IMF: Carbon taxes are effective instruments to reduce carbon dioxide emissions
The IMF provides practical guidance on the design of fiscal policy to mitigate climate change.
The world is getting hotter, resulting in rising sea levels, more extreme weather like hurricanes, droughts, and floods, as well as other risks to the global climate like the irreversible collapsing of ice sheets.
Carbon taxes, or similar charges for the carbon content of coal, petroleum products, and natural gas, are potentially the most effective instruments to reduce carbon dioxide emissions, the major source of heat-trapping gases. These taxes are straightforward to administer, for example, building off existing fuel excises, and can raise significant revenue for the government that they might use to cut other burdensome taxes on the economy or fund growth-enhancing investments.
The IMF provides practical guidance on the design of fiscal policy to mitigate climate change. IMF is developing spreadsheet tools to help countries gauge the emissions, and broader fiscal and economic impacts of carbon pricing, and the trade-offs across alternative mitigation instruments like taxes on individual fuels, emissions trading, and incentives for energy efficiency.
For example, IMF's annual economic review for China showed that a carbon tax, or just a tax on coal use, would be significantly more effective at reducing carbon and local air pollution emissions than emissions trading systems which do not cover emissions from vehicles and buildings and would also raise substantial revenue.
And according to IMF"s forthcoming working paper, a USD 70 price per ton on carbon dioxide emissions in 2030, which would increase gasoline prices by about 60 cents per gallon, and more than triple coal prices, would be more than sufficient to meet mitigation pledges in some advanced and emerging market economies like China, India, Indonesia, and South Africa. That price would be nearly sufficient in some other countries like Turkey and the United States, but well short of what Australia, Canada, and some European countries need.
These differences in the ability of the USD 70 price to meet mitigation pledges reflect both differences in the stringency of commitments, and in the responsiveness of fuels and emissions to pricing. For example, emissions tend to be more responsive to pricing in countries that use a lot of coal, like China, India, and South Africa.