Ian Parry

Fiscal Affairs Department, IMF

The Energy Transition, INDCs and the Post-COP21 Agenda, Marrakech, September 8-9, 2016

Outline

• Carbon pricing

• Broader energy price reform

2

Carbon Pricing

3

Rationale for Carbon Pricing

• Carbon pricing vs. regulatory approaches• Far more environmentally effective

• Raises significant revenue

• Trading systems should look like taxes• Combine with taxes for uncovered emissions (e.g.,

road, heating fuels)

• Auction allowances

• Include price ceilings and floors 4

Design Issues: Domestic

• Administration: ideally upstream• Maximizes coverage/minimizes collection points

• Straightforward extension of fuel taxes

• Revenues: use productively• Cut other taxes or fund high-value spending

• Strong case for carbon taxes in developing countries

• Price trajectories: align with INDCs based on • Emission projections and their responsiveness 5

Design Issues: International

• Price floors more flexible than uniform prices• Allow countries to exceed floor (for fiscal, domestic

environmental, or political acceptability reasons)

• Precedents: EU tax floors for VAT, excises

• Need to monitor broader energy taxes/subsidies (manageable)

6

Prices for Paris and Revenue (Preliminary)

7Source. IMF (2016).

Argentina GHGs 15% below BAU in 2030 0.6 7 0.3Australia GHGs 26-28% below 2005 by 2030 1.3 >150 >3.5Brazil GHGs 37% below 2005 by 2025 1.5 >150 >3.1Canada GHGs 30% below 2005 by 2030 1.7 >150 >3.7China CO2/GDP 60-65% below 2005 by 2030 29.0 39 2.0France GHGs 40% below 1990 by 2030 1.0 >150 >1.5Germany GHGs 40% below 1990 by 2030 2.5 >150 >2.3India GHG/GDP 33-35% below 2005 by 2030 6.0 0 0Indonesia GHGs 29% below BAU in 2030 1.4 >150 >4.3Italy GHGs 40% below 1990 by 2030 1.1 >150 >2.2Japan GHGs 25% below 2005 by 2030 4.0 >150 >3.3Korea GHGs 37% below BAU in 2030 1.8 >150 >4.3Mexico GHGs 25% below BAU in 2030 1.5 >150 >4.3Russia GHGs 25-30% below 1990 by 2030 5.0 22 2.4S. Arabia GHGs 130 mn tons below BAU by 2030 1.5 >150 >8.9S. Africa GHGs 398-614 mn tons in 2025 and 2030 1.4 42 5.0Turkey GHGs up to 21% below BAU by 2030 0.9 93 2.8UK GHGs 40% below 1990 by 2030 1.4 >150 >1.8US GHGs 26-28% below 2005 by 2025 16.5 116 2.3

Country Mitigation pledge: Reduce…Revenue in target year, percent GDP

Required CO2

price/ton in target year, $2015

Share of global CO2,

2013

China: Comparing Policy Effectiveness

80 5 10 15 20 25 30

Carbon Tax

Coal excise

ETS

Electricity excise

Renewable subsidy

Reducing CO2intensity: power

Energy efficiency:electricity

Road Fuel Tax

Energy efficiency:vehicles

Energy efficiency:buildings/industry

% CO2 reduction in 2030 below business as usual

Modest policy:almost meets INDC with CO2 price $35/ton

Aggressive policy:CO2 price $70/ton

INDC

Source. IMF (2016).

China: Reductions in Air Pollution Deaths

90.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0.8

0.9

1.0

1.1

1.2

1.3

1.4

2015 2018 2021 2024 2027 2030

Cum

ulat

ive L

ives

Sav

ed (M

illio

ns)

Mill

ions

of D

eath

s per

Yea

r

Baseline

ETS

Coal tax

Carbon tax

Source. IMF (2016).

Broader Energy Price

Reform

10

Other Externalities

• (Outdoor) air pollution from fine particulates• 3.2 million deaths a year

• Requires: tax on emissions or tax on fuel with credits for downstream mitigation (e.g., SO2 scrubbers)

• Road congestion, accidents, pavement damage • London congestion $40/gal., accidents kill 1.2 million

• Requires: mileage taxes (e.g., peak period pricing)

• Fuel taxes appropriate for the interim11

Valuing Externalities: Air Pollution

• Population exposure• Power plant loca on → number

of people in proximity

• Exposure → mortality• Evidence from GBD

• Monetize health effects• Evidence on WTP for health

• Damages per unit of fuels• Country-specific emissions factors 12

Efficient Coal Prices, 2013

13

0.9

39.2

6.0

6.5

65.8

4.8

26.9

40.9

16.4

8.7

25.7

26.3

6.8

18.7

66.9

31.3

18.9

19.1

0 5 10 15 20 25

Argentina

Australia

Brazil

Canada

China

France

Germany

India

Indonesia

Italy

Japan

Korea

Mexico

Russia

South Africa

Turkey

UK

US

$/Gigajoule

supply cost global warming Local pollution VAT current price

share of fuelin primary energy

Source. IMF (2016).

Efficient Natural Gas Prices, 2013

14

51.0

23.3

10.8

31.3

4.6

14.7

19.8

5.4

17.0

29.1

22.4

14.1

34.0

28.0

33.8

2.9

32.8

30.9

25.6

0 5 10 15 20 25 30

ArgentinaAustralia

BrazilCanada

ChinaFrance

GermanyIndia

IndonesiaItaly

JapanKorea

MexicoRussia

Saudi ArabiaSouth Africa

TurkeyUKUS

$/Gigajoule

supply cost global warming local pollution VAT current price

share of fuelin primary energy

Source. IMF (2016).

Efficient Gasoline Prices, 2013

15

7.6

12.7

8.9

13.3

3.3

2.8

6.0

2.2

13.4

6.0

9.2

3.1

20.6

7.2

11.7

6.5

1.8

6.6

17.0

0.00 0.50 1.00 1.50 2.00 2.50

ArgentinaAustralia

BrazilCanada

ChinaFrance

GermanyIndia

IndonesiaItaly

JapanKorea

MexicoRussia

Saudi ArabiaSouth Africa

TurkeyUKUS

$/Liter

supply cost global warming local pollution congestionaccidents VAT current price

Source. IMF (2016).

share of fuelin primary energy

Efficient Road Diesel Prices, 2013

16

12.0

14.0

16.3

10.8

5.8

18.9

17.6

7.8

12.7

17.3

8.5

6.6

11.1

4.6

11.0

8.0

15.7

13.1

8.1

0.00 0.50 1.00 1.50 2.00 2.50 3.00

ArgentinaAustralia

BrazilCanada

ChinaFrance

GermanyIndia

IndonesiaItaly

JapanKorea

MexicoRussia

Saudi ArabiaSouth Africa

TurkeyUKUS

$/Liter

supply cost global warming local pollution congestionaccidents road damage VAT current price

Source. IMF (2016).

share of fuelin primary energy

Large Benefits from Reform, 2013

• Global CO2

• Reduced 21%

• Fossil fuel air pollution deaths• Reduced 55%

• Revenue gain• 4% of global GDP

• Economic welfare gain • 2% of global GDP 17

Concluding: Moving Policy Forward

• Energy price reform largely in countries interests• Countries can move ahead unilaterally

• Time is right• Low energy prices, fiscal pressures, Paris Agreement

• Need to address domestic obstacles• Protect low income households (requires ≈10% of

revenues)

• Assist transition away from uneconomic firms18