IMF takes positive step into the discussion on mitigation of climate change

Posted by Craig Clarke

on Sep 28, 2012

Last month, International Monetary Fund Managing Director Christine Lagarde used a speech at the Center for Global Development to begin an IMF-housed discussion on the use of macroeconomic policy to address what she explained as the interconnected economic, environmental, and social crises related to climate change. The IMF has since released an e-book titled Fiscal Policy to Mitigate Climate Change that makes the policy argument for different carbon tax and cap-and-trade systems. It also sent Lagarde to the Rio+20 summit as the first IMF head to attend an environmental summit.

Below is Lagarde's forward to the report.

"Global warming poses critical policy challenges, now and for the coming years, with potentially profound implications for macroeconomic performance and economic well-being. These challenges are, to an important degree, ones for the design of national tax and spending systems. The world needs strategies for adapting to the medium- and long-term consequences of climate change, and these have fiscal implications. Most pressing, however, is the need for appropriate policies to limit reenhouse gas (GHG) emissions. This need is very widely acknowledged, although the appropriate scale of (near-term and longer-term) mitigation policies, as well as the responsibilities of developing countries, remain contentious. Without significant emissions reductions, most studies project global temperature rises of 2.5° C to 6.5° C above preindustrial levels by the end of this century. The associated uncertainties and risks are substantial. Tax and similar pricing instruments have a crucial role to play in this area. We need to understand both their environmental effectiveness and their impacts on competitiveness, different household groups, and overall fiscal positions. This volume seeks to provide policymakers with practical guidelines for the design and implementation of climate mitigation policies. The premise at its heart is that fiscal instruments—carbon taxes or their cap-and-trade equivalents (with auctioned allowances)—can and should form the centerpiece of policies to reduce energy-related carbon dioxide emissions (which account for about 70 percent of projected GHG emissions). These pricing policies can also become a large new source of government revenue, which could make a significant contribution to meeting fiscal consolidation challenges and, more generally, to building more efficient and fairer tax systems. So addressing climate change can be both a challenge and an opportunity.

As the contributions in this volume make clear, this premise reflects what is (for once) a strong consensus among economists. Important areas of disagreement remain, of course, and the various chapters explore many of these. But there is wide agreement on the central role that fiscal instruments must play if we are to address climate change effectively and efficiently. I hope that the guidelines set out in this volume, prepared by some of the leading experts in the field, will contribute not only to informed debate but also to much-needed action. "