IMF Managing Director Calls for Carbon Tax

Depending on one’s point of view, the International Monetary Fund (IMF) is either the global organization tasked with maintaining global economic stability or the group that subjugates developing countries to financial assistance with onerous terms that make life worse for the poor. But this organization, which has caused its fair share of controversy from its involvement in fiscal crises from Iceland to South Korea, is finding itself front and center of other fiscal policy fights.

Now the IMF has become the latest advocate for a new twist on financial reform as its managing director, Christine Lagarde, added her voice to the global chorus calling for a carbon tax.

“To get it right, we have to price it right,” exhorted Lagarde at the recent IMF-World Bank meetings held late last week in Lima, Peru. Criticizing global energy subsidies, which she said total $5.3 trillion annually, or 6.5 percent of the world's GDP, Lagarde insisted now is the time to eliminate such price supports and tax incentives, as the current price of energy is very low.

Quoted by several sources as describing climate change as a “macro-critical” issue, Lagarde’s stance is an encouraging signal for carbon tax advocates because such policies, according to the IMF, are critical to sustained and secure economic development. “It is just the right moment to introduce a carbon tax and just the right time to eliminate energy subsidies,” Lagarde said at a panel during the Lima meetings.

With about six weeks to go before the COP21 climate talks launch in Paris, many observers believe the global community has a long road ahead to an agreement that would cap global emissions to 2 degrees Celsius. Martin Wolf of the Financial Times, a publication not always sympathetic to causes related to climate change, called out developing countries at this same meeting, saying that they have “failed utterly” to both take advantage of low global energy prices and succeed in enacting policies that could play a role in stalling what scientists agree to be a warming of the earth’s climate.

Other speakers at the Lima meeting lamented the lost opportunity to launch financial mechanisms such as a carbon tax or emissions trading program, which would now be more palatable for consumers with petroleum prices well below $50 a barrel. According to a report issued by the New Climate Economy, of the 40 countries and 20 local and regional governments that have implemented a carbon tax, most have shown promise as a way to transition toward a low-carbon economy while helping governments achieve financial stability. A revenue-neutral carbon tax in British Columbia, for example, reduced fuel consumption in that province by 16 percent while the rest of Canada saw the use of fuel increase 3 percent.

It is the voice of Lagarde and the IMF, however, that could be decisive in nudging more countries to adopt carbon pricing policies that would help their societies become more energy efficient while creating new revenue streams. Lagarde insisted such programs could help raise up to $100 billion by 2020, which could be used to help poor countries implement climate change mitigation plans. Such revenues could also create “buffers” in the event national treasuries or finance ministries have to cope with an unforeseen financial crisis.

Say what you want about the IMF, but governments listen to this 70-year-old institution. And with the evidence suggesting energy companies are rethinking their stance on a carbon tax, we could be on the cusp of a shift in global financial and environmental policy considered unthinkable by most experts just a few years ago.

Image credit: World Economic Forum