The IMF Supports Taxes for Fossil Fuels that Reflect Environmental Damage

The International Monetary Fund has been a leader in the fiscal side of green finance but in 2016 they have expanded their approach. The IMF is a key supporter of the Green Climate Fund and carbon taxes for fossil fuels. At a London meeting in 2014, International Monetary Fund leader Christine Lagarde warned that the planet is “perilously close” to a climate change tipping point, and requires urgent cooperation between countries, cities and business. Lagarde went on to describe the consequences of climate change as “merciless” and she called for a “new multilateralism”.

At this meeting Lagarde quoted Prince Charles who said, “In failing the earth, we are failing humanity”.

The IMF has recently expanded its interpretation of green finance as more than just a fiscal matter. As explained in a new report titled, After Paris: Fiscal, Macroeconomic and Financial Implications of Climate Change:

“In financial markets, increased disclosure of firms’ carbon footprints, prudential requirements for the insurance sector, and appropriate stress testing for climate risks will help ensure financial stability during the transition to a low-carbon economy. Analyses of how firms’ asset values could be impacted by de-carbonization are needed to efficiently allocate investments across carbon-intensive and other sectors. Strengthening countries’ regulatory oversight is also needed to ensure sound and resilient institutions and well-functioning financial markets for providing instruments to manage climate risks. Besides promoting green financial instruments, catastrophe bonds and similar hedging instruments can transfer climate-damage risks to those who are better able to bear them.”

The IMF argues that energy prices should reflect the harmful and environmental side effects of using fossil fuels, particularly damage such as climate change and air pollution. The book is titled, “Getting Energy Prices Right: From Principle to Practice” and it says that that fossil fuels are underpriced and they should reflect the true costs of the environmental damage they cause.

The book includes what Lagarde described as a smarter tax structure that should be levied on coal, natural gas, gasoline and diesel. The report argues that these taxes could cut carbon pollution by 23 percent and raise revenue equivalent to 2.6 percent of global GDP.

At the launch of the book Lagarde said that environmental damage is “mission critical” to the IMF. She also described climate change as “the greatest crisis facing our generation” She explained: “It is bad for an economy to be downgraded – we know that. It is even worse for an economy to be degraded. When the environment is degraded, the economy is degraded as well.”

“While the world became richer as energy fueled economic expansion, only recently have we come to fully appreciate the damage done to our precious—and irreplaceable—natural resources,” Lagarde said.

She quoted the American poet Wendell Berry: “To cherish what remains of the earth and to foster its renewal is our only legitimate hope of survival.”