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The Price Is Wrong: New Report Calls for Fossil Fuel Prices that Reflect Environmental Costs

Energy prices around the world are too low—far too low.

That’s the big message from a new report from the International Monetary Fund (IMF), Getting Energy Prices Right: From Principle to Practice, launched today at an event at the Center for Global Development. The report argues that the costs of coal, natural gas, gasoline, and diesel fail to account for these fuels’ environmental and social impacts—such as greenhouse gas emissions, air pollution, and traffic deaths. Setting prices that reflect these side effects—through taxes, licensing, or cap-and-trade systems—could reduce deaths from fossil fuel-related air pollution by 63 percent, decrease global carbon dioxide emissions by 23 percent, and generate revenues totaling about 2.6 percent of global GDP.

“It’s bad for an economy to be downgraded, but it’s even worse for it to be degraded,” said Christine Lagarde, managing director of the IMF. “Our take is that when the environment is degraded, the economy is degraded as well.”

Lagarde was joined by WRI president and CEO, Andrew Steer, and president of the Center for Global Development, Nancy Birdsall, in launching the report earlier today.

Getting the Price Right

The report lays out ways that 156 developed and developing countries could price their energy to factor in environmental and social damages. By raising prices to account for fuels’ “true” costs, the report argues, countries would discourage their overuse.

This type of tax reform could also yield significant socioeconomic benefits.

Birdsall highlighted the current U.S. tax on gasoline, which has been at 18 cents since 1993. “Correcting” this tax to account for gasoline’s environmental impact would raise it to about $1.60—an increase that would raise 0.8 percent of U.S. GDP.

Taxing coal to account for its environmental impact, the report shows, can reduce the use of coal and drive adoption of emissions-control technologies, reducing U.S. air pollution-related deaths by 47 percent and those in China by more than 60 percent. “The message is that coal kills, and it’s in the national interest of many countries to deal with the coal problem,” said Birdsall.

The Right Price Won't Burden Consumers

Lagarde noted that taxing fossil fuels doesn’t need to result in higher taxes for citizens. Rather, countries could lower other types of taxes—such as those on income or consumption—if they tax energy.

“We’re not advocating for higher taxes, we’re saying that a smarter tax is needed,” said Lagarde.

A Time for Action

The report makes a compelling case for energy tax reform. But getting countries to actually adopt these reforms is another story.

To that end, Lagarde argues that countries need not wait for international cooperation on climate change to pursue new energy pricing. Accounting for environmental impact makes good economic sense—and national governments can start reaping the benefits now.

“The question we now need to ask today is, how close are we to a tipping point?” said Steer. “What would it take to get that momentum going?”

Lagarde points to the costs of failing to switch to more sustainable energy systems. “If we do nothing, our fortunes will melt with the ice, evaporate like water under the sun, and wither away like sand in the desert storm.”

Comments

Imagine employment by a workforce that knows the economy is heading in a healthy direction.

I fully agree with the authors that we need to have smart taxing policy to encourage a life style that is sustainable for the future generation as well. Just prior to reading this item, I came accross a report "Can Earth's and Society's Systems Meet the Needs of 10 Billion People?; Summary of a Workshop. The revised taxing approach will surely help answer to the this question in a positive way.

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