IMF calls for pricing and taxing of carbon to mitigate climate risks

Production of low-carbon hydrogen has topped green investment agendas recently

The yawning gap between the developed and low-income income countries is being partly bridged by multilateral institutions such as the IMF and the World Bank, which Ms Georgieva previously headed.. ReutersShow less

The International Monetary Fund's managing director is calling for the implementation of taxes on carbon as the most efficient way to meet climate goals within the Paris Agreement.

"We are looking at three ways: tax – the most efficient way to do it; trade – which has taken off and is quite popular; and also regulatory equivalency of pricing carbon – in other words, a sort of a shadow carbon price based on regulation, Kristalina Georgieva told the Green Swan conference on Wednesday.

Carbon taxes are an indirect form of taxation, which sets a price for emitters for each tonne of greenhouse gas that is emitted.

The Covid-19 pandemic has urged several countries to adopt net-zero standards and pledge to offset their carbon emissions and adopt energy-efficient technologies and alternative fuels.

The 2015 Paris Agreement provides a mandate for countries to lower their carbon emissions to well below 2°C (3.6F) above pre-industrial levels, preferably about 1.5°C. Carbon capture, use and storage is favoured by several oil producers to green their processes and is one of the many strategies governments are adopting to reach their goal. Production of low-carbon hydrogen is also at the top of green investment agendas.

The Paris Agreement also aims to limit the amount of greenhouse gases emitted by human activity to the same levels that trees, soil and oceans can absorb naturally.

"We do not have time to waste. Today, we have 23 per cent of carbon emissions being covered by tax or trade – we don't have exactly the number for regulatory equivalency – and it has jumped by 5 percentage points in just this last year. So, we are on the right track, but we have a long way to go," Ms Georgieva told the conference.

She urged countries to price carbon and to "do it fast".

"How we go about pricing carbon in different country situations, and at what level to pricing, is a top of mind priority," she added.

The IMF includes climate risks in its assessments and is looking at challenges stemming from physical and transition risks.

Stress-testing, managing climate risks through supervisory frameworks and narrowing the scope for greenwashing by coming up with smaller, credible frameworks and standards are among ways to mitigate these risks, she added.

Following the integration of climate into its assessments, the IMF has engaged with 30 countries, including the UK, Canada, Germany, South Korea, and the US.

China and India will be included in its assessments soon, Ms Georgieva said.

"We are going to cover all top 20 emitters within two years. When we engage with countries on mitigation policies, our top priority is to help them shape the incentive environment for public and private investments and consumer behaviour – to change and shift to low-carbon intensity," she said.

She also recommended green investment as a method of lowering the impact of climate risks. So far this year, 140 financial institutions have invested $203 billion in bonds and loans in green projects, compared with $189bn in hydrocarbons.

The biggest challenge is a lack of uniformity in standards for assessments, she said.

"Two hundred frameworks is a little too much to handle. We have to narrow this down and accept that mandatory reporting can only be done when we have commonalities of standardised disclosure and accepted frameworks," she said.