Determinants of sectoral effective carbon rates on energy use

Hildegart Ahumada¹, Santos Espina-Mairal², Fernando Navajas^2,3 and Alejandro Rasteletti⁴

¹University Torcuato Di Tella, Argentina, ²FIEL, Argentina, ³University of Buenos Aires, Argentina, ⁴InterAmerican Development Bank, USA

We explore the determinants of effective carbon rates (ECR) as defined by the OECD methodology (OECD-ECR, 2018, 2021), using a sample of 66 countries across 6 sectors for 2018 which includes our estimates -with the same methodology- for 18 countries in Latin America and the Caribbean (LAC). We adopt an econometric modelling strategy where we first account for the determinants of economy-wide ECR and then explain differences in road transport and the rest of sectors with an automatic, machine learning model selection and using large set of potential explanatory variables that cover different structural, economic and institutional dimensions. Decoupling road transport form the rest of sectors is important due to differences in explanatory variables. Fiscal variables such as proxies for the marginal cost of public funds are important determinants of ECR in the road transport sector, as expected from the genesis of fuel excises. On the other hand, emission trading systems (ETS) tend to increase the value of ECR in the rest of sectors and, through this, for the whole economy. This positive effect on ECR is not observed in the case of carbon taxes, suggesting they may be introduced substituting for fuel excises and leaving unchanged the ECR burden. These results are robust to the strong prevalence of energy subsidies in some countries. We find that LAC does not depart from the model estimated for the whole global sample, except for the fact that ETS are not observed in LAC. suggesting there might be an avenue for improving ECR in some countries. We discuss directions of reform implied by our findings and also assess the relationship between ERC and CO2 emissions observed in our sample.