Friday, September 19, 2014

Carbon Pricing: Good for You, Good for the Planet

By Ian Parry, International Monetary Fund
Posted on September 17, 2014 by iMFdirect

The time has come to end hand wringing on climate strategy, particularly controlling carbon dioxide (CO2) emissions. We need an approach that builds on national self-interest and spurs a race to the top in low-carbon energy solutions. Our findings here at the IMF—that carbon pricing is practical, raises revenue that permits tax reductions in other areas, and is often in countries’ own interests—should strike a chord at the United Nations Climate Summit in New York next week. Let me explain how.

Ever since the 1992 Earth Summit, policymakers have struggled to agree on an international regime for controlling emissions, but with limited success. Presently, only around 12 percent of global emissions are covered by pricing programs, such as taxes on the carbon content of fossil fuels or permit trading programs that put a price on emissions. Reducing CO2 emissions is widely seen as a classic “free-rider” problem. Why should an individual country suffer the cost of cutting its emissions when the benefits largely accrue to other countries and, given the long life of emissions and the gradual adjustment of the climate system, future generations?

This argument crucially ignores immediate domestic environmental benefits from reducing CO2. Fossil fuel combustion, especially coal, is a leading cause of local outdoor air pollution which, according to World Health Organization figures, is estimated to cause over 3 million premature deaths a year worldwide—through increasing the risk of heart disease, lung cancer, and so on. Taxing the carbon content of coal will increase its price, and decrease its use, leading to both fewer CO2 emissions and better public health due to cleaner air. A carbon tax would also increase motor fuel prices, which will reduce traffic congestion and accidents as people economize a bit on their use of vehicles. This again spurs domestic economic benefits, at least in countries where people are not already fully charged for these adverse effects through existing motor fuel excises. These health and other “co-benefits” from reducing fossil fuel use add to the gains in economic efficiency that start with pricing CO2 emissions.

(Continued here.)

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