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IMF Sets Path for Sustainable Development

Carbon taxes: not just incentive to get prices right but also help put in place right environment for innovation (photo: Radius Images/Corbis)

RIO+20 CONFERENCE

IMF Sets Path for Sustainable Development

IMF Survey online

June 25, 2012

  • IMF outlines fiscal approach to sustainable, inclusive development
  • Carbon taxes, subsidies removal could generate revenues for social safety nets
  • Need to deliver jobs, reduce inequality, raise social protection for vulnerable

The International Monetary Fund (IMF) outlined a path for sustainable development at a major United Nations environmental conference, promoting use of carbon taxes to reduce environmental damage and the gradual removal of subsidies on fossil fuels as a way to generate much needed revenues for governments and reduce greenhouse gas emissions.

At the Rio+20 United Nations Conference on Sustainable Development delegates focused on renewing the political commitment to sustainable development, taking stock of progress to date and addressing emerging challenges. The conference was held in Rio de Janeiro, Brazil June 20–22, 20 years after the UN’s 1992 Earth Summit in Rio, where countries adopted a blueprint to rethink economic growth, advance social equity, and ensure environmental protection.

Growth based on three pillars

Speaking at the conference, IMF Deputy Managing Director Min Zhu emphasized the need for countries to adopt a sustainable growth path based on three pillars: job creation, reduction of inequality, and increased social protection for the most vulnerable.

At a side event, Tax Subsidy Reform for a Greener Economy, Zhu said an essential condition for a green economy is the need to balance environmental and economic concerns by getting the prices right.

Tax instruments can help ensure that environmental damages and other adverse side effects of economic growth are reflected in the prices paid for energy, transportation, and other industrial products. “Today over 90 percent of global carbon emissions remain untaxed,” said Zhu, adding that in the United States “a carbon tax of $25 per ton of CO2 would amount to 1 percent of GDP, or over $1 trillion in one decade.”

Zhu also said subsidies on fossil fuels—which cost the global economy $409 billion in 2010—should be phased out, emphasizing that, contrary to common perceptions, untargeted subsidies benefit the rich more than the poor. He cited the example of Indonesia, where revenues raised by allowing fuel prices to rise meant that 19 million poor families benefited with direct cash transfers.

"Policymakers need to know precisely how they are to 'get the prices right.' To help, the IMF has recently published a book seeking to provide them with practical guidance for carbon pricing, and stands ready to help any of our members wanting technical assistance in using fiscal instruments to address key environmental problems," said Mick Keen, Deputy Director of the IMF’s Fiscal Affairs Department.

Zhu also spoke about how carbon taxes are not just an incentive to getting the prices right, but how they also help put in place the right environment for innovation to take place—for instance, by encouraging a shift to alternative sources of energy that are now being, and can still be, developed.

Striking a balance

Most finance ministers attending the conference in Rio concur with the premise that economic growth and environmental preservation are not mutually exclusive goals. At a gathering organized by Brazil’s Finance Minister, Guido Mantega, ministers agreed that the goals of sustainable development are interlinked and cannot be treated separately.

“Brazil’s growth is indivisible from environmental preservation and social inclusion, including social programs,” said Mantega in opening the panel, which included Juan Somavia, Director General of the International Labour Organization (ILO).

At center stage in the discussions in Rio was inclusiveness, or the notion that everyone share in the fruits of prosperity and be given the chance to fulfill their potential.

Working solutions

The ILO organized a side event on Decent Work and Social Protection Floors for sustainable development, with participation from the IMF and the United Nations Environment Program. Brazil’s Minister of Social Development, Tereza Campello, and Norway’s Minister of International Development Heikki Holmas, also participated.

The panel analyzed how the transition to a greener economy creates opportunities but also challenges for social inclusion and better jobs. Recent collaboration between the IMF and the ILO was highlighted during the discussion: Zhu paid tribute to Somavia’s leadership at the ILO, saying that throughout the crisis, he had ensured that the issue of jobs and the plight of workers remained a central focus of world leaders.

Zhu’s remarks focused on three aspects of the inclusive growth agenda that are connected and self reinforcing: job creation, including the right kind of jobs; reduction of inequality; and increasing countries’ resilience to economic shocks through social protection.

“Employment is the principal source of income for most people, but it is often tenuous. With robust social protection systems in place, the loss of a job does not mean the immediate loss of all income, helping ensure that those who cannot earn an income are not entirely deprived of access to basic services,” said Zhu, adding that the IMF is working closely with the ILO, the United Nations Children’s Fund, the World Food Program, and other agencies to promote effective social protection.


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