Increasing the price of carbon is the most efficient and powerful method of combating global warming and reducing air pollution, according to a new report from the International Monetary Fund.
While the idea of carbon taxes on fossil fuel corporations has been spreading across the globe in the past couple decades, increasing prices on carbon emissions has received widespread backlash from those who argue the tax would raise energy bills.
But economists have long contended that raising the cost of burning fossil fuels like coal, oil and gas is the best way to mitigate climate change, and that revenue raised from the tax can be returned to consumers through rebates and dividends.
“We view fiscal policy as a crucial way of combating climate change,” said Paolo Mauro, deputy director of Fiscal Affairs Department at the IMF. “You can reshape the tax system and you can reshape fiscal policy more generally in order to discourage carbon emissions.”
Global temperatures are projected to rise by roughly 4 C above preindustrial levels by 2100. The 2015 Paris climate accord aims to limit warming to 2 C, with a long shot goal of 1.5 C. Most countries are not on track to achieve those targets, and the U.S. plans to formally withdraw from the Paris agreement in 2020.
More than 40 governments globally have implemented a form of carbon pricing, whether it be through direct taxation on fossil fuel producers or cap-and-trade programs. However, the global average carbon price is $2 a ton — a small fraction of the estimated $75 a ton price in 2030 consistent with a 2 C warming target, according to the report.
The IMF estimates a $75 a ton carbon tax will lead to the amount of emissions scientists estimate will correspond to 2 C of warming. At that level, coal prices would rise by more than 200% above baseline levels in 2030.
Under the same tax, the price of natural gas, which is used for power generation and for heating and cooking in households, would increase by 70% on average, with most of the impact in North and South America, where baseline prices are much lower. Gasoline prices would rise by 5% to 15% in most countries.
For electricity and gas, the price increases might seem substantial. However, those price rises are within the bounds of price fluctuations experienced during the past few decades, according to the IMF.
“If you think about it from a historical perspective, gasoline prices fluctuate … much more than that,” Mauro said.
“Carbon taxes … and similar arrangements to increase the price of carbon, are the single most powerful and efficient tool to reduce domestic fossil fuel CO2 emissions,” the report said.
Some countries have prices on carbon
In the U.S., a slew of presidential candidates have vowed to impose a carbon tax on corporations, proposals which have come under attack from President Donald Trump and Republicans, who are repealing environmental regulations.
Most carbon pricing efforts in the U.S. have occurred on the state level. Nine states in the Northeast participate in a cap-and-trade program that hands out carbon pollution permits to power plants, and other states like New Jersey might join that system.
Cap-and-trade programs work by taxing companies if they produce higher emissions than their permit allows. Companies that reduce emissions can sell unused permits to other firms. The government also narrows the number of permits every year, reducing overall emissions.
California has its own cap-and-trade program that includes other polluters in addition to power plants.
In Britain, coal use has gone down substantially after a carbon tax in 2013 prompted electric utilities to switch away from coal.
Canada has a carbon tax that started at $15 per ton of carbon dioxide this year and will rise to $38 per ton by 2022. And China plans to start a cap-and-trade program beginning in 2020.
“The cost of achieving emissions reductions through these approaches would be lower than the costs to people and the planet from climate change,” the report said.
“Finance ministers in all countries are central to designing and implementing policies to meet emissions reductions in the most efficient, equitable, and socially and politically acceptable way.”