IMF calls for higher taxes on ‘dirty’ fuels, to fight climate change

Almost two weeks after the Abbott government won its battle to dump Australia’s carbon tax, the International Monetary Fund has released a report calling on governments to introduce higher taxes on heavy polluting energy sources, as the most efficient and simple way of dealing with climate change.

In a publication titled Promoting Responsible Energy Pricing, the IMF has laid out its views on appropriate taxes on coal, natural gas, gasoline and diesel in 156 countries to factor in the fuels’ overall costs, which include carbon dioxide emissions, air pollution, congestion and traffic accidents.

In short, it believes that energy taxes in much of the world remain far below what they should be to reflect the harmful environmental and health impact of fossil fuels use, and it provides a practical methodology – alas, too late for Australia’s purposes – providing actionable guidance to policymakers on “pricing it right”.

At the book’s launch in Washington, IMF managing director Christine Lagarde said countries should not have to wait for global agreement on climate policies, and instead should move ahead in adjusting energy prices on their own.

In a speech that might have been directed solely at Tony Abbott, Lagarde said that carefully targeting the source of environmental harm was critical.

“This means, for example, making sure that charges on different fuels are proportional to emissions from those fuels. That way, we get the relative prices of dirty, intermediate, and clean fuels right – and environmental damage is properly factored into energy prices,” she said.

“In turn, that encourages people to make green choices all across the spectrum—such as power generators switching to less polluting fuels or installing emissions-control technologies; and households driving less often, or upgrading to more energy-efficient vehicles and appliances.

“Using a single fiscal instrument targeted at a particular source of environmental harm is both effective and administratively simple. It is better than relying on a patchwork of uncoordinated policies—such as telling some manufacturers to install certain control technologies, requiring others to use certain fuels, or rewarding households for buying certain vehicles.

“The bottom line is that we can spur the same kinds of virtuous behavior by using a much simpler tool—a single fiscal instrument. And once we price bad things right, we will not need to worry so much about subsidizing good things—like renewable energy.”

Lagarde also stressed that higher energy taxes should not hurt countries’ economies, as long as they were done properly.

“On this point, let me be crystal clear: we are generally talking about smarter taxes rather than higher taxes,” she said.

It’s a distinctly different view from that proffered by Australia’s Prime Minister, who in Canada in June had this to say:

“The argument is not about climate change — the argument is about the best means to respond to climate change and I believe that carbon taxes and emissions trading schemes are the wrong way to go.

“We should do what we reasonably can to limit emissions and avoid climate change – man-made climate change – but we shouldn’t clobber the economy. That’s why I’ve always been against a carbon tax or an emissions trading scheme because it harms our economy without necessarily helping the environment.”

But for Abbott – who has been particularly concerned that Australia avoids climate policies that might “demonise the coal industry” – Lagarde had another message.

“Let me mention just one other important aspect – how pervasively energy seems to be mispriced at present, based on our assessment,” the IMF chief said.

“Take coal, for example. This is about the dirtiest of all fuels, yet almost no country imposes meaningful taxes on its use. Our work suggests that, to reflect the carbon damages alone, a reasonably-scaled charge would amount, on average, to around two-thirds of the current world price of coal. In countries where a lot of people are exposed to air pollution, the coal charge should be even higher—several times higher in some cases.”

Food for thought.