Fiscal Policies to Curb Climate Change

IMF Blog, October 8, 2019

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Global warming is a clear and present threat; current actions and commitments have fallen short.
Finance ministers should champion and implement fiscal policies to discourage carbon emissions from coal and other polluting fossil fuels.
The Fiscal Monitor helps policymakers choose what to do and how to do it, globally and at home.

To limit global warming to 2°C or less, large emitting countries should introduce a carbon tax set to rise quickly to $75 a ton in 2030.
Projected impacts on consumers (average across countries):
- Household electric bills would go up by 43 percent cumulatively over the next decade.
- Gasoline would cost 14 percent more on average.
Expected revenue from such a carbon tax: between ½ and 4½ percent of GDP (depending on the country).
Health and climate benefits:
- Taxpayer-funded measures could help save more than 700,000 people a year in advanced and emerging market economies who currently die from local air pollution.
- Revenues would also help contain future global warming as agreed by the international community.

Cut other taxes that harm incentives for work and investment (for example, income or payroll taxes).
Support disproportionately affected workers and communities (for example, coal-mining areas).
Return revenue as an equal dividend to the entire population.
Compensate only the poorest 40 percent of households, leaving three quarters of the revenues for:
- Additional investment in green energy.
- Innovation.
- Funding the Sustainable Development Goals.

About 50 countries have a carbon pricing scheme in some form.
The global average carbon price is currently only $2 a ton.
Sweden example:
- Carbon tax is $127 per ton.
- Reduced emissions 25 percent since 1995.
- Economy has expanded 75 percent since then.
Political economy challenges: countries may fear loss of competitiveness from higher energy costs.

Proposal: agreement on a carbon price floor, with stricter requirements for advanced economies to ensure equity.
Example scenario:
- Carbon price floor of $50 and $25 a ton in 2030 for advanced and developing G20 countries respectively.
- This would reduce emissions 100 percent more than countries’ current commitments in the 2015 Paris Agreement on Climate Change.
Flexibility: countries using other policies (for example, regulations to reduce emission rates or curb coal use) could join the price floor agreement by calculating the carbon price equivalent of their policies.

Feebates: charge a fee on polluters and give a rebate for energy-efficient and environmentally friendly practices to encourage choices like hybrid vehicles or renewable energy use.
Extend pricing schemes beyond power generation and domestic transportation to other greenhouse gas sources:
- Forestry, agriculture, extractive industries, cement production, and international transportation.
Support clean technology investment through:
- Power grid upgrades to accommodate renewable energy.
- Research and development.
- Incentives to overcome barriers to new technologies and the time needed for firms to produce clean energy efficiently.

Carbon taxes are the most powerful and efficient tool to raise the price of carbon emissions, but must be implemented in a fair and growth-friendly way.
Revenue use is central to political feasibility—options include tax cuts, targeted compensation, dividends, and investment in green growth.
International coordination (for example, a carbon price floor) can address competitiveness concerns and amplify emissions reductions.
Investing in clean energy fosters jobs, growth, and reduces both air pollution deaths and future warming.

Source: Fiscal Policies to Curb Climate Change (October 8, 2019) — Vitor Gaspar, Paolo Mauro, Ian Parry, Catherine Pattillo.