Paying the Price for the Future We Want

Min Zhu

June 19, 2012

Putting an accurate price on pollution is something the world has been struggling with now for decades. Getting prices to reflect environmental damage will help slow pollution by encouraging people and firms to change their behavior and shift away from activities and products that pollute the planet. Paying true prices is something we need to do if we want to keep economic development on an environmentally sustainable track.

Behind the concept of sustainable development lies a bold vision of the future, or “The Future We Want,” as Ban Ki-Moon puts it. It is about the vitality of our global economy, the harmony of our global society, the nurturing of our global inheritance.

It is about laying the foundation so that every single person can flourish and reach their true potential.

Eyes on Rio

This week the world is looking to Rio de Janeiro as those of us gathered there for the Rio+20, United Nations Conference on Sustainable Development affirm our commitment to sustainable development—the idea that we should strive for economic growth, environmental protection, and social progress at the same time.

Because, standing in the way of the future we want are the environmental problems we continue to face. Climate change could lead to potentially devastating consequences down the line, especially for the world’s poorest and most vulnerable populations. Look at Africa. This is the continent that contributes least to climate change, and yet suffers most from it. It is among the regions most at risk from natural disasters. It is the region with the highest rainfall volatility—and the region that desperately needs the rain for agriculture, growth, and employment.

But environmental problems are broader than climate change. In India, for example, pollution from coal generation plants has been estimated to cause 70,000 premature deaths a year. Across the world, many of our fisheries are still being overharvested. And the delicate ecosystems in many of our forests and wetlands remain under threat.

Not everyone agrees on the appropriate policy responses to deal with environmental challenges. And that is one of the reasons why so many of us have gathered in Rio—to keep the dialogue going, and to continue to make incremental progress toward the future we want.

While the International Monetary Fund is not an environmental organization, we cannot ignore the extensive human suffering and the misallocation of resources that leads us down the wrong path.

And where we can, we will offer help in finding solutions—something Christine Lagarde spoke about in more detail last week at the Center for Global Development in Washington, D.C.

What’s in a price?

One area where the IMF can help to promote sustainable development is by “getting the prices right.”

Getting appropriate pricing means, for example, making sure that companies and individuals pay the true cost of polluting our planet. The best way to come up with the true costs is through fiscal instruments, such as environmental taxes or emissions trading systems where governments sell pollution rights, to reflect environmental damages in the prices we pay for energy, food, driving our cars, and so on.

Getting the prices right should form the centerpiece of policies to promote green, or environmentally sustainable, development.

Because, as discussed in a new IMF guide for policymakers, fiscal instruments can help to solve two of today’s most urgent challenges:

First, they can play a key role in raising badly needed revenues. In the United States, for example, a carbon tax of about $25 per ton of CO2—which would add 22 cents to a gallon of gasoline—could bring in about 1 percent of GDP, or over $1 trillion over a decade. And, as discussed in an IMF-World Bank report for the G-20 last year, charges on international aviation and maritime emissions could meet about a quarter of the commitment developed countries have made to mobilize $100 billion a year for climate finance by 2020.

Second, appropriately targeted fiscal instruments are, by far, the most effective way to exploit opportunities to reduce environmental harm across all sectors of the economy. Environmental taxes also galvanize clean technology development and deployment by the private sector—such as investments in energy efficiency and renewables. Recent empirical work at the Fund has confirmed this.

Our road ahead

But at present we are only at base camp in getting the prices right.

Over 90 percent of global greenhouse gas emissions remain unpriced, only a handful of cities have begun to experiment with policies charge for the use of gridlocked roads, and worldwide farmers are not charged for the marginal costs of (increasingly scarce) water resources. And in fact, many countries continue to subsidize, rather than tax, fossil fuels, even though these subsidies may do very little to help the poorest members of society who do not have cars or access to electricity.

As we push for pricing reform however, we need to think carefully about how vulnerable groups might be helped, for instance by strengthening social safety nets, or tightly focusing subsidies on products used by poorer groups.

We can and must do better. We can all be a part of the solution—rich nations and poor nations; economists, environmentalists, and social policymakers; public sector, private sector, civil society, and international organizations. We must all come together and work together.

For in the end, we all share the same goal—to make this small planet we call our home a better place for this generation and for generations to come.