ISLAMABAD: The International Monetary Fund (IMF) has said that energy prices in many countries are wrong because they do not reflect environmental damage, notably climate change, air pollution and various side effects of motor vehicle use such as traffic accidents and congestion.

Whether on energy or any other product, prices should provide consumers with an accurate assessment of the actual costs associated with the product, emphasises the IMF in a new report named “Getting Energy Prices Right: From Principle to Practice”.

Also read: IMF assured of consistent hike in gas prices

A number of countries rely too much on general income, payroll, and consumption taxes for their fiscal objectives, and too little from taxes on energy use. In fact, fiscal policies should be centre stage in getting energy prices to reflect the harmful and environmental side effects associated with energy use, points out the report.

“Fuel tax reforms can yield substantial health, environmental, and fiscal benefits,” said Vitor Gaspar, head of the IMF’s Fiscal Affairs Department. “According to our estimates, moving from existing to efficient fuel prices, at a global level, would reduce pollution-related deaths from fossil fuel combustion by 63 per cent, mostly from reduced coal deaths, reduce energy-related carbon emissions by 23pc, and raise revenues equal to 2.6pc of GDP,” he said.

The report stresses that energy tax reform need not be about raising new revenues, rather, reform 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 — smarter taxes rather than higher taxes.

According to the report, getting energy prices right involves extending motor fuel taxes, which are already well established and easily administered in many countries, to other fossil fuel products, such as coal and natural gas, or their emissions, and aligning the rates of these taxes with environmental damage.

Finance ministries can be actively engaged in getting energy prices right, given their role in administering energy taxes, perhaps as part of a broader tax shifting operation. And given the potentially large domestic environmental and fiscal benefits, reform need not await global cooperation over climate policy, suggests the report.

The report notes that impacts on vulnerable households can be lessened through targeted measures like strengthened social safety nets, which are a more effective way to help these groups than holding down energy prices, given most of the benefits of low energy prices accrue to higher income groups.

“In our study, we offer practical guidance for countries on how to go about quantifying the harmful side effects of energy use, and to show what this implies for corrective taxes on coal, natural gas, gasoline, and road diesel, for over 150 countries,” said Ian Parry, Principal Environ­mental Fiscal Policy Expert at the IMF and lead author of the report.

Published in Dawn, August 3rd, 2014