How does one quantify the harmful side effects of energy use? According to Dyson School assistant professor Shanjun Li, 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. Energy tax reform need not be primarily about raising new revenues, but 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, he argues.
Li teamed up with three researchers at the International Monetary Fund (IMF) to study the issue. The results, published in a book offering practical advice illustrated for more than 150 countries, suggest there is pervasive mispricing of energy across developed and developing countries alike, with much at stake in policy reform.
“Getting energy prices right would require extending current widely accepted and easily administered motor fuel taxes, to better align the rates of these taxes with environmental damage,” the authors write. “Similar charges could be added to other fossil fuel products, such as coal and natural gas, or their emissions.”
At a global level, implementing efficient energy prices would reduce carbon emissions by an estimated 23 percent and fossil-fuel air pollution deaths by 63 percent, while raising revenues (badly needed for fiscal consolidation and reducing other burdensome taxes) averaging 2.6 percent of GDP.
The book was officially launched July 31 at an event at the Center for Global Development, recorded here.
