Last week, carbon pollution pricing got a heavy – and hopefully monumental – endorsement when the International Monetary Fund (IMF) deemed the policy the “single most powerful” tool to deal with the climate crisis. It comes after an upswing of unprecedented momentum, from 4 million students worldwide striking to demand meaningful action, to CEOs joining the movement for sweeping changes and greenhouse gas emissions reductions.
It’s all made me think that we might just be at the brink of something great, of finally stepping up to the challenge and urging our policy makers to step up too.
For those of us working on finding ways out of the climate crisis – or mitigating its most horrific impacts – that feeling has been popping up quite a bit lately. I can only imagine the feeling of joy (and maybe a tiny bit of annoyance) from someone working in this field for decades, only now seeing the amount of momentum and resonance that message is finally having.
But things are different now. Young people today not only believe the science, but are taking action on their own right to a livable planet and demanding more from those in power. This is such an incredible shift in a short amount of time, and one that makes me incredibly hopeful.
As someone advocating for putting a price on carbon pollution, last week’s IMF announcement is a breath of fresh air and a signal that pricing pollution is no longer a far-fetched idea, but a reality that is here to stay.
This is a big deal
In the latest Fiscal Monitor Report, dedicated to climate change mitigation, the IMF found that a global price of $75 per ton by the year 2030 could limit the planet’s warming to 2 degrees Celsius or 3.6 degrees Fahrenheit.
This is a high price relative to what has so far existed, but it matches the theory and science in terms of what is needed to ensure emissions reductions at the scale we need them to occur. It is also in line with estimates for what the true social cost of carbon really is.
For context, the current global average carbon price is $2 a ton – from the 46 national jurisdictions and 30 subnational jurisdictions that currently impose a form of carbon pricing. This is a massive difference from the $75 a ton the report deems necessary. It also matches the level of urgency we have seen coming out of the scientific community in recent years, in terms of the emissions cuts necessary to prevent us from realizing the worst effects of the crisis.
A price that high would increase the price of fossil-fuel-based energy — especially for the most carbon-intensive sources like coal and oil – but the economic impacts could be offset by routing the money raised straight back to citizens. The IMF finds that revenue from a $75 carbon price would generate revenue equivalent to one percent of gross domestic product in the United States. That is an enormous amount of revenue that can be used to accelerate a transition that is just and equitable and addresses the needs of the most disproportionately burdened communities.
The beauty of pollution pricing as a policy tool is the myriad of design choices available to those drafting the policy.
The report makes an environmental, fiscal, economic, and administrative case for using carbon taxes (or similar pricing schemes, such as emission trading systems) to implement mitigation strategies. The beauty of pollution pricing as a policy tool is the myriad of design choices available to those drafting the policy. Everything from the structure, price level, rebate and/or investment use of revenue, can be tailored to fit the local context the best. The IMF itself provided a quantitative framework for understanding the effects and trade-offs of a market mechanism to reduce emissions, applied to both large and emerging economies.
Moreover, many have actually called for a price on carbon that far exceeds the $75 called for by the Fund. The Nobel Prize-winning Yale economist William D. Nordhaus has argued that a carbon tax of $300 per ton or even higher might be required; and recent research in the Proceedings of the National Academy of Sciences (PNAS) concludes that a carbon price must start high and decline over time in order to “put the focus on near-term action and on the large costs of delay.” Under these calculations, a $75 price might in fact not be high enough.
What does this mean?
The IMF’s primary purpose is to ensure the stability of the international monetary system—it has 189 member countries, and works to foster “global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.”
Their global leadership on financial matters makes them a key player in shaping what the future of carbon markets can look like as well as a potential key player in these markets development and linkage. The IMF’s position adds to the urgency recent scientific and economic assessments have signaled, and goes a step further in endorsing a concrete policy that can substantially begin to tackle the kind of emissions reductions that are needed. The role the Fund will undoubtedly play in carbon markets as they continue to emerge can be significant – from finding risk in continued investment on fossil fuel based energy systems, to preferring cleaner alternatives and technologies as a more financially stable investment.
Adapting to climate change is one of the most important challenges facing economic policy makers worldwide, and the recognition by the Fund that carbon is an important risk factor is very telling.
It also follows a train of institutional concern over climate change risks, and the need to safeguard future financial stability through tackling them. The Federal Reserve is taking a close look at the risks posed by climate change and the rapid transition towards a low-carbon economy; the World Bank has also been an active voice of support in the movement to price carbon. Both climate impacts in terms of infrastructure damage from sea-level rise, increased temperatures, extreme weather events, and added risks from carbon pollution that affect everything from public health and the worsening climate crisis, are crucial considerations for financial institutions in the coming decades.
Specifically, keeping up with clean technology and renewable trends to sustain economic vitality, while transitioning away from dirty fuels, will be a determining move for global systems to adapt and adjust to. Carbon pricing is an integral part of that planning.
We have known for a long time that market-based mechanisms can, when designed effectively, be an incredibly powerful tool to reduce the greenhouse gas emissions responsible for the climate crisis. We also know that there is growing momentum for these policies – just this year, 16 state legislatures saw the introduction of bills aiming to put a price on carbon pollution.
We have used pricing schemes to incentivize choices that have positive outcomes for our health as well as the health of our planet, and pricing carbon is increasingly seen as a necessary – albeit, by itself insufficient – tool in mitigating the worst impacts of climate change. Even a slew of presidential candidates have endorsed the policy as part of their climate plans.
While it might seem simple, passing this policy won’t be easy. There are still important hurdles to overcome in order to establish these pricing mechanisms. To make carbon pricing politically feasible and economically efficient, governments can choose how to use the revenue and how to best show value to the communities they are trying to get buy-in from. Options here include cutting other kinds of taxes, investing in clean energy and green infrastructure, returning money in the form of rebates that can be designed to be progressive to avoid economic burdens, to name a few.
This freedom of choice is one of the best parts about the policy – it can do a lot of things while at the same time having a market indicator that favors cleaner energy sources. Our own research on this policy at the state level in the United States shows these options clearly, specifically how the policy can be used to advance environmental justice needs, avoid regressive rebate allocation, and produce massive local benefits like new jobs and innovation.