 2015). 8    TABLE OF CONTENTS TECHNICAL NOTE 16 - USING CARBON REVENUES – ANNEX TO REPORT: CASE STUDIES A carbon tax whose acceptability has grown over time While the initial level of acceptance of British Columbia’s carbon tax was relatively low, it grew substantially over time (figure A.2).1 Presenting the carbon tax in British Columbia as a revenue-neutral policy was instrumental in boosting the acceptability of the tax, and especially in attracting support from the business sector (Clean Energy Canada 2015). The associated communication campaign successfully deflected criticisms that the tax would spur the expansion of the state budget (Komanoff and Gordon 2015). Another crucial factor for acceptance was that the provincial government was able to prove through various ex post studies that the tax was not harmful to the economy (Murray and Rivers 2015; Clean Energy Canada 2015; Pedersen and Elgie 2015). Today, removing the tax could prove politically challenging as it would require reversing the tax cuts brought in as part of its revenue-neutral scheme (Harrison 2013). FIGURE A.2. Public support for versus opposition to carbon tax in British Columbia, mid-2007 to mid-2012 60 Support Oppose 55 50 Percent 45 40 35 30 Jun-07 Jan-08 Aug-08 Feb-09 Sep-09 Mar-10 Oct-10 Apr-11 Nov-11 Jun-12 Source: Harrison 2013. A robust legal framework to report on the use of carbon revenues In British Columbia, carbon tax revenues are administered by the provincial Ministry of Finance. Until 2017, the ministry was legally required to report on the use of revenues for the previous two years in the Revenue Neutral Carbon Tax Report, and to draft a three-year Revenue Neutral Carbon Tax Plan for the use of revenues. This plan was then presented to the Legislative Assembly of British Columbia for review and approval, as part of the province’s yearly revision of the budget plan. In addition, all reports and plans dealing with carbon revenues were published online, making the process highly transparent (Murray and Rivers 2015). Following the 2017 update, the legal requirement to prepare these carbon tax reports and plans no longer applies. However, to maintain accountability, the province is developing a new reporting structure for future years. 1 Metcalf (2015) and Murray and Rivers (2015) provide insightful perspectives on how the perceived acceptability of British Columbia’s carbon tax evolved. 1. BRITISH COLUMBIA    TABLE OF CONTENTS 9 References Beck, M., N. Rivers, R. Wigle, and H. Yonezawa. 2015. “Carbon Tax and Revenue Recycling: Impacts on Households in British Columbia.” Resource and Energy Economics 41: 40–69. https://doi.org/10.1016/j.reseneeco.2015.04.005. Bowen, A. 2015. “Carbon Pricing: How Best to Use the Revenue?” Policy brief, Grantham Research Institute and Global Green Growth Institute. http://www.lse.ac.uk/GranthamInstitute/wp-content/uploads/2015/11/Bowen-policy-brief-2015.pdf. Carl, J., and D. Fedor. 2016. “Tracking Global Carbon Revenues: A Survey of Carbon Taxes versus Cap-and-Trade in the Real World.” Energy Policy 96: 50–77. https://doi.org/10.1016/j.enpol.2016.05.023. Clean Energy Canada. 2015. “How to Adopt a Winning Carbon Price: Top Ten Takeaways from Interviews with the Architects of British Columbia’s Carbon Tax.” http://cleanenergycanada.org/wp-content/uploads/2015/02/Clean-Energy-Canada- How-to-Adopt-a-Winning-Carbon-Price-2015.pdf. Farid, M., M. Keen, M. G. Papaioannou, I. W. H. Parry, C. A. Pattillo, and A. Ter-Martirosian. 2016. “After Paris: Fiscal, Macroeconomic and Financial Implications of Climate Change.” IMF Staff Discussion Note SDN/16/01, International Monetary Fund. January. https://www.imf.org/external/pubs/ft/sdn/2016/sdn1601.pdf. Fay, M., S. Hallegatte, A. Vogt-Schilb, J. Rozenberg, U. Narloch, and T. Kerr. 2015. Decarbonizing Development: Three Steps to a Zero-Carbon Future. Washington, DC: World Bank Group. https://openknowledge.worldbank.org/handle/10986/21842. Harrison, K. 2013. “The Political Economy of British Columbia’s Carbon Tax.” OECD Environment Working Paper 63, OECD Publishing. https://ideas.repec.org/p/oec/envaaa/63-en.html. Komanoff, C., and M. Gordon. 2015. “British Columbia’s Carbon Tax: By the Numbers.” Carbon Tax Center. December. https://www.carbontax.org/wp-content/uploads/CTC_British_Columbia’s_Carbon_Tax_By_The_Numbers.pdf. Metcalf, G. E. 2015. “A Conceptual Framework for Measuring the Effectiveness of Green Fiscal Reforms.” Paper prepared for the Green Growth Knowledge Platform Third Annual Conference “Fiscal Policies and the Green Economy Transition: Generating Knowledge—Creating Impact,” Venice, Italy, January 29–30. https://www.greengrowthknowledge.org/sites/ default/files/Metcalf_A_Conceptual_Framework_for_Measuring_the_Effectiveness_of_Green_Fiscal.pdf. Ministry of Finance, British Columbia. 2017. “Budget 2017 Update: 2017/18–2019/20.” Murray, B., and N. Rivers. 2015. “British Columbia’s Revenue-Neutral Carbon Tax: A Review of the Latest ‘Grand Experiment’ in Environmental Policy.” Energy Policy 86: 674–83. Pedersen, T. F., and S. Elgie. 2015. “A Template for the World: British Columbia’s Carbon Tax Shift.” In Carbon Pricing: Design, Experiences and Issues, edited by Larry Kreiser et al., 3–15. Cheltenham, Gloucestershire, UK: Edward Elgar Publishing Ltd. 10    TABLE OF CONTENTS 2. California Summary California’s Greenhouse Gas Reduction Fund (GGRF) manages the state’s cap-and-trade auction revenues with a legal mandate to invest at least 35 percent in climate change-related projects that benefit disadvantaged and low-income communities. The majority of California’s auction revenues are dedicated to specific programs, including 60 percent for clean transportation, affordable housing, and sustainable communities. Additional revenue commitments have been made to forest health, wildfire prevention and management, and a credit for manufacturing tax and use fees. California’s use of carbon revenue not only pursues stability through investment minimums for disadvantaged and low-income communities and designated programs; it also acknowledges a need for flexibility in using the remaining revenue. GHG emissions (year) 429 MtCO2e in 2016a Revenue raising mechanism Emissions trading system (ETS) Start year of the mechanism 2012 Coverage (sectors/fuels) Power, industry, transportation, residential, and commercial GHG emissions covered by the mechanism 80% (2016)b Annual revenues US$ 3,019 million in 2018c - Implementation California Air Resources Board (CARB) of the scheme Department/agency Funding appropriations and allocation decisions are made by the state in charge legislature, governor, and California Department of Finance. CARB and Use of revenues - over 20 state agencies implement programs and select recipients for grants, loans, rebates, and subsidies. All revenues are allocated to the GGRF for the purpose of facilitating the reduction of greenhouse gases within the state. Since 2012, 25% of GGRF proceeds have to be dedicated to disadvantaged communities. In 2016, this requirement was amended to dedicate another 10% to low-income communities. Since 2014, 60% of the GGRF proceeds have Institutional constraints (ex ante) to be dedicated to clean transportation and affordable housing and sustainable community programs. In 2017 and 2018 other long-term funding commitments for the GGRF were established. All programs must report on outcomes of funded projects for the benefit of public transparency and accountability. Revenues fund climate change-related programs, with 60% earmarked for transportation, affordable housing, and sustainable communities programs. The GGRF also supports energy, natural resources, and Use of revenue (ex post) waste diversion programs that reduce greenhouse gas emissions. Over a third (35%) of all funds (including earmarked programs) are for projects that benefit disadvantaged and low-income communities. a. CARB 2018. b. California Climate Investments 2018. c. CARB, “Auction Information and Archived Auction Information and Results,” https://www.arb.ca.gov/cc/capandtrade/auction/auction.htm (accessed February 2019). 2. CALIFORNIA    TABLE OF CONTENTS 11 Context California’s approach to climate change action is based on the Global Warming Solutions Act (also referred to as AB 32), which has been in force since 2006. AB 32 requires the State of California to reduce its greenhouse gas emissions. The act granted legal authority to California to develop the cap-and-trade program, a carbon pricing mechanism that started in 2012 (Narassimhan et al. 2017). When it was launched, the cap-and-trade program covered all six major greenhouse gases in the industrial and electricity sectors; coverage was expanded in 2015 to include transportation fuels and natural gas (EDF 2017). With its broad scope, California’s cap- and-trade program currently covers around 80 percent of greenhouse gas emissions sources in the state.2 Depending on the sectors, California employs a mix of free allowance allocations and allowance auctions that include a steadily increasing auction price floor and declining cap (Narassimhan et al. 2017). The cap-and- trade program sets a price floor that started at US$ 10 per ton in 2012 and that has since risen by 5 percent plus inflation every year (EDF 2017). Allowances are freely allocated to both electrical distribution utilities and natural gas suppliers to limit the impact of the cap-and-trade program on electricity and natural gas bills. Utilities receiving these free allowances must consign the allowances at the quarterly auctions and use the resulting monies for the ratepayers’ benefit in line with the goals of AB 32 and must report annually on how they used the value of these allowances. Investor-owned utilities must return almost all the value of the allowances to customers through an industry credit or a climate credit on residential and business customers’ energy bills. Auction proceeds from the sale of state-owned allowances are deposited into the GGRF (the account that holds auction proceeds, managed by the California Air Resources Board, CARB). These proceeds can be appropriated by the legislature for state agencies to implement climate change-related programs. According to the state regulator, the cap-and-trade auctions of state-owned allowances generated around US$ 9.5 billion from 2013 through 2018.3 California formally linked its system with Quebec’s emissions trading scheme in January 2014. In 2017, state lawmakers reauthorized the program through 2030 in order to achieve California’s 2030 greenhouse gas target. A legal requirement to use carbon revenues to support disadvantaged communities California’s legislation takes into account the disproportionate impacts of climate change on vulnerable communities by imposing investment minimums on the projects funded by the GGRF. In 2012 and 2016, the California legislature passed laws that imposed specific constraints on how cap-and-trade proceeds were to be appropriated and specifically focused on how disadvantaged communities, low-income communities, and low-income households should benefit from auction revenues. Since 2016, the investment minimums have been raised from 25 percent directed at disadvantaged communities to 35 percent directed to disadvantaged and low-income communities.4 As of late 2017, cumulative investments benefiting disadvantaged communities have been consistently higher than the minimums legally imposed (figure A.3). When using appropriations from the GGRF, California agencies must detail what share of their spending proposal will support disadvantaged 2 This used to be 85 percent; however, emissions from the covered sectors decreased, while those from non-covered sectors slightly increased. 3 CARB, “Auction Information and Archived Auction Information and Results,” https://www.arb.ca.gov/cc/capandtrade/auction/auction.htm (accessed February 2019). 4 State law now requires that at least 25 percent of auction revenues be invested in programs located within, and benefiting individuals living in, disadvantaged communities. An additional minimum of 5 percent of revenues should support projects that benefit low-income households and communities; and another 5 percent should benefit low-income households or communities located within half a mile of a disadvantaged community (California Climate Investments 2017). 12    TABLE OF CONTENTS TECHNICAL NOTE 16 - USING CARBON REVENUES – ANNEX TO REPORT: CASE STUDIES and low-income communities (Carl and Fedor 2016).5 These investment minimums are a legal requirement for certain programs, and most programs are designed to help meet the required overarching investment minimums for the GGRF, including the subset of the state’s continuous appropriations for transportation and housing programs. FIGURE A.3. Cumulative investments benefiting disadvantaged communities $2.0B in Cumulative Implemented Funds* Located in Benefiting 31% of funding for projects located in disadvantaged communities 51% of funding for projects benefiting disadvantaged communities ($1,001M) * Total amounts do not include benefits attributable to the High-Speed Rail Project Source: California Climate Investments 2018. Supporting long-term development goals through infrastructure projects California must meet the transportation demand of a growing population, while mitigating transport emissions (40 percent of the state’s emissions) and modernizing its infrastructure network. A 2014 law established that 60 percent of the GGRF be dedicated to transportation and housing programs (25 percent for the high-speed rail project, 20 percent for the affordable housing and sustainable communities program, 10 percent for the transit and intercity rail capital program, and 5 percent for the low-carbon transit operations program) (Narassimhan et al. 2017). This approach allows an uninterrupted stream of revenues from year to year, with medium-term certainty, for infrastructure financing. Legislation in 2017 and 2018 committed additional funds to forest health, wildfire prevention and management, and a credit for manufacturing tax and use fees. Annual budget negotiations determine the use of the remaining portion of revenue, which may include additional investment for the existing transportation and housing programs receiving earmarked funds. From 2013 through 2017, the legislature appropriated over US$ 4 billion of GGRF money for clean transportation and affordable housing and sustainable communities. Such investments allowed the issuance of over 150,000 rebates for zero-emission or hybrid vehicles, funded more than 330 transit-related projects, and supported innovative freight demonstrations, active transportation, and community-focused air pollution monitoring and prevention projects. 5 Although this aspect is not the focus of this section, we note here that the agencies must also show that the project will facilitate GHG emis- sion reductions. 2. CALIFORNIA    TABLE OF CONTENTS 13 A carbon revenue management framework to support stable funding of projects and flexibility to address changing needs The California Air Resources Board is the regulatory state agency responsible for managing the instrument’s regulations and conducting auctions. The state legislation requires the Department of Finance, with support from the CARB and other state entities, to develop triennial investment recommendations for auction revenues. Auction revenues directly fund the GGRF. The California legislature and governor then distribute GGRF money to state agencies for climate change-related projects (Carl and Fedor 2016)”container-title”:”Energy Policy”,”page”:”50-77”,”volume”:”96”,”source”:”ScienceDirect”,”abstract”:”We investigate the current use of public revenues which are generated through both carbon taxes and cap-and-trade systems. More than $ 28.3 billion in government “carbon revenues” are currently collected each year in 40 countries and another 16 states or provinces around the world. Of those revenues, 27% ($ 7.8 billion. Projects benefiting from GGRF funds are referred to as California Climate Investments. Each year, through the budget process, the state legislature develops budgets that may include appropriations from the GGRF to state agencies. The process for the implementation of GGRF investments is described in figure A.4. The Californian system aims to provide both stability and flexibility. For transportation and housing programs, earmarking 60 percent of cap-and-trade proceeds every year guarantees a stream of revenues from year to year, reducing uncertainty in the funding of such projects (Alberola and Vaidyula 2015). After other additional funding commitments are fulfilled, annual negotiations on budget allow for flexibility for remaining revenue. Investments of GGRF money to date span various economic sectors including those not covered under the cap-and-trade program; funded projects have, for example, included rebates for the purchase of electric vehicles, subsidies for public mass transit, energy efficiency retrofits for residents, subsidies for rooftop solar panels and agricultural energy efficiency, and projects supporting forest health, land conservation, urban greening, healthy soils, biomethane capture, recycling, edible food rescue, and other waste diversion activities. FIGURE A.4. Process for implementing GGRF investments ADMINISTRATION Investment plan Triennal investment plan identifies priority investments that facilitate GHG emission reductions GOVERNOR & LEGISLATURE Budget Budget enacted by Governor and Legislature appropriates funds consistent with Investment Plan STATE AGENCIES Funding guidelines Agencies that receive appropriations design and implement programs in accordance with CARB Funding Gidelines and programs-specific guidelines PROJECTS Project tracking Data on project outcomes are provided for public reports and tracking Investments result in net greenhouse gas reductions and provide benefits to disadvantaged communities through a publicly accessible and transparent process Source: California Climate Investments 2017. 14    TABLE OF CONTENTS TECHNICAL NOTE 16 - USING CARBON REVENUES – ANNEX TO REPORT: CASE STUDIES Consultations, performance analysis, and comprehensive communication to assess and promote effective use of carbon revenues Triennial investment plans and annual budget proposals in California are informed by the outcomes of public consultations and negotiations involving nongovernmental organizations, the private sector, local authorities, and interested citizens. Budget discussions that determine annual funding to programs occur at public legislative hearings. Stakeholder engagement in the process of how programs spend funds takes several forms, including public hearings and workshops held by state agencies overseeing funded programs and the possibility to provide inputs at various points from program design through project selection. In 2017, California agencies organized over 350 public meetings to discuss the use of cap-and-trade proceeds. Decision making on revenue use in California may also be informed through ex post assessments. The Department of Finance each year submits a report to the state legislature, which details the outcomes and performance of projects funded under the GGRF, including the GHG emission reductions expected from these projects. CARB also releases an interactive map displaying all the programs implemented with GGRF funds, along with a comprehensive project list.6 Such tools are regularly updated and aim to provide greater transparency and support further evaluation of investments. To assess the effectiveness of projects funded with auction proceeds, the administering agencies with CARB’s assistance evaluate the environmental and social impacts of implemented projects, looking specifically at greenhouse gas reductions, co-benefits, and benefits for disadvantaged communities, low-income communities, and low-income households. References Alberola, E., and M. Vaidyula. 2015. “COPEC Report, Chapter 5: The EU-ETS and Low-Carbon Funding Mechanisms.” I4CE Institute for Climate Economics. https://www.i4ce.org/wp-core/wp-content/uploads/2016/06/rapport-I4CE-chapitre-5.pdf. California Climate Investments. 2017. Annual Report to the Legislature on California Climate Investments Using Cap- and-Trade Auction Proceeds–2017 Report. California Air Resources Board. http://www.caclimateinvestments.ca.gov/ annual-report. ———. 2018. Annual Report to the Legislature on California Climate Investments Using Cap-and-Trade Auction Proceeds–2018 Report. California Air Resources Board. http://www.caclimateinvestments.ca.gov/annual-report. CARB (California Air Resources Board). 2018. “California Greenhouse Gas Emission Inventory—2018 Edition.” July 11. https://www.arb.ca.gov/cc/inventory/data/data.htm. Carl, J., and D. Fedor. 2016. “Tracking Global Carbon Revenues: A Survey of Carbon Taxes versus Cap-and-Trade in the Real World.” Energy Policy 96: 50–77. https://doi.org/10.1016/j.enpol.2016.05.023. EDF (Environmental Defense Fund). 2017. “California’s Cap-and-Trade Program Step by Step.” Environmental Defense Fund. https://www.edf.org/sites/default/files/californias-cap-and-trade-program-step-by-step.pdf. Narassimhan, E., K. S. Gallagher, S. Koester, and J. R. Alejo. 2017. “Carbon Pricing In Practice: A Review of the Evidence.” Climate Policy Lab, the Fletcher School, Tufts University, Medford, MA. https://sites.tufts.edu/cierp/files/2017/11/ Carbon-Pricing-In-Practice-A-Review-of-the-Evidence.pdf. 6 CARB, “California Climate Investments Project Map,” https://webmaps.arb.ca.gov/ccimap/.    TABLE OF CONTENTS 15 3. Chile Summary Chile has implemented various public funds to manage revenues from copper with a clear and transparent accumulation rule. While the national carbon tax goes into the state budget without any specific allocation, the implementation of this tax was followed by an increase in public spending on the national education and health systems. GHG emissions (year) 87.88 MtCO2e (2016)a Revenue raising mechanism Carbon tax and mineral resources Start year of the mechanismb 2017 GHG emissions covered by the mechanism ~39% (2017)c Stationary sources with boilers and turbines whose emission sources Coverage (sectors/fuels) sum 50 MW or more of nominal thermal power generation Institutional constraints (ex ante) No earmarking of carbon revenues Use of revenue (ex post) 100% allocated to the general budget Annual revenues US$ 168 million in 2017c - Implementation Department/agency Ministry of Environment of the scheme in charge Use of revenues - Ministry of Finance a. Government of Chile 2018. b. The remainder of the table relates to carbon tax revenues only. c. Communication from official representative of Government of Chile, 2018. Tackling copper resource volatility through sovereign funds As the world’s biggest copper exporter (responsible for approximately 30 percent of global production), Chile draws a large share of its national fiscal revenues from copper contributions (up to 20 percent in 2007) (Navia 2009). However, such revenues depend heavily on global price fluctuations. Chile’s first sovereign fund was the Copper Stabilization Fund; set up in 1987, it was reformed in 2006 as two new funds, the Economic and Social Stabilization Fund (ESSF) and the Pension Reserve Fund (PRF). The PRF is a transitory fund, created to manage the transition between two different pension regimes; it should disappear in 2021 and all resources will then go to the ESSF. The national fiscal rule establishes a minimal annual transfer of 0.2 percent of the previous year’s gross domestic product (GDP) to the PRF. The transfer may increase to 0.5 percent of GDP in case of large overall fiscal surpluses, which can be used to recapitalize the Central Bank; the entire remaining surplus is to fuel the ESSF. By mid-2016, the PRF had accumulated a surplus of US$ 8.3 billion, and the ESSF was worth US$ 16 billion (Solimano and Calderón Guajardo 2017). Even though causality is hard to establish, Chile displayed remarkable stability compared to the rest of Latin America during the 2001 and 2008 crises, as the consistently low risk spread shows (figure A.5). Chile’s funds owe their widely acknowledged success to clear and transparent accumulation rules, as well as extensive 16    TABLE OF CONTENTS TECHNICAL NOTE 16 - USING CARBON REVENUES – ANNEX TO REPORT: CASE STUDIES governance regulation and public disclosure (NRGI 2013). However, in an arrangement that goes against the accumulation rules, payments by the ESSF are left to the discretion of the Ministry of Finance, leading some studies to criticize the consistency and predictability of the ESSF (Solimano and Calderón Guajardo 2017). FIGURE A.5. Country risk spreads in Chile, 1999–2016 (basis points) 1,200 1,100 1,000 900 800 700 600 500 400 300 200 100 0 06 05 12 06 07 06 02 07 09 08 04 08 11 09 06 09 01 10 06 11 03 11 10 12 05 12 12 13 07 13 02 14 09 15 04 15 6 12 99 07 99 02 00 09 01 04 01 11 02 06 02 01 03 08 04 03 04 10 05 01 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 9 9 0 0 0 0 0 0 0 0 0 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /1 /1 /2 /2 /2 /2 /2 /2 /2 /2 /2 05 Chile Latin America Asia Source: Solimano and Calderón Guajardo 2017. A tax system mandate to feed the state budget with no specific allocations The second election victory of President Bachelet in 2014 was followed by a comprehensive fiscal reform, which aimed at supporting primarily education and health. The new government, looking for new sources of revenue, decided to introduce a national tax reform that included a carbon tax, leveraged from existing frameworks for environmental damages and local contaminants. Although earmarking of tax revenues is prohibited by Chile’s Constitution save for rare exceptions (Schlegelmich and Joas 2015; Narassimhan et al. 2017; PMR 2017b), it is safe to say that the introduction of the carbon tax in this case was mostly aimed at supporting improvement in the national education and health systems. On the other hand, the tax rate of US$ 5 per tCO2 in 2014 (PMR 2017a) was determined through an analysis of the social cost of carbon. The carbon tax finally came into effect in January 2017 covering roughly 39 percent of Chile’s CO2 emissions (Government of Chile 2018). By 2017, carbon tax revenues reached US$ 168 million, out of US$ 8.3 billion generated by the full tax reform (PMR 2017a). The development of Chile’s carbon tax thus makes a good case for consistently promoting climate objectives through the tax itself, and national development objectives through increases in the state budget. In August of 2018 the recently elected second government of President Piñera introduced amendments to the carbon tax in a new fiscal reform that was sent to Congress. There were two especially important modifications to the instrument: first, the threshold for covered entities switched from a technology-based criterion to an annual emissions–based one; and second, it became possible to use a crediting mechanism to offset emissions in lieu of the tax payment. 3. CHILE    TABLE OF CONTENTS 17 References Government of Chile. 2018. Tercer Informe Bienal de Actualización de Chile Sobre Cambio Climático. https://mma.gob. cl/wp-content/uploads/2018/12/3rd-BUR-Chile-SPanish.pdf. Narassimhan, E., K. S. Gallagher, S. Koester, and J. R. Alejo. 2017. “Carbon Pricing In Practice: A Review of the Evidence.” Climate Policy Lab, the Fletcher School, Tufts University, Medford, MA. https://sites.tufts.edu/cierp/files/2017/11/ Carbon-Pricing-In-Practice-A-Review-of-the-Evidence.pdf. Navia, P. 2009. “Managing Mineral Wealth in Middle-Income Countries: Chile.” September 18. NRGI (Natural Resource Governance Institute). 2013. “Chile: Pension Reserve Fund and Economic and Social Stabilization Fund.” Natural Resource Governance Institute. August. PMR (Partnership for Market Readiness). 2017a. Appendix: Carbon Tax Case Studies. Vol. 2 of Carbon Tax Guide: A Handbook for Policy Makers. Washington, DC: World Bank. http://documents.worldbank.org/curated/en/799761535605686418/ Appendix-Carbon-Tax-Case-Studies. ———. 2017b. Carbon Tax Guide: A Handbook for Policy Makers. Washington, DC: World Bank. https://openknowledge. worldbank.org/handle/10986/26300. Schlegelmich, K., and A. Joas. 2015. “Fiscal Considerations in the Design of Green Tax Reforms.” GGKP Working Paper 03-2015, Green Growth Knowledge Platform. November. http://www.greengrowthknowledge.org/resource/ fiscal-considerations-design-green-tax-reforms. Solimano, A., and D. Calderón Guajardo. 2017. “The Copper Sector, Fiscal Rules, and Stabilization Funds in Chile: Scope and Limits.” WIDER Working Paper No. 2017/53, UNU-WIDER. https://www.wider.unu.edu/publication/ copper-sector-fiscal-rules-and-stabilization-funds-chile. 18    TABLE OF CONTENTS 4. Colombia Summary Given how the revenues of Colombia’s carbon tax are used, the tax is clearly a policy instrument aimed at achieving joint development and environmental objectives. GHG emissions (year) 173 MtCO2e (2012)a Revenue raising mechanism Carbon tax Start year of the mechanism 2017 Liquid fossil fuels. Taxpayers are exempted from the payment when Coverage (sectors/fuels) certifying national carbon offsets. GHG emissions covered 24%a by the mechanism (%) Institutional constraints (ex ante) n.a. Use of revenue (ex post) 100% earmarked to environment-related projects Annual revenues US$ 161 million in 2017b - Implementation Ministry of Environment and Sustainable Development, Ministry of Department/agency of the scheme Finance and Public Credit in charge Ministry of Environment and Sustainable Development, Ministry of Use of revenues - Finance and Public Credit Note: n.a. = not applicable. a. World Bank, Carbon Pricing Dashboard, https://carbonpricingdashboard.worldbank.org/map_data (accessed 2019). b. Communication from official representative of Government of Colombia, 2018. Using carbon tax revenues to pursue both environmental and development objectives Colombia’s carbon tax is part of a larger tax reform initiated in 2016 to boost productivity and generate revenues for the country’s new development agenda. The national peace process and associated need for public revenues created the momentum that effectively enabled its implementation. Operational since May 2017, Colombia’s carbon tax applies to large upstream companies that produce or import liquid fossil fuels, and the National Planning Secretary (Departamento Nacional de Planeación) estimates that it directly reduced around 1 percent of the country’s emissions in 2017. With a rate of Col$ 15,000/tCO2e (table A.1), the tax generated Col$ 476 billion (US$ 161 million) in its first year of operation and Col$ 294 billion (US$ 90 million) in 2018. Revenues are used to finance environmental and rural development projects. One novel feature of the Colombian scheme is to allow the use of offset credits as a flexibility mechanism to meet the tax obligation. Colombia’s government thus trades part of its expected revenues against national investment in low-carbon development projects, aligned with national priorities. While such offsets are often 4. COLOMBIA    TABLE OF CONTENTS 19 seen associated with emissions trading schemes, this is one of the few examples of this type of flexibility scheme applied to a tax. International certificates were accepted in the first year of operation (2017), but only national certificates are likely to be accepted in the coming years. TABLE A.1. Carbon tax rates and conversion factors in different fuel types, 2017 Fuel Unit Carbon tax rate Conversion factor in 2017 (Col$ ) Natural gas (only for refineries and the petrochemical cubic 29 1.95 kgC02/m³ industry) meter Liquid gas (propane, butane) (only for industrial use) gallon 95 6.33 kgC02/gal Gas (regular and premium) gallon 135 9.00 kgC02/gal Kerosene and jet fuel gallon 148 9.86 kgC02/gal Diesel gallon 152 10.13 kgC02/gal Fuel oil gallon 177 11.80 kgC02/gal Source: Congreso de Colombia 2016. References Congreso de Colombia. 2016. Ley 1819 de 2016. http://www.secretariasenado.gov.co/senado/basedoc/ley_1819_2016_ pr004.html. 20    TABLE OF CONTENTS 5. Côte d’Ivoire Summary As part of its reflection on the feasibility of a national carbon tax, Côte d’Ivoire is considering several options for using potential carbon revenues. GHG emissions (year) 20 MtCO2e (2016)a Revenue raising mechanism Carbon tax Start year of the mechanism n.a. Coverage (sectors/fuels) n.a. GHG emissions covered by the mechanism (%) n.a. Institutional constraints (ex ante) n.a. Use of revenue (ex post) n.a Annual revenues n.a. - Implementation of the scheme n.a. Department/agency in charge - Use of revenues n.a. Note: n.a. = not applicable. a. Communication from Cote d’Ivoire government official. Planning for a national carbon tax and the use of its revenues In 2015, in its nationally determined contribution (NDC) to the United Nations Framework Convention on Climate Change (UNFCCC), Côte d’Ivoire clearly stated that it intends to “explore the opportunity of setting up a carbon price at the national level.”7 Two motivations underpin this initiative. The first is to achieve the country’s NDC objectives, as obtaining emissions reductions and using them for its NDC is key to furthering domestic low-carbon development and enhancing the country’s international attractiveness. The second is to find alternatives to the Clean Development Mechanism (CDM) to support local project developers by providing and securing support at the local level through subsidies. In 2015, Côte d’Ivoire launched a national process to explore the feasibility of introducing a national carbon tax. After joining the Carbon Pricing Leadership Coalition in April 2016, Côte d’Ivoire commissioned a first feasibility study with support from the World Bank. This feasibility study proposes various options for the use of revenues generated by a national carbon tax. One option would be to use revenues directly for renewable energy or energy efficiency projects and investments. Another option would be to create a dedicated National Carbon Fund. This fund would aim to reflect the fact that carbon pricing schemes are deployed in the international cooperation framework of the Paris Agreement and contribute to meeting the country’s NDC. The fund would be chaired by a multi-stakeholder commission including representatives from the Environment and Finance Ministries as well as the business community and civil society. The fund would be managed by the Ministry of Finance, under the supervision of the General Directorate of the Treasury and Public Accounting. 7 UNFCCC INDC portal, https://www4.unfccc.int/sites/submissions/indc/Submission%20Pages/submissions.aspx. 5. CÔTE D’IVOIRE    TABLE OF CONTENTS 21 Consultations with key stakeholders were conducted from March to July 2017, and the findings were discussed in September 2017. Regarding the options for using carbon revenues, it seems that no obstacles are raised by the Finance and Environment Ministries to the idea of a dedicated national fund. One question still to be answered is whether the government would prefer to keep the existing National Environmental Fund or to merge it with the new National Carbon Fund. An interministerial dialogue to discuss the different options for carbon taxation in Côte d’Ivoire took place in October 2018, and further studies, including a mapping of the fiscal environment and options, are planned for 2019. 22    TABLE OF CONTENTS 6. European Union Summary Under European Union (EU) legislation, at least 50 percent of the revenues generated from the auctioning of European Union Emissions Trading System (EU ETS) allowances should be used by EU member states to support the achievement of specific climate and energy activities. In practice, around 80 percent of the EU ETS revenues returned to member states have been earmarked for climate-related projects in recent years. GHG emissions (year) 4,750 MtCO2e (2012)a Revenue raising mechanism Emissions Trading System Start year of the mechanism b 2005 Coverage (sectors/fuels) Power and industry since 2005, aviation since 2012 GHG emissions covered 45%a by the mechanism (%) Member states should use at least 50% of EU ETS auction revenues for climate change-related projects. Between 2013 and 2020, 300 million emission allowances Institutional constraints from the EU ETS New Entrants’ Reserve (NER) were available for investments (ex ante) in low-carbon technology projects. For the period 2021–2030, the proceeds of the sale of 450 million allowances will be used to create an Innovation Fund for the support of innovative technologies in the power and industry sectors. From the revenues that go the national administrations, a European average Use of revenue (ex post) of 80% is earmarked to member states’ climate change-related projects; 20% is allocated to member states’ general budget. Annual revenues 5,525 million (US$ 6,780 million) in 2017c - Implementation Member states implement the ETS Directive through national legislation. of the scheme Department/ agency in charge Main use is by member states’ institutions; as of 2021, there will be dedicated Use of revenues - funds for innovation (at least 450 million allowances) and modernization of the energy sector (2% of auction volume).  orld Bank, Carbon Pricing Dashboard, https://carbonpricingdashboard.worldbank.org/map_data (accessed 2019). a. W ncluding international aviation and indirect CO2 emissions, and excluding emissions or removals from land use, land use change, and b. I forestry.  EX 2018; ICE 2018. https://www.eex.com/en/market-data/environmental-markets/auction-market/european-emission-allowances-auction/ c. E european-emission-allowances-auction-download. Increasing the leverage effect on private capital for low-carbon energy demonstration projects: the experience of the EU ETS with its dedicated NER 300 program The NER 300 program was created in 2009 as a catalyst both for the demonstration of carbon capture and storage and for innovative renewable energy technologies on a commercial scale within the European Union. It is so called because it is funded from the sale of 300 million emission allowances from the EU ETS New Entrants’ Reserve (NER). The funds have been distributed with the objectives of leveraging private investment 6. EUROPEAN UNION    TABLE OF CONTENTS 23 or public co-funding, boosting the deployment of innovative low-carbon technologies, and stimulating the creation of jobs for the low-carbon transition within the EU. The European Commission is responsible for the overall coordination of NER 300. As the implementing entity, the European Investment Bank has been responsible for evaluating proposals submitted by member states, monetizing the 300 million allowances, and managing the revenues and delivering the funds to member states during project implementation. Member states follow the implementation of projects in their jurisdiction. NER 300 funds were distributed through two calls for proposals, covering 200 million and 100 million allowances respectively. Under the first call for proposals,8 the European Commission awarded € 1.1 billion (US$ 1.4 billion) to 20 renewable energy projects hosted in 14 EU member states (European Commission 2012), covering a wide range of renewable energy technologies. This amount is estimated to have leveraged additional funding of over € 2 billion (US$ 2.6 billion) from private sources. Under the second call for proposals in July 2014, the European Commission awarded a total of €  1.3 billion) to 18 renewable energy projects and 1 billion (US$  one carbon capture and storage project hosted in 12 EU member states (European Commission 2014). This amount is estimated to have leveraged additional funding of over € 860 million (US$ 1.1 billion) from private sources (European Commission 2014). The European Commission is expanding its support for innovative technologies in the industrial sector with the creation of an Innovation Fund. This instrument will be funded via the sale of at least 450 million emission allowances9 and via unused funds from the NER 300 program. Supporting member states’ national climate-related priorities EU member states determine at the national level how to use the revenues generated by the EU ETS allowance auctions; however, they must report annually on the use of these revenues, including the amount spent for climate action.10 EU legislation states that at least 50 percent of the revenues should support the achievement of climate and energy objectives.11 TABLE A.2. EU ETS auction revenues for the 2013–2017 period Year Revenue (€  billions) Revenue (US$  billions) 2013 3.7 4.8 2014 3.2 4.3 2015 4.9 5.4 2016 3.8 4.4 2017 5.6 6.3 Total 2013–2017 21.2 25.2 Auction revenues for the 2013–2017 period amounted to approximately € 21.2 billion (table A.2). The member states earmarked roughly 80 percent of the auctioning revenues for climate and energy purposes. Among 8 European Commission, “NER 300 First Call for Proposals,” https://ec.europa.eu/clima/funding/ner300-1_en. 9 At least 400 million allowances should be reserved from 2021 onward for this purpose. A further 50 million of the unallocated allowances from 2013–2020 should also be set aside, together with remaining funds from the second call of the existing NER 300 program, to enable earlier support to eligible projects, before 2021. 10 Member states are required to submit these reports to the Reporting Obligation Database (ROD), which is managed by the European Environment Agency. To date, reports from the years 2013, 2014, 2015, 2016, and 2017 had to be submitted. 11 Under Article 10 of the EU ETS Directive, “climate and energy purposes” refers to greenhouse gas emissions reductions, renewable ener- gy development, energy efficiency improvements, carbon capture and sequestration, low-carbon transports, and measures to avoid deforestation. 24    TABLE OF CONTENTS TECHNICAL NOTE 16 - USING CARBON REVENUES – ANNEX TO REPORT: CASE STUDIES the revenues earmarked for domestic uses, € 5.8 billion (US$ 6.52 billion) financed renewable energy projects and € 5.5 billion (US$ 6.18 billion) supported energy efficiency projects (figure A.6 and figure A.7) (European Commission 2018b). FIGURE A.6. Use of ETS revenues, 2013–2017 (€  millions) 6,000 5,000 4,000 € millions Not used for climate and energy 3,000 purposes or use not reported Total used for international climate 2,000 and energy purposes 1,000 Total used for domestic an EU climate and energy purposes 0 2014 2015 2016 2017 2018 Source: European Commission 2018b. FIGURE A.7. Domestic use of auction revenues, 2013–2017 (€  billions) 1,4 1,2 5,8 Renewable energy 1,6 Energy efficiency Sustainable transport R&D Other domestic / EU uses 5,5 Source: European Commission 2018b. Managing emission allowance surplus in the EU ETS The legislative framework for the third Phase of the EU ETS (2013–2020) was finalized in 2008, just before the significant economic downturn triggered by the global financial crisis. Due to a sluggish economic environment and the large import of international credits, the CO2 emissions of installations covered by the EU ETS decreased by 26 percent between 2005 and 2016. In 2014, they dropped below the cap set for 2020. This situation caused the accumulation of a large surplus of allowances from 2009, which dampened the carbon price signal. The lower price reduced EU ETS revenues as well as the incentive role of the EU ETS in spurring innovation and delivering long-term signals for low-carbon investments. The EU responded by postponing the auctioning of 900 million carbon allowances until 2019–2020 (“back-loading”). This postponement reduced the surplus of allowances equivalent to under one year’s worth of EU ETS emissions (European Commission 2018a). 6. EUROPEAN UNION    TABLE OF CONTENTS 25 The Market Stability Reserve (MSR) was adopted in 2015 as a long-term solution and strengthened as part of the EU ETS reform completed in 2018. The MSR started in 2019 and will be continued in Phase 4 of the EU ETS (2021–2030). It regulates the surplus by applying thresholds to the total number of allowances circulating in the market. When the allowances in circulation are above the ceiling threshold, the auction volumes are reduced and the corresponding allowances are placed into the reserve. If the surplus falls below a given threshold, allowances are released from the reserve. Market analysts have made varying estimations of the effects of the MSR. Vailles et al. (2018) estimate that auctions could be reduced by 1.8 billion allowances by 2030. Aside from the increased stability of the revenue stream, the resulting increase in carbon prices could lead to increasing revenues even though auctioning volumes are reduced. References European Commission. 2012. “Questions and Answers on the Outcome of the First Call for Proposals under the NER300 Programme.” Press release. December 18. http://europa.eu/rapid/press-release_MEMO-12-999_en.htm. ———. 2014. “Questions and Answers on the Outcome of the Second Call for Proposals under the NER 300 Programme.” Press release. July 8. http://europa.eu/rapid/press-release_MEMO-14-465_en.htm. ———. 2018a. “Publication of the Total Number of Allowances in Circulation in 2017.” May 15. https://ec.europa.eu/clima/ sites/clima/files/ets/reform/docs/c_2018_2801_en.pdf. ———. 2018b. “Report from the Commission to the European Parliament and the Council: EU and the Paris Climate Agreement: Taking Stock of Progress at Katowice COP. Climate Action Progress Report.” https://eur-lex.europa.eu/ legal-content/EN/ALL/?uri=COM:2018:0716:FIN. Vailles, C., E. Alberola, B. Farrokhi, C. Cassisa, and J. Bonnefous. 2018. “’Mind the Gap’: Aligning the 2030 EU Climate and Energy Policy Framework to Meet Long-Term Climate Goals.” Climate Brief 52, I4CE, Paris. April. https://www.i4ce.org/ download/mind-the-gap-aligning-the-2030-climate-and-energy-policy-framework-to-meet-long-term-climate-goals/. 26    TABLE OF CONTENTS 7. France Summary The French carbon levy is a component of a wider tax, whose revenues fuel the general budget without further specification. France’s auction revenues from the EU ETS are wholly earmarked to the French National Housing Improvement Agency (Agence nationale de l’habitation, ANAH) for energy efficiency in buildings. The level of the carbon component in the French energy taxation is planned and has already been revised upward twice since its implementation in 2014. GHG emissions (year) 465 MtCO2e (2016)a Revenue raising mechanism Carbon tax revenues Start year of the mechanism 2014 Coverage (sectors/fuels) All fossil fuels GHG emissions covered 35%b by the mechanism (%) Institutional constraints (ex ante) No earmarking of carbon revenues (budgetary principle of universality) 73% allocated to the general budget; 27% earmarked for climate Use of revenue (ex post) change-related projects (as of 2017) Annual revenues (year/period) € 5,200 million (US$ 6,380 million) in 2017c - Implementation Department/agency Ministry for the Ecological and Inclusive Transition of the scheme in charge Use of revenues - Ministry for the Economy and Finance a. United Nations Framework Convention on Climate Change, “Time Series—Annex 1,” http://di.unfccc.int/time_series. b. World Bank, Carbon Pricing Dashboard, https://carbonpricingdashboard.worldbank.org/map_data (accessed 2019). c. Communication with official representative of Government of France, 2018. Merging carbon revenues with other tax revenues For legal reasons related to the existence of the EU ETS and associated tax exemptions, the introduction of carbon taxation failed twice in France, in 2000 and 2010 (El Beze 2014). Carbon pricing was then piggybacked onto existing energy taxation rather than adopted as a separate environmental tax (Comité pour la Fiscalité Ecologique 2013). The carbon price was included as a carbon component of the domestic taxes on fossil fuel consumption. Carbon revenues are not officially monitored or disclosed in France since the carbon component is not a stand-alone tax: its revenues are mixed with domestic consumption tax revenues and feed the general budget. However, it is estimated that the carbon component revenues contributed € 3 billion (US$ 3.3 billion) in 2016 to financing competitiveness and employment tax credits that were established at the same time as the implementation of the carbon component. Part of the revenues (€ 1.7 billion, or US$ 1.96 billion in 2017) have also been allocated to support the energy transition (MTES 2017b). In 2017, carbon revenues in France were estimated at € 5.2 billion (US$ 6.4 billion). 7. FRANCE    TABLE OF CONTENTS 27 A gradual stepping up of carbon revenues through planned increases and upward revisions The introduction of the carbon component into energy taxation was adopted by the French Parliament at the end of 2013. A trajectory for the corresponding tax rate was also determined for 2014, 2015, and 2016 (French Government 2013); however, this trajectory has already changed twice. In August 2015, the country’s Energy Transition for Green Growth Act called for a 40 percent reduction in GHG emissions relative to 1990 levels by 2030; it also extended the trajectory of the tax rate until 2030 (table A.3), based on the social value of carbon for France defined by the Commission Quinet in 2009 (Quinet 2009). TABLE A.3. Carbon component trajectory in the 2015 Energy Transition for Green Growth Act Year 2014 2015 2016 2017 2020 2030 Rate excluding VAT (€ /tCO2e) 7.0 14.5 22.0 30.5 56.0 100 Estimated revenues (€  billions) 0.3 2.3 3.8 5.2 — — Note: VAT = value added tax; — = not available. Source: French Government 2015. In July 2017, the French Ministry for the Ecological and Inclusive Transition published an update of the National Low-Carbon Strategy, which includes a new ambition of zero net GHG emissions by 2050 and new increases in the carbon component rate, confirmed in the 2018 Finance Act (table A.4). TABLE A.4. Carbon component trajectory in the 2018 Finance Act   2018 2020 2022 Rate (€ /tCO2e) 44.6 65.4 86.2 Source: MTES 2017a. This trajectory was suspended in 2019 due to the organization of the “Grand Débat National” on different issues, including tax, public spending, and ecological transition. For this reason, the rate of the carbon component in 2019 and the following years is the same as in 2018 (44.6 € /tCO2). This trajectory may be revised upward once again. Earmarking EU ETS revenues for energy efficiency programs In France, revenues from the auctioning of EU ETS allowances are earmarked to ANAH’s Habiter Mieux (“Live Better”) program, up to a cap of € 550 million. The Habiter Mieux program finances building retrofit for low-income people. Between 2013 and 2015, auction revenues contributed € 747 million (US$ 934 million; 39 percent) to the € 1.9 billion budget of the Habiter Mieux program. Revenues do vary over time, however. They contributed (respectively) to €  221 million (US$ 298 million) in 2013, € 215 million (US$ 280 million) in 2014, € 312 million (US$  343 million) in 2015, € 235 million (US$ 264 million) in 2016, and € 313 million (US$ 351 million) in 2017. In 2018, because of the sharp increase in ETS prices, the budget cap of € 550 million was reached and the remaining € 280 million went to the general budget.  The variability of EU ETS auction revenues strongly affects ANAH’s budget and achievements from year to year. When auction revenues turn out to be smaller than those anticipated during the preparation of the finance law the previous year, funding gaps can occur. Some of these funding gaps have been partly covered by other 28    TABLE OF CONTENTS TECHNICAL NOTE 16 - USING CARBON REVENUES – ANNEX TO REPORT: CASE STUDIES funds; in 2017, for example, the transition fund for energy renovation made an exceptional contribution of € 50 million to ANAH because of the low auctions of 2016. When auction revenues are larger than anticipated, as happened in 2018, it can be challenging to proportionally scale up the programs in the following year. References Comité pour la Fiscalité Ecologique. 2013. Travaux du Comité pour la fiscalité écologique—Tome 1: Rapport du Président. Comité pour la fiscalité écologique, Ministère de l’écologie, du développement durable et de l’énergie, Ministère de l’économie et des finances. El Beze, J. 2014. “The Reform of Energy Taxation: An Extension of Carbon Pricing in France.” Policy Brief 2014- 06, Chaire Economie du Climat. https://www.chaireeconomieduclimat.org/en/publications-en/policy-briefs-en/ policy-brief-6-la-reforme-de-la-fiscalite-de-lenergie-une-extension-de-la-tarification-du-carbone-en-france/. French Government. 2013. Loi n°2013-1278 du 29 décembre 2013 de finances pour 2014, 2013-1278 §. ———. 2015. Loi n°2015-992 du 17 août 2015 relative à la transition énergétique pour la croissance verte, 2015-992 §. MTES (Ministère de la Transition écologique et solidaire). 2017a. Plan Climat. Ministère de la Transition ecologique et solidaire. ———. 2017b. «Fiscalité carbone.» January 9. https://www.ecologique-solidaire.gouv.fr/fiscalite-carbone. Quinet, A. 2009. La valeur tutélaire du carbone: Rapport de la commission présidée par Alain Quinet. No. 16. Centre d’analyse stratégique. https://www.ladocumentationfrancaise.fr/var/storage/rapports-publics/094000195.pdf.    TABLE OF CONTENTS 29 8. Ghana Summary Ghana’s cash transfer program, implemented following its 2005 fossil fuel subsidy reform, helped reduce income inequality. GHG emissions (year) 42.2 MtCO2e (2016)a Revenue raising mechanism Fossil fuel subsidy reforms (savings) Start year of the mechanism 2005 and 2013 Coverage (sectors/fuels) Gasoline, diesel, kerosene, and liquid petroleum gas (LPG) GHG emissions covered n.a. by the mechanism (%) Annual revenues n.a. Institutional constraints (ex ante) n.a. Social programs (free schools; low-income health care; increased Use of revenue (ex post) minimum wage) - Implementation Department/agency National Petroleum Authority of the scheme in charge Use of revenues - President/Ministry of Finance a. MESTI and EPA 2018. Until 2005, fossil fuel subsidies in Ghana used to be overall regressive, with 78 percent of the policy benefiting the top quintile and less than 3 percent reaching the poorest quintile (figure A.8). The country reformed these subsidies twice, in 2005 and 2013. The 2005 reform increased the price of petroleum products by 50 percent. Subsequent revenues funded a series of measures, including the following: • Removing tuition fees for public primary and secondary schools • Increasing the number of public buses and capping public transport fares • Increasing the funding of a national health care system for rural areas • Raising the minimum wage from US$ 1.24 to US$ 1.50 per day • Implementing electrification programs in rural areas • Introducing a bimonthly direct payment of US$ 36 for the poorest 20 percent of the population through the Livelihood Empowerment against Poverty (LEAP) program A second fiscal reform in 2013 eliminated the remaining subsidies, triggering a second 20 percent price hike for gasoline, kerosene, diesel, and LPG. The cash transfers associated with these reforms led to significant inequality reductions.12 This account of the two reforms is based on Coady and Newhouse (2006); Cooke et al. (2014); Laan and Beaton (2010); Lindebjerg, Peng, 12 and Yeboah (2015). 30    TABLE OF CONTENTS TECHNICAL NOTE 16 - USING CARBON REVENUES – ANNEX TO REPORT: CASE STUDIES FIGURE A.8. The impact of fuel subsidies on the benefits accruing to each quintile in Ghana (%) 100 80 1 (Poorest) 60 2 In percent 3 40 4 5 (Richest) 20 0 Diesel Petrol LPG Kerosene Source: Based on Cooke et al. 2014. References Coady, D., and D. Newhouse. 2006. “Ghana: Evaluating the Fiscal and Social Costs of Increases in Domestic Fuel Prices.” In Poverty and Social Impact Analysis of Reforms: Lessons and Examples from Implementation, edited by A. Coudouel, S. Paternostro, and A. A. Dani, 387–413. Washington, DC: World Bank. https://doi.org/10.1596/978-0-8213-6486-4. Cooke, E. F. A., S. Hague, J. Cockburn, A.-R. El Lahga, and L. Tiberti. 2014. “Estimating the Impact on Poverty of Ghana’s Fuel Subsidy Reform and a Mitigating Response.” PEP Working Paper 2014-02, Partnership for Economic Policy. https://dx.doi.org/10.2139/ssrn.3167429. Laan, T., and C. Beaton. 2010. “Strategies for Reforming Fossil-Fuel Subsidies: Practical Lessons from Ghana, France and Senegal.” Global Subsidies Initiative and International Institute for Sustainable Development. Lindebjerg, E. S., W. Peng, and S. Yeboah. 2015. “Do Policies for Phasing Out Fossil Fuel Subsidies Deliver What They Promise? Social Gains and Repercussions in Iran, Indonesia and Ghana.” UNRISD Working Paper 2015-1, United Nations Research Institute for Social Development. https://www.econstor.eu/handle/10419/148759. MESTI and EPA (Ministry of Environment, Science, Technology and Innovation and Environmental Protection Agency). 2018. “Ghana’s Second Biennial Update Report.” https://unfccc.int/sites/default/files/resource/ghbur2_21018.pdf.    TABLE OF CONTENTS 31 9. India Summary Following the removal of various fossil fuel subsidies in 2014 and 2015, India used the associated savings to implement the world’s largest program for direct benefit transfers to vulnerable households. GHG emissions (year) 3,166 MtCO2e (2012)a Revenue raising mechanism Coal tax and fossil fuel subsidy reforms (savings) Start year of the mechanism 2010 Coverage (sectors/fuels) Coal (tax) GHG emissions covered n.a. by the mechanism (%) Up to 2017, revenues were allocated to the National Clean Energy & Institutional constraints (ex ante) Environment Fund (NCEEF). Use of revenue (ex post)   Annual revenues (year/period) Rs 493.13 billion (US$ 7.5 billion) for 2011–2017b Ministry of Environment, Forest and Climate Change, Ministry of New - Implementation and Renewable Energy, Ministry of Power, Ministry of Water Resources, Department/agency of the scheme River Development and Ganga Rejuvenation, Ministry of Drinking Water in charge and Sanitation Use of revenues - Ministry of Finance European Commission Joint Research Centre, EDGAR–Emissions Database a.  for Global Atmosphere Research, https://edgar.jrc.ec.europa.eu/overview.php?v=CO2andGHG1970-2016&dst=GHGemi. b. Communication from official representative of Government of India, 2018. Context India used to subsidize the consumption of fossil fuels by controlling the price of petroleum and electricity. These subsidies aimed to protect consumers from volatile energy prices and ensure energy access for the poor, yet they often failed to reach their target groups: for example, more than 50 percent of the subsidies for LPG used for cooking went to the richest 30 percent of the population, while the poorest 30 percent received only 15 percent of these subsidies (Jain, Agrawal, and Ganesan 2014). Implementing the world’s largest direct benefit scheme for vulnerable households In 2014, the Indian government moved to eliminate all diesel subsidies by fiscal year 2015/16 and implemented a tax on produced and imported coal of around Rs 400/t (US$ 3.29/t) (IEA 2015; Whitley and van der Burg 2015). LPG and kerosene price supports were cut in January 2015. The total estimated oil and gas subsidies in India decreased 78 percent in three years, from Rs 1,578 billion (US$ 26 billion) in 2014 to Rs 347 billion (US$ 5 billion) in 2017 (GSI-IISD 2017). 32    TABLE OF CONTENTS TECHNICAL NOTE 16 - USING CARBON REVENUES – ANNEX TO REPORT: CASE STUDIES Savings from these reforms made it possible to implement the world’s largest scheme of direct benefit transfers to vulnerable households, namely the Pratyaksh Hanstantrit Labh (PAHAL). Initially implemented at reduced scale in 2013 and extended nationwide in January 2015, PAHAL subsidized natural gas and LPG for cooking by directly transferring refunds to each consumer’s bank account. To avoid diversion of the subsidies and double counting, biometric identity cards were issued to link individual consumers to their bank accounts (GSI-IISD 2017; IEA 2015, 2017). Although the compensation scheme linked the receipt of the subsidy to fuel consumption, direct benefit transfers were considered preferable to direct cash transfers, as the latter would be less accessible to women, who are responsible for most LPG purchases in India. The initial version of the scheme also failed to target specific beneficiaries: in 2016, Prime Minister Modi called for high-income households to give up their subsidies, which resulted in 11 million Indians—around 7 percent of the total customer base—voluntarily relinquishing their subsidies, and saved the exchequer over Rs 23 billion (US$ 350 million) per year. Moreover, 36 million illegal beneficiaries had their connections deactivated, which alone led to savings of nearly Rs 300 billion (US$ 4.6 billion) in cooking gas subsidies over the last three financial years (GSI-IISD 2018; Mittal, Mukherjee, and Gelb 2017; Whitley and van der Burg 2015). The Indian government estimates that, by mid-2017, the PAHAL scheme resulted in 199 million verified active domestic LPG connections. The PAHAL scheme was supplemented in 2016 by the Ujjwala program, which aims to provide 50 million free LPG connections to low-income households by 2019 and to ensure universal access to clean cooking by 2022. The country also recently announced ambitions to reduce its remaining excise duty exemptions on domestic LPG and kerosene, while extending the targeted direct benefit transfer to other fossil fuels (GSI-IISD 2018; Mittal Mukherjee, and Gelb 2017; Whitley and van der Burg 2015). Coal tax revenues In 2010, India introduced the Clean Energy Cess—renamed in 2016 the Clean Environment Cess—as a federal excise tax on coal, lignite, and peat, both domestic and imported. Under the scheme, all revenues from the tax are earmarked for a dedicated fund, the National Clean Energy & Environment Fund (NCEEF; formerly the National Clean Energy Fund, NCEF). Initially fixed at Rs 50 (US$ 1.08) per metric ton of coal, the tax was increased to Rs 200 (US$ 4.32) in March 2015 and Rs 400 (US$  5.86) in March 2016 (Ministry of Finance, India 2010; PMR 2017). To 2018, the cess has collected Rs 864.4 billion (US$ 13.15 billion).13 With the introduction of the Goods and Service Tax (GST) in India in July 2017, the Clean Energy Cess was abolished by the Taxation Laws Amendment Act, 2017. A new cess on coal production, called the GST Compensation Cess, was put in its place at the same rate of Rs 400 per tonne. The GST Compensation Cess is aimed at filling in the budget deficits that Indian states faced following the GST introduction. This last round of changes effectively means that taxation of coal production will continue to be a source of funding for various regional development needs. Communication from official representative of Government of India, 2018. 13 9. INDIA    TABLE OF CONTENTS 33 References GSI-IISD (Global Subsidies Initiative–International Institute for Sustainable Development). 2017. India’s Energy Transition: Mapping Subsidies to Fossil Fuels and Clean Energy in India. International Institute for Sustainable Development. https:// www.iisd.org/sites/default/files/publications/india-energy-transition.pdf. ———. 2018. “India Energy Subsidy: Briefing Note.” Global Subsidies Initiative–International Institute for Sustainable Development. https://www.iisd.org/sites/default/files/publications/energy-subsidy-briefing-note-january-2018.pdf. IEA (International Energy Agency). 2015. WEO 2015 Special Report: Energy and Climate Change. https://www.iea.org/ publications/freepublications/publication/weo-2015-special-report-2015-energy-and-climate-change.html. ———. 2017. “Tracking Fossil Fuel Subsidies in APEC Economies.” International Energy Agency. Jain, A., S. Agrawal, and K. Ganesan. 2014. “Rationalising Subsidies, Reaching the Underserved: Improving Effectiveness of Domestic LPG Subsidy and Distribution in India.” Council on Energy, Environment and Water, New Delhi. http://www. indiaenvironmentportal.org.in/files/file/Rationalising-LPG-Subsidies-Reaching-the-Underserved.pdf. Ministry of Finance, India. 2010. Clean Energy Cess Rules. § Government of India, Ministry of Finance, Department of Revenue, Central Board of Excise and Customs. Mittal, N., A. Mukherjee, and A. Gelb. 2017. “Fuel Subsidy Reform in Developing Countries: Direct Benefit Transfer of LPG Cooking Gas Subsidy in India.” CGD Policy Paper 114, Center for Global Development, Washington, DC. PMR (Partnership for Market Readiness). 2017. Appendix: Carbon Tax Case Studies. Vol. 2 of Carbon Tax Guide: A Handbook for Policy Makers. Washington, DC: World Bank. http://documents.worldbank.org/curated/en/799761535605686418/ Appendix-Carbon-Tax-Case-Studies. Whitley, S., and L. van der Burg. 2015. “Fossil Fuel Subsidy Reform: From Rhetoric to Reality.” http://newclimateeconomy. report/workingpapers/workingpaper/fossil-fuel-subsidy-reform-from-rhetoric-to-reality/. 34    TABLE OF CONTENTS 10. Indonesia Summary Indonesia has undertaken several reforms of its fossil fuel subsidies since 1988. Savings from the reforms have led to an increase in public spending, which in turn has stimulated private sector investments. While its early reforms did not include social measures, Indonesia has since redistributed savings to support low-income households and to finance education, health spending, and job creation, in turn creating wider support for the reform. GHG emissions (year) 823 MtCO2e (2012)a Revenue raising mechanism Fossil fuel subsidy reforms (savings) Start year of the mechanism Between 1998 and 2013 Coverage (sectors/fuels) Electricity, gasoline, diesel, kerosene, and LPG GHG emissions covered n.a. by the mechanism (%) Total revenues US$ 62 billion over 2012–2017 Institutional constraints (ex ante) n.a. Use of revenue (ex post) Various - Implementation Department/agency Ministry of Finance, Coordinating Ministry for Economic Affairs of the scheme in charge Use of revenues - Various ministries and state agencies European Commission Joint Research Centre, EDGAR–Emissions Database for Global Atmosphere Research, https://edgar.jrc. a.  ec.europa.eu/overview.php?v=CO2andGHG1970-2016&dst=GHGemi. Deriving large revenues from fossil fuel subsidy reforms Indonesia’s fossil fuel subsidies represented up to 10 percent of the country’s expenditures between 2005 and 2014 (Lindebjerg, Peng, and Yeboah 2015; Pradiptyo et al. 2016). The government implemented more than 10 energy price reforms in the period 1998–2015 (f igure A.9). Specifically: In 2005, a major reform led to a fuel price increase of 29 percent in March and 114 percent in October, reducing the state deficit by Rp 43 trillion (US$ 4.5 billion) in 2005 and Rp 91 trillion (US$ 10 billion) in 2006 (Beaton and Lontoh 2010). From 2007 to April 2011, a program to shift residential cooking and water heating to LPG saved Rp 45.3 trillion (US$ 5 billion). On the other hand, LPG subsidies rose sharply, from Rp 4 trillion (US$ 0.4 billion) in 2008 to Rp 25 trillion (US$ 2 billion) in 2016 (Adeoti et al. 2016; GSI-IISD 2012, 2018). The subsidies to electricity tariffs fell from Rp 99 trillion (US$ 8 billion) to Rp 38 trillion (US$ 3 billion) between 2014 and 2016 (IEA 2016).14 IEA (International Energy Agency), WEO 2016 Electricity Access Database, http://www.worldenergyoutlook.org/resources/energydevelop- 14 ment/energyaccessdatabase/ (accessed 2019). 10. INDONESIA    TABLE OF CONTENTS 35 39 trillion (US$  • The 2013 diesel and gasoline subsidy reform generated fiscal savings of Rp  3.5 billion) in 2013 (Diop 2014). • Starting January 2015, Indonesia also removed all gasoline subsidies15 and changed fixed diesel prices for a per liter subsidy. Combined with the fall of global oil prices, this measure saved Rp 211 trillion (US$ 15.6 billion), or 10.6 percent of annual public spending (Pradiptyo et al. 2016). • Starting September 2016, LPG subsidies were reduced, with the exception of those on 3 kg gas cylinders of LPG (IEA 2017; MEMR, Indonesia 2016). FIGURE A.9. National fossil fuel subsidies in Indonesia, 2011–2016 300 240,0 250 211,9 210,0 Energy subsidies 200 165,2 savings Rp Trillion 150 90,4 94,6 100,0 101,8 100 60,8 58,3 63,7 38,4 43,7 50,7 50 0 APBN APBN-P 2011 2012 2013 2014 2015 2016 Fuel and gas Electricity Note: APBN = Indonesian state budget; APBN-P = Revised state budget. Source: Ministry of Finance, Indonesia. Together with fossil fuel subsidies reforms, Indonesia introduced a number of poverty alleviation programs and compensations for low-income households, setting the building blocks of a national social welfare system. Assessing the impacts of this reallocation of public expenditures may take several years, yet the savings have already contributed to supporting the government’s budget and improving its ability to fund social programs (Adeoti et al. 2016; Gass and Echeverria 2017; Perdana 2014; Pradiptyo et al. 2016). Leveraging private investments with energy subsidy reform savings The December 2014 subsidy reform saved Rp 211 trillion (US$ 15 billion), or 11 percent of Indonesia’s public expenditure. These funds were redistributed directly to regions and villages, to ministries linked to human and economic development, and to state-owned enterprises (SOEs).16 This additional funding targeted SOEs responsible for air services, sea transport, construction, housing, plantations, financing of small and medium- sized enterprises, agriculture, fisheries, shipping, mining, rail, tourism and ports. The capital injection to SOEs in the 2015 revised state budget (RSB-2015) was more than 10 times the previous budget, and was again significantly reduced in the 2016 state budget (Pradiptyo et al. 2016). Except for distribution costs. 15 No explicit earmarking exists here; these insights are drawn from a comparison of the pre-reform state budget (SB-2015) and its revised 16 post-reform version (RSB-2015). 36    TABLE OF CONTENTS TECHNICAL NOTE 16 - USING CARBON REVENUES – ANNEX TO REPORT: CASE STUDIES Improving acceptability through the redistribution of savings from energy subsidy reforms and public consultations One of the main barriers to early attempts to reform fossil fuel subsidies in Indonesia was the common perception that such subsidies supported low-income households (Beaton and Lontoh 2010). The May 1998 reforms contributed to triggering a general riot. Subsequent large-scale public protests also led the government to roll back much of the 2002 and 2003 price increase (Bacon and Kojima 2006). By contrast, the 2005 reform did not generate such large-scale opposition. The price hikes in this case were softened with cash transfer programs for the poor. The government also ran a public information campaign to publicize the rationale for energy price increases and the cash transfer scheme. Information was disseminated by local civil servants and police, electronic media and television, and societal and religious leaders (Widjaja 2009). Based on an early assessment, the government also organized reviews through public hearings of program beneficiaries and worked to improve logistics of distribution, dissemination, and complaint resolution mechanisms. These measures had positive effects on public acceptance until 2009, when a government backtrack on energy price increases, perceived as a bid for reelection, undermined public support for further subsidies reforms (Beaton and Lontoh 2010; Lindebjerg et al. 2015). In recent years, the successive governments have conducted consultations with civil society organizations and government officials prior to further subsidy reforms. Such consultations were key to public acceptance of 2014 reforms. Despite significant up-front protests (and thanks to a favorable international oil price context), the eventual reactions of the civil society were largely positive, and civil society organizations indicated near unanimous support for the reforms (Gass & Echeverria 2017; Pradiptyo et al. 2016). Reducing poverty and inequality with energy subsidy savings The 2005, 2008, and 2013 fuel subsidy reforms in Indonesia included temporary cash transfer programs to smooth the transition for low-income households. Indonesia’s first large-scale universal cash transfer program (Bantuan Langsung Tunai, or BLT), was created as one of these temporary schemes. Initially planned to run from October 2005 to March 2006, the BLT aimed to redirect approximately 25 percent (US$ 2 billion) of the 2005 savings to poor and near-poor households (28 percent of the total population) through monthly cash transfers of about US$ 10 per household. Its registry was successively improved, and it is now a unified registry used by many of Indonesia’s social protection programs. One of these programs, the Hopeful Family Program (Program Keluarga Harapan or PKH), is considered a key policy for long-term poverty reduction. It was introduced in 2007 as a conditional cash transfer system for health and educational requirements, and currently targets more than 3 million households from the bottom income decile of the population. Along the same lines, savings from the 2013 reform were used to expand the coverage of a cash transfer program launched in 2008 to support students from low-income households; the number of beneficiaries rose from 8 million to more than 15 million students as a result of the savings (Adeoti et al. 2016; Beaton and Lontoh 2010; Widjaja 2009). Apart from direct cash assistance, savings from the reform have allowed the government to implement a mix of social protection policies covering health insurance, food subsidies, and infrastructures. The Rice Subsidy for the Poor (Beras Miskin), first introduced in 1998, was revised following the 2008 and 2013 subsidy reforms to provide rice below market prices to 25 percent of the poorest population (Pradiptyo et al. 2016). Savings of US$ 1.87 billion from the 2005 reform were also spent on education, health, and rural infrastructure programs. These funds were partly used to distribute health cards to 16 million households, as part of the Public Health Insurance system (Jamkesmas) that covers most health care services. As for rural development measures, the 10. INDONESIA    TABLE OF CONTENTS 37 government issued direct grants to some 13,000 poor villages to generate labor-intensive jobs and improve infrastructure (GSI-IISD 2012; Lindebjerg et al. 2015; World Bank 2008). As of 2013, 28 million Indonesians (11 percent of the population) were living below the poverty line, with another 47 percent considered as near-poor and particularly vulnerable to fuel price hikes.17 Fiscal reforms could thus have been likely to push more households into poverty if compensation measures had not been provided: without the associated social compensation mechanisms, the 2005 reform would have decreased the welfare of the poor and near-poor population by about 5 percent (Bacon and Kojima 2006; World Bank 2013). TABLE A.5. Social programs associated with fossil fuel subsidy reform in Indonesia Policy Name Description Beneficiaries Budget Direct Cash Assistance Unconditional cash transfers of 19 million, about 35% Rp 23.0 trillion (Bantuan Langsung Tunai) Rp 1,200,000 delivered in four of the total population (25% of subsidy savings) instalments School Operational Rp 25,000 to primary schools   Rp 12.0 trillion Assistance and Rp 35,000 to junior high schools on the basis that they (Bantuan Operational reduce fees accordingly Sekolah) Healthcare for the Poor Cards entitling holders to free 16 million households Rp 2.9 trillion health care at public clinics and hospitals Rural Infrastructure Support Rehabilitation and renewal 1,840 villages Rp 569.0 billion Project (Infrastruktur of infrastructure in low-income Perdesaan) and often remote villages in poor provinces 2008 reforms Direct Cash Assistance Unconditional cash transfers 18.4 million households Rp 14.1 trillion (Bantuan Langsung Tunai) of Rp 900,000 divided into three payments Rice Subsidy for the Poor Subsidized rice program   Rp 4.2 trillion (Raskin), supplementary allocation Loan-interest subsidy     Rp 1.0 trillion for small enterprises In particular, ongoing urbanization has caused the emergence of a large group of urban poor who are more sensitive to fuel price hikes, due 17 to their reliance on electricity and their employment in energy-intensive sectors (Beaton and Lontoh 2010). 38    TABLE OF CONTENTS TECHNICAL NOTE 16 - USING CARBON REVENUES – ANNEX TO REPORT: CASE STUDIES Policy Name Description Beneficiaries Budget 2013 reforms Temporary Community Unconditional cash transfers 15.5 million households Rp 9.3 trillion Direct Assistance (Bantuan of Rp 600,000 per household Langsung Sementara delivered over 4 months Masyarakat) Hopeful Family Program Average benefit level will Expanded from the 2012 level Rp 0.7 trillion (Program Keluarga Harapan), increase from Rp 1.4 million of 1.5 million households to supplementation to Rp 1.8 million per year per 2.4 million households in 2013 household and 3.2 million households in 2014. Scholarships for the Poor Benefits increase for a primary Increase from 8.7 million Rp 7.5 trillion (Bantuan Siswa Miskin), school student to 16.6 million beneficiaries supplementation from Rp 360,000 per year to Rp 450,000 and for a junior secondary student from Rp 550,000 per year to Rp 750,000 Rice Subsidy for the Poor, Additional 15 kilograms   Rp 4.3 trillion Raskin supplementation of subsidized rice per month for 3 months to households eligible for Bantuan Langsung Sementara Masyarakat Infrastructure funding Infrastructure for communities   Rp 7.5 trillion including potable and irrigation water Sources: Bacon and Kojima (2006); Beaton and Lontoh (2010); World Bank (2013c). Source: Asian Development Bank 2015. References Adeoti, J., L. Chete, C. Beaton, and K. Clarke. 2016. “Compensation Mechanisms for Fuel Subsidy Removal in Nigeria.” International Institute for Sustainable Development. https://www.iisd.org/sites/default/files/publications/compensation- mechanisms-fuel-subsidy-removal-nigeria.pdf. Asian Development Bank. 2015. “Fossil Fuel Subsidies in Indonesia: Trends, Impacts, and Reforms.” Asian Development Bank, Mandaluyong City, Philippines. Bacon, R., and M. Kojima. 2006. Coping with Higher Oil Prices. Energy Sector Management Assistance Program Report 323/06. Washington, DC: World Bank. Beaton, C., and L. Lontoh. 2010. “Lessons Learned from Indonesia’s Attempts to Reform Fossil-Fuel Subsidies.” International Institute for Sustainable Development. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1702880. Diop, N. 2014. “Why Is Reducing Energy Subsidies a Prudent, Fair, and Transformative Policy for Indonesia?” Economic Premise 136, World Bank Group, Washington, DC. Gass, P., and D. Echeverria. 2017. “Fossil Fuel Subsidy Reform and the Just Transition: Integrating Approaches for Complementary Outcomes.” Global Subsidies Initiative–International Institute for Sustainable Development. GSI-IISD (Global Subsidies Initiative–International Institute for Sustainable Development). 2012. “A Citizen’s Guide to Energy Subsidies in Indonesia—2012 Update.” Global Subsidies Initiative–International Institute for Sustainable Development. ———. 2018. “Indonesia Energy Subsidy News Briefing.” Global Subsidies Initiative–International Institute for Sustainable Development. January. https://www.iisd.org/library/indonesia-energy-subsidy-news-briefing-january-2018. 10. INDONESIA    TABLE OF CONTENTS 39 IEA (International Energy Agency). 2017. “Tracking Fossil Fuel Subsidies in APEC Economies.” https://webstore.iea.org/ search?q=tracking+fossil+fuel. Lindebjerg, E. S., W. Peng, and S. Yeboah. 2015. “Do Policies for Phasing Out Fossil Fuel Subsidies Deliver What They Promise? Social Gains and Repercussions in Iran, Indonesia and Ghana.” UNRISD Working Paper 2015-1, United Nations Research Institute for Social Development. https://www.econstor.eu/handle/10419/148759. MEMR (Ministry of Energy and Mineral Resources), Indonesia. 2016. “Update on Recent Developments on Fossil Fuel Subsidies in Indonesia.” Presentation at IEA International Conference on Fossil Fuel Subsidy Reform, Paris, October 13. https://www.iea.org/media/countries/nonmembers/UpdaterecentdevelopmentsonFossilFuelSubsidiesinIndonesia.pdf. Perdana, A. A. 2014. “The Future of Social Welfare Programs in Indonesia: From Fossil-Fuel Subsidies to Better Social Protection.” Briefing Note. Global Subsidies Initiative–International Institute for Sustainable Development. https://www. iisd.org/gsi/sites/default/files/ffs_indonesia_briefing_welfare.pdf. Pradiptyo, P., A. Susamto, A. Wirotomo, A. Adisasmita, and C. Beaton. 2016. “Financing Development with Fossil Fuel Subsidies.” International Institute for Sustainable Development, Winnipeg. Widjaja, M. 2009. “An Economic and Social Review on Indonesian Direct Cash Transfer Program to Poor Families Year 2005.” Presentation at Association for Public Policy Analysis and Management International Conference “Asian Social Protection in Comparative Perspective,” Singapore, January 7–9. World Bank. 2008. Spending for Development: Making the Most of Indonesia’s New Opportunities.Washington, DC: World Bank. https://doi.org/10.1596/978-0-8213-7320-0. ———. 2013. “Indonesia: Urban Poverty and Program Review.” World Bank, Washington, DC. http://documents.worldbank. org/curated/en/156871468285576971/Indonesia-Kemiskinan-perkotaan-dan-ulasan-program. 40    TABLE OF CONTENTS 11. Iran Summary Iran provides an interesting case study becomes it involves inflationary pressures and an extensive social program built to compensate low-income households. The universal cash transfer scheme implemented to offset adverse effects of energy subsidy reforms helped reduce poverty and inequality. Iran thus provides interesting insights into the limits inflation poses to lump-sum recycling schemes. GHG emissions (year) 786 MtCO2 (2012)a Revenue raising mechanism Fossil fuel subsidy reforms (savings) Start year of the mechanism 2010 and 2014 Coverage (sectors/fuels) Electricity, gasoline, and diesel GHG emissions covered n.a. by the mechanism (%) Institutional constraints (ex ante) - Use of revenue (ex post) - Annual revenues (year/period) - - Implementation Department/agency - of the scheme in charge Use of revenues - - Note: n.a. = not applicable. - = not available European Commission Joint Research Centre, EDGAR–Emissions Database for Global Atmosphere Research, https://edgar.jrc. a.  ec.europa.eu/overview.php?v=CO2andGHG1970-2016&dst=GHGemi. Context Traditionally, fossil fuel subsidies in Iran have mostly taken the form of price controls through state-owned companies, specifically the National Iranian Oil Company, the National Iranian Oil Products Distribution Company, and the Tavanir Company for power generation, transmission, and distribution (Guillaume, Zytek, and Farzin 2011; Hassanzadeh 2012). Formerly, the difference between nationally set prices and international prices constituted the world’s highest subsidy for fossil fuel consumption in absolute terms. According to a conservative estimate by the International Energy Agency (IEA 2014, 2016), in 2015 this subsidy totaled US$  52 billion (16 percent of global fossil fuel consumption subsidies), down from US$ 84 billion in 2013. As the subsidies took the form of price controls, their cost to the government was not explicit (Guillaume, Zytek, and Farzin 2011). However, the growth in fossil fuel consumption made Iran one of the world’s most energy-intensive countries, forcing the country to import increasing amounts of refined fuels (36 percent of the domestic gasoline consumption in 2009) (Ettehad and Sterner 2011; Lindebjerg, Peng, and Yeboah 2015). Rationing measures for gasoline were first introduced in 2007, and involved a subsidized price for the first 60 liters of gasoline purchased every month and free-market prices for additional consumption (Guillaume et al. 2010). In 2010, Iran rolled out a comprehensive and ambitious energy subsidy reform, with the intended goals of 11. IRAN    TABLE OF CONTENTS 41 curbing pollution, turning consumption-based subsidy into a pro-poor universal cash transfer (the most widely publicized goal of the reform), and transitioning toward a competitive market economy (Hassanzadeh 2012; Sdralevich et al. 2014). The 2010 Targeted Subsidies Reform Act triggered an overnight four- to sevenfold increase in gasoline prices and a nine- to eighteenfold increase in diesel prices by December 2010. Natural gas prices climbed to 75 percent of their export value, while electricity and water tariffs were set at their full cost (Guillaume, Zytek, and Farzin 2011; Lindebjerg Peng, and Yeboah 2015; Salehi-Isfahan, 2016). Accounting for inflation in the compensation scheme The 2010 Targeted Subsidies Reform Act raised Iran’s domestic oil prices to 90 percent of their export value by 2015 (compared to 5 percent in 2008). The reform was expected to save an annual Rls 100–200 trillion (US$ 15–30 billion) of public expenditure. These savings were earmarked for direct transfers to poor households (50 percent), support to energy-intensive companies (30 percent), and smoothing of international oil price volatility (20 percent). In the first year of the reform, the government deposited Rls 445,000 (US$ 45, or US$ 90 in 2011 PPP dollars) directly into individual bank accounts every month. However, in the first year of the reform, the cash payments totaled around Rls 45 trillion (US$ 6 billion) due to difficulties in identifying lower-income citizens, while reform savings amounted to some Rls  30 trillion (US$  4 billion). To reduce this imbalance, direct support to industries was reduced the following year, and government appropriation for price smoothing was eliminated (Hassanzadeh 2012). The initial success of the reform in driving down oil consumption and improving income distribution was limited by a sharp rise in inflation and by an intensification of international sanctions (figure A.10). The value of benefits fell by 38 percent in real terms between 2012 and 2014, limiting cash transfer impacts on poverty in this first phase. To offset these inflationary effects, direct payments in the second Phase of the reform (from 2014 on) focused on low-income households, with the government also providing low-cost health insurance for cash transfer beneficiaries. FIGURE A.10. Annual rates of inflation in Iran, 2010–2015, 3-month moving averages Note for the designer: 2nd caption from the right to be changed in “election of President Rouhani”. Inflation history (3 month moving averages, annual rates) 70 60 Devaluation Election 50 Subsidy reform US sanctions of President Rouhani 40 Percent Subsidy reforms 30 phase 2 20 10 0 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 2010 2011 2012 2013 2014 2015 Source: Salehi-Isfahani 2016. 42    TABLE OF CONTENTS TECHNICAL NOTE 16 - USING CARBON REVENUES – ANNEX TO REPORT: CASE STUDIES Fighting poverty and inequalities with cash transfers The monthly cash transfer program associated with Iran’s 2010 Targeted Subsidies Reform Act amounted to 29 percent of the median household income in 2011. The reform reduced the poverty head count ratio by 61 percent and inequality of final income (measured by Gini) by 21 percent between 2010 and 2014 (Enami, Lustig, and Taqdiri 2016). The success of the Reform Act also owed much to the ability to reach rural areas, where the poverty head count ratio fell from 44 percent in 2010 to 23 percent in 2014. The government electronically deposited the cash transfers into the individual bank accounts of 73 million Iranians (out of 75 million); as a result of the cash transfer scheme, 16 million new bank accounts were opened and the automated teller machine network was expanded into rural areas. References Enami, A., N. Lustig, and A. Taqdiri. 2016. “Fiscal Policy, Inequality and Poverty in Iran: Assessing the Impact and Effectiveness of Taxes and Transfers the Poor in the Developing World.” Working Paper 442, Center for Global Development. https:// www.cgdev.org/publication/fiscal-policy-inequality-poverty-iran. Ettehad, S., and T. Sterner. 2011. “Distributional Effect of Reducing Transport Fuel Subsidies in Iran.” In Fuel Taxes and the Poor: The Distributional Effects of Gasoline Taxation and Their Implications for Climate Policy, edited by T. Sterner, 299–308. RFF Press. http://www.tandfebooks.com/isbn/9781936331925. Guillaume, M. D. M., M. R. Zytek, and M. R. R. Farzin. 2011. “Iran: The Chronicles of the Subsidy Reform.” IMF Working Paper 11/167, International Monetary Fund. Hassanzadeh, E. 2012. “Recent Developments in Iran’s Energy Subsidy Reforms.” Policy Brief. Global Subsidies Initiative– International Institute for Sustainable Development. www.iisd.org/gsi/sites/default/files/pb14_iran.pdf. IEA (International Energy Agency). 2014. World Energy Outlook 2014. Paris: International Energy Agency. https://doi. org/10.1787/weo-2014-en. ———. 2016. World Energy Outlook 2016. Paris: International Energy Agency. https://www.iea.org/newsroom/news/2016/ november/world-energy-outlook-2016.html. Lindebjerg, E. S., W. Peng, and S. Yeboah. 2015. “Do Policies for Phasing Out Fossil Fuel Subsidies Deliver What They Promise? Social Gains and Repercussions in Iran, Indonesia and Ghana.” UNRISD Working Paper 2015-1, United Nations Research Institute for Social Development. https://www.econstor.eu/handle/10419/148759. Salehi-Isfahani, D. 2016. “Energy Subsidy Reform in Iran.” In The Middle East Economies in Times of Transition, edited by I. Diwan and A. Galal, 186–195. London: Palgrave MacMillan. Sdralevich, C., R. Sab, Y. Zouhar, and G. Albertin. 2014. “Subsidy Reform in the Middle East and North Africa: Recent Progress and Challenges Ahead.” Departmental Paper No. 14/08, International Monetary Fund.    TABLE OF CONTENTS 43 12. Ireland Summary Ireland’s carbon tax implementation was part of a larger fiscal regime redesign to diminish the country’s debt without increasing income taxes. GHG emissions (year) 61 MtCO2e (2012)a Revenue raising mechanism Carbon tax Start year of the mechanism 2010 Coverage (sectors/fuels) Residential and commercial uses of all fossil fuels GHG emissions covered 49%b by the mechanism (%) Institutional constraints (ex ante) Objective of revenue neutrality Use of revenue (ex post) Allocated to the general budget Total revenues (year/period) € 434 million, or US$ 533 million (2016) Department responsible Office of Revenue Commissioners for the implementation Department responsible Office of Revenue Commissioners for the use of revenues European Commission Joint Research Centre, EDGAR–Emissions Database for Global Atmosphere Research, https://edgar.jrc. a.  ec.europa.eu/overview.php?v=CO2andGHG1970-2016&dst=GHGemi. b. World Bank, Carbon Pricing Dashboard, https://carbonpricingdashboard.worldbank.org/map_data. A carbon tax designed to raise revenues for the general budget Implemented in 2010, Ireland’s carbon tax complements the European Union Emissions Trading System by targeting residential and commercial uses of oil, natural gas, and solid fossil fuels not covered by the EU ETS. Since May 2014, it has covered around 50 percent of greenhouse gas emissions; the initial tax rate was € 20/tCO2e (World Bank, Vivid Economics, and Ecofys 2017). The carbon tax is administered by the Office of Revenue Commissioners and is reviewed each year as part of the annual budgetary process (PMR 2017). Ireland’s carbon tax is an environmental tax that supports climate change policy by raising revenues to help to pay for the negative externalities caused by CO2 emissions from transport and the heating of dwellings. But it has also played an important role in raising revenues more broadly. In late 2008, Ireland was hit by the global financial crisis (Convery, Dunne, and Joyce 2013). With public debt reaching unprecedented levels under the recession, Ireland entered into a bailout program with the European Commission, the European Central Bank, and the International Monetary Fund in 2010. The three organizations provided financial relief in exchange for the introduction of various revenue raising policies, including a carbon tax (PMR 2017). Thus in addition to its role in supporting climate change policy, for the Irish government the carbon tax was part of a larger fiscal regime redesign (Carl & Fedor 2016). This was in line with the country’s 44    TABLE OF CONTENTS TECHNICAL NOTE 16 - USING CARBON REVENUES – ANNEX TO REPORT: CASE STUDIES Programme for Government 2007–2012, which already included a commitment to implement a carbon tax as a revenue raising mechanism that would contribute to reducing greenhouse gas emissions (PMR 2017). Ireland’s carbon tax revenues have risen steadily over time, along with the successive increases in the tax rate and the expansion of the tax base, from € 223 million (US$ 274 million) in 2010 to € 434 million (US$ 533 million) in 2016 (Central Statistics Office of Ireland 2017). Between 2010 and 2012, the carbon tax contributed 20–25 percent of the tax hikes required under the bailout plan, prevented an additional surge in labor taxes, and (in 2011) contributed to a 7 percent decrease in Ireland’s greenhouse gas emissions while the economy was slowly growing (Convery, Dunne, and Joyce 2013; South Africa National Treasury 2013; PMR 2017). References Carl, J., and D. Fedor. 2016. “Tracking Global Carbon Revenues: A Survey of Carbon Taxes versus Cap-and-Trade in the Real World. Energy Policy 96: 50–77. https://doi.org/10.1016/j.enpol.2016.05.023. Central Statistics Office of Ireland. 2017. «Environment Taxes 2016.» June 28. https://www.cso.ie/en/releasesandpublications/ er/eaet/environmenttaxes2016/. Convery, F. J., L. Dunne, and D. Joyce. 2013. “Ireland’s Carbon Tax and the Fiscal Crisis.” OECD Environment Working Papers 59, Organsiation for Economic Co-operation and Development. https://doi.org/10.1787/5k3z11j3w0bw-en. PMR (Partnership for Market Readiness). 2017. Appendix: Carbon Tax Case Studies. Vol. 2 of Carbon Tax Guide: A Handbook for Policy Makers. Washington, DC: World Bank. South Africa National Treasury. 2013. “Carbon Tax Policy Paper: Reducing Greenhouse Gas Emissions and Facilitating the Transition to a Green Economy.” May. http://www.treasury.gov.za/public%20comments/Carbon%20Tax%20Policy%20 Paper%202013.pdf. World Bank, Vivid Economics, and Ecofys. 2017. “State and Trends of Carbon Pricing 2017.” World Bank Group, Washington, DC. https://openknowledge.worldbank.org/handle/10986/28510.    TABLE OF CONTENTS 45 13. Japan Summary Japan’s carbon tax revenues are all earmarked for green investments. GHG emissions (year) 1,479 MtCO2e (2012)a Revenue raising mechanism Carbon tax Start year of the mechanism 2012 Coverage (sectors/fuels) All fossil fuels GHG emissions covered 68%a by the mechanism Revenues from the carbon tax are lumped together with the revenues from the petroleum and coal tax. All revenues are earmarked for promotion Institutional constraints (ex ante) of clean energy technologies and renewable energy, development of energy-saving programs, and reduction of the use of fossil fuels. Use of revenue (ex post) 100% earmarked to climate change-related projects Annual revenues ¥ 262 billion, or US$ 2.5 billion (2016) - Implementation Department/agency Ministry of the Environment; Ministry of Economy, Trade, and Industry of the scheme in charge Use of revenues - Ministry of Finance a. World Bank, Carbon Pricing Dashboard, https://carbonpricingdashboard.worldbank.org/map_data. Dedicating carbon revenues for low-carbon projects and green R&D Japan’s carbon tax adds a carbon content component to the existing petroleum and coal tax. It was adopted in October 2012, as part of the major energy policy overhaul that followed the 2011 Fukushima nuclear disaster. It covers roughly 70 percent of greenhouse gas emissions in Japan, with a rate of US$ 3 per tCO2e in April 2016 (World Bank, Vivid Economics, and Ecofys 2017). Revenues were estimated to climb from ¥ 39 billion (US$ 500 million) in fiscal year 2011/12 to ¥ 262 billion (US$ 2.2 billion) in 2015/16 and the following years (Ministry of the Environment, Japan 2012). Japan’s carbon tax was explicitly passed to fund renewable energy and energy efficiency programs: green subsidies and R&D support for (e.g.) lithium-ion batteries, distributed energy generation, and carbon capture and storage. According to the Japanese government, carbon tax revenues are earmarked for green spending and measures aimed at reducing greenhouse gas emissions. Tracking revenue use is challenging, however, as revenues are lumped together with the broader petroleum and coal tax revenues (Carl and Fedor 2016; Kawakatsu, Lee, and Rudolph 2017; Kuramochi 2014). 46    TABLE OF CONTENTS TECHNICAL NOTE 16 - USING CARBON REVENUES – ANNEX TO REPORT: CASE STUDIES References Carl, J., and D. Fedor. 2016. “Tracking Global Carbon Revenues: A Survey of Carbon Taxes versus Cap-and-Trade in the Real World.” Energy Policy 96: 50–77. https://doi.org/10.1016/j.enpol.2016.05.023. Kawakatsu, T., S. Lee, and S. Rudolph. 2017. “The Japanese Carbon Tax and the Challenges to Low-Carbon Policy Cooperation in East Asia.” Discussion Paper E-17-009, Kyoto University, Graduate School of Economics. http://www. econ.kyoto-u.ac.jp/dp/papers/e-17-009.pdf. Kuramochi, T. 2014. “GHG Mitigation in Japan: An Overview of the Current Policy Landscape. Working paper, World Resources Institute, Washington, DC. https://www.wri.org/publication/ghg-mitigation-japan. Ministry of the Environment, Japan. 2012. “Details on the Carbon Tax (Tax for Climate Change Mitigation.)” https://www. env.go.jp/en/policy/tax/env-tax/20121001a_dct.pdf. World Bank, Vivid Economics, and Ecofys. 2017. “State and Trends of Carbon Pricing 2017.” World Bank Group, Washington, DC. https://openknowledge.worldbank.org/handle/10986/28510.    TABLE OF CONTENTS 47 14. Mexico Summary In addition to generating revenues from its carbon tax, Mexico has generated substantial savings by reforming its fuel and electricity subsidies. The revenues and savings are recycled through the general budget. GHG emissions (year) 441 MtCO2 (2016) Revenue raising mechanism Carbon tax and fossil fuel subsidy reforms a Start year of the mechanisma 2014 GHG emissions covered 46% in 2019 b by the mechanism (%) Institutional constraints (ex ante) No earmarking of carbon revenues Use of revenue (ex post) 100% allocated to the general budget Coverage (sectors/fuels) Coal and oil - Implementation Department/agency Ministry of Finance of the scheme in charge Use of revenues - Ministry of Finance Annual revenues MXN 5.88 billion (US$ 0.5 billion) in 2018 c a. The rest of this table relates to carbon tax revenues only. b. World Bank, Carbon Pricing Dashboard, https://carbonpricingdashboard.worldbank.org/map_data (accessed 2019). c. Servicio de Administratción tributaria [Mexican Tax Administration Service], “Recaudación: Ingresos tributarios del Gobierno Federal,” http://omawww.sat.gob.mx/cifras_sat/Paginas/datos/vinculo.html?page=IngresosTributarios.html; communication with official re- presentative of the Government of Mexico. Generating public savings through the removal of fossil fuel subsidies Mexico made heavy use of transport fuel subsidies for nearly a decade between  2006 and 2014. The purpose of these subsidies was to smooth the price changes faced by consumers in a context of rising international oil prices through paced monthly increases in domestic prices. However, in the late 2000s, domestic oil production declined, associated revenues began to fall, and the subsidies started to weigh strongly on the government budget. While fuel taxes had previously provided significant revenues for the national government—equivalent to 1.1 percent of GDP annually between 1995 and 2004 (G20 2017)— in 2008 consumption subsidies peaked at 1.8 percent of GDP (US$ 20 billion) (figure A.11). 48    TABLE OF CONTENTS TECHNICAL NOTE 16 - USING CARBON REVENUES – ANNEX TO REPORT: CASE STUDIES FIGURE A.11. Mexican gasoline and diesel taxes and subsidies, as a percentage of GDP 2.0 1.6 1.5 1.4 1.5 1.3 1.4 Taxe (positive), subsidies (negatives), 1.0 1.1 1.1 0.8 0.7 0.9 as percentage points of GDP 1.0 0.6 0.5 0.2 0.0 -0.1 -0.2 -0.5 -0.4 -0.4 -0.6 -0.7 -1.0 -1.5 -1.1 -1.4 -2.0 -1.8 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: G20 2017. In 2010, Mexico began to phase out fossil fuel subsidies by increasing retail prices by about 1 percent a month. In addition to introducing a carbon tax on fossil fuels, the 2014 reform adjusted the formula to reflect inflation (Di Bella et al. 2015). In 2016, the government introduced price bands for gasoline and diesel, increasing excise tax revenues. Since 2017, gasoline, diesel, natural gas, and LPG have all been free from any direct subsidies. In 2017, some specific subsidies remained, amounting to around US$ 2.5 billion of forgone revenues (table A.6). TABLE A.6. Forgone revenue as identified in Mexico’s self-review of national fossil fuel subsidies (US$  millions)   2013 2014 2015 2016 2017 Consumption subsidies for gasoline and diesel 8,245 2,833 0 0 0 Consumption subsidies for LPG 373 493 0 0 0 Tax benefit for gasoline consumption in the northern border 81 289 705 512 519 Fossil fuel subsidies and tax expenditures related to gasoline and diesel 245 63 171 127 63 used in agriculture and fishing Diesel excise tax credit, public transport 0 0 810 1,062 1,309 Diesel excise tax credit, industrial machinery 0 0 376 493 532 other than transportation Diesel excise tax credit, fisheries machinery including vessels 0 0 65 85 6 Diesel excise tax credit, farming machinery 0 0 174 222 92 Source: G20 2017. Unlike liquid fossil fuel subsidies, electricity subsidies have remained substantial (G20 2017), with subsidy rates differing substantially across consumer and tariff categories. The total cost of electricity subsidies was Mex$ 91 billion (US$ 5.8 billion) in 2015. 14. MEXICO    TABLE OF CONTENTS 49 The 2014 carbon tax Initially proposed by the General Law on Climate Change (enacted in 2012) to fight climate change and foster adaptation, Mexico’s carbon tax was included in 2014 in a broader tax reform package known as “Pacto por México” (Ministry of Finance, Mexico 2016). The tax aims both to generate revenues in a context of declining fossil fuel royalties, and to contribute to the implementation of Mexico’s NDC. As of February 1, 2019, the carbon tax covers roughly 46 percent of Mexico’s total GHG emissions. It is levied on the sales and imports of a series of 10 fuel types (table A.7) (Waty 2015), with the notable exemption of natural gas (IETA 2014; PMR 2017). The initial tax rate was capped at Mex$ 39.80/tCO2e (US$ 3.50/tCO2e), or 3 percent of the sales price of the fuel (World Bank and Ecofys 2014). The tax has since been adjusted annually to take inflation into account (IETA 2018; Ministry of Finance, Mexico 2016), and its current higher level is Mex$  58.23/tCO2e (US$ 3/tCO2e).18 TABLE A.7. Mexico’s carbon tax levied on fuels by type, 2019 Fuel Carbon tax rates Unit in 2019 (Mex$ ) Natural gas 0   Propane 7.96 Cents per liter Butane 9.40 Cents per liter Gas (regular and premium) 12.74 Cents per liter Jet Fuel 12.74 Cents per liter Turbosine and other kerosene 15.22 Cents per liter Diesel 15.46 Cents per liter Fuel oil (heavy and regular 15) 16.50 Cents per liter Petroleum coke 19.15 Peso per ton Coal coke 44.90 Peso per ton Mineral coal 33.81 Peso per ton Other fossil fuels 48.87 Peso per ton Source: Ministry of Finance, Mexico 2016. World Bank, Carbon Pricing Dashboard, https://carbonpricingdashboard.worldbank.org/map_data (accessed 2019). 18 50    TABLE OF CONTENTS TECHNICAL NOTE 16 - USING CARBON REVENUES – ANNEX TO REPORT: CASE STUDIES Table A.8 illustrates revenues collected from 2014 to 2017. At present, all revenues are channeled into the national budget, without earmarking. TABLE A.8. Collection of federal government tax revenue Year Revenue Revenue (Mex$  million) (US$  million) 2014 9,670 493 2015 7,650 390 2016 6,970 355 2017 11,537 490 2018 5,880 317 2019 (January–April) 1,577 82 Source: Servicio de Administratción tributaria [Mexican Tax Administration Service], “Recaudación: Ingresos tributarios del Gobierno Federal,” http://omawww.sat.gob.mx/cifras_sat/Paginas/datos/vinculo.html?page=IngresosTributarios.html; communication with official representative of the Government of Mexico. References Di Bella, M. G., M. L. Norton, M. J. Ntamatungiro, M. S. Ogawa, I. Samake, and M. Santoro. 2015. “Energy Subsidies in Latin America and the Caribbean: Stocktaking and Policy Challenges.” Working Paper 15/30, International Monetary Fund. G20 (Group of 20). 2017. “Mexico’s Efforts to Phase Out and Rationalise its Fossil-Fuel Subsidies: A Report on the G20 Peer-Review of Inefficient Fossil-Fuel Subsidies That Encourage Wasteful Consumption in Mexico.” G20, Hamburg, Germany. November 15. https://www.oecd.org/fossil-fuels/Mexico-Peer-Review.pdf. IETA (International Emissions Trading Association). 2014. Greenhouse Gas Market 2014. International Emission Trading Association. https://www.ieta.org/resources/Resources/GHG_Report/2014/ieta%202014%20ghg%20report.pdf. Mexico2, EDF, and IETA (Platforma Mexicana de Carbono, Environmental Defense Fund, and International Emissions Trading Association). 2018. “Mexico: A Market Based Climate Policy Case Study.” International Emission Trading Association. https://www.ieta.org/The-Worlds-Carbon-Markets. Ministry of Finance, Mexico. 2016. Ley del Impuesto Especial sobre Producción y Servicios. http://www.diputados.gob. mx/LeyesBiblio/pdf/78_281218.pdf. PMR (Partnership for Market Readiness). 2017. Carbon Tax Guide: A Handbook for Policy Makers. Washington, DC: World Bank. https://openknowledge.worldbank.org/handle/10986/26300. Waty, E. 2015. “Is Mexico the Emerging Leader of Latin America in Post-Carbon Politics?” Pepperdine Policy Review 8 (6). https://digitalcommons.pepperdine.edu/cgi/viewcontent.cgi?referer=https://www.google. com/&httpsredir=1&article=1113&context=ppr. World Bank and Ecofys. 2014. “State and Trends of Carbon Pricing 2014.” World Bank Group, Washington, DC.    TABLE OF CONTENTS 51 15. Quebec Summary Quebec’s cap-and-trade auction revenues are 100 percent earmarked for a climate change fund that invests its resources in mitigation and adaptation measures.19 GHG emissions (year) 78.56 MtCO2e (2016)a Revenue raising mechanism Emissions trading scheme Start year of the mechanism 2013 Coverage (sectors/fuels) Power; industry; buildings and transport GHG emissions covered 85%b by the mechanism Can$ 831.4  million (US$ 641.8  million) in 2018; Can$ 2.9  billion for Annual revenues the 2013–2018 period.c All auction revenues are allocated to the Green Fund to be reinvested Institutional constraints (ex ante) in projects and programs that reduce greenhouse gas emissions or support climate change adaptation. Use of revenue (ex post) 100% earmarked to climate change-related projects and programs Ministry of the Environment and the Fight against Climate Change - Implementation Department/agency (Ministère de l’Environnement et de la Lutte contre les Changements of the scheme in charge Climatiques) Use of revenues - Ministry of the Environment and the Fight against Climate Change a. Gouvernement du Québec 2018a. b. World Bank, Carbon Pricing Dashboard, https://carbonpricingdashboard.worldbank.org/map_data (accessed 2019). Gouvernement du Québec, “The Carbon Market: Auction Proceeds Allocated to the Green Fund,” http://www.mddelcc.gouv.qc.ca/ c.  changements/carbone/revenus-en.htm (accessed 2019). Context Quebec officially launched its emissions trading scheme in January 2013. Quebec has been a member of the Western Climate Initiative (WCI) since 2008. Using the WCI framework, Quebec and California linked their carbon pricing schemes in 2014. Quebec’s cap-and-trade program includes facilities with annual emissions above 25,000 tons of CO2 equivalent in the industry and power sectors and, as of 2015, the transport and building sectors, with an upstream coverage of fuel distributors (that distribute 200 L or more in Quebec); it covers around 85 percent of its greenhouse gas emissions (Clean Energy Canada 2015; World Bank, Vivid Economics, & Ecofys 2017). In Quebec, 99.6 percent of electricity is renewable energy, mostly hydroelectric, but also wind and biomass. The transport sector is the main 19 GHG-emitting sector (responsible for 43 percent of total emissions), and a significant part of Green Fund investments are directed toward improving public transportation and the electrification of transport systems. 52    TABLE OF CONTENTS TECHNICAL NOTE 16 - USING CARBON REVENUES – ANNEX TO REPORT: CASE STUDIES Governance discussions around the Green Fund Quebec’s cap-and-trade auction revenues are directed to a special purpose fund, the Green Fund, managed by the Ministry of the Environment and the Fight against Climate Change. Through the Green Fund, these revenues finance mitigation and adaptation projects and programs. Between 2013 and 2020, Quebec’s government expects carbon market revenues to account for more than Can$ 3.6 billion (around US$ 2.8 billion)20 allocated to the Green Fund (Gouvernement du Quebec 2018b).21 Currently, more than 20 programs are totally or partially financed by the Green Fund in various fields, including transport, energy efficiency, renewable energy, research and innovation, waste management, agriculture, climate change adaptation, and international cooperation (figure A.12). The number of programs supported, each involving specific government entities and partners, complicates the fund governance; concerns have also been raised about the management of revenues and the transparency of the fund (Canada’s Ecofiscal Commission 2016; Carl and Fedor 2016). The Government of Quebec has been working to improve the governance of the Green Fund and the way it administers revenues, including by setting up an independent management board (Conseil de Gestion du Fonds Vert). Improving cooperation among ministries is key to achieving objectives in a more efficient manner. In addition, the management of the fund’s resources will increasingly target spending programs in line with their potential to achieve Quebec’s climate objectives (Gouvernement du Quebec 2017, 2018b). FIGURE A.12. Quebec’s revenue spending plan, 2013–2020 In million CAD Sustainable transport 1,776.7 Transition to a low-carbon economy (including carbon markets) 224.4 Sustainablility of buildings 188.5 Social Programs 143.5 Research and development of technology 100.6 Community engagement 91.5 Renewable energy 50.5 Monitoring and reporting 45 Biodiversity 24 Sustainable agriculture and waste management 20.3 Source: CPLC 2016; Vaidyula and Alberola 2016. Additional climate change revenues include carbon levy proceeds (2007–2015) and federal government transfers. 20 The other revenue streams for the Green Fund include levies related to waste management and water use; these revenues are earmarked for 21 waste management improvement and water protection projects. 15. QUEBEC    TABLE OF CONTENTS 53 References Canada’s Ecofiscal Commission. 2016. “Choose Wisely: Options and Trade-offs in Recycling Carbon Pricing Revenues.” Canada’s Ecofiscal Commission. https://ecofiscal.ca/wp-content/uploads/2016/04/Ecofiscal-Commission-Choose- Wisely-Carbon-Pricing-Revenue-Recycling-Report-April-2016.pdf. Carl, J., and D. Fedor. 2016. “Tracking Global Carbon Revenues: A Survey of Carbon Taxes versus Cap-and-Trade in the Real World.” Energy Policy 96: 50–77. https://doi.org/10.1016/j.enpol.2016.05.023. Clean Energy Canada. 2015. “Inside North America’s Largest Carbon Market: Ten Lessons from the Front Lines of Quebec’s Fight against Carbon Pollution.” http://cleanenergycanada.org/wp-content/uploads/2015/02/Clean-Energy-Canada- How-to-Adopt-a-Winning-Carbon-Price-2015.pdf. CPLC (Carbon Pricing Leadership Coalition). 2016. “What Are the Options for Using Carbon Pricing Revenues?” Executive briefing. September. https://www.carbonpricingleadership.org/resource-library/. Gouvernement du Quebec. 2017. Budget des Fonds Spéciaux—Budget de dépense 2017–2018. ———. 2018a. “Inventaire québécois des émissions de gaz à effet de serre en 2016 et leur évolution depuis 1990.” http://www.environnement.gouv.qc.ca/changements/ges/2016/inventaire1990-2016.pdf. ———. 2018b. Plan d’action 2013–2020 sur les changements climatiques—Bilan mi-parcours. Vaidyula, M., and E. Alberola. 2016. “Recycling Carbon Revenues: Transforming Costs into Opportunities.” I4CE–Institute for Climate Economics, Paris. May 31. World Bank, Vivid Economics, and Ecofys. 2017. “State and Trends of Carbon Pricing 2017.” World Bank Group, Washington, DC. 54    TABLE OF CONTENTS 16. South Africa Summary South Africa has implemented a nationwide carbon tax. The tax respects a strict non-earmarking rule for fiscal revenues, while trying to address competitiveness concerns. GHG emissions (year) 391 MtCO2 (2016) Revenue raising mechanism Carbon tax Start year of the mechanism 2019 Emissions from energy combustion and gasification (stationary and Coverage (sectors/fuels) nonstationary sources); process and fugitive emissions GHG emissions covered 80% (estimated) a by the mechanism Annual revenues n.a. Institutional constraints (ex ante) n.a. Use of revenue (ex post) n.a. - Implementation Department/agency Treasury of the scheme in charge Use of revenues - Treasury Note: n.a = not applicable a. World Bank, Carbon Pricing Dashboard, https://carbonpricingdashboard.worldbank.org/map_data (accessed 2018). Revenue use planning for South Africa’s carbon tax The South Africa carbon tax (Carbon Tax Act, 2019) came into effect on June 1, 2019. Its passage was the culmination of an extensive history of debates that saw the publication of a carbon tax discussion paper (South Africa National Treasury 2010), a carbon tax policy paper (South Africa National Treasury 2013), and a paper on carbon offsets (South Africa National Treasury 2014). The initial carbon tax rate is equal to R 120/tCO2e (US$ 8/tCO2e), and will increase at the rate of inflation plus 2 percent yearly until 2022. The tax applies to GHG emissions from fossil fuel combustion and industrial processes, as well as to fugitive GHG emissions. The proposed design includes various tax-free allowances to mitigate the impact of the carbon tax on certain sectors/activities, including: • A basic tax-free allowance of 60 percent for all activities • A maximum 10 percent tax-free allowance for trade-exposed sectors to account for competitiveness concerns • A performance benchmark–based allowance of up to 5 percent to incentivize investment in mitigation technologies that lower emissions intensity of production processes Further, some activities/sectors are allowed to reduce the tax liability by using offsets. The use of offsets is capped at 10 percent of GHG emissions per tax period, which varies across sectors/activities. Tax payers 16. SOUTH AFRICA    TABLE OF CONTENTS 55 who participate in the carbon budget system and belong to activities/sectors covered by the tax can receive an additional allowance of 5 percent. The total allowances are capped at 95 percent of the carbon tax liability of covered entities. Regarding public finance, South Africa usually applies a strict rule whereby fiscal revenues are not earmarked. For the Carbon Tax Act, however, several soft recycling options were discussed, including an energy efficiency savings tax incentive (implemented since 2013 and due to be extended beyond the current 2020 sunset provision so as to be aligned with the first Phase of the carbon tax), support for the installation of solar water geysers, improved free basic energy for low-income households, improved public passenger transport, and support for shifting of freight from road to rail (Government of South Africa 2017). Further, to assist low-income households and energy-intensive companies, revenues will be recycled by allowing electricity generators to offset their payment of the existing electricity levy against their carbon tax liability during the first Phase of the carbon tax. References Government of South Africa. 2017. “First Draft Carbon Tax Bill 2015: Response Document.” http://www.treasury.gov.za/ public%20comments/CarbonTaxBll2017/Annexure%203%20Response%20Document%20to%202015%20Draft%20 Carbon%20Tax%20Bill.pdf. South Africa National Treasury. 2010. “Reducing Greenhouse Gas Emissions: The Carbon Tax Option.” Discussion paper for public comment. December. http://www.treasury.gov.za/public%20comments/Discussion%20Paper%20Carbon%20 Taxes%2081210.pdf. ———. 2013. “Carbon Tax Policy Paper: Reducing Greenhouse Gas Emissions and Facilitating the Transition to a Green Economy.” Policy paper for public comment. May. http://www.treasury.gov.za/public%20comments/Carbon%20 Tax%20Policy%20Paper%202013.pdf. ———. 2014. “Carbon Offsets Paper.” Published for public comment. April. https://www.gov.za/documents/ carbon-offsets-paper-draft. 56    TABLE OF CONTENTS 17. Sweden Summary In Sweden, the gradual increase in carbon tax rates since 1991 has been accompanied by various tax cuts to prevent an escalation of the overall level of taxation and address negative distributional effects. Sweden’s carbon tax raises significant revenues and plays a key role in the country’s mitigation policy. GHG emissions (year) 66 MtCO2e (2012)a Revenue raising mechanism Carbon tax Start year of the mechanism 1991 Coverage (sectors/fuels) All fossil fuels GHG emissions covered 40%a by the mechanism (%) Institutional constraints (ex ante) No earmarking of carbon revenues Use of revenue (ex post) 100% allocated to the general budget Annual revenues SKr 24,138 million (US$ 2,927 million) in 2016b - Implementation Department/agency Ministry of Finance of the scheme in charge Use of revenues - Ministry of Finance a. World Bank, Carbon Pricing Dashboard, https://carbonpricingdashboard.worldbank.org/map_data (accessed 2019). Skatteverket [Tax Agency], “Energiskatter och andra Miljörelaterade Skatter,” https://skatteverket.se/omoss/varverksamhet/ b.  statistikochhistorik/punktskatter/energiskatterochandramiljorelateradeskatter.4.3152d9ac158968eb8fd24b2.html (accessed 2018). Context Sweden’s carbon tax (koldioxidskatt in Swedish), adopted in 1991, targets households and businesses and applies to fossil fuels used for engines and heating purposes. The US$ 127/tCO2 tax is currently the highest worldwide (World Bank Group 2019) and is administered by the Swedish Tax Agency. As Sweden is part of the European Union Emissions Trading System, its energy-intensive industries are covered by the European carbon pricing scheme (PMR 2017); the Swedish carbon tax covers about 95 percent of CO2 emissions from sectors outside the EU ETS. There is no earmarking of carbon tax revenues in Sweden (PMR 2017; Raab 2017); carbon tax revenues are considered as an integrated part of the tax system (CPLC 2017). A balanced combination of increase in carbon revenues and various tax cuts Gradual increases in the carbon tax rates and in associated revenues have been combined with tax cuts in different ways in order to prevent an escalation of the overall level of taxation, encourage job growth, and address negative distributional effects (Åkerfeldt and Hammar 2015). In 2001, social security contributions from employers were decreased and income tax–free allowances were expanded, while the carbon tax was reformed and its rate increased (Carl and Fedor 2016). The 2001–2006 tax reforms, along with the surge in 17. SWEDEN    TABLE OF CONTENTS 57 the general carbon tax and other environmental taxes, led to further cuts in income taxes, with measures specifically targeting low-income households (Åkerfeldt 2016; Raab 2017). Between 2007 and 2012, additional cuts in labor taxes decreased the state’s budget by about € 9 billion, while increases in environmental taxes generated about € 0.5 billion of public revenue (Hammar, Åkerfeldt, and Sterner 2013). The carbon tax has played a significant role in emission mitigation in Sweden, while successive tax reforms have allowed continued economic growth. Even though the correlation between Sweden’s carbon tax and its GHG emissions is difficult to establish quantitatively, Sweden’s greenhouse gas equivalent emissions decreased by 25 percent between 1990 and 2016, while GDP increased by 75 percent (figure A.13) (Åkerfeldt 2017; Raab 2017). FIGURE A.13. Real GDP and domestic CO2e emissions in Sweden, 1990–2016 180 170 160 150 Index (1990=100) 140 +75% 130 120 110 100 -25% 90 80 70 1990 1995 2000 2005 2010 2015 GDP CO2eq Note: Sweden’s National lnventory Report (Swedish Environmental Protection Agency 2018), submitted under the UNFCCC and the Kyoto Protocol, indicates that C02 accounts for approximately 80 percent of total CO2e emissions (preliminary data for 2016). Source: Åkerfeldt 2017. A steady escalation of nominal carbon tax revenues in Sweden In light of all other climate-related policies in Sweden, the carbon tax will surely remain a crucial tool to contribute to Sweden’s goal of becoming carbon neutral by 2045 (World Bank, Vivid Economics, and Ecofys 2017). The regular or “full” tax rate applied to households has coexisted with a reduced rate for the industrial sector since the inception of the tax in 1991. The full tax rate was gradually increased from US$ 30 in 1991 to US$ 127 in 2019 (figure A.14), while the reduced rate grew from US$ 7 in 1993 to US$ 105 in 2016 (Åkerfeldt 2016; World Bank Group 2019). In 2018, this reduced rate for industry outside of the EU ETS was fully abolished: there is now a single price on carbon in Sweden (World Bank, Vivid Economics, and Ecofys 2017). Over the past two and a half decades, and despite changes in government, there has been no major deviation from the chosen path in Sweden, thus ensuring the predictability and stability of the carbon pricing scheme (Åkerfeldt and Hammar 2015). 58    TABLE OF CONTENTS TECHNICAL NOTE 16 - USING CARBON REVENUES – ANNEX TO REPORT: CASE STUDIES FIGURE A.14. Development of the Swedish carbon tax at general level and industry level General and non EU ETS industry rate 114 EUR/tonne 88 24 18 6 1991 2004 2019 Source: Government of Sweden 2018. Thanks to a stepped approach leading to gradual increases in the tax rate and associated revenues, Sweden has been able to count on significant and predictable carbon revenues for over 25 years. In 2016, revenues from the carbon tax amounted to € 2.5 billion, representing between 1 and 2 percent of the national budget (Raab 2017). References Åkerfeldt, S. 2016. “Carbon Tax—A Good Idea for Developing Countries?” Presentation at the 13th session of the United Nations Committee of Experts on International Cooperation in Tax Matters, New York, December 5. ———. 2017. “The Benefits of a Carbon Tax—Swedish Experiences and a Focus on Developing Countries.” Presentation at the UN Workshop on Practical Issues in Protecting the Tax Base of Developing Countries, Addis Ababa, Ethiopia, November 10. Åkerfeldt, S., and H. Hammar. 2015. “CO2 Taxation in Sweden: Experiences of the Past and Future Challenges.” https://www.un.org/esa/ffd/wp-content/uploads/2016/12/13STM_Article_CO2-tax_AkerfeldtHammar.pdf. Carl, J., and D. Fedor. 2016. “Tracking Global Carbon Revenues: A Survey of Carbon Taxes versus Cap-and-Trade in the Real World.” Energy Policy 96: 50–77. https://doi.org/10.1016/j.enpol.2016.05.023. CPLC (Carbon Pricing Leadership Coalition). 2017. Report of the High-Level Commission on Carbon Prices. World Bank, Washington, DC. https://static1.squarespace.com/static/54ff9c5ce4b0a53decccfb4c/t/59244eed17bffc0ac25 6cf16/1495551740633/CarbonPricing_Final_May29.pdf. Government of Sweden. 2018. “Sweden’s Carbon Tax.” February 26. https://www.government.se/government-policy/ taxes-and-tariffs/swedens-carbon-tax/ (accessed August 13, 2018). Hammar, H., S. Åkerfeldt, and T. Sterner. 2013. “Sweden’s CO2 Tax and Taxation Reform Experiences.” In Reducing Inequalities: A Sustainable Development Challenge, edited by Rémi Genevey, Rajendra K. Pachauri, and Laurence Tubiana. Energy and Resources Institute (TERI). PMR (Partnership for Market Readiness). 2017. Appendix: Carbon Tax Case Studies. Vol. 2 of Carbon Tax Guide: A Handbook for Policy Makers. Washington, DC: World Bank. http://documents.worldbank.org/curated/en/799761535605686418/ Appendix-Carbon-Tax-Case-Studies. Raab, U. 2017. “Carbon Tax—Determining the Tax Rate: Swedish Experiences.” Presentation at the PMR Technical Workshop “Carbon Tax: Design and Implementation in Practice,” New Delhi, March 22. 17. SWEDEN    TABLE OF CONTENTS 59 Swedish Environmental Protection Agency. 2018. National Inventory Report Sweden 2018. Stockholm: Swedish Environmental Protection Agency. https://www.naturvardsverket.se/upload/miljoarbete-i-samhallet/internationellt- miljoarbete/miljokonventioner/FN/national-inventory-report-2018.pdf. World Bank Group. 2019. “State and Trends of Carbon Pricing 2019.” World Bank, Washington, DC. https://doi. org/10.1596/978-1-4648-1435-8. World Bank, Vivid Economics, and Ecofys. 2017. “State and Trends of Carbon Pricing 2017.” World Bank Group, Washington, DC. 60    TABLE OF CONTENTS 18. Switzerland Summary Two-thirds of Switzerland’s carbon levy revenues are returned to households and businesses, mainly through health insurance premiums and reduced social security payments respectively. Up to one- third of revenues are used to promote emission mitigation in buildings. GHG emissions (year) 54 MtCO2e (2012)a Revenue raising mechanism Carbon levy Start year of the mechanism 2008 Coverage (sectors/fuels) Heating and power GHG emissions covered 36.3% (2017)b by the mechanism (%) Annual revenues Sw F 1,116 million (US$ 1,133 million) in  2017b One-third of revenue from the CO2 levy, but no more than Sw F 450 million/ year, may be used to finance measures to reduce CO2 emissions from Institutional constraints (ex ante) buildings. A maximum of Sw F 25 million/year of revenues from the CO2 levy may be allocated to the Technology Fund. 67% returned through direct transfers for households and businesses; Use of revenue (ex post) 33% earmarked for climate change-related projects - Implementation Department/agency Swiss Federal Office for the Environment (FOEN) of the scheme in charge Use of revenues - FOEN a. World Bank, Carbon Pricing Dashboard, https://carbonpricingdashboard.worldbank.org/map_data (accessed 2019). b. Communication from Swiss government official. Redistributing carbon levy revenues to households and businesses through direct transfers Switzerland’s CO2 levy was introduced in 2008 and covers around 36 percent of the country’s greenhouse gas emissions, mainly in the heating and power generation sectors (World Bank & Ecofys 2018). The levy rate is linked to compliance with mitigation targets: if CO2 emissions in a given year exceed the annual target, the levy rate is raised (Betz, Leu, and Schleiniger 2015). The Swiss Federal Office for the Environment (FOEN), which administers the CO2 levy, was expecting carbon levy revenues of about Sw  F 1.2 billion (US$ 1.2 billion) in 2018. One-third of revenues are earmarked for green spending and are used to reduce energy use in the building sector. The remaining two-thirds (except for a small funding for the national Technology Fund) are redistributed annually to households and businesses (FOEN 2018). The share of revenues that goes to businesses funds reductions in social security payments for the Old-Age Insurance System (OASI) (PMR 2017). 18. SWITZERLAND    TABLE OF CONTENTS 61 The remnant is redistributed uniformly to all Swiss residents, regardless of their income or consumption. Health insurers are in charge of this distribution (basic health insurance is compulsory in Switzerland). The amount that each insured person receives is settled against health insurance premiums, guaranteeing low additional administrative costs (CPLC 2016). In 2018, each Swiss resident was expected to receive Sw F 88.8 (US$ 89) via this yearly lump-sum rebate (FOEN 2018). References Betz, R., T. Leu, and R. Schleiniger. 2015. “Disentangling the Effects of Swiss Energy and Climate Policies.” CEEE 2015 Summer Study Proceedings. European Council for an Energy Efficient Economy. https://www.researchgate.net/ publication/274009758_Disentangling_the_effects_of_Swiss_energy_and_climate_policies. CPLC. 2016. “What Are the Options for Using Carbon Pricing Revenues?” Executive briefing. September. https://www. carbonpricingleadership.org/resource-library/. FOEN (Swiss Federal Office for the Environment). 2018. “The CO2 Levy.” https://www.bafu.admin.ch/bafu/en/home/topics/ climate/info-specialists/climate-policy/co2-levy.html. PMR (Partnership for Market Readiness). 2017. Carbon Tax Guide: A Handbook for Policy Makers. Washington, DC: World Bank. https://openknowledge.worldbank.org/handle/10986/26300. World Bank and Ecofys. 2018. “State & Trends of Carbon Pricing 2018.” World Bank, Washington, DC. https://doi. org/10.1596/978-1-4648-0725-1. PMR Supporting action for climate change mitigation http://www.thepmr.org pmrsecretariat@worldbankgroup.org sophieBerlioz.fr