International Monetary Fund Proposes Carbon Taxes to Avert Climate Change

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.