Kato: carbon pricing provides "strong and credible incentives" for reducing emissions, developing alternative technologies (photo: Reuters)
BALI CLIMATE CHANGE CONFERENCE
"Climate change is perhaps the largest collective action problem that the world faces," Kato said on December 14. "Early and sustained action is needed to avoid future harm."
Kato joined high-level officials from over 180 countries who are in Bali to create a roadmap for an international climate change agreement after the Kyoto Protocol expires in 2012. For the first time at UN-organized climate change talks, finance ministers held a forum alongside the main conference, reflecting a growing acknowledgement of the economic policy implications of climate change.
Main challenges
Speaking at the conference's high-level segment, Kato said that countries face the following economic challenges as a result of long-term climate change:
• Direct negative effects on output and productivity in many countries;
• Deteriorating fiscal positions resulting from weakening traditional tax bases and increased expenditure on some aspects of mitigation and adaptation—for example, to counter the effects of rising sea levels and heightened risks of flooding;
• Private economic costs arising from efforts to mitigate carbon emissions—for example, as a result of higher energy prices and increased investment requirements (including those designed to reduce exposure to climate risks);
• Possible balance of payments problems owing to reduced exports of goods and services, such as agricultural products, fish, and tourism—and perhaps also from the increased need for food and other essential imports; and
• Contingent risks to social and economic stability as a result of climate change that have potentially important transnational dimensions, including the possibility of massive migration and even conflict.
At the finance ministers' forum on December 11, Kato discussed the array of options available to economic policymakers for fighting the challenges posed by climate change, highlighting in particular the vital role of fiscal instruments. "They cannot provide a complete solution, but taxes and public spending are key to getting the incentives right for households and firms, as well as ensuring a fair distribution of the associated costs and benefits."
Carbon pricing
In terms of policies to mitigate the effects of climate change, Kato observed that effective carbon pricing policies were essential. Whether governments choose carbon taxes, a system of tradable permits that give firms the right to emit up to a certain level, or some combination of the two, such carbon pricing policies provide "strong and credible incentives" for reducing emissions and developing alternative technologies.
With regard to adaptation policies—actions to reduce climate change's adverse impact—Kato emphasized that public spending on information campaigns could play an important role in encouraging households and firms to increase their own resilience.
Public spending could also help reduce countries' risk exposure directly by providing public goods and services such as infrastructure and coastal protection, Kato said, adding that much adaptation could also be achieved through the pursuit of broader development goals, such as improved health and education services.
Incentives to adapt
Though Kato stressed the role of policymakers in providing incentives, he also noted that private industry has an important role to play. "Much of the response to climate change must come from the private sector, including seizing opportunities for technological advances," 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. "With our very wide membership, together with a great depth of technical knowledge and experience in macroeconomic, fiscal, and financial analyses, the Fund does, I believe, have a unique contribution to make," Kato observed, adding that the IMF has been active in the design of relevant tax mechanisms and other fiscal measures.
Financial market involvement
Despite the long-term nature of the problem, countries are already beginning to prepare for the effects of climate change. These preparations are evident in innovations in financial markets to insure against the increased frequency of natural disasters as well as in changes in agricultural practices, Charles Collyns of the IMF's Research Department told the press in Washington ahead of the Bali meeting. "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 would 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.
While in some respects, climate change work represents a new area for the IMF, many of the issues are also those that the institution 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.
