Guest essay by Eric Worrall

The executive overview is a little vague about IMF intentions, but the report is very clear about what they think should be done with the money – funding the $100 billion / year climate pledge, kicking in additional money ($6 trillion / year) and governments using the carbon tax revenue to take a larger role in national economic activity (investing in economic “efficiency”).

Getting Real on Meeting Paris Climate Change Commitments

MAY 3, 2019
By Christine Lagarde and Vitor Gaspar

Climate change is the great existential challenge of our times. It is a challenge that spans all regions, with especially severe consequences for low-income countries.

Without mitigating actions, global temperatures are projected to rise by 4^oC above pre-industrial levels by the end of the century—with increasing and irreversible risks of collapsing ice sheets, inundation of low-lying island states, extreme weather events, and runaway warming scenarios.

A warming climate could also mean increased extinction risk for a large fraction of species, the spread of diseases, an undermining of food security, and reduced renewable surface water and groundwater resources.

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The need for effective carbon pricing

There is a growing consensus that carbon pricing—charging for the carbon content of fossil fuels or their emissions—is the single most effective mitigation instrument. It provides across-the-board incentives to reduce energy consumption, use cleaner fuels, and mobilize private finance.

It also provides much needed revenues. These should be allocated to reorient public finances in support of sustainable and inclusive growth. How this is best done will differ across countries. In some cases it means investing in people and infrastructure, to attain the Sustainable Development Goals. In others it might mean reducing taxes that harm work incentives and growth.   

A new IMF paper discusses how carbon prices could be used to meet Paris CO₂ mitigation pledges. The pledges and required carbon prices to meet those commitments vary by country, and the paper considers the impact on CO₂ emissions of $35 and $70 per ton carbon prices. A carbon price significantly below $35 per ton would be sufficient to meet the pledge for the G20 countries, which together account for four-fifths of global emissions, and this is also true for key G20 members such as China and India.

Although a $35 per ton price would roughly double coal prices, it would add only about 5 to 7 percent to pump prices for road fuels. For some countries with more ambitious pledges, however, even a $70 per ton price would fall short of what is needed.

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Read more: https://blogs.imf.org/2019/05/03/getting-real-on-meeting-paris-climate-change-commitments/

From the “new IMF paper“;

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8. Pricing and finance at the international level can also help. An international carbon price floor arrangement—requiring participants to impose a minimum price on carbon—could reinforce domestic mitigation efforts, accommodate diversity in prices and pricing instruments, and provide some reassurance against competitiveness impacts; and the technicalities seem manageable (see below). There also appear feasible pathways for meeting the advanced economies’ pledge to mobilize US$100 billion a year (from both public and private sources in unspecified proportion) from 2020 onwards for climate projects in developing countries. However, the measurement of finance flows will likely remain contentious, and total investment needs are at least an order of magnitude larger than pledged finance.

9. Political economy aspects can, however, be challenging. To enhance the acceptability of fuel price reform, Fund advice has emphasized the importance of a broad strategy that includes specifics on how revenues are to be used, assistance to vulnerable households and firms, gradual price reform, stakeholder consultation, and public communication. But pricing may also need to be part of a broader fiscal and regulatory reform agenda that is perceived as fair overall and it can be difficult to anticipate public opposition. For example, resistance to carbon pricing can be compounded if it is introduced simultaneously with broader tax reductions perceived as benefitting the wealthy. If political obstacles are insurmountable or might require using up all the fiscal dividend in universal compensation schemes, fiscal instruments which are less efficient but avoid increases in energy prices (e.g., that tax/subsidize activities or products with above/below average emissions intensity), or regulations (e.g., emission standards for vehicles, appliances, and power generation), may provide a reasonable ‘second-best’ approach.

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Box 1. The Importance of Using Carbon Pricing Revenues Efficiently

A large, somewhat technical, literature decomposes the linkages between carbon taxes and the broader fiscal system into two effects.
First is the potential economic efficiency gain from ‘revenue recycling’. This could reflect gains from using revenues to reduce broader (e.g., income and payroll) taxes that distort the economy by deterring investment and labor force participation, promoting informality, creating a bias towards tax-preferred spending like housing and fringe benefits, etc. More generally, using revenues to fund public investments— perhaps to meet SDGs—or reduce fiscal deficits, could generate comparable efficiency gains.

The second effect is the efficiency loss from the potential impact of higher energy costs on reducing overall investment and employment (which are already inefficiently low, due to harmful incentive effects of labor, capital, and other taxes)—put another way, taxes on fuels act like implicit taxes on labor and capital. The effects are complex, however, depending, for example, on the labor intensity of the expanding (green) sectors relative to the contracting (polluting) sectors.

The first effect can dominate the second effect in some cases. The more important point however, is that if carbon pricing revenues are not used to increase economic efficiency, pricing can be substantially less cost effective in a broad sense than regulatory combinations or similar policies mimicking many of the behavioral responses from carbon pricing (e.g., emissions standards for power generators, vehicles, and electricity-using products). This is because the latter policies avoid a large first-order impact on energy prices, thereby limiting the increase in energy costs and potentially adverse economy-wide reductions in employment and investment.

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16. Carbon taxes are not new and existing taxes often amount to substantial carbon prices. Averaged globally, road fuel taxes are currently around US$1 per liter, or US$380 per tonne of CO2 emissions from these fuels, while average royalty rates for oil and gas extraction are around 12 and 6 percent respectively, implying taxes equivalent to US$33 and US$10 per tonne of CO2respectively. Carbon charges need to be imposed on top of these taxes because existing taxes are embedded in BAU fuel use projections and may be addressing non-carbon externalities and fiscal needs.

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Box 2. Financial Sector Policies to Complement Mitigation and Adaptation

The financial system can play a key role in supporting price signals to redirect finance towards clean technologies, without losing sight of financial stability. It already has a crucial role in financial protection through insurance and other risk-sharing mechanisms to reduce the cost of disasters when they occur.

Most climate finance is likely to be intermediated through the financial system. Advanced economies pledged to mobilize US$100 billion a year from 2020 for mitigation and adaptation in developing economies. The needs for global finance are an order of magnitude higher, with estimated infrastructure needs about US$6 trillion per year to 2030. This would require both public and private finance.

28. Carbon pricing in large developing countries could catalyze, and efficiently allocate, private sector finance but is less urgent in low-income, low-emitting countries. Unlike under carbon pricing, top-down finance provides no automatic mechanism for ensuring that the most cost-effective projects are selected first. Also, high transaction costs may prevent funding for small- scale opportunities (e.g., adoption of energy efficient vehicles, appliances, or lighting). Although low-income, low-emitting countries contributed mitigation pledges for the Paris Agreement (Appendix I), their individual (and collective) contribution to global emissions is minimal and their capacity for enforcing carbon pricing may be weak (e.g., in some cases because it might promote informal use of charcoal and firewood). Developing capacity and financing adaptation strategies is generally the more important priority for these countries.

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Nitric and Adipic Acid
The process used to produce nitric acid (commonly used as feedstock for fertilizers) and adipic acid (commonly used as a feedstock for synthetic fibers like nylon) generates nitrous oxides which account for 1 percent of projected BAU non-CO2 GHGs in 2030 (Appendix Figure 1). Abatement possibilities include, for example, thermal destruction and catalytic decomposition applied to the tail gas streams—emissions could be reduced by an estimated 79 percent in 2030 with a US$50 carbon equivalent price. Taxes on acid manufactures could be applied based on default emission rates with rebates provided to entities demonstrating emissions mitigation.

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Read more: https://www.imf.org/en/Publications/Policy-Papers/Issues/2019/05/01/Fiscal-Policies-for-Paris-Climate-Strategies-from-Principle-to-Practice-46826

A global carbon floor price cartel so there is nowhere to escape (though developing countries are let off the hook, for now), taxing fertiliser manufacturers unless they fit expensive catalytic converters, demanding revenues be invested in economic “efficiency” (IMO code for greater government ownership of and intervention in the economy), and a demand that carbon taxes not be offset by reductions in other taxes.

My question, why is the USA still funding this organisation? 17% of IMF revenue comes from the USA, triple what any other country contributes.