"I think we really need to, you know, put carbon pricing squarely on the table, despite all the political issues surrounding it," the IMF's First Deputy Managing Director Gita Gopinath said at a conference in Washington.
"We cannot think of the subsidies as a complete substitute for carbon taxes," she said, adding that current discussions on the energy transition "seem to focus on subsidies and not on prices."
"But fiscally, it makes a huge difference if you deal with the carbon pricing versus subsidies," she said.
The practice increases revenues which can then be used to help households and businesses deal with the energy transition, and also reduce debt, she noted.
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," Gopinath said.
Carbon pricing is equivalent to buying a "pollution permit" to cover CO2 emissions.
The European Union, in particular, has just expanded its carbon market, which is already the most ambitious such program in the world and currently covers around 40 percent of the continent's emissions.
Gopinath said she believes there are grounds to provide subsidies to help stimulate innovation.
However, the world needs to avoid a "race in subsidies," where richer countries would sideline smaller countries' competitiveness with generous support, she said.
This could bring about "costlier, much more distorted subsidies than what's needed," she added.
Gopinath's intervention into the debate on subsidies follows frustration in Europe over US President Joe Biden's major climate plan, which grants generous subsidies to new electric vehicles manufactured in the United States.
After negotiations between the United States and European Union, Washington has since widened access to these subsidies.
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