Heavy smog hangs over Beijing traffic: the Bali conference is discussing how to combat climate change (photo: Reuters/Claro Cortes IV)
Global warming
IMF Deputy Managing Director Takatoshi Kato told reporters in Washington that the IMF will work in close conjunction with the World Bank and relevant agencies to contribute to the analysis of the macroeconomic implications of climate change and the spillover effects of national polices on greenhouse gas emissions.
Bali conference
Kato met with reporters before leaving for the UN Conference on Climate Change in Bali, Indonesia, where representatives from over 180 countries are mapping out a global action plan to fight climate change in the period after the Kyoto Protocol expires in 2012. Kato, who will address the conference on December 11 and 14, said that the economic challenges posed by long-term climate change are "many and complex."
Many countries will experience direct negative effects on output and productivity. Countries may also see a deterioration of their fiscal position resulting from a weakening of traditional tax bases and increased expenditure on efforts to mitigate the effects of climate change. Some countries could experience balance of payments problems owing to a reduction in exports of goods and services, such as agricultural products, fish, and tourism. And private economic costs are also likely to arise from mitigation efforts, Kato said.
The IMF's membership includes most developed, emerging market, and low-income countries, which gives the IMF an advantage in studying the economic effects of climate change. "On the basis of a very universal membership, we can provide bilateral and multilateral analysis and monitoring," Kato observed, adding that the IMF has been active in the design of relevant tax mechanisms and other fiscal measures.
In addition to the challenges of climate change, Kato noted that efficient carbon pricing schemes could also present potential revenue opportunities for some countries. Precisely how countries use these revenues would have to be decided on a case-by-case basis, but Charles Collyns of the IMF's Research Department cautioned that it was important to ensure that these revenues were directed into efficient local spending or saved. "It's quite possible that the best use for some of these funds will be to save them to avoid a "Dutch disease" type of problem," he said, referring to the potential loss of competitiveness resulting from a sudden surge of foreign exchange inflows.
Need for carbon pricing framework
Despite the long-term nature of the problem, countries are already beginning to prepare for the effects of climate change. These preparations are evident, Collyns said, in innovations in financial markets to insure against the increased frequency of natural disasters as well as in changes in agricultural practices. "But the response so far is relatively muted because we have not yet had an efficient and credible framework for carbon pricing," he noted, adding that investors will not fully respond to the incentives of the carbon trade until a credible carbon price path is established.
Collyns was referring to the system of trading in carbon credits developed since the signing of the Kyoto Protocol, giving firms and governments a financial incentive to reduce their carbon footprint. As it currently stands, however, trading in carbon credits is too low to provide for a meaningful reduction in emissions.
The December 5 press conference was the IMF's first on the topic of climate change. Although in some respects, climate change work represents a new area for the institution, many of the issues are also ones that the IMF has perennially analyzed. "One large aspect of the problem is proper energy pricing, and that, of course, has been a key Fund concern for many years," said Michael Keen of the IMF's Fiscal Affairs Department. "So I think this is far from being a new area for us. It's an additional part of the context."
The IMF published an analysis of the implications of climate change in its October 2007 World Economic Outlook and is preparing a more in-depth study for the WEO's April 2008 edition. Kato also noted that the IMF's Executive Board will discuss, possibly in early 2008, the fiscal implications of climate change.
