## Fiscal Policies to Curb Climate Change

_IMF Blog, October 8, 2019_

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**Canonical URL:** [Fiscal Policies to Curb Climate Change](https://www.imf.org/en/blogs/articles/2019/10/10/fiscal-policies-to-curb-climate-change)

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## Bibliographic details
- Authors: Vitor Gaspar, Paolo Mauro, Ian Parry, Catherine Pattillo
- Published: October 8, 2019

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### Overview
- 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.

### The price to pay
- 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.

### How revenues can be used (to make carbon taxes feasible and efficient)
- 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.

### Existing experience and feasibility
- 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.

### International coordination: carbon price floor
- 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.

### Other policy tools and complementary measures
- 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.

### Key takeaways
- 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.*

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## References

- [Fiscal Monitor](https://www.imf.org/en/Publications/FM/Issues/2019/09/12/fiscal-monitor-october-2019)
- [https://www.imf.org/wp-content/uploads/2019/10/eng-sept-26-climate-2-1.png](https://www.imf.org/wp-content/uploads/2019/10/eng-sept-26-climate-2-1.png)

_Source: https://www.imf.org/en/blogs/articles/2019/10/10/fiscal-policies-to-curb-climate-change_