IMF releases paper on implications of climate change for fiscal, financial, and macroeconomic policies

Washington, 11th January, 2016 (WAM) – The International Monetary Fund (IMF) today released a paper on the implications of climate change for fiscal, financial, and macroeconomic policies.

The paper takes stock of the wide-ranging implications for fiscal, financial, and macroeconomic policies of coming to grips with climate change.

The paper: After Paris: Fiscal, Macroeconomic and Financial Implications of Global Climate Change, says the December 2015 Paris Agreement lays the foundation for meaningful progress on addressing climate change now the focus must turn to the practical policy implementation issues.

”Most pressing is the use of carbon taxes (or equivalent trading systems) to implement the emissions mitigation pledges submitted by 186 countries for the December 2015 Paris Agreement while providing revenue for lowering other taxes or debt. Carbon pricing in developing countries would effectively mobilize climate finance, and carbon price floor arrangements are a promising way to coordinate policies internationally,” it stresses.

”Targeted fiscal measures that are tailored to national circumstances and robust across climate scenarios are needed to counter private sector under-investment in climate adaptation. And increased disclosure of carbon footprints, stress testing of asset values, and greater proliferation of hedging instruments, will facilitate low-emission investments and climate risk diversification through financial markets,” it says.

At the heart of the climate change problem is an externality: firms and households are not charged for the environmental consequences of their greenhouse gases from fossil fuels and other sources. This means that establishing a proper charge on emissions that is, removing the implicit subsidy from the failure to charge for environmental costs has a central role.

Also critical are establishing a clear pathway to meeting complementary commitments on climate finance, effective adaptation, and ensuring financial markets play a full and constructive role. Fiscal policies are key to efficiently mobilizing both public and private sources of finance, while the need to adapt economies to climate change raises issues that have implications for the design of national tax and spending systems (for example, strengthening fiscal buffers and upgrading infrastructure in response to natural disaster risks). There is also a growing need to enhance the contribution of the financial sector to addressing climate challenges, by facilitating clean investments and pooling climate-related risks.

For reducing carbon emissions (‘mitigation’), carbon pricing (through taxes or trading systems designed to behave like taxes) should be front and center. These are potentially the most effective mitigation instruments, are straightforward to administer (for example, building off fuel excises already commonplace in most countries), raise (especially timely) revenues for lowering debt or other taxes, and establish the price signals that are central for redirecting technological change towards low-emission investments. The challenges lie in gauging appropriate price paths and dealing with the adverse effects on vulnerable households and firms, and the consequent political sensitivities.

Moving ahead unilaterally with carbon pricing is likely to be in many countries’ own interests, because of the domestic (non-climate) benefits of doing so, most notably fewer deaths from exposure to local air pollution. As national pricing schemes emerge, a natural way to enhance these efforts and address concerns regarding lost competitiveness would be through international carbon price floor arrangements, analogous to those developed to counter some cases of international competition over mobile tax bases.

For climate finance, carbon pricing in developing countries would establish price signals needed to attract private flows for mitigation. Substantial amounts could also be raised from charges on international aviation and maritime fuels. These fuels are a growing source of emissions,