Carbon revenue use beyond earmarking

Context

Carbon pricing is increasingly applied as a key instrument for the climate transition and the related revenues are expected to keep increasing in the coming years. National and local governments can adopt various approaches to using these revenues, which could be critical for the public acceptability of these measures, or indeed to finance the transition to a low-carbon and resilient economy. Thus, when deciding how to best use carbon revenues, policymakers are faced with a series of crucial questions. They have to arbitrate between competing policy objectives – such as mitigation, adaptation, just transition or competitiveness. They may need to set up new specific vehicles to channel the funds to the end-beneficiaries or to repurpose existing ones, as well as to define how to communicate these decisions. Policymakers’ choices will have specific consequences in terms of sustainability, resilience to political change, acceptability, transparency, or oversight.

Few studies and benchmarks of best practices are looking in-depth at this critical ‘use of carbon pricing proceeds’ question. Existing studies have heavily focused on earmarking strategies, although, in practice, policymakers may prefer to keep some flexibility when dealing with annual budgets. According to I4CE’s 2022 Global Carbon Accounts, 33% of carbon pricing revenues around the world are channelled to the general budget. Some of the countries that do not earmark revenues have been putting in place other practices, such as green budgeting or annual disclosure reports. These practices, within and beyond earmarking, should be further analysed and shared between countries to support the development of a needed innovative approach to link climate strategy, budget, and carbon pricing, and to enhance public climate action while increasing the acceptability of carbon pricing instruments. 

Objectives

To enlarge and enhance the existing approaches to the use of revenues from carbon pricing mechanisms and support a switch from the narrow earmarking/no-earmarking debate to a comprehensive perspective focused on the implementation of decarbonization pathways that integrates carbon revenues.

Specific objectives

• to develop a conceptual framework and map the different uses of revenues from carbon pricing mechanisms around the world ;
• to understand related institutional arrangements and accompanying political narratives ;
• to assess the integration of carbon revenues in transition financing plans ;
• to organise international workshops on best practices.

Timeline and deliverables

• Preliminary report – July 2023
• 1st online workshop – September 2023
• 2nd online workshop – October 2023
• Final report and presentation – February 2024

Partners

This activity is part of the European Union Climate Dialogues Project (EUCDs).