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Ian W.H. Parry, Mr. Simon Black, and Nate Vernon
This paper provides a comprehensive global, regional, and country-level update of: (i) efficient fossil fuel prices to reflect their full private and social costs; and (ii) subsidies implied by mispricing fuels. The methodology improves over previous IMF analyses through more sophisticated estimation of costs and impacts of reform. Globally, fossil fuel subsidies were $5.9 trillion in 2020 or about 6.8 percent of GDP, and are expected to rise to 7.4 percent of GDP in 2025. Just 8 percent of the 2020 subsidy reflects undercharging for supply costs (explicit subsidies) and 92 percent for undercharging for environmental costs and foregone consumption taxes (implicit subsidies). Efficient fuel pricing in 2025 would reduce global carbon dioxide emissions 36 percent below baseline levels, which is in line with keeping global warming to 1.5 degrees, while raising revenues worth 3.8 percent of global GDP and preventing 0.9 million local air pollution deaths. Accompanying spreadsheets provide detailed results for 191 countries.
Ian Parry and Karlygash Zhunussova

, being somewhat regressive in some countries and progressive in others, recycling of carbon pricing revenues can result in reforms that support both equity and poverty objectives. Climate mitigation can generate substantial domestic environmental co-benefits, most notably reductions in local air pollution mortality . These co-benefits can more than offset abatement costs—before even counting climate benefits—especially in countries with severe air pollution exposure. Beyond carbon pricing, policies vary in their effectiveness . Carbon pricing schemes for

International Monetary Fund. European Dept.

considered. The impacts of policies largely depend on how they affect fuel prices (explicitly or implicitly), fuel price responsiveness, and environmental impacts (carbon emissions, local air pollution mortality, etc.) of fuel use. Various data sources are used to parameterize the model, including the IMF (for GDP growth and domestic environmental impacts); the International Energy Agency (for fuel use data by sector); Dutch authorities (for current fuel prices and taxes); and empirical evidence/results from energy models for fuel price responsiveness and rates of

Ian W.H. Parry

-benefits (e.g., particularly reductions in local air pollution mortality) exceed the economic costs. 7 To the extent that carbon pricing is part of the mitigation strategy significant revenues could be raised (see below) which could be used, for example, to cut distortionary taxes on labor and capital or fund public investment in clean technology networks. US GHG emissions (excluding land-use) were 6.7 billion tons in 2018, with 78 percent from fossil fuel CO2 ( Figure 3 ). By sector, power generation accounted for 38 percent of fossil fuel CO2 emissions, industry 22

Ian W.H. Parry
The United States has pledged to become carbon neutral by 2050, meet sectoral objectives (e.g., for carbon free power, electric vehicles) and encourage greater mitigation among large emitting countries and of international transportation emissions. Fiscal policies at the national, sectoral, and international level could play a critical role in implementing these objectives, along with investment, regulatory, and technology policies. Fiscal instruments are cost-effective, can enhance political acceptability, and do not worsen, or could help alleviate, budgetary pressures. Domestically, a fiscal policy package could contain a mix of economy-wide carbon pricing and revenue-neutral feebates (i.e., tax-subsidy schemes) with the latter reinforcing mitigation in the transport, power, industrial, building, forestry, and agricultural sectors. Internationally, a carbon price floor among large emitters (with flexibility to implement equivalent measures) could effectively scale up global mitigation, while levies/feebates offer a practical approach for reducing maritime and aviation emissions.
Mr. Simon Black, Ian Parry, Mr. James Roaf, and Karlygash Zhunussova
Achieving the Paris Agreement’s temperature goals requires cutting global CO2 emissions 25 to 50 percent this decade, followed by a rapid transition to net zero emissions. The world is currently not yet on track so there is an urgent need to narrow gaps in climate mitigation ambition and policy. Current mitigation pledges for 2030 would achieve just one to two thirds of the emissions reductions needed for limiting warming to 1.5 to 2oC. And additional measures equivalent to a global carbon price exceeding $75 per ton by 2030 are needed. This IMF Staff Climate Note presents extensive quantitative analyses to inform dialogue on closing mitigation ambition and policy gaps. It shows purely illustrative pathways to achieve the needed global emissions reductions while respecting international equity. The Note also presents country-level analyses of the emissions, fiscal, economic, and distributional impacts of carbon pricing and the trade-offs with other instruments—comprehensive mitigation strategies will be key.
International Monetary Fund. Asia and Pacific Dept

(e.g., reductions in local air pollution mortality). 11. The authorities can rely on the existing ETS as their central tool for carbon pricing in Korea. The ETS already has relatively good coverage compared with pricing schemes in most other countries (see Table 1 ). However, there is room for further strengthening the ETS as emissions caps are not fully aligned with intermediate mitigation goals, future emissions prices are uncertain, and revenue opportunities for the government are not fully exploited. 12. Consistency with a linear pathway to emissions

mitigation costs (regardless of future energy prices or availability of carbon-saving technologies) by equalizing the cost of the last ton reduced across fuels and sectors; (iii) provides a robust price signal for redirecting private investment to clean technologies; (iv) mobilizes government revenue; and (v) generates domestic environmental benefits, like reductions in local air pollution mortality. It can also be straightforward administratively if, for example, it builds off existing fuel tax collection. 20. The pan-Canadian carbon pricing scheme is well designed

Mr. David Coady, Ian W.H. Parry, Nghia-Piotr Le, and Baoping Shang

products traded across regions, such as gasoline and diesel, this can be measured by the international reference price as reflected in the cost faced by importers or the revenue foregone by domestically consuming rather than exporting the product. For non-traded energy, such as electricity, the supply cost is the domestic production cost or ‘cost-recovery’ price, with fuel inputs evaluated at international reference prices. Second, there are the environmental costs associated with fossil fuel consumption, the most quantitatively important of which includes local air

Mr. Simon Black, Ms. Ruo Chen, Ms. Aiko Mineshima, Victor Mylonas, Ian W.H. Parry, and Dinar Prihardini
Germany has set national greenhouse emissions targets of a 65 percent reduction below 1990 levels by 2030 and net zero emissions by 2045, along with various sectoral emissions goals. To achieve these targets, the government has introduced multi-pronged policy measures, including a national emissions trading system (ETS), which complements the ETS at the EU level. This paper shows the substantial variation in the price responsiveness of emissions across sectors and thus prices implied by sectoral targets. It proposes the following measures to help Germany meet emissions targets with greater certainty and cost effectiveness: (i) further strengthening carbon pricing, for example through automatically rising price floors for the national ETS after 2026; (ii) harmonizing carbon pricing to reduce cross-sector differences in marginal abatement costs; and (iii) introducing feebates (revenue neutral taxsubsidy schemes) to reinforce incentives at the sectoral level. The paper also studies the distributional impact of higher carbon pricing and suggests that reducing social security contributions can mitigate the regressive direct impact of higher carbon pricing on lowerincome households. Concerns with carbon leakages and firms’ competitiveness are best addressed through agreeing on an international carbon price floor.