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Political Science > Environmental Policy

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Cover Staff Climate Notes
Sleepwalking to the Cliff Edge? A Wake-up Call for Global Climate Action
Simon Black, Ian W.H. Parry, and Karlygash Zhunussova
Urgent action to cut greenhouse gas (GHG) emissions is needed now. Early next year, all countries will set new emissions targets for 2035 while revising their 2030 targets. Global GHGs must be cut by 25 and 50 percent below 2019 levels by 2030 to limit global warming to 2°C and 1.5°C respectively. But current targets would only cut emissions by 12 percent, meaning global ambition needs to be doubled to quadrupled. Further delay will lead to an ‘emissions cliff edge’, implying implausible cuts in GHGs and putting put 1.5°C beyond reach. This Note provides IMF staff’s annual assessment of global climate mitigation policy. It illustrates options for equitably aligning country targets with the Paris Agreement’s temperature goals. It also provides guidance on modelling needed to set emissions targets and quantify climate mitigation policy impacts.
Keywords:
Paris Agreement; climate mitigation; carbon pricing; climate finance; climate investment; IMF staff Climate note; part of the International Monetary Fund; IMF staff Climate; IMF analysis; IMF staff Climate Note 2024/006; cliff edge; Greenhouse gas emissions; Climate change; Global
Cover Staff Climate Notes
Harnessing Renewables in Sub-Saharan Africa: Barriers, Reforms, and Economic Prospects
Kailhao Cai, Thibault Lemaire, Andrea Medici, Giovanni Melina, Gregor Schwerhoff, and Sneha D Thube
Sub-Saharan Africa needs to significantly accelerate its electricity generation. While hydropower is prominent in some countries, solar and wind power generation has lagged other world regions, even though sub-Saharan Africa has some of the most favorable conditions. A mix of domestic and external financing can increase both renewable electricity generation and GDP. In a scenario where about $25 bn in climate finance flows are allocated annually to renewable energy, renewable electricity production could be up to 24 percent higher than in a scenario excluding this financing, and annual GDP growth would be boosted by 0.8 percentage point on average over the next decade, accompanied by stronger labor demand in the electricity sector. Policies can help catalyze climate finance. An ambitious package of governance, business regulations, and external sector reforms is associated with a 20 percent increase in climate finance flows and a 7 percent increase in electricity generation over five years. In addition, implementing climate policies is linked to increases in green foreign direct investment announcements and green electricity production.
Keywords:
Sub-Saharan Africa; electricity generation; renewable energy; climate finance; economic development; market reforms; climate policies; IMF staff Climate note; harnessing renewable; part of the International Monetary Fund; IMF analysis; IMF staff Climate; Electricity; Climate policy; Africa; Global; East Africa
Cover IMF Working Papers
Policy Options for Climate Mitigation: Emissions Trading Schemes in Asia-Pacific
Margaux MacDonald and Ian W.H. Parry
Large reductions in global emissions are needed for the world to be on track to meet global temperature goals. Asia-Pacific countries have a critical role in emissions reduction given their large and rising share in global emissions. This paper discusses the main opportunities and behavioral responses for reducing emissions, and commonly used mitigation instruments. It then considers key design issues for carbon pricing, with a focus on emissions trading schemes (ETS), describes measures to overcome the obstacles to carbon pricing, and discusses experiences with carbon pricing relevant for Asia-Pacific economies. Lastly, the paper covers complementary policy reforms, including reinforcing mitigation instruments, public investment, fuel tax reform, green industrial policies, and supporting reforms to the energy sector. Carbon pricing, including ETSs can be the centerpiece of climate mitigation strategies for most countries, particularly if ETSs are designed to mimic some of the administrative and economic attractions of carbon taxes and implemented appropriately.
Keywords:
Emissions trading scheme; climate; Asia; mitigation instrument; climate mitigation strategy; mitigation opportunity; Asia-Pacific country; policy reform; transmission company; Carbon tax; Greenhouse gas emissions; Non-wage benefits; Asia and Pacific; Global
Cover High-Level Summary Technical Assistance Reports
Islamic Republic of Mauritania: Climate Mitigation Policy Diagnostic
Diego Mesa Puyo, Zhiyong An, Thomas Benninger, and Nate Vernon
Mauritania requested capacity development from the Fiscal Affairs Department on carbon taxation, fossil fuel pricing and fiscal aspects of hydrogen development. This is a high-level summary of the technical assistant and the recommendations provided to the authorities. The report assesses options to gradually introduce a carbon tax to bring the country in line with its Nationally Determined Contribution for 2030 and net-zero pledge for 2050, including targeted support for vulnerable households. It then reviews approach to price fossil fuel products and proposes a revised methodology better aligned with international petroleum markets, along with a fiscally neutral smoothing mechanism to mitigate the impact of abrupt price changes on Mauritanian consumers. Finally, the report evaluates fiscal aspects related to the development of the low and zero-emissions hydrogen to ensure the country continues to position itself as an attractive investment destination without foregoing future revenue streams.
Keywords:
Carbon Pricing; Carbon Taxes; Fiscal Policy; Climate Mitigation; climate mitigation policy diagnostic; high-level summary; tax volatility; hydrogen development; price setting; Carbon tax; Fuel prices; Climate policy; Non-renewable resources
Cover High-Level Summary Technical Assistance Reports
Cabo Verde: Climate Policy Assessment
Katja Funke, Alberto Garcia Huitron, and Didier Tabaro
Cabo Verde faces development challenges from multiple structural factors, including insularity, territorial discontinuity, fragility of ecosystems, and scarcity of natural resources, namely water and arable land. Climate change implications are amplifying these challenges. As an island extension of the arid Sahel zone, Cabo Verde faces severe water shortage, which the country addresses more and more through energy intensive desalination, using electricity produced largely by thermal power plants, which depend entirely on imported fossil fuels. The resulting high energy prices directly impact the cost of water production. In conjunction with climate change induced aridity, the energy-water-climate nexus presents the core development challenge for the country.
Keywords:
Cabo Verde; Climate; Energy; Water; Adaptation; energy-water-climate nexus; climate change implication; climate policy assessment; Sahel zone; climate policy diagnostic; Climate policy; Climate change; Renewable energy; Tariffs; Global
Cover IMF Working Papers
Cross-Border Impacts of Climate Policy Packages in North America
Jean-Marc Fournier, Tannous Kass-Hanna, Liam Masterson, Anne-Charlotte Paret, and Sneha D Thube
We quantify cross-border effects of the recent climate mitigation policies introduced in Canada and the U.S., using the global general equilibrium model IMF-ENV. Notably, with the substantial emission reductions from Canada’s carbon tax-led mitigation policies and the U.S.’ Inflation Reduction Act, these two countries would bridge two-thirds of the gap toward their Nationally Determined Contribution (NDC) goals. While the broadly divergent policies are believed to elicit competitiveness concerns, we find the aggregate cross-border effects within North America to be very limited and restricted to the energy intensive and trade exposed industries. Potential carbon leakages are also found to be negligible. A more meaningful difference triggered by policy heterogeneity is rather domestic, especially with U.S. subsidies increasing energy output while the Canada model with a carbon tax would marginally decrease it. This analysis is complemented by a stylized model illustrating how such divergence can affect the terms of trade, but also how these effects can be countered by exchange rate flexibility, border adjustments or domestic taxation.
Keywords:
Climate Policy; Climate Change Policy; Nationally Determined Contributions (NDCs); Mitigation; Climate subsidies; Carbon Tax; Carbon pricing; Spillovers; North America; Global; IMF-ENV model; Computable General Equilibrium (CGE) models; Competitiveness; Greenhouse Gas Emissions (GHG); Revenue Recycling; Inflation Reduction Act (IRA); Power; Electricity; climate policy package; mitigation policy; green subsidy; Canada's Carbon pricing policy; divergent policy
Cover IMF Working Papers
Firms’ Resilience to Energy Shocks and Response to Fiscal Incentives: Assessing the Impact of 2022 Energy Crisis
David Amaglobeli, Joaquim Guilhoto, Samir Jahan, Salma Khalid, Waikei R Lam, Gregory M Legoff, Brent Meyer, Xuguang Simon Sheng, Pawel Smietanka, Sonya Waddell, and Daniel Weitz
The energy price shock in 2022 led to government support for firms in some countries, sparking debate about the rationale and the nature of such support. The results from nationally representative firm surveys in the United States and Germany indicate that firms in these countries were generally resilient. Coping strategies adopted by firms included the pass-through of higher costs to consumers, adjustment of profit margins (United States) and investments in energy saving and efficiency (Germany). Firms in energy-intensive industries would have been significantly more affected if international energy prices were fully passed through to domestic prices in Europe. Survey responses further reveal that most firms are uncertain about the impact of recent policy announcments on green subsidies. Firms take advantage of fiscal incentives to accelerate their climate-related investment plans are often those that have previous plans to do so. These findings suggest better targeting and enhancing policy certainty will be important when facilitate the green transition among firms.
Keywords:
Energy prices; Subsidies; Survey; Cost-Push Model; Input Output Table; Firm Behavior; energy price shock; D. government intervention; firms' resilience; investment plan; Energy conservation; Inflation; Greenhouse gas emissions; Climate policy; Global; Europe
Cover IMF Staff Country Reports
Czech Republic: Selected Issues
International Monetary Fund. European Dept.
This Selected Issues paper analyzes inflation in the Czech Republic. The paper analyzes using an adaptive learning structural model. A structural model incorporating adaptive learning features is well suited to project inflation path in the Czech Republic. In Czechia, inflation expectations are notably shaped by past inflation outcomes, creating a feedback loop where rapidly decreasing inflation contributes to a shorter duration of elevated inflation, and vice-versa. Within this model, the central bank influences inflation through three channels. The first is direct-tightening policy reduces demand, lowers the output gap, and thus decreases inflation. The other two channels operate through inflation expectations. Tightening policy not only reduces current inflation but also impacts future expectations. Importantly, in contrast to perfect foresight-rational expectations models, the central bank can shape agents’ learning. Lower-than-expected current inflation leads to adjustments in how past inflation is perceived, influencing future inflation. The model suggests that the speed to reach the inflation target depends on the strength of the monetary policy stance.
Keywords:
decarbonization strategy; inflation in the Czech republic; green transition; financial conditions in Czechia; economy FCI; Inflation; Renewable energy; Non-renewable resources; Greenhouse gas emissions
Cover IMF Working Papers
Climate Change Mitigation and Policy Spillovers in the EU’s Immediate Neighborhood
Mr. Serhan Cevik, Mr. Nadeem Ilahi, Mr. Krzysztof Krogulski, Ms. Grace B Li, Sabiha Mohona, and Yueshu Zhao
EU’s neighborhood countries (EUN) have lagged the EU on emissions mitigation; coal-heavy power generation and industrial sectors are a key factor. They have also trailed EU countries in emissions mitigation policies since 2000, with little use of market-based instruments, and they still have substantial fossil fuel subsidies. Increasingly stringent EU mitigation policies are asociated with lower emissions in EUN. Overall output effects of the CBAM, in its current form, would be limited, though exports and emissions-intensive industries could be heavily impacted. A unilaterally adopted economywide carbon tax of $75 per ton would significantly lower emissions by 2030, with minimal consequences for output or household welfare, though a safety net for the affected workers may be necessary. To become competitive today by attracting green FDI and technology, overcoming infrastructure constraints and integrating into EU’s supply chains, EUN countries would be well served to front load decarbonization, rather than postpone it for later.
Keywords:
Climate change; carbon emissions; climate change mitigation; carbon tax; Europe; EU mitigation policy; EUN country; policy spillover; neighborhood country; Greenhouse gas emissions; Climate policy; Global