Tackling Climate, Development and Growth, a panel discussion at 2015 World Economic Forum
IMF Moving Forward on Energy Tax Reform
Resources on Environmental Policy
IMF and the Environment
Although the future extent and effects of global climate change remain uncertain, the expected damages are not zero, and risks of serious environmental and macroeconomic consequences rise with increasing atmospheric greenhouse gas concentrations. Despite the uncertainties, reducing emissions now makes sense, and a carbon tax is the simplest, most effective, and least costly way to do this. At the same time, a carbon tax would provide substantial new revenues which may be badly needed, given historically high debt-to-GDP levels, pressures on social security and medical budgets, and calls to reform taxes on personal and corporate income.
This book is about the practicalities of introducing a carbon tax in the United States, set against the broader fiscal context. It consists of thirteen chapters, written by leading experts, covering the full range of issues policymakers would need to understand, such as the revenue potential of a carbon tax, how the tax can be administered, the advantages of carbon taxes over other mitigation instruments and the environmental and macroeconomic impacts of the tax. A carbon tax can work in the United States. This volume shows how, by laying out sound design principles, opportunities for broader policy reforms, and feasible solutions to specific implementation challenges.
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).
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.
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:
- Designing Fiscal Policy to Address the External Costs of Energy, by Ian Parry, December 2014
- How Much Carbon Pricing is in Countries' Own Interests? The Critical Role of Co-Benefits, by Ian Parry, Chandara Veung, and Dirk Heine, September 2014
- The Fiscal and Welfare Impacts of Reforming Fuel Subsidies in India, by Rahul Anand, David Coady, Adil Mohommad, Vimal Thakoor, and James P. Walsh, May 2013
- Energy Subsidy Reforms: Lessons and Implications, January 2013
- The Unequal Benefits of Fuel Subsidies: A Review of Evidence for Developing Countries, November 2012
- Environmental Tax Reform: Principles from Theory and Practice to Date by Dirk Heine, John Norregaard, and Ian W.H. Parry, July 2012
- Going Green, F&D article by Luc Eyraud and Benedict Clements, June 2012
- International Fuel Tax Assessment: An Application to Chile by Ian W.H. Parry and Jon Strand, July 2011
- Reforming the Tax System to Promote Environmental Objectives: An Application to Mauritius by Ian W.H. Parry, June 2011
- Petroleum Product Subsidies: Costly, Inequitable, and Rising, February 2010
- Climate Policy and the Recovery, December 2009
- The Fiscal Implications of Climate Change by the Fiscal Affairs Department, IMF, March 2008
- Climate Change and the Global Economy, Chapter 4, World Economic Outlook, April 2008