Launch of IMF Staff Climate Note: A Proposal for an International Carbon Price Floor Among Large Emitters

June 18, 2021

As prepared for delivery

 

Thank you Stephanie and I am pleased to join you today.

 

Speaking about climate change it was Sir David Attenborough who said: "Real success can only come if there is a change in our societies and in our economics and in our politics"

 

At the IMF we embrace our responsibility to press for change in what we know best — the field of economics.   Our work on climate has four pillars: carbon pricing, public investment, disclosure standards and just transition.

 

Today I will talk about the first of these pillars — carbon pricing.  Our research shows that it provides the most effective incentive to make progress in decarbonization at the scale and the speed needed to reach the goals of the Paris Agreement.  Gradually increasing price on carbon encourages innovation and transition to renewable energy, clean mobility, and low carbon technologies.  Limiting global warming to 1.5 to 2 degrees will require emissions to be cut by a quarter to a half by 2030, and this is unlikely to happen without measures equivalent to a global carbon price of around $75 per ton by the end of this decade.

 

And we have long way to go. Yes, there has been progress, with over 60 national and subnational carbon pricing schemes around the world. But four-fifths of global emissions still remain unpriced and the global average emissions price is only $3 per ton.

 

Stronger and more coordinated action in the decade ahead is critical—and today IMF staff is publishing a proposal, still under discussion with the IMF Board and membership, that sets out how an international carbon price floor can help achieve the goal of accelerating the transition to low carbon growth over the course of this decade.

 

Such a price floor would have three crucial elements.

 

First, it would focus on a small number of large emitters, such as some or all G20 countries. This would make negotiations easier and could still cover a big percentage of global emissions, thereby taking a major step towards the cuts in greenhouse gases we need.

 

Second, the agreement would be anchored on a minimum carbon price—a single, efficient parameter—that would allow simultaneous action across different countries. And it would help large emitters scale up their ambition by providing reassurance that others are acting in coordination. 

 

Finally, a carbon price floor agreement would be flexible, pragmatic, and equitable and account for different responsibilities across countries with different pricing based on different development levels and historical emissions.

As an illustrative example—take an agreement among just six participants—Canada, China, EU, India, UK, and US—to implement a $75 carbon price by 2030 for advanced countries, $50 for higher-income emerging economies, and $25 for lower-income emerging countries. This scheme could help achieve a 23 percent reduction in global emissions below baseline by 2030, enough to bring emissions in 2030 in line with keeping global warming below 2°C.

 

And—let me be clear – a carbon price floor arrangement does not mean carbon taxes per se. While taxes are an efficient mechanism, a price floor can work through other policy measures – such as regulation or emissions trading – that achieve equivalent outcomes.

 

As well as reducing emissions, an international carbon price floor can build domestic and international support for action on climate change.

 

On the domestic front, carbon revenues can help secure a just transition—compensating households for price increases and helping businesses and workers move from high to low-carbon intensity activities.

 

And internationally, it would be less divisive and far more effective than unilaterally imposed border carbon adjustments – taxes on the carbon content of imports, which may otherwise emerge as some jurisdictions move ahead ambitiously with carbon pricing.

 

Let me conclude.

 

In the last 15 months we have seen the importance of coordinated action.

 

To save the global economy, governments injected around $16 trillion in support.

 

To save lives, scientists came together to develop vaccines in record time.

 

To help repair the public finances G7 ministers agreed to end the race to the bottom in corporate taxation, as well as endorsing stepped up action on climate change by the IMF.

 

To help save the planet we must work together to prevent a climate crisis turning into a catastrophe.

 

A robust price on carbon can play a hugely important role—and even more so when it is a product of an international agreement.  We see an international carbon price floor as a viable option to reach such an agreement and will continue our work on it.

 

Thank you.

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