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Taxation is an important lever of economic policy. Taxes and tax expenditures on energy can greatly influence energy-related CO2 emissions. After an overview of existing fossil fuel subsidies, this chapter first describes the diversity of taxes applying to fossil fuels, including the differences between gasoline and diesel fuels in transport. It then identifies other tax provisions that can have a strong influence on emissions, such as the fiscal treatment of company cars and commuting expenses, and the design of property taxes. The role of tax provisions in driving investments in specific activities should also be assessed against the objective of the low-carbon transition.

At the Ministerial Council Meeting in May 2014, ministers and representatives of OECD member countries and the European Union invited the OECD to work with the International Energy Agency (IEA), the International Transport Forum (ITF) and the Nuclear Energy Agency (NEA) “to continue to support the UNFCCC negotiations and to examine how to better align policies across different areas for a successful economic transition of all countries to sustainable low-carbon and climate-resilient economies and report to the 2015 OECD Ministerial Council Meeting.” These areas include economic, fiscal, financial, competition, employment, social, environmental, energy, investment, trade, development co-operation, innovation, agriculture and sustainable food production, regional as well as urban, and transport policies.

Electricity generation and uses are critical to the decarbonisation of energy systems. In some countries, power generators compete on wholesale electricity markets that optimise the near-term power supply. This chapter describes how such design may limit the market’s ability to guide future low-carbon investments, including in presence of a price on CO2. New arrangements are needed to lock-in investment in capital-intensive low-carbon technologies, while reflecting their specific costs and benefits for electricity system. The incentives in regulated electricity systems are also not always aligned with the decarbonisation of power generation. Beyond generation, there are examples of regulatory barriers that could be addressed to facilitate climate-friendly innovations, such as demandside response and electricity storage. The chapter also touches on the impacts of climate change on energy systems.

Current transport systems rely largely on fossil fuels and impose very high environmental costs (climate change, noise, air pollution), particularly in urban settings. Policy intervention is needed to provide more energy efficient and less carbon-intensive mobility. These measures should focus on shifting away from the use of individual cars to mass transport modes, reducing the need for travel through land-use planning, as well as improving fuel and vehicle efficiency.

Addressing climate change requires urgent policy action to drive an unprecedented global infrastructure and technological transformation. More countries are implementing core climate policies: carbon pricing and market-based instruments, regulatory intervention and targeted support to innovation in low-carbon sustainable technologies. But global greenhouse gas emissions have risen rapidly and remain too high to avoid severe and irreversible climate change impacts.

Addressing human-induced climate change is one of the most significant challenges to be undertaken by the international community. The problem has long been identified but emissions of greenhouse gases keep rising, and the urgency of action increases with every passing year. Protecting the earth’s climate implies a transformational agenda that needs a resolute and enduring commitment. The IPCC Fifth Assessment Report tells us that we need to return global greenhouse gas emissions to a net zero level by the end of the century.

This chapter presents the scientific basis for climate action and the transformative nature of climate policy objectives. Action to mitigate climate change must rest on three pillars: an explicit or implicit price on CO2 emissions, regulations to remove barriers to energy efficiency, and targeted support to bring low-carbon technologies to market. The chapter highlights the need for stakeholder (consumers, industry) buy-in of these core climate policies, careful consideration by governments, and alignment of broader policy frameworks, traditionally hard-wired to fossil fuels, towards a low-carbon economy. Identifying and reforming misaligned policies can also help the transition while also supporting other policy objectives.

Although international trade contributes directly to GHG emissions, increased trade can help to achieve economic goals in a GHG-efficient manner, provided that GHG emissions are correctly priced everywhere. Given that emissions are not universally priced, this chapter examines where policies related to trade may be in misalignment with climate change objectives. While concluding that the multilateral agreements of the World Trade Organization do not generally prevent governments from pursuing strong domestic climate policy, the chapter does identify potential misalignments. These include import tariffs on environmental goods, barriers to trade in services and domestic policies designed to support local low-carbon industry but which are restrictive of international trade and therefore potentially counter-productive. The chapter concludes by looking at pricing policies for the machinery of international trade, aviation and shipping fuel, as well as resilience of the global trade system.

Climate change increases the risk of severe, pervasive and irreversible impacts such as species extinctions, threats to food security, changing patterns of weather-related mortality and rising sea levels. All countries are or will be affected; yet, many are not well adapted to this new reality. This chapter first reviews misalignments between existing policies and climate adaptation objectives, such as regulatory barriers in infrastructure financing, poorly designed planning policies and lack of pricing of natural resources. It then provides guidance on how countries could better manage the risk linked to climate change.

There is an urgent need to significantly scale-up investment to low-carbon, more energy efficient alternatives (e.g. renewable energy, sustainable transport systems, energy efficiency) and to shift investment away from fossil fuel use. The low-carbon transition will require mobilising of all sources of public and private sector investment and finance, including institutional investors. Governments need to use their scarce resources to trigger large-scale private sector investment in activities otherwise unlikely to attract sufficient private funding. However, some financial systems regulations hinder the allocation of longterm finance to low-carbon infrastructure investments. This chapter reviews such barriers in areas including: regulations related to long-term investment; corporate disclosures on climate risks; public procurement; and the allocation and delivery of development finance. It then provides some guidance for governments on how to align principles governing financial regulations, corporate governance and public spending with the low carbon transition.

There is a wide range of policy instruments that drive innovation. Strong climate policies are essential to pull innovation in the right direction, but other instruments play a role, and may inadvertently hamper change. This chapter describes the trends in public research, development, and deployment (RDamp;), the incentives for private RDamp; and innovations, as well as the labour and capital attractiveness of innovative firms in different policy settings. It also touches on whether countries have the right set of skills for the low-carbon transition. Last, specific industries may face regulatory hurdles to innovate to lower their emissions, as illustrated by a case study on cement manufacturing.

Sustainable land-management practices – reduced deforestation, restoring degraded land, low-carbon agricultural practices and increased carbon sequestration in soils and forests – can contribute to significant greenhouse gas emission reductions while responding to growing food demand. They could also improve the resilience of our economies to a changing climate by protecting ecosystems. Achieving this will require an integrated approach that breaks down the silos between climate change, agriculture, food security, forestry and environment policies. This chapter explores misalignments arising from the existence of environmentally harmful agricultural subsidies, the lack of valuation of ecosystem services and forest protection, and the incentives leading to food waste across the agriculture value chain.