## eebiccpea ## Source details **Canonical URL:** [eebiccpea](https://www.imf.org/-/media/files/publications/dp/2022/english/eebiccpea.pdf) ## Other formats - [Markdown version](/-/media/files/publications/dp/2022/english/eebiccpea.pdf.md) - [Structured JSON version](/-/media/files/publications/dp/2022/english/eebiccpea.pdf.json) --- ### Context and objectives - Despite commitments under the Paris Agreement and the 26th UNFCCC Conference of the Parties, an ambition and policy gap remains to keep temperature increases below 2°C. - Urgent scaling up of climate policies is required; a low-carbon transition also reduces reliance on volatile fossil-fuel markets and enhances energy independence. - This paper analyzes international mechanisms to scale up global mitigation and the low-carbon transition and to address the policy gap using a newly developed global general equilibrium model (IMF-ENV). ### Policy instruments analyzed - International carbon price floors (ICPF) with differentiation by development level (IMF proposal and related climate club proposals). - Carbon price floors allow countries to do more if they wish and permit differentiation by development level. - Border carbon adjustment (BCA) mechanisms: tariffs on carbon embodied in imports from nonacting countries to limit competitiveness losses and carbon leakage. - Sectoral carbon pricing agreements: minimum carbon prices differentiated by development level applied to energy-intensive and trade-exposed (EITE) sectors. ### Scenarios analyzed (focus to 2030) - Scenario 1 (ICPF, differentiated floors): - HICs: $75/tCO2eq - MICs: $50/tCO2eq - LICs: $25/tCO2eq - For each country, the implemented carbon price equals the maximum of the price floor and the carbon price implicit in their NDCs. - Scenario 2 (Uniform global carbon tax): uniform price delivering the same global GHG reduction as ICPF (equivalent uniform carbon price in 2030: $55.80/tCO2eq). - Scenarios 3–4: Fragmented action with only HICs implementing ICPF; assessed without and with various BCA designs (coverage: all goods vs EITE; stringency: “standard” vs “maximum”). - Scenario 5: Sectoral ICPF limited to EITE sectors for MICs and LICs as an alternative to BCAs. --- ### Key modeling features and baseline projections - Model: recursive dynamic neoclassical global CGE (IMF-ENV) built on GTAP v10 (data based on 2014); 25 regions aggregated into HICs, MICs, LICs, and oil exporters. - Baseline growth (2019–30): - Global GDP growth: 2.6 percent per year. - LICs: 4.3 percent per year. - MICs: 4.1 percent per year. - HICs: 1.3 percent per year. - Baseline emissions (2019–30): - CO2 emissions projected to grow by 23 percent. - All GHGs projected to grow by 23.7 percent. - CO2 emissions per capita projected to increase by 11 percent. - Revenue recycling assumption across policy scenarios: carbon-pricing revenues used to reduce labor income taxes (keeps government revenue constant). --- ### Major findings ### I. Effectiveness of the International Carbon Price Floor (ICPF) - Emissions outcomes (ICPF, 2030, percent change from baseline): - CO2 emissions fall by 29 percent relative to baseline. - Global GHG emissions fall by 26.6 percent relative to baseline. - Emissions relative to 2019 (ICPF): - CO2 emissions fall by 13 percent from 2019 levels. - GHG emissions fall by 9 percent from 2019 levels. - By country group (ICPF, 2030, percent change from baseline): - HICs: CO2 down by 43 percent; GHGs down by 45 percent. - MICs: CO2 down by about 28 percent; GHGs down by 25 percent. - LICs: CO2 down by 16.6 percent relative to baseline, but LICs’ aggregate emissions rise relative to 2019 under ICPF. - Oil exporters: CO2 down by 16 percent relative to baseline. - Carbon prices in 2030 under ICPF by development level: - LICs: $25/tCO2 eq - MICs: $50/tCO2 eq - HICs and Saudi Arabia: $75/tCO2 eq - Interpretation: - Most HICs reduce emissions by more than the $75 floor because many NDCs are very ambitious; several MICs and LICs scale up reductions relative to their NDCs. - Scaling up action in MICs and LICs is essential since the bulk of current and projected emissions are located in these countries. ### II. Macroeconomic costs, investment needs, and distribution - Global real GDP (ICPF, 2030): - Decreases by about 1.1 percent relative to baseline in 2030 (with global CO2 reductions of 29 percent). - Growth example (cumulative, 2019–30): - Baseline global cumulative growth: 30.4 percent. - ICPF cumulative growth: 29.2 percent. - LICs cumulative growth baseline: 58.3 percent; under ICPF: 57.3 percent. - Country GDP impacts (examples, percent deviation from baseline in 2030): - Russian Federation: about 3 percent GDP loss (most affected region). - China: 1.8 percent GDP loss. - Mexico: about 1.2 percent GDP loss. - Indonesia: about 1.0 percent GDP loss. - India: 0 percent GDP cost reported. - Energy-sector investment shifts required by 2030 (relative to 2019 levels): - Overall energy-related investment increase under ICPF: about 50 percent by 2030 (versus 25 percent in the baseline). - Non-fossil-fuel power investment needs to increase by 168 percent from 2019 levels by 2030. - Fossil-fuel power investment needs to contract by 64 percent by 2030. - Distributional and co-benefit points: - ICPF is progressive in emissions reductions: wealthier countries reduce emissions proportionally more (with notable exceptions: China, Indonesia, South Africa). - Differentiated carbon prices shift some emission reductions and GDP costs from LICs to HICs relative to a uniform carbon tax. - Potential co-benefits (not fully captured in the model): reduced local air pollution, health and labor-productivity gains, and benefits from shifting taxation away from labor. ### III. Efficiency trade-offs: ICPF versus uniform global carbon tax - Equivalent uniform global carbon price to match ICPF global GHG reduction: $55.80/tCO2eq in 2030. - Global GDP cost (deviation from baseline in 2030): - Global tax scenario: about 0.8 percent. - ICPF: about 1.1 percent. - Distributional contrast: - Uniform global pricing is more efficient (lower global GDP cost) but less progressive: it implies much higher emission reductions among MICs and LICs because emission intensity is highest at lower income levels. - ICPF improves burden sharing across income groups at a small efficiency cost. ### IV. Unilateral HIC action and carbon leakage - HICs-only action (HICs implement ICPF; MICs and LICs do not): - Global CO2 emissions decrease by almost 12 percent relative to baseline (versus 15 percent without carbon leakage to MICs and LICs). - Aggregate carbon leakage rate: about 6.5 percent (within literature range). - EITE sector leakage: - Average leakage for all EITE sectors: 40 percent of the corresponding emission reductions in acting HICs. - Sectoral EITE leakage rates (acting HICs): - Chemicals: 50 percent. - Iron and steel: 50 percent. - Nonmetallic minerals: 30 percent. - Nonferrous metal manufacturing: 15 percent. - Pulp and paper manufacturing: 0 percent. - Sectoral competitiveness: - HICs’ EITE output losses are up to one-third higher when HICs act unilaterally (about 7.5 percent) than under the full ICPF; nonacting countries’ gross output in these sectors can improve by about 1.25 percent. ### V. Border Carbon Adjustments (BCAs): designs and impacts - BCA designs analyzed: - Coverage: BCAs on all goods versus BCAs limited to EITE goods. - Stringency: - “Standard” BCA: tariff based on domestic carbon content of imports; tariff revenues retained by acting countries. - “Maximum” BCA: tariffs based on foreign carbon content, includes indirect electricity carbon content and an export subsidy; tariff revenue used partly to finance export subsidies. - Key quantitative effects: - Using foreign carbon content is critical for BCA effectiveness; domestic-content BCAs are much less effective. - Maximum BCA applied to all products reduces aggregate leakage from 6.5 percent to 2.7 percent under the standard BCA and can turn leakage negative under the maximum BCA. - Average EITE leakage reduced from 50 percent to 10 percent when foreign carbon content is used. - Maximum BCA limited to EITE goods reduces EITE output losses in acting countries from 7.5 percent (no BCA) to 4 percent and suppresses nonacting countries’ gross output gains from 1.25 percent to –0.2 percent relative to baseline. - Limitations and trade-offs of BCAs: - Estimating foreign carbon content is difficult; BCAs can be administratively cumbersome and perceived as trade barriers, risking retaliation. - BCAs do not substantially scale up global mitigation because emissions embodied in domestic consumption in nonacting countries remain untaxed. ### VI. Sectoral ICPF as an alternative to BCAs - Sectoral carbon pricing agreement for EITE sectors (MICs and LICs apply ICPF to EITE only; HICs adopt economy-wide ICPF): - Could be a politically feasible intermediate path that: - Achieves outcomes for HIC EITE sectors close to full ICPF outcomes. - Yields GDP outcomes for MICs and LICs broadly similar or slightly better than BCAs because revenues are retained domestically. - Introduces limited carbon pricing in EMDEs and allows EMDE governments to acquire revenues. - Does not scale up mitigation sufficiently; ultimate goal remains economy-wide global minimum carbon prices aligned with mitigation needs. --- ### Policy implications and recommendations - An economy-wide ICPF with carbon price floors differentiated by development level is an effective mechanism to scale up mitigation, improve burden sharing relative to a uniform carbon tax, and broadly preserve competitiveness in EITE sectors. - Complementary cross-country financial and technology transfers are advisable to further improve burden sharing and support MICs and LICs that face larger development needs and higher reliance on fossil fuels. - If full economy-wide ICPF is politically infeasible in the short term: - A sectoral ICPF limited to EITE sectors could be a cooperative intermediate approach to avoid BCAs and preserve competitiveness. - BCAs can limit competitiveness losses for acting HICs, but their effectiveness depends on using foreign carbon content and they risk trade friction and do not substitute for economy-wide mitigation in nonacting countries. - Investment policy priorities: - Scaling up non-fossil-fuel power investment (increase by 168 percent from 2019 levels by 2030) while contracting fossil-fuel power investment (fall by 64 percent by 2030) is essential; overall energy-related investment needs to increase by about 50 percent by 2030 under ICPF. - Public roles in de-risking and providing infrastructure and coordination are important to mobilize private investment for the low-carbon transition. - Revenue use: - Recycling carbon-pricing revenues to reduce labor income taxes mitigates GDP costs and can produce employment gains relative to lump-sum rebates. - Longer-term note: - Mixed policy packages (regulation, targeted R&D for hard-to-abate sectors, and alternative policies) can substantially reduce required marginal carbon prices; the ICPF framework allows equivalent alternative policies. --- *Italic source: IMF Departmental Paper — "Economic and Environmental Benefits from International Cooperation on Climate Policies" (eebiccpea).* ### Executive Summary ................................................................................................v ### Executive Summary ### Context and objectives - Despite the new commitments made at the 26th United Nations Climate Change Conference of the Parties, there is still an ambition and a policy gap at the global level to keep temperature increases below the 2°C agreed upon in Paris. - Avoiding the worst outcomes of climate change requires an urgent scaling up of climate policies. - The current environment of high and volatile energy prices highlights another benefit from a low-carbon energy transition: less reliance on volatile fossil fuel markets and greater energy independence. - This paper discusses and analyzes various international mechanisms for scaling up global action on climate mitigation and the low-carbon transition and addressing the policy gap. ### Policy instruments analyzed - International carbon price floors, including differentiated carbon price floors by level of development (the IMF’s international carbon price proposal (Parry, Black, and Roaf 2021) and related climate club proposals). - Carbon price floors allow countries to do more if they wish and permit differentiation by development level. - Border carbon adjustment (BCA) mechanisms: taxes on the carbon embodied in imports from nonacting countries to prevent domestic producers from being at a competitive disadvantage. - Examines whether BCAs can deliver additional emissions reductions or provide incentives for other countries to join a carbon price floor agreement. - Sectoral carbon pricing agreements for energy-intensive and trade-exposed industrial sectors (applying minimum carbon prices differentiated by level of development). ### International coordination challenges - Low- and middle-income countries (LICs and MICs) worry decarbonization could compromise development prospects and ask HICs to bear a larger mitigation burden (including through climate finance), given historical responsibility for greenhouse gas emissions. - High-income countries (HICs) worry ambitious domestic climate policies could put producers at a competitive disadvantage, potentially causing reallocation of emission-intensive activity to laxer-policy countries and negating part of their emissions reductions. - International cooperation that motivates climate action across all country groups, especially LICs and MICs, is key because HICs alone cannot reduce global emissions sufficiently to stay below the 2°C target. ### Method and scope - Uses a newly developed state-of-the-art global general equilibrium model to quantify the emissions, economic, burden-sharing, and competitiveness effects of the various policies. ### Main findings - First, relative to a business-as-usual scenario, international carbon price floors substantially enhance global climate mitigation at small macroeconomic costs, provided needed energy investments materialize. - Second, a differentiated international carbon price floor—which allows a lower carbon price floor for MICs and LICs—contributes to improving the international burden sharing of mitigation relative to a uniform carbon tax, at small efficiency costs: - It shifts emission reductions and GDP costs from LICs to HICs. - This comes without necessarily creating substantial competitiveness impacts for HICs, because the emission intensity of production is significantly higher in MICs and LICs than HICs. - Third, in the case of unilateral climate action by HICs, a border carbon adjustment mechanism helps limit competitiveness losses for energy-intensive and trade-exposed industries and reduces international carbon leakage. - However, it does not deliver a strong additional reduction in global emissions, nor does it provide sufficient incentives for nonacting countries to join the carbon price floor. - Fourth, a sectoral carbon pricing agreement for energy-intensive and trade-exposed industrial sectors, that applies minimum carbon prices differentiated by level of development to these sectors, could be preferable to a border carbon adjustment for LICs and MICs: - Like a BCA, it does not scale up global emissions reductions substantially. - It would allow HICs to implement ambitious mitigation policies without concern for carbon leakage and loss of competitiveness. - It would introduce limited carbon pricing in EMDEs, and have EMDE governments acquire revenues. - Subsequently, the coverage and level of carbon pricing would gradually need to be aligned with global mitigation requirements. *Executive Summary — eebiccpea* ### 1. Introduction ### 1. Introduction ### Background and urgency - There is an urgent need to scale up action on climate mitigation to avoid the worst outcomes of climate change. - All countries committed under the Paris Agreement to keeping global temperature increase well below 2°C above preindustrial levels; many have announced plans to reduce emissions to net zero by midcentury. - Countries’ current commitments for 2030 (Nationally Determined Contributions, or NDCs) cut emissions only by one- to two-thirds of the emissions reductions needed for emission pathways consistent with 1.5–2°C increases. - Current policies are not sufficient to stop the projected increase in global emissions. - The High-Level Commission on Carbon Prices (2017) found that staying below the 2°C increase would require policies equivalent to a global carbon price between $50 and $100 by 2030; the explicit global average carbon price is currently only $3. ### Obstacles to enhanced international climate action - Concerns about compatibility of decarbonization with continued robust growth, fairness of international burden sharing, and risks of competitiveness losses. - For low-income countries (LICs) and middle-income countries (MICs): - Resistance rooted in concern that decarbonization would compromise development prospects by making energy more expensive given fast-growing energy needs. - Raising consumer prices of fossil fuels might increase energy poverty and slow energy access expansion, though targeted measures (for example, subsidies for subsistence level of electricity consumption) can address this. - Emphasize that high-income countries (HICs) should bear a larger mitigation burden, including providing climate finance, given their responsibility for the large majority of historical greenhouse gas (GHG) emissions. - For high-income countries (HICs): - Want ambitious climate policy but worry about competitiveness losses for energy-intensive and trade-exposed (EITE) industries and carbon leakage if they adopt more stringent carbon-pricing policies than partners. - Considering the use of border carbon adjustments (BCAs) to offset competitiveness losses. ### Policy proposals and rationale - Several institutions have called for introducing global minimum carbon prices to scale up mitigation and to avoid implementation of BCAs. - IMF proposal: an international carbon price floor (ICPF) arrangement among a subset of large emitters covering the bulk of global emissions; organized around carbon pricing but allows alternative policy approaches with similar emissions effects; uses carbon price floors differentiated by level of development and can be complemented by financial and technology assistance to LICs. - Germany’s climate club proposal: coordination on a joint minimum carbon price focused initially on energy and industrial sectors to prevent carbon leakage. - Distinctive feature of recent proposals: use of carbon price floors (allow ambitious countries to do more) and differentiation by income levels. - Agreement on joint minimum carbon prices among participants would obviate the need for a BCA among participants, though a BCA could still be applied against nonparticipants. ### Scenarios analyzed in the paper (up to 2030, in line with the horizon of NDCs) - Scenario 1: International carbon price floor (ICPF) applied worldwide with differentiated price floors by income: - HICs: $75 - MICs: $50 - LICs: $25 - Countries implement the maximum of their carbon price floor and the carbon price implicit in their NDCs. - Scenario 2: Uniform global carbon price that delivers cumulative emissions reductions similar to the ICPF arrangement (carbon price in 2030 is about $56) and is implemented by all countries. - Scenario 3 and 4: Fragmented action in which only HICs implement ambitious climate policies; impacts examined without and with border carbon adjustments of various designs. - Scenario 5: If MICs and LICs do not want an economy-wide ICPF, examine whether they would accept an ICPF limited to energy-intensive and trade-exposed sectors to avoid BCAs. ### Model, scope, and contributions - Uses a newly developed dynamic computable general equilibrium model (IMF-ENV) suited for large simultaneous policy changes across the global economy, integrating trade impacts and induced changes in global energy prices; assesses GDP, employment, investment, competitiveness, and burden sharing. - Builds on previous IMF reduced-form closed economy analysis (Carbon Pricing Assessment Tool) by providing broader, trade-integrated assessment and by applying scenarios to all countries (not only G20). - Compares ICPF, global uniform carbon tax, and various BCA policy options and their interactions (for example, whether BCAs incentivize adoption of economy-wide or sectoral ICPFs). ### Key findings - ICPF effectiveness and emissions outcomes - The carbon price floors considered reduce global carbon dioxide (CO2) emissions by 29 percent below baseline and about 13 percent from current (2019) levels, consistent with keeping temperature increases below 2°C. - For all GHG emissions the corresponding reductions are 26.6 percent and 9 percent. - Most HICs reduce emissions by more than implied by the $75 floor because many NDCs are very ambitious; in many MICs and LICs the price floors imply scaling up of reductions relative to their NDCs. - Scaling up action in MICs and LICs is essential because the bulk of current and projected emissions are located in these countries. - Macroeconomic costs and investment implications - ICPF scales up mitigation at relatively small macroeconomic costs and is compatible with continued economic development, provided needed energy investments materialize. - Assuming carbon-pricing revenues are used productively (for example, to reduce labor income taxes), GDP growth remains very robust under ICPF and is only slightly lower than baseline. - Example: LICs’ cumulative growth in 2021–30 would be reduced from 58.3 percent in the baseline to 57.3 percent under ICPF. - Most countries have a GDP within 1 percent of baseline GDP projections in 2030. - MICs and LICs can expect sizable co-benefits, for example through reduced local air pollution. - Energy-sector investment shifts required by 2030: - Investment in non-fossil-fuel power needs to increase by 168 percent from 2019 levels by 2030. - Investment in fossil-fuel power needs to contract by 64 percent by 2030. - Distributional effects and efficiency - Differentiated carbon prices under ICPF allow more international burden sharing than a uniform carbon price, at a small efficiency cost. - ICPF is progressive in emissions reductions: countries with higher income generally reduce emissions proportionally more (with some exceptions like China, Indonesia, and South Africa). - Compared with a uniform global carbon price, ICPF shifts part of emissions reductions and economic cost from LICs to HICs. - Economic efficiency (global GDP cost per unit of emission reduction) is slightly worse under ICPF than under a uniform price because lowest-cost abatement options are in MICs and LICs, but the efficiency loss is marginal. - Despite higher carbon prices and proportionally larger emissions reductions, HICs typically incur moderate mitigation costs due to very low emission intensity. - Complementary cross-country financial and technology transfers may be needed to increase international burden sharing further. - Border carbon adjustments (BCAs) and fragmented action - If MICs and LICs do not initially participate in ICPF, BCAs help protect domestic industries of acting countries from carbon leakage and competitiveness losses but do not deliver substantial additional global emissions reductions. - Macroeconomic cost for HICs acting alone is not much larger than under ICPF, but competitiveness of EITE industries can be substantially affected. - A strong BCA (including foreign carbon intensity to determine tariff and inclusion of export subsidies) would substantially curb losses in EITE industries’ output and market shares and reduce carbon leakages. - Emission reductions by HICs alone would not be sufficient to meet the Paris Agreement 2°C target. - Sectoral ICPF as an alternative to BCAs - If a full economy-wide ICPF cannot be agreed, a sectoral ICPF focused on EITE industries could be a preferable short-term alternative to BCAs to address competitiveness concerns. - BCAs are not sufficient to incentivize most nonacting countries to join a full ICPF because ICPF is costlier for those countries (applies to entire economic activity vs. only to exports under BCA). - A strong BCA could provide incentives for MICs and LICs to impose carbon prices on their EITE sectors, paving a cooperative path forward and avoiding administratively demanding and trade-friction-prone BCAs. - Ultimately, sectoral agreements do not increase global emissions reductions sufficiently; the goal should be global minimum carbon prices applied economy-wide. ### Contributions to the literature - Relates to studies on international burden sharing and coordination mechanisms; finds ICPF is relatively effective at improving burden sharing because differentiation by development level makes distribution of impacts more progressive with limited efficiency costs. - Confirms existing findings on BCAs: - BCAs help reduce competitiveness losses of EITE sectors. - BCAs are not perfect at entirely restoring EITE output levels. - BCAs shift a small part of mitigation burden to noncoalition countries and sectors. - Adds new findings: - An ICPF can be as effective as BCAs at preserving competitiveness of HICs’ EITE sectors. - Stronger BCAs could incentivize MICs and LICs to introduce ICPFs for EITE sectors. ### Paper structure - Chapter 2: model and scenarios. - Chapter 3: effects of ICPF and comparison with a uniform global carbon tax. - Chapter 4: effects of introducing BCAs in the context of uncoordinated policy and comparison with ICPF and a sectoral agreement for EITE sectors. - Chapter 5: conclusions. *IMF DEPARTMENTAL PAPERS • Economic and Environmental Benefits from International Cooperation on Climate Policies — 1. Introduction* ### 2. Modeling and Scenario Design ### 2. Modeling and Scenario Design ### A. IMF-ENV model: structure and capabilities - Model type and scope - Recursive dynamic neoclassical global computable general equilibrium (CGE) model. - Built on a database of national economies and bilateral trade flows (Global Trade Analysis Project version 10 database). - Currently used database version 10 is based on data from 2014. - Central actors: representative firms by sector, a regional representative household, a government, and markets. - Model solved as a sequence of comparative static equilibria (recursive dynamic). - Key features and assumptions - Activities represented with nested constant-elasticity-of-substitution functions to capture substitutability across inputs. - International trade modeled with Armington specification (demands differentiated by region of origin; full set of bilateral flows and prices by traded commodity). - Primary factors (capital, labor, land): primary factors are not mobile across countries; labor and land can shift across sectors within a region without adjustment cost in each year. - Vintage capital stocks: new investment flexible across activities; existing (“old”) capital mostly fixed and costly to reallocate, producing different short-term and long-term substitution elasticities. - Capital market: characterized by real rigidities; labor market frictions are limited. - Emissions linkage: - Emissions from fuel combustion linked with fixed coefficients. - Non-energy emissions and some process emissions linked via marginal abatement cost curves (emission intensities decrease nonlinearly with carbon prices). - Limitations: - Focus on real economic flows and potential output dynamics; not adapted to business cycle analysis or financial/monetary consequences of climate policies. - May overestimate long-term decarbonization costs because radical future technologies (hydrogen, second generation nuclear and biofuels, carbon capture and storage) are not included due to lack of reliable future cost information. - Operational status: model has been operational for a few months at the IMF; some aspects under development (including draft documentation). Current model built on ENVISAGE and OECD ENV-Linkages Model. ### B. Model regional grouping and calibration - Regions and groups - Model considers 25 regions and countries; figures typically aggregate them into: HICs, MICs, LICs (following World Bank classification), and oil exporters. - Table 1 groupings (selected examples preserved as in source): HICs include Australia, Canada, France, Germany, Italy, Japan, Republic of Korea, Rest of European Union and Iceland (RESTEU), Turkey, United Kingdom, United States; MICs include Argentina, Brazil, China, Indonesia, Mexico, South Africa, Other Latin America (OLA); LICs include India, Other Africa (OAF), Other East Asia and New Zealand (ODA), Other Eastern Europe and Caspian countries (OEURASIA); Oil exporters listed separately (Turkey, Russian Federation, Saudi Arabia, Other oil-exporting countries (RESTOPEC)) with a clarification that Saudi Arabia is high-income, Russian Federation middle-income, and “Other oil-exporting countries” low-income in development classification. - Baseline calibration inputs and procedure - Macroeconomic projections up to 2025 based on April 2021 World Economic Outlook (IMF 2021). - For 2025–50, projections use a long-term growth model decomposing potential GDP into labor supply, capital-to-GDP ratio, and total factor productivity (TFP), with conditional convergence assumptions and a standard Solow decomposition (see Dellink and others 2017). - TFP is not endogenous; sectoral TFP and labor efficiency are calibrated exogenously in the baseline. Policy-induced reallocations change apparent TFP and labor efficiency because sectors have different baseline TFP. - GDP and investment are endogenous in IMF-ENV; other variables are calibrated to reproduce targeted real GDP and investment trajectories. For GDP calibration: sectoral labor efficiencies are uniformly adjusted. For investment-to-GDP calibration: household saving rate is adjusted. - Income elasticities, production structure, and sectoral productivity assumed to conditionally converge toward preferences and structures of more advanced countries. - Baseline includes sectoral autonomous energy efficiency improvements following latest historical trends; evolution of regional energy systems mimics IEA World Energy Outlook Stated Policies Scenario (STEPS) (IEA 2020). - Baseline assumptions on energy policy: constant levels for feed-in tariffs, other energy subsidies, and taxes; constant carbon prices of $15/ton CO2 for sectors covered by the European Union emissions-trading system and $10/ton CO2 for the power sector in China. ### C. Baseline scenario projections and stylized outcomes (to 2050; focus 2019–30) - Baseline scenario definition - Projection to 2050 under assumption that climate mitigation is limited to current actual climate and energy policies (no “new” climate or energy policies implemented). - Macroeconomic growth (2019–30 decade of focus) - Global GDP growth on the order of 2.6 percent per year over 2019–30. - Growth by income group: - LICs: 4.3 percent per year. - MICs: 4.1 percent per year. - HICs: 1.3 percent per year. - Emissions and intensity outcomes (2019–30) - CO2 emissions are projected to grow by 23 percent in the baseline over 2019–30. - Emissions of all greenhouse gases are projected to grow by 23.7 percent over 2019–30. - CO2 emissions per capita would increase by 11 percent at the global level. - Emission intensity (CO2 emissions per unit of GDP) continues to decline. - Drivers of emissions changes cited: robust GDP growth, electrification, increasing share of renewables in electricity mix, sectoral energy efficiency improvements—insufficient to offset GDP-driven emissions growth. - CO2 emissions from LULUCF are generally not taken into account in the numbers shown for CO2 emissions but are taken into account in total GHG calculations unless otherwise mentioned. - Behavioral and structural assumptions affecting baseline - Nonhomothetic preferences: as GDP per capita grows, final demand shifts away from “necessary goods”. - Servitization: more intensive use of service inputs into production and increasing use of information technology assumed. - COVID-related demand shifts for leisure and tourism assumed not permanent; expected increase in teleworking assumed to have no major long-term effect on production modes and preference patterns. ### D. Policy scenario overview (designs analyzed) - General policy design across scenarios - Revenue recycling assumption: revenue from carbon pricing assumed to be used to reduce distortionary labor income taxes, keeping tax burden equal and government revenues constant. - Rationale: move away from more distortive taxation provides GDP boost, partly offsetting mitigation costs; potential for a double dividend if preexisting tax system not optimal and carbon tax increase small. - Scenarios analyzed (Table 2 overview) - Baseline: Countries do not implement additional climate policies. - ICPF: Global International Carbon Price Floor in which countries gradually implement a carbon price up to 2030 to reach the maximum of their carbon price floor and the carbon price implicit in their NDC (as of November 2021). - Carbon price floors: $25/tCO2eq for LICs, $50 for MICs, and $75 for HICs; oil exporters have prices according to income levels. - Coverage: comprehensive across sectors, sources of emissions, and GHGs except CO2 from traditional biomass combustion and from LULUCF. - For each country, carbon price implemented equals the maximum of the carbon price floor and the carbon price implicit in their NDC commitment as of November 2021. - Global tax: Global carbon tax uniform across all sources and countries to meet exactly the same global GHG emissions reduction target as in ICPF. - Equivalent uniform carbon price to meet the same global GHG reduction target: $55.8/tCO2eq. - HICs only: Only the HICs country group and Saudi Arabia are acting, implementing their ICPF carbon price; MICs and LICs do not implement additional climate policies. - HICs with BCA: As in the HICs-only scenario, but HICs implement a border carbon adjustment (BCA) in addition. Various designs considered: - Coverage variants: BCAs on all goods versus only on EITE (energy intensive and trade exposed) goods. - Stringency variants: - “Standard” BCA: acting countries introduce a countervailing tariff on imports from nonacting countries based on domestic carbon content. - “Maximum” BCA: countervailing tariff based on foreign carbon content complemented by an export subsidy to level the playing field on international markets. - EITE: In HICs-only scenario, MICs and LICs adopt their carbon price in the ICPF scenario only for EITE industries (examined as an alternative to being subjected to a BCA). - Additional scenario details and data mapping - NDC targets: emission reduction targets for 2030 from NDCs are expressed in terms of total GHGs in megatons of CO2eq for all sources (including LULUCF); NDC targets calculated using ClimateWatch data as of November 29, 2021. - For countries with NDCs expressed as emission intensity reductions (e.g., China and India), baseline GDP projections used to translate intensity targets into absolute targets. For countries with conditional and unconditional NDCs (e.g., Indonesia, Mexico), the conditional NDC is used. - Dollar amounts in the paper refer to 2018 $. ### E. Comparison focus and analytical scope - Comparative aims - Compare ICPF with a global uniform carbon price achieving same global GHG reduction (assess efficiency and burden-sharing). - Compare global and partial-action scenarios, including HIC-only action and the effects of BCAs with varying coverage and stringency. - Examine whether MICs and LICs adopting ICPF only for EITE sectors could be preferable alternative to facing BCAs. - Policy implementation and distributional note - Revenue recycling to labor income tax reduction is the common standard assumption across policy scenarios. - Representative household used in model prevents exploration of targeted transfers to low-income households, although the text notes such targeting could ensure progressivity. *Italic source: IMF Departmental Papers — "Economic and Environmental Benefits from International Cooperation on Climate Policies", Chapter 2: Modeling and Scenario Design (eebiccpea - 2. Modeling and Scenario Design)* ### 3. The International Carbon Price Floor ### 3. The International Carbon Price Floor ### Design of the ICPF and carbon prices - Under the ICPF scenario, all countries introduce a carbon price that is the maximum of: - their carbon price floor, and - the implicit carbon price required to reach their NDC. - Carbon price floors in 2030 by development level: - LICs: $25/tCO2 eq - MICs: $50/tCO2 eq - HICs and Saudi Arabia: $75/tCO2 eq - If a country’s carbon price floor is insufficient to reach its NDC, the country-specific carbon price is adjusted to reach GHG emissions in 2030 consistent with the country’s NDCs. - Carbon prices are phased in gradually between 2022 and 2030. - Some MICs (Argentina, Brazil, and Mexico) and all HICs except Australia face carbon prices higher than their group’s floor. - Estimated carbon prices required to reach NDCs with carbon pricing alone: - Reaching NDCs could require carbon prices close to $225 in HICs. - The study’s uniform global tax scenario—presented later in the paper—is $55.80 (2030, implied comparison to model review range). - Context from literature: - High-Level Commission on Carbon Prices (2017) found estimated carbon prices in 2030 ranging from $50 to $100. ### A. Effect of the ICPF on projected GHG and CO2 emissions - Global emissions in 2030 under ICPF (percent change from baseline): - CO2 emissions fall by 29 percent relative to baseline. - Global GHG emissions fall by 26.6 percent relative to baseline. - Emissions relative to 2019 levels (under ICPF): - CO2 emissions fall by 13 percent from 2019 levels. - GHG emissions fall by 9 percent from 2019 levels. - By country group in 2030 (percent change from baseline): - HICs: CO2 emissions down by 43 percent; GHGs down by 45 percent. - MICs: CO2 emissions down by about 28 percent; GHGs down by 25 percent. - LICs: CO2 emissions down by 16.6 percent relative to baseline, but emissions for all LICs rise relative to 2019 under ICPF. - Oil exporters: CO2 emissions down by 16 percent relative to baseline. - Within-group drivers and notable country outcomes: - MIC reductions driven by high-carbon-intensity countries such as China, Indonesia, and South Africa. - India accounts for 45 percent of CO2 emissions of the LIC group in 2030; under ICPF: - India’s CO2 emissions decline by 22 percent compared with the baseline in 2030. - India’s CO2 emissions increase by 17 percent compared with 2019 emissions. - India’s share of global CO2 emissions increases from 7 percent (2019) to 10 percent (2030) under ICPF. - Carbon prices measure marginal abatement costs; very ambitious NDCs or low current emission levels can imply very high marginal carbon prices for the last unit of abatement. ### B. Effect of the ICPF on economic development and GDP - Global real GDP in 2030 under ICPF: - Decreases by about 1.1 percent relative to baseline in 2030 (with global CO2 emissions reductions of 29 percent from baseline in the same year). - GDP costs by country and sector observations: - HICs: GDP costs generally moderate despite higher proportional emission reductions and more expensive abatement opportunities (HICs are on average less carbon intensive). - Countries with large fossil-fuel sectors record larger GDP losses (more than 1.5 percent), driven by declines in export incomes: - Example: Russian Federation: GDP loss of about 3 percent relative to baseline (most-affected region). - Range of GDP impacts in selected countries: - India: 0 percent GDP cost (in model results reported). - China: 1.8 percent GDP cost relative to baseline. - Mexico: about 1.2 percent GDP cost. - Indonesia: about 1.0 percent GDP cost. - MICs on average have larger GDP losses than LICs and HICs, but with heterogeneity across MICs. - LICs as a group have smaller losses than MICs and HICs, reflecting more moderate emission reductions under the ICPF. - Growth and development context (cumulative growth 2019–2030): - Baseline global cumulative growth: 30.4 percent. - ICPF cumulative growth: 29.2 percent (global level). - LICs cumulative growth baseline: 58.3 percent. - LICs cumulative growth under ICPF: 57.3 percent. - Co-benefits and limitations in modeling: - The model does not incorporate important economic benefits from climate policy such as: - Positive effects on labor productivity and health via reduced local air pollution. - Benefits from shifting tax burden from labor to carbon pricing (reduced informality). - In some countries, these co-benefits can fully offset GDP losses of carbon pricing. - Long-term avoided climate damages are not incorporated for this decade and are therefore not counted in GDP impacts here. ### Energy investment, electricity mix, and energy prices - Energy-related investment changes required by 2030 (relative to 2019 levels): - Overall energy-related investment needs to increase by about 50 percent by 2030 under ICPF (relative to 2019), versus 25 percent in the baseline. - Within power generation: - Non-fossil-fuel power investment increases by 168 percent from 2019 levels. - Fossil-fuel power investment falls by 64 percent from 2019 levels. - Non-fossil-fuel power investments are mainly renewable energy and electricity network infrastructure. - Energy consumption and electricity mix: - Energy consumption keeps growing strongly under ICPF, especially in MICs and LICs. - Carbon pricing increases energy efficiency incentives, higher electrification of energy consumption, and a switch to non-fossil-fuel power in electricity production. - Effects on energy prices and markets: - Carbon pricing increases the price of fossil fuels and electricity for consumers; in some cases prices rise by more than 10 percent. - Electricity price increases stem from: - Higher generation costs for fossil-fuel-powered generation due to the carbon price (increase in the supply price of electricity). - Rising demand for electricity due to electrification and substitution toward electricity. - Oil and gas consumer prices also increase (less for oil than gas), reflecting market elasticities and differing supply responses: - World oil market is less elastic than gas; production price of crude oil falls more than gas extraction when demand for liquids and gases falls. - Coal markets are more elastic, so carbon pricing causes strong demand reductions and an even larger reduction in coal extraction, which raises coal supply prices. - Investment challenges and public roles: - Scaling up and reallocating energy-related investments may require government support due to: - Credibility and coordination issues, perceived risk, and high financing costs for low-carbon investments. - Possible government interventions: - Provision of infrastructure investment. - De-risking mechanisms to support private investment in low-carbon technologies. ### Sectoral impacts and distributional considerations - Sectoral real gross output changes (relative to 2019): - Most sectors grow compared with 2019, but emission-intensive sectors grow less quickly than in the baseline. - Fossil-fuel production grows only by a few percent. - Energy-intensive sectors (transportation services and EITE industries: chemicals, pulp and paper, nonferrous metals, iron and steel, nonmetallic minerals) grow substantially more slowly than in the baseline. - Low-carbon sectors benefit from changed incentives and generally grow relatively faster. - Distributional and transitional considerations: - Significant heterogeneity across countries and sectors highlights the need for support measures to ensure a just transition. - To prevent disruptions and address effects on lower-income households: - Careful monitoring of energy markets is crucial. - Targeted income transfers or subsidies for subsistence levels of electricity consumption can address higher energy-price burdens on lower-income households. ### Policy implications and mitigation of needed carbon-price levels - High marginal carbon prices required when carbon pricing is the only instrument reflect: - Use of carbon pricing alone in the analysis. - The need to decarbonize hard-to-abate sectors for ambitious NDCs. - Measures that could substantially reduce the need for very high carbon prices: - Comprehensive policy packages including regulations. - Targeted research and development to develop low-carbon technologies for hard-to-abate sectors (examples cited: producing steel with green hydrogen; improving carbon capture and sequestration technologies). - Mixed approaches and alternative policies to carbon pricing (the ICPF proposal allows use of alternative policies and mixed approaches; future work will focus on this). - Anticipation effects: forward-looking agents front-load adjustment to expected future carbon-price increases, reducing need for high up-front carbon prices. *Italic source attribution: IMF Departmental Paper — Economic and Environmental Benefits from International Cooperation on Climate Policies, Section 3: The International Carbon Price Floor* ### 1. Global (Real) Investment in 2030, by Aggregate ### 1. Global (Real) Investment in 2030, by Aggregate ### Energy-sector investment and capital stock shifts (ICPF scenario) - For power sectors the measure reported is change in the capital stock with respect to the baseline and not a change in investment. - Non-fossil-fuel power (wind, solar, nuclear, hydro, and other power) expands to replace fossil-fuel power. - Fossil-fuel power and extraction sectors contract: - Extraction of natural gas, coal, and crude oil and fossil-fuel power are expected to contract. - Only the refined-oil sector is expected to grow, "by a few percent," reflecting residual oil demand and oil as an input (for example, in plastics). - Utilities benefit in the ICPF as the sector includes renewable energy. - Note: “Fossil-fuel” includes natural gas extraction, coal extraction, crude oil extraction, and refined oil. “Utilities” include power generation, electricity distribution and transmission, and waste and water management. ### Investment magnitudes and deviations from baseline - Figures report percent deviations from baseline across energy subsectors (natural gas extraction, nuclear, refined oil, coal extraction, wind power, hydro, fossil-fuel power, crude oil extraction, solar power, other power) and show large reallocation of capital toward non-fossil-fuel power by 2030 (ICPF scenario). - Source: IMF-ENV model. ### Implications for firms and policy - Sectoral reallocations will create difficult transitions for firms and workers and require careful policy planning, including support measures for affected sectors and regions to ensure the transition is as inclusive as possible. - Policy support to facilitate transitions of workers from declining to growing sectors and compensatory measures for those most affected will be key to ensuring a just and smooth transition. --- ### Projected changes in world energy prices (ICPF scenario) - Figures show projected changes in world energy supply prices (percent change from baseline) and household consumer prices in 2030 (percent change from baseline) under ICPF and baseline scenarios. - In the short term, technologies to shift production to zero-carbon energy sources are not ready for large-scale rollout, so some exposure to higher emission prices remains. --- ### Macroeconomic and sectoral output effects in 2030 - Service sectors expand relative to baseline as they are not very energy intensive and benefit from the reduction in the labor income tax financed with carbon price revenues. - Panel highlights: - Services (labor-intensive) expand. - Fossil-fuel sectors and fossil-fuel power contract. - Non-fossil-fuel power generation expands substantially. - Labor income tax reduction financed by carbon price revenues stimulates labor supply and implies a small net increase in employment, while masking substantial sectoral reallocation. --- ### Employment outcomes and distributional impacts - The small net increase in employment relative to the baseline masks substantial reallocation across sectors. - Fossil-fuel sectors lose large fractions of employment relative to today, especially: - Coal extraction - Fossil-fuel power - Employment in total EITE (energy-intensive, trade-exposed) industries in 2030 is lower than today, but only by small amounts; global employment in some of these sectors was already projected to fall under the baseline due to China’s structural and demographic change. - Employment increases in non-fossil-fuel power and in service sectors due to labor-income-tax recycling. - Alternative revenue recycling: - If carbon tax revenues are used as a lump-sum rebate to households instead of labor-income-tax reduction: - Global employment would be 0.6 percent lower in 2030 (relative to the baseline), instead of being 0.2 percent higher with labor income tax recycling. - Global GDP cost of climate policy would be 1.8 percent in 2030, higher than the 1.1 percent cost in the study’s central scenario. --- ### International burden sharing: ICPF versus uniform global carbon tax - Global tax scenario is calibrated to match the total CO2 emission reductions of the ICPF scenario. - The endogenous carbon price in the global tax scenario reaches $55.80/tCO2eq in 2030 (2018 prices). - Emissions and GDP impacts (deviation from baseline in 2030): - ICPF scenario: - Emission reductions are progressive: highest among HICs and lowest among LICs. - Global tax scenario: - Implies much higher emission reductions among MICs and LICs than among HICs because emission intensity is highest at lower income levels. - Efficiency versus fairness: - Uniform global carbon pricing is more efficient (lower global GDP cost) but less progressive. - Global GDP cost: about 0.8 percent under the global tax scenario versus 1.1 percent under the ICPF. - The ICPF transfers a fraction of emissions reductions and associated GDP cost from LICs to HICs, with MICs little affected since their ICPF carbon price floor is close to the uniform global carbon price. - Carbon budget shares for 1.5°C (cumulative emissions 2021–30 as share of remaining carbon budget): - The ICPF reduces the share used by HICs by about 3 percentage points relative to a uniform price, offset by increases in LICs and MICs. - Even under the ICPF, about two-thirds of the remaining carbon budget for 1.5°C would be consumed in the decade 2021–30. --- ### Measures of fairness and additional policy tools - Under the ICPF: - Wealthier countries reduce emissions proportionally more relative to the baseline (percentage reductions in total CO2 emissions, emissions per capita, emissions per unit of GDP). - Main outliers: Indonesia and South Africa and to a lesser extent China reduce emissions more than other countries in their income groups because of especially high carbon intensity at their group level. - Other fairness measures: - GDP per capita costs and the carbon-tax-to-income ratio do not increase with income level despite higher capacity to pay among HICs; this reflects low emission intensity of HICs (about 20 percent of that in other countries). - Emissions per capita remain higher in HICs than in the rest of the world in 2030; emissions per unit of income (or GDP) in HICs are much lower than elsewhere. - Climate finance and technology transfer: - Per-unit abatement costs are currently lowest in LICs. - Current commitment of advanced economies is to provide $100 billion per year to EMDEs. - Scaling up international support and technology transfers would reduce emissions where reductions are most efficient and make mitigation more progressive globally. --- ### Incomplete action, unilateral HIC action, and carbon leakage - Partial action by HICs (HICs implement their ICPF carbon price floor; all other countries remain at baseline): - Global CO2 emissions still decrease by almost 12 percent relative to baseline (versus by 15 percent without carbon leakage to MICs and LICs). - Aggregate carbon leakage rate: about 6.5 percent (within literature range of 5 to 25 percent; mean 14 percent). - HICs’ emissions and GDP outcomes are very close to those in the full ICPF scenario; HICs experience only slightly higher GDP losses reflecting competitiveness losses vis-à-vis nonacting countries. - Effects on nonacting countries: - Most MICs and LICs experience a minor decrease in GDP relative to baseline; a few MICs and LICs (Argentina, India, South Africa, Turkey) record marginal GDP gains relative to baseline. - Oil exporters experience substantial GDP losses even if they do not act, because HIC climate policy reduces international demand for oil and gas and therefore international prices for these fuels. - Sectoral competitiveness: - In EITE sectors (chemicals, iron and steel, nonmetallic minerals), HICs’ output losses are up to one-third higher when HICs act unilaterally (about 7.5 percent) than under the ICPF; nonacting countries see gross output in these sectors improve by about 1.25 percent. - HICs’ market share in international markets for EITE goods declines noticeably under unilateral action relative to the ICPF (example statistic cited: 56.2 percent market share in the ICPF scenario—no end value provided in the source text for unilateral case). --- *Source: IMF-ENV model and IMF Departmental Papers, "Economic and Environmental Benefits from International Cooperation on Climate Policies" (figures and text excerpts provided).* ### 54.2 percent in the HICs-only scenario (Figure 15, panel 4). Leakage rates for EITE sectors are much greater ### 54.2 percent in the HICs-only scenario (Figure 15, panel 4). Leakage rates for EITE sectors are much greater ### Leakage rates and EITE sectors - Aggregate leakage when HICs act alone: 6.5 percent. - Average leakage rate for all EITE sectors: 40 percent of the corresponding emission reductions in acting HICs. - Sectoral EITE leakage rates (acting HICs): - Chemicals: 50 percent. - Iron and steel: 50 percent. - Nonmetallic minerals: 30 percent. - Nonferrous metal manufacturing: 15 percent. - Pulp and paper manufacturing: 0 percent. - Drivers of high EITE leakage: - These goods are carbon intensive. - They are heavily traded (notably chemicals and iron and steel). - Trade pattern changes are highly sensitive to relative price changes across regions because the goods are rather homogenous. ### Global emission reductions under HIC-only action versus global action - Global CO2 (GHG) emissions change in 2030: - HICs-only ICPF: CO2 declines by 12 percent; GHG declines by 10 percent below baseline. - Full global ICPF: CO2 declines by 29 percent; GHG declines by 26.6 percent below baseline. - HICs contribution and global outcome: - HICs reduce their CO2 emissions by 44 percent relative to baseline. - HICs account for 23.5 percent of baseline global GHG emissions in 2030. - Global CO2 emissions still increase by 8.4 percent in 2030 relative to 2019 under HICs-only action. - Conclusion: Global emission reductions are very insufficient when only HICs implement the ICPF; MICs and LICs play a central role in reaching global temperature goals. ### Border Carbon Adjustment (BCA): designs and effectiveness - Two coverage options analyzed: - BCA on all commodities (base assumption). - BCA limited to EITE sectors. - Two stringency cases: - Maximum BCA: - Countervailing tariff based on specific foreign carbon content of a commodity. - Includes indirect carbon content from electricity used in production. - Includes an export subsidy; tariff revenue retained by acting countries partly to finance export subsidies. - Tariffs and export adjustments calculated based on difference between acting and nonacting carbon prices (carbon price for most nonacting countries is zero). - Standard BCA: - Only the tariff part is implemented. - Tariffs calculated based on domestic carbon content of equivalent goods produced in the acting country (same for all nonacting partners). - Includes indirect carbon content from electricity. - Tariff revenues retained by acting countries. - Key findings on BCA effectiveness: - Using foreign carbon content is generally key for BCA effectiveness; domestic-content BCAs do little to restore EITE competitiveness. - Maximum BCA applied to all products reduces aggregate leakage from 6.5 to 2.7 percent under the standard BCA and turns leakage negative under the maximum BCA. - Negative leakage means emissions in nonacting countries are lower than baseline when facing carbon tariffs on exports—can occur when coal supply is more elastic than oil and gas. - Sectoral effects when foreign carbon content is used: average EITE leakage reduced from 50 to 10 percent (Figure 16). - Maximum BCA applied only to EITE goods reduces EITE output losses in acting countries from 7.5 percent (no BCA) to 4 percent. - Maximum BCA suppresses gross output gains of nonacting countries in these sectors from 1.25 percent to –0.2 percent (relative to baseline). - Maximum BCA can reduce EITE market share losses to 1 percentage point from the baseline when applied to all goods, and can generate small market share gains for HICs when limited to EITE goods. ### Comparison: ICPF versus BCAs - ICPF performance: - An ICPF can be as effective as some BCAs at protecting HIC competitiveness and market shares in EITE sectors. - ICPF performs better than the standard BCA and almost as well as the maximum BCA in limiting HIC EITE output losses and world market share changes. - Under ICPF, MICs and LICs have lower carbon prices than HICs but often higher carbon intensity per unit of output, evening out carbon costs. - A sectoral ICPF (EITE-only in MICs and LICs, economy-wide in HICs) yields outcomes for HIC EITE sectors close to full ICPF outcomes. - Limitations and trade-offs of BCAs: - Estimating foreign carbon content is difficult due to variation in carbon intensity across countries, sectors, and within sectors. - Domestic carbon-content BCAs reduce BCA efficiency substantially. - BCAs could be perceived as trade barriers and provoke retaliation. - BCAs do not scale up mitigation sufficiently because emissions embodied in domestic absorption in nonacting countries remain untaxed. - BCAs extend emission reduction burdens to nonacting countries by taxing exports, but do not incentivize nonacting countries to join the ICPF. - Distributional outcomes: - HICs are better off imposing a BCA relative to unilateral action without a BCA; nonacting countries are worse off under BCAs irrespective of design or coverage. - For most nonacting countries, GDP outcomes are better under a BCA than under joining the ICPF, because BCAs tax only exports while the ICPF applies economy-wide carbon pricing. - Exceptions: LICs like India and other developing Asian countries have similar GDP outcomes under the ICPF and standard BCA and can be slightly worse under maximum BCA due to low ICPF floors ($25) versus higher BCA-equivalent levels (at least $75) and specialization in EITE goods. - Other LICs (African countries) are often better off under a BCA than under ICPF because their trade specialization is in agriculture, food, and textiles rather than energy-intensive goods. - MICs are generally better off under a BCA than under the ICPF (which would require implementing a $50 carbon tax under the ICPF scenario). ### Sectoral carbon pricing as a cooperative path forward - A sectoral carbon pricing agreement for EITE sectors could be an intermediate path to avoid BCAs: - MICs and LICs impose a carbon price floor on EITE sectors only; HICs implement economy-wide carbon price. - GDP costs for MICs and LICs would be broadly similar or slightly lower under a sectoral agreement compared with a BCA, because the sectoral tax would be lower and they could retain revenue. - Sectoral agreement would not scale up mitigation sufficiently, but could avoid BCAs and provide a cooperative solution. - Political feasibility: limiting carbon pricing to traded goods might be politically easier for MICs and LICs as EITE sectors are generally a small share of total economic activity and would not require increasing prices for transportation fuel. ### Overarching policy conclusion - A full ICPF with economy-wide carbon price floors (or equivalent policies) in all regions provides a reasonable way forward to scale up global climate mitigation, substantially increase global emissions reductions, and provide some degree of burden sharing among countries. *IMF Departmental Paper content excerpt.* ### 1. Middle-Income Countries2. Low-Income Countries ### eebiccpea - 1. Middle-Income Countries2. Low-Income Countries ### Key findings and conclusions - An international carbon price floor arrangement would be a very effective mechanism for scaling up global mitigation efforts toward what is required to keep within the temperature targets of the Paris Agreement. - Current policies are not sufficient to stop global emissions from increasing, let alone to implement the substantial reductions that are required to reach net zero targets by midcentury. - Key to the mechanism is global minimum carbon prices—whether achieved explicitly by a carbon price or implicitly by an equivalent set of alternative policies—and differentiation of minimum carbon prices by level of development of countries. - Such an arrangement would: - deliver substantial global emission reductions while improving international burden sharing relative to a uniform global carbon tax; - produce emissions reductions that are progressive, largest for high-income countries and smallest for low-income countries; - broadly preserve the relative competitiveness of country groups in sensitive energy-intensive and trade-exposed sectors. - The arrangement should be complemented by cross-country transfers to further improve burden sharing and support transition efforts of middle- and low-income countries that have larger development needs and higher reliance on fossil fuels. - The GDP costs associated with the international carbon price floor arrangement pale in comparison to baseline growth, and decarbonization is compatible with continued robust growth, provided it is supported by the right investments. - In the longer term, ambitious decarbonization is the only path for ensuring sustained growth. ### Unilateral action by high-income countries and BCAs - In case of unilateral action by high-income countries (HICs), a border carbon adjustment (BCA) mechanism would be effective at protecting their energy-intensive and trade-exposed (EITE) industries and limiting aggregate carbon leakage if it is based on foreign carbon content. - In the absence of a multilateral effort, HICs can still effectively reduce their emissions without much damage to economic activity. - Contrary to common intuition: - unilateral climate action causes neither substantial losses in aggregate GDP for acting countries, relative to the case of joint action, nor gains in nonacting countries, relative to the case in which no country acts. - aggregate carbon leakage is moderate, so efforts of acting countries at reducing emissions are not undermined. - However, energy-intensive and trade-exposed industries specifically do experience more substantial competitiveness losses and carbon leakages under unilateral action. - A BCA would help reduce carbon leakage and restore competitiveness for these industries by forcing firms in nonacting countries to pay a price for carbon emissions. - The effectiveness of a BCA depends strongly on measuring the foreign carbon content, which is difficult and administratively cumbersome to implement. - Drawbacks of BCAs: - administrative effort implied by implementation of a strong BCA; - potential perception as hostile and protectionist, triggering retaliation and escalating trade tensions. ### Sectoral international carbon price floor as an alternative - A sectoral carbon pricing arrangement for energy-intensive and trade-exposed sectors could offer a better alternative if the full international carbon price floor arrangement is not yet in reach. - Such a sectoral arrangement would: - require countries to introduce a carbon price floor differentiated by income level on their EITE sectors; - achieve broadly similar outcomes as a strong form of BCA (one based on foreign carbon content) in terms of preserving relative competitiveness of country groups in EITE sectors; - lead to broadly similar or better GDP outcomes for middle- and low-income countries than under a BCA, which could make them amenable to such an arrangement; - allow HICs to implement ambitious mitigation policies without concern for carbon leakage and loss of competitiveness and without resorting to BCAs; - introduce limited carbon pricing in EMDEs and allow EMDE governments to acquire revenues; - allow subsequent gradual alignment of coverage and level of carbon pricing with global mitigation requirements. ### Box 2 — Design and coalition size determine BCA effectiveness - Carbon leakage rates are higher for smaller coalitions of acting countries. - When HICs are acting alone, the increase in carbon dioxide (CO2) emissions in nonacting countries represents 6 percent of CO2 emissions reductions in HICs in 2030. - If only EU countries are acting, the leakage rate could reach 17 percent of the EU CO2 emissions reductions in 2030. - The value for the EU is close to the estimate of 15 percent in Misch and Wingender (2021). - Mechanisms driving leakage vary with coalition size: - When the coalition is small, most CO2 leakage results from reallocation of production out of acting countries. - When the coalition is large, reallocation phases out and leakage is largely driven by lower international prices of fossil fuels. - Output losses in EITE sectors are larger for EU countries when they act alone than for HICs when all HICs act alone, because EU countries face competitiveness losses relative to more countries and because other HICs have trade specializations similar to those of the EU. - A BCA reduces leakage less for larger coalitions because a larger fraction of leakage is driven by the rebound effect of fossil-fuel demand in other countries as a result of lower international fossil fuel prices. - BCA design matters greatly: - Using foreign carbon content for computing tariffs is critical for BCA efficiency. - Adding export subsidies improves BCA efficiency, but to a much smaller extent. - Incorporating indirect carbon content from power generation into the BCA improves efficiency only when tariffs are calculated using foreign carbon content. - BCAs including process-based CO2 emissions or non-CO2 greenhouse gas emissions are slightly more effective at leakage reduction. ### Annex highlights and model aggregation - Annex 1 lists aggregate sectors in the IMF-ENV model, including but not limited to: Air transport; Chemical products; Coal extraction; Coal-powered electricity; Construction; Crops; Crude oil extraction; Electricity transmission and distribution; Fabricated metal products; Food products; Forestry; Gas-powered electricity; Hydro power; Iron and steel; Livestock; Mining (non-fossil-fuel); Natural gas: extraction and distribution; Nonferrous metals; Nonmetallic minerals; Nuclear power; Oil-powered electricity; Paper and paper products; Petroleum and coal products; Solar power; Textiles; Transport equipment; Water supply; sewerage and waste; Wind power. - Annex 2 provides supplementary figures on changes in global GHG emissions in 2030 under the ICPF scenario by greenhouse gas and on changes in global outdoor air pollution in 2030 under the ICPF scenario by pollutant. - Specific numeric results highlighted: - Leakage rates: 6 percent (HICs acting alone, 2030) and 17 percent (EU acting alone, 2030). - Reference to an estimate of 15 percent in Misch and Wingender (2021) as comparable to the EU-only leakage figure. *Source: IMF-ENV model.* ### References ### References ### GTAP, CGE models, and related modeling tools - Aguiar, Angel, Maksym Chepeliev, Erwin L. 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