“Fiscal policies should be center stage in getting energy prices to reflect the harmful and environmental side effects associated with energy use.”
This is according to the latest research from the once-maligned International Monetary Fund, who have released their latest findings in a report entitled ‘Getting Energy Prices Right’. “Energy prices in many countries are wrong because they are set at levels that do not reflect environmental damage, notably climate change, air pollution, and various side effects of motor vehicle use,” the IMF further note.
Fiscal policies specifically targeted towards energy use can be one of the great motivators for change. They can create an atmosphere which shift people towards cleaner alternatives — whether it be solar-powered hot water or electric or alternative-fuel vehicles.
Furthermore, such policies can extricate countries from reliance upon fossil fuels — fossil fuels which many experts predict will soon be lost, or should be left alone if the planet’s health is to remain salvageable. The authors note that too many countries rely on general income, payroll, and consumption taxes for their fiscal objectives, rather than rebalancing to include taxes on energy use.
With a number of countries looking to divest themselves from fossil fuel use while simultaneously make significant headway on environmental policies, taxing fossil fuel energy need not only be about raising revenue.
Rather, reform could focus on restructuring the tax system away from taxes that are likely to be most harmful for efficiency and growth, such as income taxes, and towards carefully designed taxes on energy—smarter taxes rather than higher taxes. According to the report, getting energy prices right involves extending motor fuel taxes, which are already well established and easily administered in many countries, to other fossil fuel products, such as coal and natural gas, or their emissions, and aligning the rates of these taxes with environmental damage.
“Fuel tax reforms can yield substantial health, environmental, and fiscal benefits,” said Vitor Gaspar, head of the IMF’s Fiscal Affairs Department. “According to our estimates, moving from existing to efficient fuel prices, at a global level, would reduce pollution-related deaths from fossil fuel combustion by 63 percent, mostly from reduced coal deaths, reduce energy-related carbon emissions by 23 percent, and raise revenues equal to 2.6 percent of GDP.” (See chart below)
“In our study, we offer practical guidance for countries on how to go about quantifying the harmful side effects of energy use, and to show what this implies for corrective taxes on coal, natural gas, gasoline, and road diesel, for over 150 countries,” said Ian Parry, Principal Environmental Fiscal Policy Expert at the IMF and lead author of the report.
“For example, health effects from dirty air are measured by assessing how many people in different countries are exposed to pollution from coal plants, vehicles, and so on and combining that with evidence from health experts on how exposure to pollution can increase the risk of various heart and lung diseases,” said Parry.
The Reason’s Why
Writing on their website, Andrew Steer, President and CEO of the World Resources Institute, notes that the opposition to such policies is based on the idea that it is “big government” overreach. “But this is a red herring,” notes Steer. “Such proposals can be totally tax neutral, being offset by reductions in taxation on labor or any other tax base.”
Steer also attacks those who would make an objection based on the idea that the poor are benefiting from “today’s low energy prices.” According to Steer, the low energy prices (and let’s be clear, “low energy prices” is a very relative term when you hop from one country to another) are actually benefiting those who are richer, not the poor. “The poor are often among the 1.2 billion who don’t have access to electricity,” Steer notes, “so they don’t benefit.” Furthermore, not only do they not significantly benefit from lower energy prices, but they are also more likely to be detrimentally affected by the pollution caused by lower energy prices sourced from coal.
Increasing energy prices, however, is not going to help those less well-off, however. As Steer notes;
Nonetheless, it is important to note that poor people are often unable to pay for higher energy prices, and compensation measures must be found. Here there’s good news. A huge amount has been learned in the past decade concerning how to use cash transfers to support poor citizens. Countries like Indonesia, and even Iran, have shown how some of the revenues from increased energy prices can be used to compensate the poor, with an overall net improvement in wellbeing.
Economic policies and taxes are never overly well received — one need only look to the absurdity that was Australian Prime Minister Tony Abbott’s decision to scrap the country’s carbon tax; such a decision has been met with a wide variety of responses, from joy to loathing to a healthy dose of “meh”.
However, the reality is that action does need to be taken, and the lackadaisical approach my home country of Australia has fallen back on is not going to cut it. People may not appreciate the need for “taxes”, but the job is then to educate rather than ignore or assume intelligence of the population.
Hopefully economic policies such as those illustrated by the IMF will continue to be a priority for countries around the world, as well as further research and reports.
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