According to a new report from the International Monetary Fund (IMF), the only effective solution to the impending climate change crisis is a new regime of carbon taxes, including stiff new taxes on both shipping and aviation. The crux of the argument of the new IMF report is that fossil fuel consumers — both businesses and individual — need to pay the “real price” for the goods and services they enjoy, and the best way to make this happen is the implementation of a broad-based carbon tax.

IMF Carbon Taxes

Carbon Taxes – IMF report argues pricing must have “central role” in efforts to reduce fossil fuel consumption

The IMF analysts argue the key problem here is that while no one firm or household has a significant effect on the climate individually, the collective effect is gigantic. They say that pricing, which leads to the factoring in of climate effects into individual decisions, and should therefore have a “central role” in policy development.

The report goes on to claim that carbon pricing through taxes or trading systems designed to act like taxes should be “front and centre” as these are likely to  be the most effective tools for reducing carbon emissions and offer some key advantages over regulatory approaches.

IMF Carbon Taxes

First, carbon taxes are more environmentally effective, as they encourage the entire range of mitigation opportunities in a single instrument, and, as the IMF report notes, the revenues they could produce have “obvious appeal on fiscal grounds” and could allow for the reduction of other taxes.

Moreover, developing countries often do not have much authority to enforce lax regulations, so energy taxes might be a relatively effective way of raising revenue from hard-to-tax enterprises. Carbon taxes would also lead to “the price signals needed to attract private money for climate finance.”

The IMF report also highlights that emissions and carbon tax schemes offer domestic benefits outside of minimizing global climate change, lowering the number of deaths from air pollution, for example. According to the authors of the report, the most important issues will be designing the right fiscal policy instruments for each nation’s carbon mitigation strategy.

IMF Carbon Taxes

Whether deciding to use carbon pricing or emissions trading systems is less important than “doing either and getting the basics right”, the document concluded. Doing it right means tackling emissions comprehensively and setting up a stable and durable price scheme that matches up with environmental objectives.

The authors specifically mention that “substantial amounts could also be raised from charges on international aviation and maritime fuels.”

The IMF report argues that regulatory policies are generally inferior, but if they are going to be used, policy development should conform to the same comprehensive design principles.

By the same token, national tax, spending systems and fiscal policies should be designed to encourage economies to adapt to climate change.

IMF Carbon Taxes

Another important priority is developing fiscal policies that bring together public and private sources of climate finance, which must continue to build towards the $100 billion that the developed world has promised to emerging economies to assist them with climate change mitigation in the next five years.

Finally, the new IMF report says that the global financial sector must play a bigger role in coming to grips with climate change, including steps such as “increased disclosure of firms’ carbon footprints, prudential requirements for the insurance sector and appropriate stress testing for climate risks to ensure financial stability during the transition to a low carbon economy”.

See full IMF report below.