Paying the Price for the Future We Want

IMF Blog, June 19, 2012

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Author: Min Zhu
Date: June 19, 2012
Context: Rio+20, United Nations Conference on Sustainable Development; focus on sustainable development, environmental protection, and aligning prices with environmental damage.

Putting an accurate price on pollution encourages behavioral change by people and firms and helps shift activity away from polluting products and services.
“Getting the prices right” is framed as central to maintaining economic development on an environmentally sustainable track.
Pricing environmental damage supports the broader vision of sustainable development—economic growth, environmental protection, and social progress concurrently.

Fiscal instruments discussed: environmental taxes, emissions trading systems (governments selling pollution rights), charges on aviation and maritime emissions.
Specific illustrative figures and findings:
- A carbon tax of about $25 per ton of CO2 would add 22 cents to a gallon of gasoline.
- Such a carbon tax could bring in about 1 percent of GDP, or over $1 trillion over a decade (United States example).
- 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.
Benefits of fiscal instruments:
- Raise badly needed revenues.
- Are, when appropriately targeted, the most effective way to reduce environmental harm across all sectors.
- Galvanize clean technology development and deployment by the private sector (investments in energy efficiency and renewables).
- Recent empirical work at the IMF has confirmed these effects.

Over 90 percent of global greenhouse gas emissions remain unpriced.
Only a handful of cities have begun experimenting with charges for the use of gridlocked roads.
Worldwide, farmers are not charged for the marginal costs of (increasingly scarce) water resources.
Many countries continue to subsidize fossil fuels rather than tax them, despite subsidies often doing very little to help the poorest members of society who do not have cars or access to electricity.
Environmental problems extend beyond climate change: examples cited include 70,000 premature deaths a year in India from pollution from coal generation plants, overharvested fisheries, and threatened forests and wetlands.
Vulnerable regions, e.g., Africa, face high risks from natural disasters and rainfall volatility while contributing least to climate change.

Make getting prices right the centerpiece of policies to promote green, environmentally sustainable development.
Use fiscal instruments (environmental taxes, emissions trading, aviation/maritime charges) to reflect environmental damages in prices for energy, food, transportation, and water.
Target fiscal instruments to simultaneously raise revenue and reduce environmental harm.
Protect vulnerable groups when implementing pricing reforms by:
- Strengthening social safety nets.
- Tightly focusing subsidies on products used by poorer groups.
Foster collaboration across stakeholders: rich and poor nations; economists, environmentalists, and social policymakers; public sector, private sector, civil society, and international organizations.

The IMF sees a role in helping design and promote pricing reforms even though it is not an environmental organization, due to the human suffering and resource misallocation caused by environmental damage.
Continued dialogue, incremental progress, and collective action are urged to secure “the future we want” for current and future generations.

Paying the Price for the Future We Want — Min Zhu, June 19, 2012

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