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IMF Says Carbon Tax Is Most Powerful Way to Fight Climate Crisis

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Signs for the upcoming IMF / World Bank Annual Meetings hang outside International Monetary Fund Headquarters in DC on Oct. 7. SAUL LOEB / AFP / Getty Images

The International Monetary Fund (IMF) released a report that says action is needed urgently to tackle the climate crisis. It said that countries around the world need to drastically reduce their carbon emissions immediately and the most effective way is through a carbon tax and with global cooperation, as Reuters reported.


The report did not mince words when it came to the threat the climate crisis poses. "Global warming causes major damage to the global economy and the natural world and engenders risks of catastrophic and irreversible outcomes," the IMF said in its semi-annual fiscal monitor report released ahead of next week's IMF and World Bank fall meetings of finance leaders and policymakers, according to Reuters.

The IMF's report said a meaningful carbon tax is the "single most powerful way" to hand the climate crisis, since it allow businesses and households to find the lowest-cost ways of reducing energy use and transitioning towards cleaner alternatives.

"We view fiscal policy as a crucial way of combating climate change," said Paolo Mauro, deputy director of Fiscal Affairs Department at the IMF, as CNBC reported. "You can reshape the tax system and you can reshape fiscal policy more generally in order to discourage carbon emissions."

However, there is sure to be backlash to the IMF's proposal since it calls for a drastic rise in energy bills.

"To limit global warming to 2C or less – the level deemed safe by science – large emitting countries need to take ambitious action," IMF economists said, as The Guardian reported. "For example, they should introduce a carbon tax set to rise quickly to $75 a ton in 2030. This would mean household electric bills would go up by 43 percent 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 percent more on average."

While more than 40 governments around the world have implemented some form of carbon pricing, the global average carbon price is $2 a ton — a small fraction of the $75 a ton price in 2030 that the IMF insists is necessary to keep a 2 degrees Celsius warming target, according to the report.

The idea is that a sharp spike in prices will force businesses and consumers to seek more affordable options provided by cleaner, renewable energy.

The report noted that while the 2015 Paris climate agreement set a target of keeping warming at just 2 degrees Celsius above pre-industrial times, the current global commitments ignore that target and are consistent with 3 degrees Celsius warming.

The report also noted that many of the world's wealthiest and most industrialized nations will miss their own targets.

"Implementation of existing commitments is therefore a first-step priority, but mechanisms to boost action at a global level are urgently needed," the report said, as Reuters reported.

A hefty carbon tax is already in place in some countries. Great Britain has seen coal use plummet after a 2013 carbon tax. Canada has a carbon tax that will hit $38 per ton of carbon in 2022. Even China will start a cap-and-trade program next year, as CNBC reported.

"The cost of achieving emissions reductions through these approaches would be lower than the costs to people and the planet from climate change," the report said.

"Finance ministers in all countries are central to designing and implementing policies to meet emissions reductions in the most efficient, equitable, and socially and politically acceptable way."

The IMF pointed to Sweden as an example of a country that has smoothly implemented a steep carbon tax. Sweden introduced a carbon tax of $28 per ton in 1991 that has since risen to $127 a ton. It made sure to protect its citizens by coupling the carbon tax with an income tax cut for low and middle-income households.

That stands in stark contrast to the lessons from France where President Macron's clumsy effort to usher in a $50 per ton of carbon tax led to the Yellow Vest riots. The IMF report noted "the perceived unfairness of the tax, which was introduced at the same time as broader tax reductions seen as benefiting the wealthy," according to Reuters.

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