Finance ministers must play central role to implement fiscal policies to curb climate change: IMF


Finance ministers must play a central role to champion and implement fiscal policies to curb climate change, top officials from the IMF said on Thursday, warning that the longer the wait, the greater the loss of life and damage to the world economy.

Noting that global warming has become a clear and present threat, four top International Monetary Fund officials led by Vitor Gasper, director of its fiscal department, rued that actions and commitments to date have fallen short.

“The longer we wait, the greater the loss of life and damage to the world economy. Finance ministers must play a central role to champion and implement fiscal policies to curb climate change. To do so, they should reshape the tax system and fiscal policies to discourage carbon emissions from coal and other polluting fossil fuels,” the officials said.

In a blog ahead of the annual meetings of the IMF and the World Bank, the officials said that to make carbon taxes politically feasible and economically efficient, governments need to choose how to use the new revenue.

Options include cutting other kinds of taxes, supporting vulnerable households and communities, increasing investment in green energy, or simply returning the money to people as a dividend.

Union Finance Minister Nirmala Sitharaman is scheduled to attend the IMF and World Bank meetings here next week.

To limit global warming to 2°C or less – the level deemed safe by science – large emitting countries need to take ambitious action. For example, they should introduce a carbon tax that could rise to USD 75 a tonne in 2030.

According to the blog, this would mean household electric bills would go up by 43 per cent cumulatively over the next decade on average – more in countries that still rely heavily on coal in electricity generation, less elsewhere. Gasoline would cost 14 per cent more on an average.

But the revenues from the tax, between ½ and 4½ per cent of GDP (depending on the country), could be used to cut other taxes, such as income or payroll taxes that harm incentives for work and investment.

Governments could also use the money to support disproportionately affected workers and communities, for example coal-mining areas, or pay an equal dividend to the entire population.

Alternatively, governments could compensate only the poorest 40 per cent of households – an approach that would leave three quarters of the revenues for additional investment in green energy, innovation or to fund the Sustainable Development Goals.

Taxpayer money would also help save more than 700,000 people a year in advanced and emerging economies who currently die from local air pollution. And the money would help contain future global warming, as agreed by the international community, the IMF officials wrote.

Calling for agreement on a carbon price floor for countries with high levels of emissions, they said a carbon price floor of USD 50 and USD 25 a ton in 2030 for advanced and developing G20 countries respectively would reduce emissions 100 per cent more than countries’ current commitments in the 2015 Paris Agreement on Climate Change.

Countries that want to use different policies, like regulations to reduce emission rates or curb coal use, could join the price floor agreement if they calculate the carbon price equivalent of their policies, they wrote.

Of the view that policies need to go beyond raising the price of emissions from power generation or domestic transportation, the IMF officials said it is also necessary to introduce pricing schemes for other greenhouse gases, for example, from forestry, agriculture, extractive industries, cement production, and international transportation. Get access to India’s fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code “GETPRO”. Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.