## EXECUTIVE SUMMARY

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### Climate risk and need for urgent action
- Global warming is threatening our planet and living standards around the world, and the window of opportunity for containing climate change to manageable levels is closing rapidly.
- Carbon dioxide (CO2) emissions are a key driver of this trend.
- The 2015 Paris Agreement goes in the right direction, but the commitments made fall well short of those needed to limit global warming to 2°C, at most, above preindustrial temperatures.
- The longer policy action is delayed, the more emissions will accumulate and the greater the cost of stabilizing global temperatures.

### Fiscal policies to mitigate climate change
- Carbon taxes—levied on the supply of fossil fuels in proportion to their carbon content—are identified as the most powerful and efficient mitigation tool because they allow firms and households to find lowest-cost reductions and shifts to cleaner alternatives.
- Distributional effects of a carbon tax vary by country: the burden in proportion to household consumption is moderately larger for lower-income households in some countries (for example, China and the United States), but roughly equal or slightly smaller in others (Canada, India).
- Revenue from carbon pricing could be used to:
  - assist low-income households;
  - support disproportionately affected workers or communities (for example, coal-mining areas);
  - cut other taxes;
  - fund investment in clean energy infrastructure or United Nations Sustainable Development Goals;
  - reduce fiscal deficits;
  - pay an equal dividend to the whole population.

### Scenarios and key quantitative impacts
- Limiting global warming to 2°C or less requires policy measures on an ambitious scale, such as an immediate global carbon tax that will rise rapidly to $75 a ton of CO2 in 2030.
- Under such a scenario:
  - electricity prices would rise, on average, by 45 percent cumulatively over 10 years for households, compared with the baseline (no policy action);
  - gasoline prices would rise by 15 percent over the same period for households;
  - revenue from such a tax would be 1.5 percent of GDP in 2030, on average, for the Group of Twenty (G20) countries.
- Environmental and health co-benefits: a $75 a ton tax for G20 countries alone would yield 725,000 fewer premature deaths in 2030.
- Employment in renewables had already reached 11 million globally in 2017.

### Revenue use tradeoffs and policy design
- Carbon pricing combined with an equal dividend to the whole population rather than an income tax cut redistributes income to favor lower-income groups but forgoes gains in economic efficiency.
- An intermediate approach—compensating the poorest 40 percent of households, as well as vulnerable workers and communities—would leave three quarters of the revenues for other goals such as productive investments or cuts in income taxes.
- Businesses considering long-term investments need certainty about future tax and regulatory policies; policymakers should lock in mitigation policies for as long as possible, including making commitments to the global community.

### Alternative instruments and their efficacy
- If carbon taxation is not feasible, emission trading systems (auctioning or allocating emission permits that are then traded) would be equally effective if applied to as wide a range of economic activities.
- If neither carbon taxes nor emission trading systems are available on the necessary scale, feebates (fees and rebates on products or activities with above- or below-average emission intensity) or regulations (for example, standards for emission rates and energy efficiency) could generate two thirds of the CO2 reduction opportunities of carbon taxation.
- Feebates and regulations prompt switching to greener energy but do not discourage activities that use energy; to deliver the full scale of necessary emission reduction, they would need to be used more aggressively, causing greater disruption to existing production processes.
- The economic costs of mitigating climate change through less-than-optimal tools would still be lower than the devastating effects of global warming.

### International cooperation and investment shifts
- The average price on global emissions is currently $2 a ton.
- A carbon price floor arrangement among countries with the largest emissions could reinforce the Paris process, providing a transparent target and reassurance against losses in international competitiveness from higher energy costs.
- If the top three emitters (China, United States, India) participated, such an agreement would cover more than half of global emissions.
- Low-income and emerging market economies could be provided with a lower floor or international transfers.
- Meeting temperature stabilization goals does not mean that overall global energy investment must increase much further, but it implies an urgent need to shift energy supply investment toward low-carbon sources because infrastructure built today will determine emission levels for decades.
- Additional policies needed include incentives for research and development, temporary fiscal incentives to promote demand for low-emission technologies until they yield sufficient economies of scale, and green bond markets to facilitate access to private capital.
- Finance ministers can act by undertaking carbon taxation or similar policies, making mitigation more acceptable through complementary tax or expenditure measures, ensuring adequate budgeting for clean technology investment, and coordinating strategies internationally.

*FISCAL MONITOR: HOW TO MITIGATE CLIMATE CHANGE — Executive Summary. International Monetary Fund | October 2019.*

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_Source: https://www.imf.org/-/media/files/publications/fiscal-monitor/2019/october/english/execsum.pdf_