31 July 2014: The International Monetary Fund (IMF) has released a book for policy makers on how to use tax policy to ensure that energy prices properly reflect impacts on the environment and sustainable economic development.

‘Getting Energy Prices Right: From Principle to Practice’ explains that energy prices in many countries are set at levels that do not reflect environmental damage, such as climate change, air pollution and side effects from motor vehicle use, and offers practical guidance for countries to quantify the harmful side effects of energy use. It also states that energy tax reform does not necessarily mean raising new revenues, but could focus on restructuring the tax system away from those taxes likely to harm efficiency and growth, such as income taxes, and towards carefully designed energy taxes that better align tax rates of motor fuels and other fossil fuels with their environmental damage or emissions.

The book lays out a methodology for determining the right price, provides estimates of taxes needed on coal, natural gas, gasoline and diesel to reflect environmental costs in 156 countries. and is based on the premise that appropriate taxes can discourage overuse of environmentally harmful energy sources.

During the report’s launch, IMF Managing Director Christine Lagarde said the book was a “toolkit” to provide guidance to help members ensure that they are pricing energy responsibly, and that “a degraded environment leads to a degraded economy.” She added that fiscal policy must take “center stage” in protecting the environment, and that, while the IMF has been working to eliminate energy subsidies, energy tax systems around the world must properly reflect environmental side effects. She urged “smarter taxes rather than higher taxes,” and emphasized the appropriate tax base and rate, targeting the source of environmental harm, and making sure charges on different fuels are proportional to emissions from those fuels.

Lagarde underscored that keeping energy prices artificially low does not help the poor and vulnerable, and suggested that policymakers should focus on overall fairness of the tax system. She said energy price reform produces a triple benefit: “saving lives, saving the planet, and saving the budget.” [IMF Website for Publication] [Publication: Getting Energy Prices Right: From Principle to Practice] [IMF Managing Director Christine Lagarde Speech]