Putting a Price on Pollution

• Author: Ian Parry
• Position: IAN PARRY is principal environmental fiscal policy expert in the IMF's Fiscal Affairs Department.
• Pages: 16-19

Carbon-pricing strategies could hold the key to meeting the world’s climate stabilization goals

Ian Parry

POLLUTION

W

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

PUTTING A PRICE ON