IMF calls for carbon taxes of up to $75 per tonne to curb emissions

Electric bills could surge as much as 4% cumulatively over the next decade on average if tax measures are introduced

Britain, which built its industrial revolution economy on coal, will phase out its remaining coal power plants by 2025. AFP

Carbon taxes of $75 (Dh275) per tonne should be introduced by the G20 countries as the first step towards effectively reducing emissions, according to the International Monetary Fund.

“To limit global warming to 2°C or less – the level deemed safe by science – large emitting countries need to take ambitious action. For example, they should introduce a carbon tax set to rise quickly to $75 a tonne in 2030,” the fund said in a report released on Thursday ahead of the annual IMF-World Bank meetings next week in Washington.

The proposal includes introducing a uniform carbon pricing of $25, $50 and $75 per tonne to reduce CO2 emissions by 19, 29 and 35 per cent respectively among the G20 countries.

Carbon tax is defined as duty on the supply of fossil fuels from refineries, coal mines as well as processing plants, in proportion to their carbon content. Enforcing such a levy will possibly lead to reduction in emissions, conservation of energy or a switch to greener sources as higher prices for fossil fuels are passed on.

With the implementation of a tax bracket of $75 per tonne for instance, household electric bills could surge as much as 43 per cent cumulatively over the next decade on average.

The effect on household bills would be higher in countries still reliant on polluting coal for instance, and much less elsewhere, with gasoline costing 14 per cent more on average. The revenues from the tax, between 0.5 and 4.5 per cent of GDP (depending on the country), can reduce other taxes, such as income or payroll taxes that harm incentives for work and investment, according to the IMF.

The fund proposes a weighted carbon tax, with countries such as China, India and Russia paying $25 per tonne to meet their pledges as part of the Paris Agreement. For other countries such as Australia and Canada, even the proposed $75 per tonne falls short, noted the IMF.

About 50 countries have varying carbon pricing schemes but the global average price is only $2 a tonne, below what is needed. Sweden's carbon tax is $127 per tonne and has reduced emissions 25 per cent since 1995, while the economy has expanded 75 per cent since then, according to the fund.

“The large cross-country differences in carbon prices consistent with individual country pledges underscore the case for greater international price co-ordination,” the IMF said.

The report comes amid increasing momentum by global policymaking bodies to introduce measures to curb carbon emissions.

Taxes on pollution from energy sources in 44 countries accounting for more than 80 per cent of emissions around the world are not high enough to force a reduction in risks and address climate change, the 36-member Organisation for Economic Co-operation and Development said in a report last month.

About 70 per cent of CO2 emissions from energy sources within the advanced and emerging economies are entirely untaxed, giving these countries little incentive to switch to clean energy, it said in a report titled, Taxing Energy Use 2019.