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IMF report says global carbon tax needed

The International Monetary Fund recommended the world adopt a steep global tax on carbon emissions within a decade to slow global warming.

WASHINGTON (AN) — The International Monetary Fund recommended on Thursday that the world adopt a steep global tax on carbon emissions within a decade as the most effective way to reduce heat-trapping gases and slow global warming.

The IMF report said imposing a global tax that rises to US$75 per ton of carbon emissions by 2030 could reduce carbon emissions by 35% over the next decade. That would help limit the planet's global average temperatures to an increase of 2 degrees Celsius above pre-industrial levels — about 1 degree C. more than now — in line with the 2015 Paris Agreement.

Without such urgent action, the IMF said in its climate mitigation report, global temperatures are projected to rise by double the Paris goal, which would be about 4 degrees C. above pre-industrial levels by 2100. Global average temperatures have already increased by 1 degree C. since 1900.

Such a tax would raise coal prices by 214%, increase electricity prices by 43% and send gasoline prices up by 14% around the world. A carbon tax of US$50 per ton would send coal prices up by 142%, raise electricity prices by 32%, and send gasoline prices up by 9%.

In the United States, the report said, a carbon tax of US$75 per ton would cut emissions by almost 30% but would cause a 254% increase in coal prices, 53% rise in electricity costs and 20% increase for gasoline by 2030.

Challenges of carbon pricing

Economists have long supported the idea that fossil-fuel burning must be made costlier for the sake of the environment, despite the huge political and societal challenges. Some countries such as Britain, France, Norway and Sweden have considered or enacted zero net emissions targets for the mid-21st century. Attempts to introduce carbon taxes in Europe have brought mixed results.

"Voters and particular groups often oppose carbon pricing because it increases their costs for energy and their cost of living. They may also oppose carbon pricing because of the misperception that these taxes impose a very disproportionate burden on low-income households; will not be effective in reducing emissions; and are a backdoor way to increase the size of government," the report said.

"Energy-intensive firms, especially those in trade-exposed sectors (that cannot easily pass on higher energy costs in product prices), labor groups, and regions that depend on energy production are often the most forceful opponents of carbon taxation," it said.

In 1991, Sweden successfully introduced a carbon tax of US$28 per ton. It is now up to US$127 per ton. But Sweden accompanied it with lower initial rates for some industries and an income tax cut to help low-to-middle-income households.

In 2018, violent demonstrations in Paris and other French cities made France's President Emmanuel Macron backtrack on a carbon tax of US$50 per ton that he introduced to protect the environment.

The IMF report said some of Sweden's success came along because "businesses and other stakeholders were involved in the decision-making process through public consultations."

By contrast, it said, France reversed course due to "a public backlash against the perceived unfairness of the tax, which was introduced at the same time as broader tax reductions seen as benefiting the wealthy."

Resources for the Future calculates the social cost of carbon (SCC)

Creating an artificially scarce commodity

The Paris climate accord sets out how nations must report their carbon emissions and pay for climate action. Last December, almost 200 nations agreed at a United Nations summit to adopt a complex and lengthy rulebook for accomplishing the Paris deal’s goal, or 1.5 degrees C. if possible.

They haggled over standards for reporting emissions of industrial gases, mainly from fossil fuel burning, that trap heat in the atmosphere like a greenhouse. They also disputed what each country must do to cut back. Financial support for developing countries was a key part of the negotiations.

But the talks apparently deadlocked over monitoring and accounting rules for carbon credits to reduce emissions, a longstanding point of contention. Also known as “cap-and trade,” such systems have been mainly put to use regionally.

Their aim is to create market value — giving nations added incentive to use clean energy — by making industrial carbon emissions an artificially scarce commodity. It is hardly a new idea; Europe’s carbon market was worth US$38 billion a year in 2018, after 13 years of effort.

Governments set the caps for carbon emissions across an industry, or an entire economy, and establish penalties for violations. The caps are then split into allowances, which are distributed by governments to companies. These can be bought and sold on the carbon marketplace. As a cap declines over time, industries have a growing incentive to use energy more cleanly and efficiently.