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IMF and the Environment

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Video: IMF Moving Forward on
Energy Tax Reform

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How Fiscal Policy Can Address Energy’s Environmental Impacts

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For more about the IMF's environmental work please contact Ian Parry at iparry@imf.org

IMF and the Environment


IMF Book: Getting Energy Prices Right:
From Principle to Practice
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Chapter Chapter 1   Data Get the spreadsheet and data

Energy prices in many countries are wrong because they are set at levels that do not reflect environmental damage, notably climate change, air pollution, and various side effects of motor vehicle use, such as traffic accidents and congestion.

Energy tax reform need not be primarily about raising new revenues, but could focus on restructuring the tax system away from taxes that are likely to be most harmful for efficiency and growth, such as income taxes, and towards carefully designed taxes on energy. Getting energy prices right would require extending current widely accepted and easily administered motor fuel taxes, to better align the rates of these taxes with environmental damage. Similar charges could be added to other fossil fuel products, such as coal and natural gas, or their emissions.

The IMF study offers practical guidance for countries on how to go about quantifying the harmful side effects of energy use, and shows what this implies for corrective taxes on coal, natural gas, gasoline, and road diesel, for over 150 countries.

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IMF Work on the Environment

While economic development is critical for lifting people out of poverty and raising living standards for the broader population, it also causes harmful side effects—particularly for the environment—with potentially sizeable costs for the macro-economy.

For example, rising atmospheric accumulations of greenhouse gases could substantially raise global temperatures, posing considerable risks. Poor air quality is a major human health problem. And road congestion can impose substantial burdens on urban economies, by reducing the productive time of the workforce.

Fiscal instruments (emissions taxes, trading systems with allowance auctions, fuel taxes, charges for scarce road space and water resources, etc.) can and should play a central role in promoting greener growth. These instruments are:

  • effective at reducing environmental harm—so long as they are carefully targeted at the source of the problem (e.g., emissions);

  • cost-effective (i.e., they impose the smallest burden on the economy for a given environmental improvement)—so long as the fiscal dividend from these policies is exploited (e.g., revenues are used to strengthen fiscal positions or reduce other taxes that discourage work effort and investment);

  • strike the right balance between environmental benefits and economic costs—so long as they are set to reflect environmental damages.

And there is plenty of scope for fiscal reform. Many countries subsidize the production and consumption of fossil fuels (rather than charging to discourage their use). And even when energy is heavily taxed, these taxes may not be very effective from an environmental perspective (e.g., taxes may be imposed on electricity use or vehicle sales rather than emissions or traffic congestion).

The Fund promotes the use of fiscal reform to address environmental problems through:

  • analytical work—for example, staff published a collected volume of papers on designing fiscal policy to mitigate greenhouse gases; the IMF assesses the magnitude of energy subsidies; and staff quantify environmental damages to provide guidance on appropriate levels of energy taxes in different countries.

  • technical assistance—to member countries interested in environmental tax reform.

  • outreach activities—including regular presentations by staff at conferences (e.g., UN climate meetings) and events the IMF cosponsors with other international organizations and research institutes (see for example Fiscal Policies and the Green Economy and Economics of Carbon Taxes).

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Analytical Work

The IMF's work includes research on 'getting the prices right' (to reflect environmental side effects in energy prices) and providing the right incentives to help countries address climate change and other environmental challenges. Fiscal instruments, either environmental taxes or systems of pollution rights sold by the government, are the most effective instruments for exploiting near and longer-term options for reducing emissions (e.g., investments in renewables and energy efficiency) while at the same time providing a potentially valuable source of government revenue.

The IMF recently published a handbook for policymakers, Fiscal Policy to Mitigate Climate Change, with many practical suggestions for designing and implementing fiscal instruments to reduce greenhouse gas emissions.

A paper prepared for the IMF Board Energy Subsidy Reform: Lessons and Implications measures both direct subsidies for energy, and indirect subsidies from the failure to charge for environmental side effects, and provides practical guidance for implementing subsidy reform.

In work for the G20 in collaboration with the World Bank and others, IMF staff evaluated a range of alternative fiscal instruments as a source of revenue for climate finance, including carbon taxes and other domestic instruments, and charges on international aviation and maritime fuels.

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IMF Papers

Related work at the IMF covers, for instance, the macroeconomic, fiscal, and financial implications of climate mitigation and adaptation policies; the appropriate design of fuel and other environmental taxes; the measurement of energy subsidies and protection of the poor when they are scaled down; border tax adjustments; and the taxation of resource industries. See, for example:

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