IMF managing director Christine Lagarde startled IFI watchers last week by warning at a CGD-hosted speech that the world faces “a triple crisis—an economic crisis, an environmental crisis and, increasing, a social crisis.”
Lagarde’s remarks, which I report on at greater length here, would not have been newsworthy coming from the head of an international environmental NGO or even the head of the World Bank, but from the head of the IMF, a citadel of economic orthodoxy, they surprised and delighted many in the development community, especially those alarmed by the looming development impacts of runaway climate change.
Joining me on this week’s Wonkcast to discuss Lagarde’s speech—and her pledge to offer IMF research and analytical support to member countries to help eliminate fossil fuel subsidies and put a price on carbon—are CGD senior fellow David Roodman and visiting senior associate Michele de Nevers.
“The legitimization that comes from an institution like the IMF makes me think this is something that every country eventually will do,” says David. “Just as every country has a value added tax or a sales tax, every country will put a price on greenhouse gas emissions.”
David knows the field well. While he is best known for his recent book on microfinance, his first book, The Natural Wealth of Nations, dealt with market-based approaches to addressing environmental problems. He argued in a blog post last week that IMF support for putting a price on carbon through a carbon tax or cap-and-trade schemes makes pricing carbon emissions “the new normal.”
Michele, who spent 15 years working on climate and other environmental issues at the World Bank highlights Lagarde’s point that putting a price on carbon emissions has the potential to provide a huge new source of government revenue at a time when many countries are attempting to avert looming long-term deficits with politically unpopular austerity measures.
“In the United States, there’s a sort of knee jerk anti-tax reaction but at the same time we need revenues to balance our budget, as do all Euro countries,” says Michele. “It’s great that Lagarde mentioned the revenue potential.” Lagarde offered the United States as an example: pricing carbon at $25 a ton would boost the price of a gallon of gasoline by 22 cents and raise more than a trillion dollars in revenue in ten years. ($25 per ton is half the price proposed in the landmark Stern Review on the Economics of Climate Change as compatible with continued economic growth but large enough to avert a climate catastrophe.)
I ask David for his assessment of a new IMF study released the day that Lagarde spoke, Fiscal Policy to Mitigate Climate Change: A Guide for Policy Makers. He tells me the report serves as a valuable primer on issues that would arise in developing a carbon tax or a tradable permit system. The book also addresses the removal of fossil fuel subsidies, an issue which that has been taken up by 350.org and other climate advocacy groups.
Michele adds that removing fossil fuel subsidies – which mostly go to the upper and middle classes in developing countries -- can be particularly difficult and politically volatile.
After a quick station break, I ask Michele to unpack Lagarde’s surprise announcement that the IMF will join the World Bank and OECD in conducting research on green GDP, an attempt to capture environmental and ecological impacts on the economy that are not currently reflected in GDP. Under current measurements, a forest only counts as a contribution to the economy when it is cut down and turned into timber.
“Once you've eliminated the virgin rainforest in Brazil, you can replant trees but you can never recapture the ecological benefits of the original system,” says Michele. “So this is a way of thinking a little more upstream, and valuing in advance what you're doing with your economy.”
We end the Wonkcast by discussing next week’s Rio+20 Earth Summit. Michele notes that Lagarde is the first IMF head to attend any United Nation’s environmental conference. With Hillary Clinton leading the U.S. delegation, Michele hopes that the two of them will have a meeting of the minds on environmental challenges to shared global prosperity.
“I hope they both have a meeting there and come out with the conclusion that the United States is going to put in place carbon taxes,” she says, perhaps a bit wistfully.
My view: if nothing more comes out of the Rio+20 summit than the impetus for Lagarde to examine and revamp the IMF’s standard fiscal advice to reflect environmental concerns, Rio+20 may well prove to have been worth it after all.