IMF and the Environment

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IMF Work on the Environment

While economic development is critical for lifting people out of poverty and raising living standards for the broader population, it also causes harmful side effects—particularly for the environment—with potentially sizeable costs for the macro-economy.

For example, rising atmospheric accumulations of greenhouse gases could substantially raise global temperatures, posing considerable risks. Poor air quality is a major human health problem. And road congestion can impose substantial burdens on urban economies, by reducing the productive time of the workforce.

Fiscal instruments (emissions taxes, trading systems with allowance auctions, fuel taxes, charges for scarce road space and water resources, etc.) can and should play a central role in promoting greener growth. These instruments are:

• effective at reducing environmental harm—so long as they are carefully targeted at the source of the problem (e.g., emissions);
  
  
• cost-effective (i.e., they impose the smallest burden on the economy for a given environmental improvement)—so long as the fiscal dividend from these policies is exploited (e.g., revenues are used to strengthen fiscal positions or reduce other taxes that discourage work effort and investment);
  
  
• strike the right balance between environmental benefits and economic costs—so long as they are set to reflect environmental damages.

And there is plenty of scope for fiscal reform. Many countries subsidize the production and consumption of fossil fuels (rather than charging to discourage their use). And even when energy is heavily taxed, these taxes may not be very effective from an environmental perspective (e.g., taxes may be imposed on electricity use or vehicle sales rather than emissions or traffic congestion).

The Fund promotes the use of fiscal reform to address environmental problems through:

• analytical work—for example, staff published a collected volume of papers on designing fiscal policy to mitigate greenhouse gases; the IMF assesses the magnitude of energy subsidies; and staff quantify environmental damages to provide guidance on appropriate levels of energy taxes in different countries.
  
  
• technical assistance—to member countries interested in environmental tax reform.
  
  
• outreach activities—including regular presentations by staff at conferences (e.g., UN climate meetings) and events the IMF cosponsors with other international organizations and research institutes (see for example Fiscal Policies and the Green Economy and Economics of Carbon Taxes).