IMF's Blunt Message to Nations: Raise Fossil-Fuel Taxes to Fight Climate Change

'Many energy prices in many countries are wrong. They are set at levels that do not reflect environmental damage, notably global warming.'

Fisk generating station in Chicago/Credit: Carlyn Crispell

Countries all over the world, including the United States, should be collecting much higher pollution taxes on fossil fuels—stiff enough to reflect the long-term cost of global warming's damage, the International Monetary Fund said on Thursday in an important new study.

The IMF, one of the world's leading development institutions, has long favored putting a price on carbon as an essential defense against the mounting damages of climate change.

But its advice has never been so blunt, or so detailed.

"Many energy prices in many countries are wrong," said the report, entitled Getting Energy Prices Right. "They are set at levels that do not reflect environmental damage, notably global warming."

Not only should countries collect taxes to take into account the future global costs of climate damage that carbon dioxide emissions are expected to cause, but they should also collect taxes to discourage burning fossil fuels because of the more localized smog and soot that make people sick. In addition, they should collect taxes on motor vehicle fuels to help pay for roadway wear and tear, crashes and the like.

Mainstream economists have long held that taxing fossil fuels is the most efficient way to ward off environmental ills. Higher taxes would discourage people from burning so much fuel, and also make alternative clean fuels more competitive in price and stimulate green innovation.

But in many countries raising taxes is political anathema, and politicians and policymakers have either let climate matters slide or resorted to other means of combating climate change, such as subsidies for green fuels, even though economists say that approach is less efficient.

The book-length IMF report contains extensive analysis on how much fossil fuel taxes should be charged by nations compared to what they charge today.

The agency estimated that its recommended tax levels would reduce global carbon emissions by 23 percent, cut fossil fuel related deaths around the world by 63 percent, and raise average national revenues by 2.6 percent of gross domestic product (GDP).

In prepared remarks delivered in Washington D.C. on Thursday, Christine Lagarde, the fund's managing director, said the agency is talking about "smarter taxes rather than higher taxes." Energy taxes, in other words, could be used to reduce other taxes or to pay down public debt. She said some nations might choose other effective mechanisms than taxes—such as a cap-and-trade scheme—to put a price on carbon.

The point of the study was not to set precise target levels for carbon taxes country by country, Lagarde said.

Instead, its purpose was to clarify what she called glaring imbalances in energy taxes. In this sense its recommendations were illustrative rather than prescriptive.

"Take coal, for example," she said. "This is about the dirtiest of all fuels, yet almost no country imposes meaningful taxes on its use. Our work suggests that, to reflect the carbon damages alone, a reasonably-scaled charge would amount, on average, to around two-thirds of the current world price of coal. In countries where a lot of people are exposed to air pollution, the coal charge should be even higher—several times higher in some cases."

Read chapter one of "Getting Energy Prices Right" by the IMF:

 

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