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IMF’s carbon tax call ‘not close to what’s needed’

RWE Niederaussem coal power station carbon CO2 from PA 229x150

The calls for a global carbon tax are getting louder but some experts believe it needs to be much higher than what is currently being recommended to make a difference and drive CO2 emissions reductions.

Putting a price on carbon, especially through taxation, is gaining increasing attention as a way to steer the economy towards cleaner technology. Ursula von der Leyen, the incoming European Commission president, supports it. The IMF plugged it hard by making carbon taxes the centrepiece of its Fiscal Monitor report, released this week.

The IMF argued: "of the various mitigation strategies to reduce fossil fuel CO2 emissions, carbon taxes — levied on the supply of fossil fuels in proportion to their carbon content — are the most powerful and efficient, because they allow firms and households to find the lowest-cost ways of reducing energy use and shifting toward cleaner alternatives."

But campaigners and experts say that while any price on carbon is helpful, the $75 level recommended by the IMF is far too low to change behaviour enough.

“Even if countries do everything they have committed to under the Paris Agreement, there would be global warming of 3C,” said Paolo Mauro, deputy director in the fiscal affairs department at the IMF. “Our role is to be truth tellers — it’s falling short of what’s necessary. By giving a number for a global carbon tax, it is essentially a way of conveying to governments that more action is necessary.”

The IMF is calling for large emitters such as the US, China and India to agree on a carbon price floor. “It has to be way higher than the current average carbon price globally, which is $2,” said Mauro.

Smaller states would be likely to fall into line. “If some countries don’t want to participate," Mauro said. "countries would likely think about ways of bringing each other to the table through a combination of carrots and sticks.”

At the moment, an international carbon price agreement seems a way off. There is no international negotiation towards it. However, the Coalition of Finance Ministers for Climate Action, which held its third meeting on Saturday October 19 in Washington, has working towards an effective level of carbon pricing as one of its core principles.

“The Coalition of Finance Ministers for Climate Action is a promising group that focuses on what fiscal policy can do to mitigate climate change,” said Mauro.

How high?

The IMF has calculated that a global tax rising to $75 a tonne of CO2 by 2030 would bring about the decarbonisation necessary to keep global warming below 2C.

It worked this out by taking the amount of future carbon emissions scientists say is compatible with keeping global warming to 2C and taking from existing economic literature estimates of the elasticity of carbon emissions with respect to carbon taxation. This assumption is crucial; the IMF took the middle of the range.

Some economists argue even a $50 tax would be high enough to cause massive shifts in technology choices that would sharply bring down emissions.

However, others are sceptical. A $75 tax would add only 7% to the cost of a return economy flight between London and Washington, which causes about 1 tonne of emissions and costs about $1,100. This is likely not enough to deter someone from flying.

To take another example, a litre of petrol combusts to produce 2.4kg of CO2. That means 417 litres produce a tonne. In the UK, a litre of petrol costs about $1.65. The 417 litres would cost $688, so a $75 tax would add about 11%. That would add to incentives to buy fuel-efficient cars, but would hardly dent car use. Petrol was that expensive several times in 2012-13.

The Intergovernmental Panel on Climate Change has estimated the effective carbon price in 2030 if global warming is to be kept to below 1.5C would be $135 to $5,500 a tonne.

Helen Mountford, vice-president at the World Resources Institute, said the IMF was “rightly advertising how important putting a price on carbon is." She said it was vital for countries to start taxing carbon at any level, and then ramp up the level. "However," she added, "it can only be part of a broader package of policies.”

The IPCC takes a similar view. It quotes research arguing that "stringent minimum performance standards (MEPS) for 14 appliances (eg. refrigerators) can effectively complement carbon pricing, as tightened MEPS can achieve ambitious efficiency improvements that cannot be assured by carbon prices of $100 or higher."

It concludes: "The literature indicates that the pricing of emissions is relevant, but needs to be complemented with other policies to drive the required changes".

Swedish example

Sweden has had a carbon tax since 1991, now $127/tonne. “Sweden’s carbon emissions fell by 25% and its GDP rose by 75% over this period,” said Mauro.

However, this pace of decarbonisation, about one percentage point a year, is too slow to avoid global warming. Sweden's carbon tax is imperfect - it has many loopholes, including for aviation fuel. But on the other hand, Sweden was also using other policies to decarbonise at the same time, such as support for renewable energy.

Rolf Lindahl, a climate and energy campaigner at Greenpeace Sweden, said the carbon tax was “the very minimum that you need to have as a bottom floor for climate action. We have had a tax for a long time and are still far from reaching our emissions goals. The level would have needed to be much higher.”

He argued an international drive for a gradually rising carbon tax could be “a lengthy distraction from the real climate action and solutions we desperately need”.

Charles Komanoff, director of the Carbon Tax Center, a US NGO, said he used to believe that "a carbon tax could take care of most of the job. Now that's no longer possible. We are a dozen years on and the world has done little or nothing".

As of now, a $75 tax was “not enough or close to what’s needed," Komanoff said. "What my country and every country needs is a co-ordinated investment programme to rebuild the economy, society, cities and infrastructure” in a green way.

Economic effects

Even if a carbon tax is only a mild stimulant to greening the economy, it can have other beneficial effects if handled right. It enables the government to raise revenue, which it can use in a variety of ways. It could cut taxes on more benign activities, such as labour, return money to citizens through direct grants, or invest in infrastructure to benefit the population.

The IMF emphasised the importance of social equity and consent. The violent gilets jaunes protests in France since 2018, sparked by a carbon tax rise, are a perfect example of what can go wrong if policies are badly designed.

"The gilets jaunes are often slightly misinterpreted as anti-climate," Mountford said. "They wanted a faster transition to a low carbon economy. They just wanted it to be done in a way that was equitable. The protest was against the latest fuel price increase."

The surest way to make carbon taxation popular is to use the revenue in a progressive redistribution of wealth that benefits most citizens. However, this does not give the government money with which to make investments necessary to combat climate change.

That leads to the question whether countries should expand budget deficits to fight climate change.

Although the IMF recommends fiscal expansion for countries that can afford it, these are few, and mainly rich. For most countries, where government finances are weak, the IMF still advises fiscal prudence.

“There will be many cases where it makes sense to increase investment as a share of total spending rather than increase the deficit," Mauro said. "What better way of investing than investing in green energy? To the extent that there is an initiative to increase investment this would be very worthwhile. If you are a country that doesn’t have a lot of fiscal space, which has a very low revenue to GDP ratio, it should use carbon taxes, and use the revenue to cut other taxes a little, but also to increase spending on infrastructure, health and education.”