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Countries should enact carbon tax to meet net-zero goals — IMF
The U.S. could amass more than $12 trillion of extra debt by 2050 if it doesn't adopt some form of carbon pricing, according to a new analysis.
CLIMATEWIRE | Countries should adopt carbon pricing as soon as possible to avoid racking up trillions of dollars in debt as they work toward climate goals, according to the World Bank and the International Monetary Fund.
Economists from the two institutions emphasized Monday that governments can't rely solely on subsidies to reach net-zero emissions. In a panel discussion — hosted by the think tank Center for Global Development — the officials recommended that nations also tax polluters or adopt a cap-and-trade system that requires companies to buy allowances for planet-warming emissions.
“Relying on spending-based policies to achieve the net-zero goal without ambitious carbon pricing would cause debt to rise," said Christine Richmond, a deputy division chief of fiscal affairs at IMF.
The policy suggestion arrives as the United States struggles to meet its climate targets, despite billions of dollars in government subsidies through the Inflation Reduction Act. The U.S. is expected to only reduce carbon emissions by 15 percent by 2030, compared to 2005 levels, according to a recent analysis from energy consultancy Wood Mackenzie. That's far lower than the Biden administration's goal of cutting carbon pollution in half by that same year.
Without some kind of carbon pricing, advanced economies will have to borrow money that amounts to 50 percent of their gross domestic produce, according to a new IMF report Richmond authored with colleagues.
For the U.S., that figure translates to more than $12 trillion of extra debt by 2050. The U.S. has $33 trillion in federal debt as of October 2023.
But governments face a “trilemma” because it seems nearly impossible to push through carbon pricing without losing popular support, Richmond said.
Governments face three unpalatable choices, she said: enacting carbon tax and losing popular support; spending heavily on subsidies and facing a large debt burden; or keeping tax benefits low and missing climate targets.
“The only way to jointly achieve these three goals is through a carefully calibrated mix of policies” that reduce emissions while also addressing voters’ concern around new taxes, Richmond said. Only two U.S. states — California and Washington — have enacted carbon-pricing mechanisms into law.
Carbon pricing is one of the most efficient ways to curb carbon emissions because it allows the largest polluters to find the cheapest way of cutting carbon pollution, instead of forcing them to chase government subsidies, the IMF report said.
Unlike subsidies that pay consumers and companies for products that emit less, carbon pricing requires payment to pollute. To implement such policies, governments can either tax producers for every ton of carbon they emit or set a yearly tonnage cap on emissions and auction the allowance. In a cap-and-trade system, corporations that bought emitting rights can later sell their allowance to other entities.
The IMF report concludes that relying solely on carbon pricing to reach net-zero emissions would be "politically unpalatable." But the authors emphasize that it must be in the mix.
"Prolonging the business-as-usual path and taking only moderate action will not contain global warming, leaving the world vulnerable to potential catastrophic consequences," they wrote. "The time to act is now, with a strong, clear, and concerted mix of policy efforts on the part of governments."
