Companies with high greenhouse gas emissions should be subject to a carbon price of $75 a tonne of carbon dioxide, the International Monetary Fund has said, as a way of reaching the goals of the Paris climate agreement.
A carbon floor price would mean that companies, including energy generators and heavy industries, would have to pay for the carbon they produce. At present, many countries and regions have their own carbon pricing systems, but there is no globally agreed carbon price.
The IMF urged the G20 countries, made up of the world’s biggest developed and developing economies, to adopt a carbon floor price for their industries, as the quickest way of reaching net zero emissions.
A price of about $75 per tonne of carbon dioxide would be needed by 2030 to meet the goal of staying within 1.5C to 2C of global heating, set under the Paris agreement in 2015, the IMF said. Countries responsible for about three-quarters of global emissions have now set out targets to reach net zero emissions around mid-century, in line with the Paris goals.
Kristalina Georgieva, managing director of the IMF, said: “To help save the planet we must work together to prevent a climate crisis from 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 floor price as a viable option to reach such an agreement and will continue our work on it.”
Bob Ward, policy and communications director at the Grantham Institute on Climate Change at the London School of Economics, who was not involved with the proposals, said: “This is an excellent initiative and leadership by the IMF. We have already seen in the UK that even a relatively modest carbon floor price can help to accelerate the phase-out of coal in particular. A carbon floor price removes some of the uncertainty for businesses and allows them to invest with greater confidence in technologies and processes to reduce emissions.”
If a carbon price were adopted by the G20, it would also affect the proposals some countries are now bringing forward on carbon border taxes.
Carbon border taxes, also known as carbon border adjustment mechanisms, or CBAMs, are currently under consideration by the EU, the UK, the US and others. These countries have strong targets on reducing emissions over the next decade, but are worried about their industries being undercut by cheap imports from countries with lax climate regulations or high emissions, such as China.
Taxing imports for the amount of carbon released in their production would ensure a level playing field for countries with strong climate regulations, and give a strong incentive to other countries to clean up their industries. But they are seen as controversial in some quarters and could be challenged, or could provoke trade retaliation.
Carbon pricing can take many forms in practice, from taxes on fuels to carbon trading systems, such as that operated by the EU, under which businesses are allocated or must buy tradable permits to produce carbon dioxide, with laggards forced to buy the excess permits of those that have cut carbon fastest.
The EU started its carbon trading system in 2005, and China, parts of the US, and other countries have since taken up similar approaches, but still only about a fifth of global greenhouse gas emissions fall under any form of pricing system. According to IMF calculations, of those emissions that do fall under form of price, the average price is only $3 a tonne, which is not enough to make any appreciable difference to emissions levels.
The IMF published its proposal on Friday, before a series of meetings of the G20, which has already taken steps towards a minimum corporate tax rate, and before Cop26, the UN climate talks to be held in Glasgow this November.
Georgieva, a former top official at the World Bank and EU commissioner, has been a longtime proponent of climate action, and has made clear that the IMF under her leadership will prioritise the climate emergency.
“This matters to the IMF because climate change presents huge risks to the functioning of the world’s economies. The right climate policies can address these risks and also bring tremendous opportunities for transformative investments, economic growth, and green jobs – so much so that our board recently approved proposals to include climate change in our regular country economic surveillance and our financial stability assessment program,” the IMF said in a blog accompanying the proposal.