Putting a Price on Pollution

Author:Ian Parry
Position:IAN PARRY is principal environmental fiscal policy expert in the IMF's Fiscal Affairs Department.
Carbon-pricing strategies could hold the key to meeting the world’s climate stabilization goals
Ian Parry
ithout major and urgent eorts to
slow accumulation of carbon diox-
ide (CO2) and other greenhouse
gases in the atmosphere, f uture gen-
erations will inherit a much warmer planet with
risks of dangerous cl imate events, higher sea levels,
and destruction of the natu ral world.
e international community’s response is
grounded in the 2015 Paris Agreement, which has
the key objective of limiting f uture global warming
to between 1.5 and 2˚C above pre-industrial levels.
One hundred ninety parties submitted climate
strategies for this a greement, almost all of which
include mitigation commitments. A ty pical pledge
among advanced economies is to reduce emi ssions
by 20–4 0 percent by 2030 relat ive to emissions in
a baseline year. ese pledges a re voluntary, but
participating pa rties are required to submit updated
pledges every ve years starting in 2020 a nd to
routinely report progress on implementing them.
For this international response to work, pol-
icymakers need carefully crafted measures that
eectively meet their mitigation commitments
while at the same time limiting the burdens on
their countries’ economies and navigating the
political obstacles to implementation. Even if suc-
cessfully implemented, however, current country
pledges would cut global emissions by only about
one-third of the amount required to meet climate
stabilization goals. Innovative mechanisms are
therefore needed to scale up mitigation eorts at
the international level.
The case for carbon taxation
Carbon taxes are charges on the carbon content of
fossil fuels. eir principal rationale is that they are
generally an effective tool for meeting domestic emis-
sion mitigation commitments. Because these taxes
increase the prices of fossil fuels, electricity, and
general consumer products and lower prices for fuel
producers, they promote switching to lower-carbon
fuels in power generation, conserving on energy
use, and shifting to cleaner vehicles, among other
things. A tax of, say, $35 a ton on CO2 emissions
in 2030 would typically increase prices for coal,
electricity, and gasoline by about 100, 25, and 10
16 FINANCE & DEVELOPMENT | December 2019

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