IMF's Lagarde urges euro zone to take "decisive steps"

WASHINGTON (Reuters) - The head of the International Monetary Fund called for "decisive steps" by European policymakers to deal with the region's financial crisis and said carbon taxes could deliver more revenues for countries worldwide with budget constraints.

In a speech on Tuesday focused on the upcoming Rio+20 earth summit in Brazil on June 20-22, IMF Managing Director Christine Lagarde said economic and financial stability was critical to addressing global environmental challenges.

The summit, 20 years after the original Rio Earth Summit that led to the Kyoto Protocol on capping greenhouse gas emissions, comes amid a faltering global economy and deep concerns over Europe's financial future.

"We need a strategy that is good for stability and good for growth - where stability is conducive to growth and growth facilitates stability," she told an event of the Washington-based Center for Global Development.

"This must start with advanced economies, especially in Europe. Policymakers need to take decisive steps to break free of the crisis," she added.

Policymakers should aim for a combination of "very accommodating" monetary policy, use of common resources to provide direct support to banks and growth-friendly policies where fiscally possible.

The euro zone crisis has intensified since last month as worry grew among investors about the possibility of Greece leaving the single currency.

Lagarde said fiscal stability meant governments in advanced economies should outline credible medium-term plans to lower public debt. Without such a plan, countries might be forced to make bigger adjustments sooner, she cautioned.

Developing economies were holding up relatively well, she said, but could "face a cold chill" if global conditions worsened. "Those with fiscal space should prepare to use it, especially if conditions continue to deteriorate," she added.

GREENER ECONOMY

With governments in advanced economies in budget-cutting mode, Lagarde said raising revenues through carbon taxes or tax-like instruments could help, and getting the pricing right was important.

"I am thinking about environmental taxes or emissions trading systems under which governments issue ? and preferably sell ? pollution rights," she added.

In the United States, for example, a carbon tax of about $25 per ton of CO2 would add 22 cents to a gallon of gasoline, which could add over $1 trillion over a decade, Lagarde said.

Charges on international aviation and maritime emissions would raised about a quarter of the $100 billion needed to tackle climate changes in developing countries, she added.

"At present, however, we are only at base camp in terms of getting the prices right. Right now, less than 10 percent of worldwide greenhouse gas emissions are covered by formal pricing programs," she said.

She added: "Getting the prices right means using fiscal policy to make sure that the harm we do is reflected in the prices we pay."

Lagarde said the IMF was collaborating with other institutions to come up with guidance for developing and developed countries that focuses on improving pricing.

She said she looked forward to initial findings by the end of this year, with a final report within 12 months, on the issue.

The IMF was also working with the United Nations and the World Bank on finding ways to properly measure the incomes and costs associated with natural resources and how extraction affects national wealth, Lagarde said.

(Reporting by Lesley Wroughton; Editing by Neil Stempleman and Phil Berlowitz)