Last month, the IMF released its Fiscal Monitor, a biannual report on how to mitigate climate change. The report argued that it is possible to switch from a reliance on fossil fuels to cleaner energy and still sustain vigorous economic growth and generate employment. However, for this to take place, countries needed to distribute the costs and benefits in a manner that supported those that really needed it.
“This Fiscal Monitor argues that, of the various mitigation strategies to reduce fossil fuel CO2 emissions, carbon taxes—levied on the supply of fossil fuels (for example, from oil refineries, coal mines, processing plants) in proportion to their carbon content—are the most powerful and efficient, because they allow firms and households to find the lowest-cost ways of reducing energy use and shifting toward cleaner alternatives.”
Carbon taxes and emission trading systems, as discussed in last month’s article, are already in place in some market economies. However, upon review, “the average price on global emissions is currently $2 a ton of CO2, a tiny fraction of what is needed for the 2°C target.” In order to reach the 2°C or less target defined in the Paris Agreement, an ambitious measure is required. Such as implementing a global carbon tax with immediate effect, that will rise to $75 a ton of CO2 by 2030.
While the need for drastic action is apparent, the reality for such a measured price hike is that, over the 10 year period, electricity prices will rise by 45% and gasoline prices by 15%. This steep incline in taxes will have a knock-on effect on consumers, especially low income families, and businesses seeking to compete with neighboring countries with lower carbon tax rates. It is thus essential that governments redistribute the additional revenue fairly among those that rates, through either cutting taxes elsewhere, dividends or investing further in greener energy opportunities. For businesses, a carbon price floor arrangement could be agreed among countries with the largest emissions.
“This would provide a transparent target based on a common measure and reassurance against losses in international competitiveness from higher energy costs.” – IMF
Despite a fear over higher taxes for consumers and businesses, the move from fossil fuels to cleaner energy will transform an economy. In Sweden, which currently has a carbon tax of $127 per ton, its emissions have reduced by 25% since 1995 and its economy has grown by 75%.
“A better future is possible. Governments will need to increase the price of carbon emissions to give people and firms incentives to reduce energy use and shift to clean energy sources. Carbon taxes are the most powerful and efficient tools, but only if they are implemented in a fair and growth-friendly way.” – The Guardian
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