Fund says governments could use money to help vulnerable people or invest in green energy

Avoiding dangerous global heating will require governments around the world to impose stringent taxes on fossil-fuel usage that will mean a 43% jump in household energy bills over the next decade, the International Monetary Fund has said.

The Washington-based Fund said the battle against climate change could only be won if the average carbon tax levied by its member states increased from $2 (£1.63) a ton (907kg) to $75 a ton.

The IMF said governments worried about a political backlash against big increases in the cost of heating homes and motoring, and should use the extra revenue raised from the tax to compensate consumers.

“To limit global warming to 2C or less – the level deemed safe by science – large emitting countries need to take ambitious action,” IMF economists said.

“For example, they should introduce a carbon tax set to rise quickly to $75 a ton in 2030. This would mean household electric bills would go up by 43% cumulatively over the next decade on average – more in countries that still rely heavily on coal in electricity generation, less elsewhere. Gasoline would cost 14% more on average.”

Calculations by the IMF’s economists show that a $75-a-ton carbon tax would also lead – once inflation has been taken into account – to an average 214% increase in the cost of coal and a 68% increase in natural gas. For the UK, the increases would be 157% for coal, 51% for natural gas, 43% for electricity and 8% for petrol.

Details of the IMF’s call for a much higher carbon tax came in a chapter from the organisation’s biannual fiscal monitor released before its publication next week.

“Without substantial mitigation of greenhouse gas emissions, global temperatures are projected to rise by around 4C above preindustrial levels by 2100 (they have already increased by 1C since 1900),” the IMF said.

“Global warming causes major damage to the global economy and the natural world and engenders risk of catastrophic and irreversible outcomes such as rising sea levels, extreme weather events (already more frequent) leading to loss of life and the possibility of much higher warming scenarios.”

The IMF said it was calling for a substantially higher carbon tax because the carbon dioxide from fossil fuels accounted for almost two-thirds of global greenhouse gas emissions and was the most immediately practical to control.

But the authors of the fiscal monitor said that without compensation to offset the impact on business and consumers, there was likely to be strong political resistance. The French president Emmanuel Macron’s attempt to cut France’s CO2 emissions through higher fuel prices prompted nationwide protests from the gilets jaunes (yellow vest) movement.

A blog post by the authors to accompany the chapter from the fiscal monitor said global heating was a clear and present threat. Actions to date had fallen short of what was required, and finance ministers needed to play a pivotal role in dealing with the problem.

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“A better future is possible. Governments will need to increase the price of carbon emissions to give people and firms incentives to reduce energy use and shift to clean energy sources. Carbon taxes are the most powerful and efficient tools, but only if they are implemented in a fair and growth-friendly way.

“To make carbon taxes politically feasible and economically efficient, governments need to choose how to use the new revenue. Options include cutting other kinds of taxes, supporting vulnerable households and communities, increasing investment in green energy or simply returning the money to people as a dividend.”

The IMF economists said governments could target financial help directly at workers and communities disproportionately affected by the carbon tax instead of paying a flat-rate dividend to everybody. Restricting compensation to the poorest 40% of households would leave three-quarters of the revenue from the carbon tax for investment in green energy, innovation or to fund the UN’s anti-poverty 2030 sustainable development goals.

While about 50 countries currently have a carbon pricing scheme in some form, the IMF said the global average carbon price of $2 a ton was far below what the planet needed. It said other countries could learn from Sweden, which has a carbon tax of $127 per ton and has managed to reduce emissions 25% since 1995, while the economy has expanded by 75%.