IMF calls on governments to impose carbon taxes or face ‘unsustainable’ fiscal hit

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The fiscal cost in effect of tackling climate change could put public debt in large carbon-emitting countries on an “unsustainable” path without a tax on pollution, the IMF has warned.

In a chapter addressing climate change, published as part of the fund’s flagship 2023 Fiscal Monitor, IMF economists said relying solely on spending measures to reach net zero carbon emissions by 2050 could increase public debt in a “representative” large-emitting country by up to 50 per cent of gross domestic product.

The IMF, which has long advocated a global carbon tax, has said that countries could decrease this debt burden and generate more revenue by implementing carbon pricing policies. These policies, which impose costs on businesses based on their carbon emissions, should be an “integral” part of any climate policy package, the fund said.

Nearly 50 countries already have carbon pricing schemes in place, according to the IMF. 

The EU, one of the world’s highest emitting groups, has just launched a trial phase of the world’s first carbon border tax, which is expected to spur its trading partners into pricing their carbon emissions. 

Yet, despite governments implementing mixtures of carbon pricing schemes and green subsidies such as those contained in the US’s $369tn Inflation Reduction Act, wealthy countries are still set to fall short of their environmental goals.

The goals stipulated in the Paris Agreement, which was struck in 2015 and signed by 189 countries, pledge to limit global warming to about 1.5C degrees above pre-industrial levels. 

But, according to a joint analysis from the IMF and World Bank from another report published on Monday, existing and planned climate policies would lower emissions by the world’s largest economies, which together make up the Group of 20, by just 13 per cent by 2030.

The emissions reductions fall “significantly” short of the 25-30 per cent reduction needed to achieve the Paris Agreement’s global temperature goals, the IMF warned on Monday.

A comprehensive UN stock take of global efforts published last month found that the earth remains headed for a temperature rise of up to 2.6C by the end of the century.

Despite almost 200 countries promising to set out plans for net zero emissions, many setting targets by 2050, the UN said the world was “not on track”.