Getting Energy Prices Right — for a Cooler, Healthier Planet

Last month in a speech at the Center for Global Development, International Monetary Fund (IMF) Managing Director Christine Lagarde said, “When the environment is degraded, the economy is degraded.”

oil refinery, United States

Oil refinery in the United States. (© VisionsofAmerica/Joe Sohm)

For those of us that work in the environmental sphere, this is not news; CI has been saying that “people need nature to thrive” for years. However, when this statement is uttered by the woman running the world’s central bank, it’s a sign of just how much the global understanding of our economic system is shifting beneath our feet.

The IMF has traditionally focused on helping governments balance their budgets and ensure stable prices to provide a framework for economic growth. But over time, the IMF has evolved to look at broader risks to economic stability, and recently identified carbon pollution as a major risk.

The IMF’s approach has been to look at the costs that producing different forms of energy impose on people and the environment. It’s no surprise that carbon-intensive fossil fuels produce a lot of costs.

The organization’s new book, “Getting Energy Prices Right, from Principle to Practice,” (PDF – 754 KB) shows in its analysis of coal, oil, diesel and natural gas that “local air pollution damages, congestion costs and revenue potential (e.g., in lieu of other taxes) are mostly large enough to warrant higher fuel taxes, even leaving climate concerns aside.”

The quickest way to fix this, in the IMF’s analysis, is to enforce the “polluter pays principle.” Under this scheme, polluters who impose costs on people and the environment through their emissions will pay in proportion to the damages. The right price reflects not only the price of extracting and supplying, but all the impacts from production to consumption.

A good starting point is the elimination of energy subsidies. These are bad for the budget, bad for the economy, bad for the environment and bad for equality (the wealthy, who consume the most energy, get the biggest subsidies). The IMF estimates that in 2011, approximately US $2 trillion was spent worldwide on fossil fuel subsidies.

Tax reform could complement these subsidy cuts. The IMF is not advocating higher taxes, but smarter taxes. Alternatively, governments could use well-designed licensing or cap-and-trade systems to limit carbon pollution.

All of these actions target the source of the environmental harm: carbon emissions. Charges on different fuels are proportionate to how dirty they are (the tons of carbon emitted), so people will choose less polluting fuels and more efficient vehicles, and will reduce fossil fuel energy use. Aligning tax rates with environmental damage will change energy production and use. Once we price bad things accurately, we won’t need to subsidize good things. Governments can use energy taxes to reduce other taxes, or to shrink public debt.

This all still seems pretty distant from CI’s work in forests, oceans and far-flung communities across the globe. Until, that is, you consider that one of our core initiatives throughout the last several years has been to develop ways to measure critical natural capital, assessing not only the stock of what’s in nature, but its flows and benefits to people.

Accounting systems that treat nature as a free, unlimited resource ignore the vital goods and services nature provides to people. ​So, we’re looking at the good that nature does for us, while the IMF is looking at the bad that fossil fuels do to us. In the end, we’re both trying to make sure that governments’ policies take the range of impacts into account. It’s two sides of the same coin.

If the IMF succeeds in its campaign to get energy prices right by taxing fossil fuels, it will bring immediate benefits to people, and long-term benefits to the environment. CI is working toward the same goals. And success of the IMF’s campaign to reduce fossil fuel pollution will also help save tropical forests, encourage sustainable fishing and farming and give the world’s most bountiful habitats a better chance of survival.

So, here’s my response to the IMF’s new stance on energy prices: Keep it coming!

Lawrence Connell is the director of multilateral programs in CI’s Policy Center for Environment and Peace.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>