Advocate For Carbon Pricing: Boosting Green Transition

Carbon pricing is necessary to finance the energy transition in a context of high inflation and high debt, IMF number two Gita Gopinath warned on Wednesday, also warning against an escalation of “green” subsidies.

“We really need to put carbon pricing on the table, despite all the political issues around it,” said the International Monetary Fund’s deputy managing director.

“We cannot see subsidies as a complete substitute for carbon taxes”, she stressed, during a conference at the Peterson Institute for International Economics (PIIE) in Washington, regretting that “discussions (not ) seem to relate only to subsidies and not to prices”.

However, “from a budgetary point of view, carbon pricing makes a huge difference compared to subsidies”, she explained, because it increases revenues, which can be used “to help households and businesses affected by this transition”, and this helps to reduce the debt.

The carbon price is also “very effective in channeling investments where they need to go and providing the right kinds of incentives for buyers to switch from one type of energy to another,” noted Ms. Gopinath.

A carbon price is like buying a “pollution permit” to cover CO2 emissions. The European Union, in particular, has just expanded its carbon market, the most ambitious in the world, created in 2005 and which currently applies to 40% of the continent’s emissions.

Furthermore, Ms. Gopinath noted, the risk of seeing interest rates continue to rise “depends a lot on how we finance the green transition”: “Do we do it by borrowing? Or by applying a price to carbon? »

The number two of the IMF nevertheless judges that “there is a need to provide subsidies” and “thinks that no one can dispute it”. In particular, she mentioned the “need for much more innovation”.

But “we really have to avoid a subsidy race,” she warned.

The risk? That rich countries “widely deploy resources” leading to “far more costly subsidies (…) than necessary” and leaving smaller countries or countries with less financial means “on the sidelines”.

President Joe Biden’s major climate plan in the United States had thus provoked the ire of the European Union, by granting subsidies for the purchase of new electric vehicles manufactured in the United States. After several weeks of negotiations, these conditions were extended to certain vehicles produced abroad.

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