Climate Change: How To Price Paris

IMF Blog, January 11, 2016

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Publication: Vitor Gaspar, Michael Keen, Ian Parry — January 11, 2016.
The Paris Agreement establishes country-level emission reduction pledges and timetables submitted by 186 countries and procedures for updating and evaluating progress.
Central argument: "The crucial thing is to price energy right" to make the Paris Agreement deliverable.

IMF estimates that energy prices undercharged the true costs of fossil fuel energy use by a total of $5.3 trillion (or 6½ percent of Global GDP) in 2015.
Global warming accounts for around 25 percent of the global subsidies identified.
The remaining 75 percent of the subsidies reflect:
- Health impacts from exposure to outdoor air pollution;
- Undercharging for local side effects of motor vehicles (e.g., congestion);
- Energy supply costs; and
- General consumption taxes.

Firms and households are not charged for the environmental consequences of their emissions, most importantly carbon dioxide (CO2) from burning fossil fuels.
Pricing carbon:
- Engages reductions in energy consumption;
- Encourages shifts from dirtier to cleaner energy generation;
- Encourages innovation and technological change.
A robust, predictable emission price is critical to redirect technological change toward low-emission investments.

Taxation is generally presented as the best way to implement carbon pricing.
- Recommendation: extend fuel excises to include carbon charges and apply similar charges to other petroleum products, coal, and natural gas.
If emissions trading systems are used, they should be designed to look like taxes by:
- Auctioning allowances to raise revenue;
- Including price floors and ceilings.
Suggested use of revenues:
- Boost the economy by cutting taxes on labor and capital that deter work effort and investment, offsetting the drag from higher energy prices.

About 40 national and over 20 sub-national governments have adopted some form of carbon pricing.
Existing schemes cover about 12 percent of global emissions (with coverage expected to double when China prices industrial emissions in 2017).
Typical prices under current schemes are modest — around $10 per ton or less.
Countries need to transition to greater coverage of emissions and to prices better aligned with their mitigation commitments.

As national pricing systems proliferate, international coordination can enhance effectiveness.
One natural mechanism: carbon price floor arrangements (analogous to tax minima for excises and value added taxes in the European Union).
- Benefits: provide protection against competitiveness impacts and allow countries to set prices above the floor if desired.

Renewables and green technologies require firms to be rewarded for adopting them.
The most effective way to create those rewards is to price carbon correctly.
Relying on technological progress alone, without appropriate carbon pricing incentives, is likened to "banking on miracles."

Get energy prices right at the national level to capture domestic benefits from reduced local pollution and other externalities.
Implement carbon pricing, preferably via taxation or trading systems that function like taxes (auctioning, price floors/ceilings).
Use carbon pricing revenues to reduce distortionary taxes on labor and capital.
Expand coverage of carbon pricing schemes and increase prices to align with mitigation commitments.
Consider international coordination via carbon price floors to manage competitiveness and enable higher national prices.

Article: Climate Change: How To Price Paris — Vitor Gaspar, Michael Keen, Ian Parry — January 11, 2016.

气候变化：巴黎协议下的能源定价; iMFdirect博客; 2016 年 1 月 11 日
- 气候变化：巴黎协议下的能源定价; iMFdirect博客; 2016 年 1 月 11 日 (Markdown version)
- 气候变化：巴黎协议下的能源定价; iMFdirect博客; 2016 年 1 月 11 日 (PDF)