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International Monetary Fund. Fiscal Affairs Dept.

Abstract

Without substantial mitigation of greenhouse gas emissions, global temperatures are projected to rise by around 4°C above preindustrial levels by 2100 (they have already increased by 1°C since 1900).1 Global warming causes major damage to the global economy and the natural world and engenders risks 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.2 Carbon dioxide (CO2) emissions from fossil fuel combustion account for a dominant (63 percent) and growing share of global greenhouse gas emissions and are the most immediately practical to control (Figure 1.1, panel 1).3 Policy action is thus urgently needed to curtail emissions. The longer that action is delayed, the greater the accumulation in the atmosphere, and the more abrupt and costly will be the necessary action to stabilize global temperatures.

International Monetary Fund. Fiscal Affairs Dept.

Abstract

This report emphasizes the environmental, fiscal, economic, and administrative case for using carbon taxes, or similar pricing schemes such as emission trading systems, to implement climate mitigation strategies. It provides a quantitative framework for understanding their effects and trade-offs with other instruments and applies it to the largest advanced and emerging economies. Alternative approaches, like “feebates” to impose fees on high polluters and give rebates to cleaner energy users, can play an important role when higher energy prices are difficult politically. At the international level, the report calls for a carbon price floor arrangement among large emitters, designed flexibly to accommodate equity considerations and constraints on national policies. The report estimates the consequences of carbon pricing and redistribution of its revenues for inequality across households. Strategies for enhancing the political acceptability of carbon pricing are discussed, along with supporting measures to promote clean technology investments.

Joseph E. Aldy

indicate that there are considerable gains to trade, but also indicate that one country will be financing emission reductions in the other country: firms in the pre-linking high carbon price country will buy allowances, and hence finance emission reductions, from firms in the pre-linking low carbon price country. Disadvantages There are a number of reasons why carbon prices may not reflect mitigation effort. A carbon price may be too narrow a measure of a country’s efforts to mitigate GHG emissions. It may only cover a subset of emissions (e.g., only large

Manuel Linsenmeier, Mr. Adil Mohommad, and Gregor Schwerhoff

interesting patterns. There appear to be at least three different kinds of trajectories of how countries built up their policy portfolios over time. Countries of the first group, including Canada, Japan, and South Africa, exhibit a relatively rapid expansion of their portfolio followed by a slow further expansion over several years that eventually includes the adoption of carbon pricing. Countries of the second group, including Argentina and Switzerland, show a steady gradual expansion of their portfolios up until the introduction of carbon pricing. Countries of the third

Ian Parry and Karlygash Zhunussova

(often less efficient or effective but politically less challenging) instruments that promote some of the key behavioral responses of carbon pricing. Countries will also need comprehensive approaches that address concerns about equity, impacts on vulnerable groups, and provide the complementary public investment in clean technology infrastructure, to enhance the overall acceptability and effectiveness of the mitigation strategy. Without an urgent narrowing of ambition and policy gaps on climate mitigation, a potentially dangerous cliff-edge for emissions reductions

Manuel Linsenmeier, Mr. Adil Mohommad, and Gregor Schwerhoff
Carbon pricing is considered the most efficient policy to reduce greenhouse gas emissions but it has also been conjectured that other policies need to be implemented first to remove certain economic and political barriers to stringent climate policy. Here, we examine empirical evidence on the the sequence of policy adoption and climate policy portfolios of G20 economies and other major emitters that eventually implemented a national carbon price. We find that all countries adopted carbon pricing late in their instrument sequence after the adoption of (almost) all other instrument types. Furthermore, we find that countries that adopted carbon pricing in a given year had significantly larger climate policy portfolios than those that did not. In the last part of the paper, we examine heterogeneity among countries that eventually adopted a carbon price. We find large variation in the size of policy portfolios of adopters of carbon pricing, with more recent adopters appearing to have introduced carbon pricing with smaller portfolios. Furthermore, countries that adopted carbon pricing with larger policy portfolios tended to implement a higher carbon price. Overall, our results thus suggest that policy sequencing played an important role in climate policy, specifically the adoption of carbon pricing, over the last 20 years.
Mr. Simon Black, Ian Parry, Mr. James Roaf, and Karlygash Zhunussova
Achieving the Paris Agreement’s temperature goals requires cutting global CO2 emissions 25 to 50 percent this decade, followed by a rapid transition to net zero emissions. The world is currently not yet on track so there is an urgent need to narrow gaps in climate mitigation ambition and policy. Current mitigation pledges for 2030 would achieve just one to two thirds of the emissions reductions needed for limiting warming to 1.5 to 2oC. And additional measures equivalent to a global carbon price exceeding $75 per ton by 2030 are needed. This IMF Staff Climate Note presents extensive quantitative analyses to inform dialogue on closing mitigation ambition and policy gaps. It shows purely illustrative pathways to achieve the needed global emissions reductions while respecting international equity. The Note also presents country-level analyses of the emissions, fiscal, economic, and distributional impacts of carbon pricing and the trade-offs with other instruments—comprehensive mitigation strategies will be key.
International Monetary Fund. Strategy, Policy, & Review Department
The scenario planning exercises help to draw out the surveillance priorities and stress- test the robustness of those priorities to uncertainties in the decade ahead. To inform the two priorities on confronting risks and uncertainties and mitigating spillovers, the scenarios illustrate how different shocks and alternative policy approaches carry their own risks and can have both positive and negative spillovers. The scenarios also illustrate some of the complex economic and non-economic factors that feed into the priority on economic sustainability and demonstrate how resource constraints and changing economic structures underpin the need for a unified policy approach.
International Monetary Fund. Strategy, Policy, & Review Department

to stabilize in larger markets as smaller countries pursue niche opportunities. Despite signs of higher growth than in the recent past, reclaiming the decade’s lost output seems a distant prospect. Larger and more diversified economies are finding domestic substitutes to fill the gaps left by previously foreign-sourced goods and components. Production methods are inefficient and of lower quality. Absent coordination on carbon pricing, countries acting as a haven for pollution-intensive industries by relaxing long-standing environmental safeguards are expected

International Monetary Fund
This paper reviews the fiscal implications of climate change, and the potential role of the Fund in addressing them. It stresses that: • The potential fiscal implications are immediate as well as lasting, and liable to affect—in differing forms and degree—all Fund members. • Climate change is a global externality problem, calling for some degree of international fiscal cooperation… • …and has features—an intertemporal mismatch between the (early) costs of action to address climate change and (later) benefits, pervasive uncertainties and irreversibilities (including risk of catastrophe), and sharp asymmetries in the effects on different countries—that raise difficult technical and ethical issues, and hinder policy coordination. • In addition to itself impacting the public finances, climate change calls for deploying fiscal instruments to mitigate its extent and adapt to its remaining effects.