Abby L. Harvey
GHG Monitor
8/1/2014
Internationally, fossil fuels are remarkably under-taxed given their climate impacts, International Monetary Fund Managing Director Christine Lagarde said this week while presenting the findings of a new IMF study. “If you take coal for example, it’s about the dirtiest of all fuels you can think of. Yet, almost no country … imposes meaningful taxes on its use,” Lagarde said at an event hosted by the Center for Global Development. “Our work suggests, to reflect the carbon damages alone, a reasonably scaled charge would amount on average to around 2/3 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.”
Fossil fuels present a difficult task for economists, Lagarde said, because of their overwhelmingly positive effects on the economy, but negative effects on the environment. For this reason, countries need to seek a way to balance the two when developing policy. “Fossil fuels, we have learned, are a double-edged economic sword. We have seen unprecedented improvements of the global living standards and they would not have happened had we not had cheap energy prices, energy derived precisely from these fuels,” she said. “Yet, we seem to have the sense of ancient vision that dictates that equilibrium, balance and moderation are key. So while the world became richer as energy fueled economic expansion produced good results for living standards, only recently have we come to fully appreciate the damage done to our precious natural resources.”
‘Price It Right’
Striking this balance will take several factors working together, but at the center is fiscal policy, Lagarde said. “We all know that there is no simple solution and protecting the environment is going to involve lots of different devices and a multitude of moving parts. It includes additional financing of research and development, infrastructures upgrades for power and transportation systems, appropriate tax on regulatory regimes for extractive industry. Yet, in all of this, fiscal policy must take center stage. Our message is clear; to get it right, price it right.”
To do this, environmental effects of the use of fossil fuels should be viewed in an economic sense, as externalities, and taxes for fossil fuels should include the costs of these externalities as well as the basic costs of supplying and extracting the fuels. Policymakers must work at “making sure that charges on different fuels are proportional to the emissions from those fuels,” Lagarde said. “Some of them are high caliber for carbon emission purposes. Those ones should be taxed more heavily than those that are low in carbon emissions content.” In doing this, Lagarde said “bad things,” like high carbon fuels, will be priced correctly, which will reduce the need to subsidize “good things,” like clean energy technologies.
Lagarde also said that countries should work to develop appropriate tax systems domestically instead of waiting for international signals. “We don’t have to wait until international cooperation is in place,” she said. “We don’t have to wait until the highly valuable [United Nations Climate Change Conference] comes up with results. We don’t have to wait until the new millennium goals are identified and include environmental issues … domestically, we can act and it can produce results that will actually benefit the population at home.”
