Major study finds tax is single most effective decarbonisation policy lever

Potsdam Institute assessed 1,500 climate policies across the globe to see which led to the highest carbon reductions

A major academic study of climate policies around the world has concluded that taxes are the most effective instrument for governments seeking to decarbonise economies.

Researchers from the Potsdam Institute for Climate Impact Research analysed the effect of 1,500 policy measures from 41 countries, and found just 63 managed to achieve average emissions reductions of 19% of more.

All the “successful” cases were based on tax or price incentives.

“In most cases, we found that effect sizes are larger if a policy instrument is part of a mix rather than implemented alone,” notes the study, which was published in the journal Science this month.

Policies such as labels and fossil fuel subsidy reforms were only meaningfully effective when used in combination with other instruments, it continued.

“Several popular instruments—such as bans, building codes, energy efficiency mandates, and subsidies—are either also only ever detected in policy mixes or have smaller average effect sizes if they are associated as stand-alone policy with emission breaks.”

The researchers described taxation as “a notable exception in effectively causing large emission breaks alone”.

“It stands out as the only policy instrument that achieves near equal or larger effect size as a stand-alone policy across all sectors.”

The taxes assessed ranged from carbon and fuel taxes, to road tolls and car taxes.

The World Bank’s most recent annual assessment of carbon pricing found 75 carbon pricing instruments in operation around the world, generating revenues of $104bn in 2023.  

However, it noted, less than 1% of global emissions are covered by a meaningful carbon price.

The Potsdam report observed a “substantial variation in the types of policy instruments used across sectors and countries”, with price-based instruments being more popular in developed economies while regulation was dominant in developing economies.