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International Monetary Fund. Fiscal Affairs Dept.

Abstract

This report emphasizes the environmental, fiscal, economic, and administrative case for using carbon taxes, or similar pricing schemes such as emission trading systems, to implement climate mitigation strategies. It provides a quantitative framework for understanding their effects and trade-offs with other instruments and applies it to the largest advanced and emerging economies. Alternative approaches, like “feebates” to impose fees on high polluters and give rebates to cleaner energy users, can play an important role when higher energy prices are difficult politically. At the international level, the report calls for a carbon price floor arrangement among large emitters, designed flexibly to accommodate equity considerations and constraints on national policies. The report estimates the consequences of carbon pricing and redistribution of its revenues for inequality across households. Strategies for enhancing the political acceptability of carbon pricing are discussed, along with supporting measures to promote clean technology investments.

International Monetary Fund. African Dept.

, milk, bread, peas, animal feeds, lentils, sorghum meal, unmalted sorghum grain, wheat grain, and wheat flour. 5 A destination-based VAT relieves exports from VAT by zero-rating exports and allowing exporters to reclaim all input tax. In jurisdictions with weak revenue administrations or governments facing revenue constraints, refund requests tend to build up, which is especially problematic during extraction firms’ start-up phase. It effectively turns the VAT into a tax on investment or on exports. 6 Central Bank of Lesotho, The Scope of Government

International Monetary Fund. Fiscal Affairs Dept.

communities. In addition, extractive activities may cause scarred local landscapes and impaired waterways, and bankrupt extraction firms may be unable to meet their obligations to clean up the abandoned mines, reducing prospects for attracting new industries ( Morris 2016 ). Options for Use of Carbon Tax Revenue For carbon pricing reforms to be economically and politically viable, and for the burden of adjustment to be distributed in a fair manner, policymakers need to consider how to best allocate the revenues considering both economic efficiency and implications

International Monetary Fund

instruments at its disposal so as to limit the damage that lingering asymmetries information can do to the pursuit of its core policy objectives. Suppose, for instance, that some projects are of two possible types, with either low or high costs for any given level of extraction. Firms know what type their project is. But the government – whose objective, assume, is simply to maximize its tax revenue – does not, and cannot rely on firms to self-report their profitability correctly. It can though observe (only) the level of extraction and the price at which the resource is