Tshering Dorji | Washington D.C
The global ambition to fight climate change is steamrolling into the financial sector.
After the United Nations called on countries to do away with the subsidy on coal and fossil fuels, the International Monetary Fund (IMF), in its annual meeting on October 16, asked the countries to introduce USD 75 carbon tax per tonne.
A study found that a global tax of USD 75 per tonne by the year 2030 could limit the planet warming to 2 degrees Celsius. This will in turn result in increase in price of fossil-fuel-based energy.
Currently, about 50 countries have a carbon pricing scheme in some form. But the global average carbon price is currently only $2 a tonne, far below what the planet needs.
However, it will cause some economic disruption. For instance, the average price of electricity in countries relying its energy needs on fossil fuels and coal could rise by 42 percent. Likewise the price of gasoline is also estimated to increase by 14 percent by 2030.
Routing the money raised back to citizens, according to the IMF could offset the impact, for example waving taxes on other sources and pumping money to finance sustainable development.
Sweden, for instance has set a good example. Its carbon tax is USD127 per tonne and has reduced emissions 25 percent since 1995, while the economy has expanded 75 percent since then.
The IMF stated that countries may be reluctant to pledge to charge more for carbon if, for example, they are worried about the impact of higher energy costs on the competitiveness of their industries. But governments could address these problems with agreement on a carbon price floor for countries with high levels of emissions.
For example, a carbon price floor of USD 50 and USD 25 a tonne in 2030 for advanced and developing G20 countries respectively would reduce emissions 100 percent more than countries’ current commitments in the 2015 Paris Agreement on Climate Change.
Countries that want to use different policies, like regulations to reduce emission rates or curb coal use, could join the price floor agreement if they calculate the carbon price equivalent of their policies.
Can Central Banks fight climate change?
Inside the atrium of the IMF building in Wangshington D.C, hundreds of financial experts, bankers, policy makers and economists were seated for the seminar themed ‘can central banks fight climate change?’
The managing director of the fund, Kristalina Georgieva, who was one of the speaker asked: “How many of you think that central banks should fight climate change?”
There was unanimous show of hands.
“The IMF too, cannot step back from acting responsibly,” she said.
The new managing director said that IMF would incorporate environmental risk into its economic analysis starting next year.
To do so, she said that policies must be driven by data and evidence. ”But there is also a need to define what is green or what is brown,” she said. This, she said must be accompanied by right policies and incentives.
“When we are working in countries that are either big emitters of carbon, and therefore need to transition, or are at high risk of carbon shocks, there is no way to address the fundamentals of their economies without looking at these climate risks,” she said.
She said that countries’ economy could be wiped out with the stuck of natural disaster and thus the need for disclosure and stress testing for environmental risks.
But she said that it all depends on how much central banks can use proactive tools like interest rates to foster green investments and whether disclosure from companies should be mandatory. ”These are controversial areas,” she said. “IMF is committed to at the forefront.”
Sabine Mauderer, the executive board member of Bundesbank, however, said that it was not the task of central bank to come up with climate policy. ”But it is clear that central banks will have to deal with the climate risk,” she said adding that there is a need to integrate efforts.
The former UN under-secretary general, Shamshad Akthar said much of what the countries can do depends on the leadership because fiscal policies must be used to discourage investment in brown assets and re-finance green assets.
“What’s wrong in penalising brown assets?” she asked.
Sooner or later, she said there would be high premium on green investment as change is happening.
Emerging markets and developing countries in the Asia-Pacific, she said were more exposed to climate risk, which could distort the entire financial sector. Central Banks, she said could be more effective because it is independent.
However, in absence of a carbon policy many emitters and polluters are not ready to move to technologies that are green because it entails more investment. This is where central banks can help.
Lack of policy and data has also made it challenging determine the level of emission from different corridor and territory. This is one of the factors affecting carbon trading.