IMF Survey : Policymakers Face Historic Opportunity to Fight Climate Change

October 10, 2015

  • Sharp drop in energy prices presents opportunity for climate initiatives
  • Revenue generated by new climate measures should be put to wise use
  • International cooperation key, but countries moving at different speeds

Governments should seize the opportunity afforded by low oil prices to move forward with combating climate change by setting a price on carbon emissions and eliminating energy subsidies, panelists said at a seminar.

<i>The Financial Times</i>’ Martin Wolf with the IMF’s Christine Lagarde in Lima: “Climate change is one of the great existential questions of our age.” (photo: IMF)

The Financial Times’ Martin Wolf with the IMF’s Christine Lagarde in Lima: “Climate change is one of the great existential questions of our age.” (photo: IMF)


The world is at a critical juncture in the fight against climate change, top climate experts and representatives of international organizations told a seminar at the IMF-World Bank Annual Meetings in Lima, Peru.

With a 50 percent drop in fossil fuel energy prices in a little over a year, policymakers have a window of opportunity to take measures that would discourage energy consumption and generate revenue that can be used to reduce more harmful taxes and help finance countries’ efforts to mitigate the effects of climate change.

“Fossil fuel energy is cheap, so it is just the right moment to introduce a carbon tax and just the right time to eliminate energy subsidies,” IMF Managing Director Christine Lagarde told the gathering.

The two-part seminar “A Conversation on Climate Change” and “Energy Pricing—Getting It Right” took place just as representatives from countries around the world prepare to meet in Paris in December 2015 for the United Nations Climate Summit known as COP21. The summit aims to build on progress made at the 2009 meeting in Copenhagen.

Challenge and opportunity

In opening remarks, moderator Martin Wolf of The Financial Times noted that the international community is far from achieving its target of limiting carbon emissions so that future global warming will be capped at 2 degrees Centigrade.

Despite widespread acknowledgement that action on climate change is needed, developed countries have “failed utterly” to respond to both the challenge and the opportunity of low energy prices, Wolf said.

Countries should be striving to set a carbon price equal to the cost of the “externality”—that is, equal to the damage that climate change is doing, noted Martin Parkinson of Princeton University. “This is a good time to do it because energy prices are falling,” he said. Putting a price on carbon emissions—whether through a carbon tax or an emissions trading scheme—tends to push up the price of energy and other goods and services, he explained, so doing it now while oil prices are low will make it more palatable to consumers.

Mary Polak, Minister of Environment for the Canadian province of British Columbia, discussed her government’s experience with introducing a carbon tax, noting that it had pursued carbon pricing more aggressively than any other government in North America. The province successfully introduced a revenue-neutral carbon tax in 2008, starting at $10 a ton and gradually raising it. As a result, she said, British Columbia reduced its consumption of all fuel types by 16 percent at the same time that across Canada it rose by 3 percent. “In addition to that, our economy also grew faster than the rest of Canada,” Polak noted.

But nobody should be under the illusion that carbon pricing is a politically easy thing to do, panelists cautioned. The key, Parkinson suggested, is to raise awareness of climate change and keep reminding people why a carbon tax and other similar measures are necessary.

“Nothing to do with the problem”

In developing countries, access to energy is a question of life or death, and climate change measures are thus perceived in a completely different light. In India, for example, about 40 percent of the population doesn’t have access to electricity. “Poor people deserve energy, and we’ve got to find ways to get it to them at a lower cost,” said World Bank President Jim Yong Kim.

But “the notion that you have to do something for the sake of climate change is hard to sell,” said Arvind Subramanian, Chief Economic Adviser to the Government of India. “It's also a hard sell because there's a deeply entrenched narrative that we had nothing to do with the problem.”

This question of equity—sharing the costs of adapting to climate change and mitigating its effects—is one of the major issues in the runup to the Paris Summit, and it featured prominently in the seminar.

“The top twenty emitting countries are responsible for roughly 90 percent of global emissions,” observed IMF Managing Director Min Zhu, noting that this group includes not just advanced economies but also developing ones. Christiana Figueres, Executive Secretary of the UN Framework Convention on Climate Change Management, put the concern of many very bluntly: “There is a subset of countries that have caused this historically and that therefore have the moral responsibility to help developing countries with the negative impact of climate change.”

Time is of the essence

Because countries are at different places in the development curve, it is proving difficult for the international community to agree on a coherent plan for financing current and future mitigation efforts. While the advanced economies have pledged to channel $100 billion a year to the developing world for this purpose starting in 2020, there remains much to do in creating a global system for climate financing.

At the seminar, panelists agreed that the path toward emissions reduction should be unique to each country, tailored to its specific circumstances. But, asked Wolf, “Are we going to have a ludicrous mosaic of fundamentally different policies with everyone worried that their neighbor isn’t doing enough?” The “free rider” problem, where countries look to others to act on mitigation, is one of the difficulties that will have to be addressed if COP21 hopes to set out a coherent policy system at the global level.

Another (but happier) issue that countries will have to confront is how to use the revenue derived from carbon pricing schemes. As with revenue generated from energy subsidy reform, it is important to use the gains wisely—whether it be to drive infrastructure change, advance technology change, or share the sorts of breakthroughs needed to bring energy security to people in the developing world, Parkinson noted. The key will be to seize opportunities to generate revenue in a welfare-enhancing way—revenue that can be used to achieve vital goals in the area of sustainable development.

Time is of the essence, warned Nicholas Stern of the London School of Economics. Panelists agreed that the world didn’t have the luxury of holding out for the perfect global system. Rather, moderator Wolf stressed, the international community should strive for agreement on “common objectives that are achieved in a modestly fair way.”

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