International Monetary Fund Proposes Carbon Taxes to Avert Climate Change


Carbon Tax

The head of the International Monetary Fund, Christine Lagarde, outlined her agency's proposal for imposing taxes on various fossil fuels as a way to avert future man-made global warming. Such taxes would encourage people to burn less coal, oil, and natural gas and to switch to no-carbon energy sources. In her presentation, Lagarde declared:

On this point, let me be crystal clear: we are generally talking about smarter taxes rather than higher taxes. This means re-calibrating tax systems to achieve fiscal objectives more efficiently, most obviously by using the proceeds to lower other burdensome taxes. The revenue from energy taxes could of course also be used to pay down public debt.

We would expect these sorts of tax shifts to have limited adverse economic effects—the whole point is to raise revenue in ways that make the economy work better by fixing market failures….

Using a single fiscal instrument targeted at a particular source of environmental harm is both effective and administratively simple. It is better than relying on a patchwork of uncoordinated policies—such as telling some manufacturers to install certain control technologies, requiring others to use certain fuels, or rewarding households for buying certain vehicles.

The bottom line is that we can spur the same kinds of virtuous behavior by using a much simpler tool—a single fiscal instrument. And once we price bad things right, we will not need to worry so much about subsidizing good things—like renewable energy.

The IMF report sets fossil fuel tax rates at different levels for each of 156 countries, taking into account not only the future damages of climate change, but also benefits like the number of lives that would be saved by reducing current levels of air pollution. So how high would a tax on coal and natural gas be for the United States? The National Journal reports that the tax rate would be $8 per gigajoule of coal and a bit over $3 per gigajoule of natural gas.

Roughly speaking a ton of coal contains somewhere around 25 gigajoules of energy, which implies a tax rate of $200 per ton. Burning a ton coal produces about 2,000 kilowatt hours of electricity. The average American household uses about 11,000 kilowatt hours annually, implying a hike in electric rates of about $1,100 per year due to the new carbon tax. Since the average monthly electric bill is about $107, the IMF's proposed tax hike on coal would approximately double how much Americans pay for coal-fired electricity.

A thousand cubic feet (mcf) of natural gas contains about 1 gigajoule of energy. The average American household burns about 75 mcf of natural gas annually so that implies a total tax burden of $225 per residential customer.

Lagarde also calls for ending the massive fossil fuel consumption subsidies that amount globally to $544 billion annually. On that point, she is certainly right.