MD Remarks to EU Pavilion Discussion on Carbon Pricing and Carbon Markets

These remarks have been lightly edited for clarity.

December 1, 2023

Thank you for bringing us together.

I cannot think of a more important topic than accelerating decarbonization by pricing carbon.

IMF research shows that the path of borrowing to fund decarbonization is not one that countries can afford to follow. Whereas the path of pricing carbon is pragmatic, leads to more revenues, creates incentives for changing behavior, and is equitable.

So, let me make three points.

One, is it possible for us to decarbonize fast enough without pricing carbon? The answer is no. We have studied that question and the answer is conclusive that pricing carbon is necessary for the speed of the transformation we need.

Second, at what level should carbon be priced?

Let's look at where we are today. We have close to 25% of emissions covered. When we look at this coverage, the carbon average price for these covered emissions is $20 per ton, compared to somewhere around $85 per ton by 2030 to keep ‘1.5 degrees alive’?. Since we know that we have 75 percent of emissions yet to be covered, what is our average price overall today? $5 a ton. So, we have a way to go, and we need to go faster.

My third point is about the role of the IMF in supporting our members.

We are advocating for an approach that allows pricing carbon in different ways. The best way -- the most efficient way -- is by taxing carbon. Taxes are easy to execute: countries that have chosen to tax have shown that they continue to enjoy growth while their emissions go down.

But taxing carbon is not politically viable in some countries, and we have no time to build political viability.

Therefore, we accept -- and recommend – that countries follow others’ approaches. For example, the one that is so popular in European Union: emissions trading. We can see how impactful it is. It also raises revenues.

But we are so under-the-gun, we should also accept regulatory approaches. In other words, indirectly pricing carbon by gradually increasing standards. Industries (and ultimately consumers) can pay the price for carbon emissions in that way.

As an institution, the IMF has been advocating very strongly for building the biggest possible tent for all pricing approaches, and then working with our partners: the World Bank, or OECD, the World Trade Organization -- to create two types of equivalency.

First an approach to equivalence covering tax, trade and regulatory compliance.

Second, equivalency of carbon price vis-à-vis level of economic development: rich countries pay more, middle-income countries pay less. Some low-income countries are ready to establish a price of carbon, but others that maybe are fragile states – we must accept they are not part of this equation yet.

And if we go the way of carbon price equivalency, and then work hard to build the different approaches in a compatible fashion – we would take away the argument of political difficulty. Because we all need to move on carbon price.

The WTO deserves praise for putting pressure on institutions to work together on a task force to work on equivalency and make sure that carbon pricing is something that is not just talked about, but that exists everywhere.

Thank you.