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IMF: Hike fossil fuel taxes and reap benefits now

National governments should not wait for a global climate deal to address underpricing of fossil fuels, says IMF

Christine Lagarde: environmental damage is "mission critical" to the IMF

Christine Lagarde: environmental damage is “mission critical” to the IMF

By Megan Darby

Governments should not wait for a global climate deal to hike taxes on fossil fuels.

That was the message, not from a green campaign group, but a groundbreaking study released by the International Monetary Fund (IMF) on Thursday.

The leading financial body said fossil fuels are “widely and substantially underpriced” and correcting those market failures would bring significant benefits.

Christine Lagarde, managing director of the IMF, at the study’s launch described climate change as “the greatest crisis facing our generation”.

The IMF normally concerns itself with fiscal affairs, but Lagarde said environmental damage was “mission critical”.

She explained: “It is bad for an economy to be downgraded – we know that. It is even worse for an economy to be degraded. When the environment is degraded, the economy is degraded as well.”

Fossil fuels have been “a double-edged economic sword”, Lagarde said: “While the world became richer as energy fueled economic expansion, only recently have we come to fully appreciate the damage done to our precious—and irreplaceable—natural resources.”

She quoted the American poet Wendell Berry: “To cherish what remains of the earth and to foster its renewal is our only legitimate hope of survival.”

Efficient tax

The study recommends efficient levels of taxation on coal, gas and motor fuels for more than 150 countries.

Together, these could cut carbon pollution by 23% and raise revenue equivalent to 2.6% of global GDP, it found.

The report’s authors counted the costs associated with air pollution, congestion and traffic accidents as well as climate impacts of burning fossil fuels.

Raising the price of pollution to reflect these impacts will benefit national economies even in the absence of a global agreement to tackle climate change, they concluded.

The report said: “The case for substantially higher energy taxes does not rest on climate change alone. Decisive action need not wait on global coordination.”

Lagarde stressed that she was not advocating higher tax overall, but “smarter tax”.

If countries act on the IMF advice, it could help build momentum towards a global treaty in Paris next year.

It follows IMF research showing fossil fuels are subsidised to the tune of US$1.9 trillion a year. These subsidies are unsustainable and should be scrapped, the IMF argued.

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