Carbon taxes and emission trading systems are the most cost-effective means of reducing CO2 emissions, and should be at the centre of government efforts to tackle climate change, according to a new OECD study.

Effective Carbon Prices shows that taxes and trading systems are preferable to other policies, such as feed-in tariffs, subsidies and other regulatory instruments. For example, the average cost of reducing a tonne of carbon emissions in the road transport sector can be up to eight times higher when instruments other than fuel taxes are used, according to the report.

“Countries are pricing carbon in a multitude of ways, not always the most effective,” said OECD Secretary-General Angel Gurría. "There has been a huge amount of taxing and regulating around carbon, with prices established too high or too low, and the outcome has been far from optimal. This is a chaotic landscape that sends no clear signal, and must be addressed.”

The study draws lessons from climate change policies in 15 countries in some of the sectors that generate the most emissions: electricity generation, road transport, pulp & paper and cement, as well as household energy use. It underlines that while the cost of carbon taxes is clear – which is why they are easy targets for political opposition – other policy instruments entail higher costs to society per tonne of CO2 abated, in many cases, substantially higher.

The report confirms that countries could achieve higher levels of emission reductions at lower cost if they used smarter, market-based policy instruments.

In the electricity sector, capital subsidies cost EUR 176 per tonne of CO2 abated; feed-in-tariffs,(long-term contracts for energy producers, typically based on the cost of generation of renewable energy) cost EUR 169 per tonne; and trading systems EUR 10 per tonne of CO2 on average. Yet capital subsidies and feed-in-tariffs are much more commonly used in spite of being more costly.

During a lecture hosted by the London School of Economics earlier in October, Mr Gurría said governments must adopt a coherent approach to carbon pricing if they are to meet international commitments to gradually phase out fossil fuel emissions and limit climate change to a 2ºC temperature increase from pre-industrial levels. “There is only one way forward: governments need to put in place the optimal policy mix to eliminate emissions from fossil fuels in the second half of the century,” Mr Gurría said. “Cherry-picking a few easy measures will not do the trick.”