July 15, 2021
Good morning. And many thanks to Minister Franco and the G20 presidency for hosting this important symposium on tax policy and climate change.
The science is clear. If we are to keep global warming below 2oC, global greenhouse gas emissions must be reduced by one quarter to one half, over the next decade. We need robust measures to complement and reinforce the Paris agreement. Finance ministries and tax authorities have a key role to play.
The IMF has been working with our members for years on energy policies, thus contributing to reducing carbon intensity. We have supported phasing out subsidies for fossil fuel consumption, though they still remain at a very high level. Broadly defined to include undercharging for supply costs, global warming, local pollution and other environmental costs, they are equivalent to over $5 trillion dollars annually. Getting rid of them creates economic, health and climate benefits.
Over the last years, we focused our attention on the carbon price. Why? Because our research indicates the drastic emission cuts needed to meet the objectives of the Paris agreement will require a powerful price signal, predictably, increasing carbon price to reach at least $75 per ton by 2030. Unfortunately, today the global average carbon price is only $3 per ton. The distance to $75 is far too big to leave it to individual countries moving up their own.
IMF staff has recently proposed an international carbon price floor to help achieve the global emissions reductions needed over the next decade. This arrangement could comprehensively cover emissions and focus initially on a small number of large emitting countries to facilitate negotiation. It could be designed pragmatically to allow different minimum prices based on development level and to accommodate different national policy approaches, as long as they have equivalent emission impact.
Internationally, the floor price would also address concerns about competitiveness that are giving rise to border carbon adjustments in some countries. While such adjustments may help prevent carbon leakage, they are unlikely on their own to significantly scale-up global mitigation because only a small portion of carbon emissions are embodied in traded products.
At the domestic level, we recommend a comprehensive strategy to enhance the acceptability and effectiveness of carbon pricing. We recognize that while carbon taxes are the most efficient way to price carbon, domestic developments and political economic considerations may necessitate the use of trading schemes or regulatory measures that translate into an implicit carbon price.
With this in mind, we envisage a comprehensive approach that includes:
First, instruments to reinforce mitigation incentives at the sectoral level, like feebates and regulations together with pricing or proxy schemes for emissions in sectors like forestry and agriculture.
Second, public investment in clean technology and infrastructure networks and financial market reforms like climate risk disclosures to complement measures to scale up private investment.
And finally, revenues raised or saved through price reforms should be used to boost the economy and provide just transition assistance for vulnerable households, workers, and regions.
As you start your discussions today, let me stress how vital you, the people in this room, both physically present and online, are. You hold the policy levers that can incentivize the actions we need. I have no doubt you will meet this challenge and you will use these levers wisely to protect the planet and secure the future for generations to come.