DUSHANBE, August 2, 2014, Asia-Plus –Fiscal policies should be center stage in getting energy prices to reflect the harmful and environmental side effects associated with energy use, according to a new report released by the International Monetary Fund (IMF) on July 31.
Energy prices in many countries are wrong because they are set at levels that do not reflect environmental damage, notably climate change, air pollution, and various side effects of motor vehicle use, such as traffic accidents and congestion. Whether on energy or any other product, prices should provide consumers with an accurate assessment of the actual costs associated with the product.
A number of countries rely too much on general income, payroll, and consumption taxes for their fiscal objectives, and too little from taxes on energy use, according to the IMF report.
The report, in particular, stresses that energy tax reform need not be about raising new revenues. Rather, reform could focus on restructuring the tax system away from taxes that are likely to be most harmful for efficiency and growth, such as income taxes, and towards carefully designed taxes on energy—smarter taxes rather than higher taxes. According to the report, getting energy prices right involves extending motor fuel taxes, which are already well established and easily administered in many countries, to other fossil fuel products, such as coal and natural gas, or their emissions, and aligning the rates of these taxes with environmental damage.
Fuel tax reforms reportedly can yield substantial health, environmental, and fiscal benefits. According to IMF estimates, moving from existing to efficient fuel prices, at a global level, would reduce pollution-related deaths from fossil fuel combustion by 63 percent, mostly from reduced coal deaths, reduce energy-related carbon emissions by 23 percent, and raise revenues equal to 2.6 percent of GDP.
The report offers practical guidance for countries on how to go about quantifying the harmful side effects of energy use, and to show what this implies for corrective taxes on coal, natural gas, gasoline, and road diesel, for over 150 countries.
The report finds that appropriate charges on fossil fuel products are equal to the emission rates from combusting the fuel times the environmental damages per unit of emissions. Additional charges would be needed for motor fuel taxes to reflect traffic congestion, accidents, and road damage, at least for the interim, though over the longer term countries could partially transition to distance-based taxation to effectively address congestion in particular (e.g., peak period fees on busy roads).
