The International Monetary Fund has advocated carbon pricing as a means to facilitate the energy transition.
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The second-highest ranking official of the International Monetary Fund warned against expanding the use of "green" subsidies on Wednesday and predicted that carbon pricing will be necessary to help finance the global switch to renewable energy.
Gita Gopinath, the IMF's first deputy managing director, said at a conference in Washington, "I think we really need to, you know, put carbon pricing squarely on the table, despite all the political issues surrounding it."
She added that current discussions on the energy transition "seem to focus on subsidies and not on prices," adding that "we cannot think of the subsidies as a complete substitute for carbon taxes."
But from a financial standpoint, it really matters whether you deal with carbon pricing or subsidies, she added.
According to her, the practice raises revenue that can then be used to assist businesses and households with the energy transition and lower debt.
Carbon pricing is also "very effective in channeling investment where it needs to go, and providing the right kinds of incentives for buyers to switch from one type of energy to another," according to Gopinath.
Purchasing a "pollution permit" to cover CO2 emissions is the same as paying a carbon tax.
In particular, the European Union has recently increased the scope of its carbon market, which already ranks as the most ambitious program of its kind in the world and currently accounts for about 40% of the emissions on the continent.
Gopinath stated that she thought there was justification for offering subsidies to encourage innovation.
She warned against a "race in subsidies," in which wealthy nations would lavishly subsidize less developed nations, undermining their ability to compete.
The result could be "costlier, much more distorted subsidies than what's needed," she continued.
Gopinath's entry into the discussion of subsidies comes in response to European dissatisfaction with US President Joe Biden's major climate plan, which provides generous subsidies to new electric vehicles made in the US.
Washington has since widened access to these subsidies following discussions between the US and the EU.