IMF: "carbon pricing" is necessary to aid financing transition into renewable energy

Deputy Managing Director of the International Monetary Fund, Kenji Okamura, stated on Wednesday that carbon taxation will be necessary to help finance the global transition to renewable energy, warning against increased resort to subsidies for “green projects”.

“I think we really need to, you know, put carbon pricing squarely on the table, despite all the political issues surrounding it,” said Gita Gopinath at a conference in Washington. Adding that subsidies cannot substitute carbon taxes in financing the current energy transition.

“Fiscally, it makes a huge difference when you’re dealing with carbon taxes versus subsidies,” Gopinath said, noting that the practice increases revenues that can be used to help households and businesses deal with the energy transition as well as reduce debt.

She added that carbon pricing is “very effective in directing investment to where it needs to go, and providing the right kinds of incentives for buyers to move from one type of energy to another.”

Carbon pricing is equivalent to purchasing a “pollution license” to cover carbon dioxide(CO2) emissions. And the European Union in particular has expanded its carbon market,which is already considered the most ambitious program in the world, and currently covers about 40% of the continent’s emissions.

Gopinath said she recognizes there are reasons for subsidies to help spur innovation, but the world must avoid a “subsidy race” in which richer countries marginalize the smaller countries with generous subsidies, adding that this could lead to a “surplus of costly distortionary tax subsidies.”

Gopinath’s comments come in the light of Europe’s concerns over US President Joe Biden’s climate plan, which provides for generous subsidies for new electric cars manufactured in the United States.

After negotiations between the United States and the European Union, Washington has since expanded the possibilities for access to this aid.