Imposing stringent taxes on fossil-fuel usage is now the option for governments from around the world to avoid dangerous global heating, which will, in turn, raise household energy bills by 43% over the next decade, the International Monetary Fund (IMF) has said. IMF says that the money raised from the carbon tax could be used by governments to help vulnerable people or invest in green energy.
To combat climate change, the average carbon tax levied by its member states must be increased to $75 a ton from $2 (£1.63) a ton (907kg) as per the Washington-based Fund.
The governments are worried about a political backlash against the sharp rise in the cost of heating homes and motoring, and in that case, the extra revenue raised from the tax should be used to compensate consumers, the IMF said.
“To limit global warming to 2C or less – the level deemed safe by science – large emitting countries need to take ambitious action,” IMF economists said.
“For example, they should introduce a carbon tax set to rise quickly to $75 a ton in 2030. This would mean household electric bills would go up by 43% cumulatively over the next decade on average – more in countries that still rely heavily on coal in electricity generation, less elsewhere. Gasoline would cost 14% more on average.”
According to the calculations by the IMF’s economists, a $75-a-ton carbon tax would also lead to an average increase in the cost of coal by 214% and a 68% increase in natural gas. In the UK, there would be a 157% increase for coal, 51% for natural gas, 43% for electricity, and 8% for petrol.
IMF’s call for a higher rate of carbon tax came in detail in a chapter from the biannual fiscal monitor of the organization released before its publication in the next week.
“Without substantial mitigation of greenhouse gas emissions, global temperatures are projected to rise by around 4C above preindustrial levels by 2100 (they have already increased by 1C since 1900),” the IMF said.
“Global warming causes major damage to the global economy and the natural world and engenders risk of catastrophic and irreversible outcomes such as rising sea levels, extreme weather events (already more frequent) leading to loss of life and the possibility of much higher warming scenarios.”
The IMF said the call for a substantially higher carbon tax was because almost two-thirds of the total global greenhouse gas emissions are caused by the carbon dioxide from fossil fuels, and it was practical to control that immediately.
However, without compensation to offset the impact on consumers and business, there was likely to be strong political resistance, authors of the fiscal monitor said. When the French president Emmanuel Macron attempted to cut CO2 emissions of France through higher fuel prices, it prompted nationwide protests from the gilets jaunes (yellow vest) movement.
Presently global heating was a clear threat, said in a blog post by the authors to accompany the chapter from the fiscal monitor. As actions to date had fallen short of what was targeted, the finance ministers required to play a pivotal role in tackling the issue.
“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.
“To make carbon taxes politically feasible and economically efficient, governments need to choose how to use the new revenue. Options include cutting other kinds of taxes, supporting vulnerable households and communities, increasing investment in green energy or simply returning the money to people as a dividend.”
The economists of IMF said, instead of paying a flat-rate dividend to everybody, governments could target financial help directly to workers and communities disproportionately affected by the carbon. If compensation is restricted to the poorest 40% of households, it will leave three-fourth of the revenue received from the carbon tax to invest in green energy, innovation, or to fund the UN’s anti-poverty 2030 sustainable development goals.
Currently, about 50 countries have a carbon pricing scheme in some form, and the global average carbon price of $2 a ton was very low compared to what is needed for the planet, IMF said. It said Sweden set an example for all other countries. It has a carbon tax of $127 per ton, and since 1995 emissions have reduced by 25%, while the economy has expanded by 75%.