5 december 2009

Carbon taxes deliver more emission reductions: IMF

David Uren, Economics Correspondent, The AustralianDecember 05, 2009

THE International Monetary Fund has backed carbon taxes over the emissions trading system favoured by the Rudd government, saying they would deliver greater reduction in emissions and more certainty.
The fund says there is a danger that the global downturn will strengthen industry lobbies opposed to reducing emissions and governments should see the revenue raised from setting a price on carbon as a means of paying down government debt.

An IMF report prepared for the Copenhagen conference is sharply critical of the concessions being granted to industries such as coal, electricity and agriculture in the government's recent negotiations with the Liberal Party.

It says that offering free permits to industries on the basis of their existing emissions is "likely to create windfall profits for firms and does little to either protect consumers or address competitive concerns".

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The IMF says the recent experience in both Australia and the US in trying to legislate climate change highlights the political difficulties in making energy-intensive industries pay for the carbon they emit.

The fund says the consensus among economists favours carbon taxes over emissions trading.

It says the experience of Europe's emissions trading system during the current economic downturn highlighted the weakness of these systems.

The price of carbon has dropped from E29 a tonne to E13 since July 2008 because of weakening demand for permits.

"Had a carbon tax rather than the ETS been in place in the EU, the reduction in abatement costs would not have brought about a fall in carbon prices but instead have led to a larger reduction in emissions," the report says.

On the other hand, any economic shock forcing a temporary increase in abatement effort would bring a very costly increase to the carbon price.

However, the temporary variations in emissions would have very little effect on the damage from climate change, which is only influenced by very long-term trends in emissions.

It says the volatility of carbon prices under an ETS would discourage investment in emissions reduction. "Risk-averse investors will likely require higher rates of return."

It also says it is possible a carbon tax would be less vulnerable to the dissipation of revenue through compensation.

Where Australia is planning to return all money raised from auctioning carbon permits as compensation, the IMF believes countries should keep the revenue they raise from either selling permits or taxing carbon directly and instead lower other more distorting taxes such as company tax and income tax on the low-paid. Revenue could also be used to pay off government debt, the report says.

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