## Fiscal Monitor: How to Mitigate Climate Change (October 2019) — Excerpts ## Source details **Canonical URL:** [Fiscal Monitor: How to Mitigate Climate Change (October 2019) — Excerpts](https://www.imf.org/-/media/files/publications/fiscal-monitor/2019/october/english/text.pdf) ## Other formats - [Markdown version](/-/media/files/publications/fiscal-monitor/2019/october/english/text.pdf.md) - [Structured JSON version](/-/media/files/publications/fiscal-monitor/2019/october/english/text.pdf.json) --- ### Projections and Assumptions - Projections drawn from the same database used for the October 2019 World Economic Outlook and Global Financial Stability Report and are referred to as “IMF staff projections.” - Fiscal projections refer to the general government, unless otherwise indicated. - Short-term projections based on officially announced budgets, adjusted for differences between national authorities and IMF staff regarding macroeconomic assumptions. - Medium-term fiscal projections incorporate policy measures judged by IMF staff as likely to be implemented; for countries supported by an IMF arrangement, the medium-term projections are those under the arrangement. - Where IMF staff has insufficient information to assess authorities’ budget intentions and prospects for policy implementation, an unchanged cyclically adjusted primary balance is assumed, unless indicated otherwise. - Details on composition of groups and country-specific assumptions in the Methodological and Statistical Appendix. ### Executive Summary — Key Findings - Global warming threatens the planet and living standards; the window to contain climate change to manageable levels is closing rapidly. - Carbon dioxide (CO2) emissions are a key driver of the trend. - The 2015 Paris Agreement commitments fall well short of what is 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. - Technological and policy means exist to switch from coal and other polluting fossil fuels to cleaner energy while maintaining robust economic growth and creating jobs. - A key challenge is distributing costs and benefits to muster political support domestically and internationally. ### Fiscal Policies to Mitigate Climate Change — Findings and Scenarios - Carbon taxes (levied on the supply of fossil fuels in proportion to their carbon content) identified as the most powerful and efficient mitigation strategy because they allow firms and households to find lowest-cost reductions and shifts to cleaner alternatives. - Distributional incidence examples: - Burden in proportion to household consumption moderately larger for lower-income households than for higher-income households in some countries (for example, China and the United States). - Burden roughly equal or slightly smaller in other countries (Canada, India). - Limiting global warming to 2°C or less requires ambitious policy measures, such as an immediate global carbon tax that will rise rapidly to $75 a ton of CO2 in 2030. - Under the $75 a ton scenario: - Over 10 years electricity prices would rise, on average, by 45 percent cumulatively for households, compared with the baseline (no policy action). - Gasoline prices would rise by 15 percent for households, compared with the baseline. - Revenue from such a tax could be 1.5 percent of GDP in 2030, on average, for the Group of Twenty (G20) countries. - Health and employment impacts under the $75 a ton tax for G20 countries: - 725,000 fewer premature deaths in 2030 from reduced air pollution. - Renewables sector employment already reached 11 million globally in 2017. ### Revenue Uses and Distributional Tradeoffs - Revenue from carbon pricing could be redistributed 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. - Tradeoffs: - Carbon pricing combined with an equal dividend 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—leaves three quarters of the revenues for other goals such as productive investments or cuts in income taxes. ### Alternative Mitigation Instruments and Comparisons - If carbon taxation is not feasible, emission trading systems (ETS) would be equally effective if applied to as wide a range of economic activities. - If neither carbon taxes nor ETSs are available at scale, feebates or regulations could generate two thirds of the CO2 reduction opportunities of carbon taxation. - Feebates and regulations prompt switches to greener energy but do not discourage energy-using activities; to deliver full-scale reductions, they would need to be used more aggressively, causing greater disruption to production processes. - Economic costs of mitigating climate change through less-than-optimal tools would still be lower than the costs of unmitigated global warming. ### International Cooperation and Policy Architecture - Some advanced and emerging market economies already use carbon taxes and ETSs, but coverage and prices are insufficient. - 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 by providing a transparent target and reassurance against losses in international competitiveness. - 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. - The arrangement could accommodate different national policy approaches (ETSs, feebates, or regulatory approaches) with agreement on verification procedures. ### Investment, Technology, and Policy Stability - Meeting temperature stabilization goals does not imply that overall global energy investment must increase much further, but it does require an urgent shift of energy supply investment toward low-carbon sources because current infrastructure decisions determine emissions for decades. - Additional policies needed: - Incentives for research and development. - Temporary fiscal incentives to promote demand for low-emission technologies until economies of scale are achieved. - Development of green bond markets to facilitate access to private capital. - Policymakers should lock in mitigation policies for as long as possible, including making commitments to the global community, so businesses can make long-term investment decisions with greater certainty. ### Policy Recommendations for Finance Ministers - Undertake carbon taxation or similar pricing policies. - Make climate change mitigation more acceptable through complementary tax or expenditure measures (for example, targeted compensation). - Ensure adequate budgeting for clean technology investment. - Coordinate strategies internationally to enhance ambition and effectiveness. ### Introduction — Key statistics and projections - Projected temperature rise by 2100 without mitigation: around 4°C above preindustrial levels. - Historical temperature increase since 1900: 1°C. - Share of global greenhouse gas emissions from CO2 emissions from fossil fuel combustion: 63 percent. - Paris Agreement mobilization commitment: $100 billion a year from 2020 onward for developing economies. - Current global average carbon price: $2 a ton. - Estimated carbon price in 2030 consistent with 2°C target: $75 a ton. - Estimated global underpricing of fossil fuels in 2017: $5.2 trillion; coal and oil account for 85 percent of that subsidy. - Many mitigation pledges, if fully implemented, are consistent with warming of 3°C; emission reductions by 2030 would be one-third of those required for 2°C. ### CHAPTER 1 — Comparison of mitigation approaches (summary) - Carbon Tax: - Potential for exploiting mitigation opportunities: Full, if applied comprehensively (in practice, may contain exemptions). - Use of Price/Market Mechanism: Yes. - Price predictability: Yes (if trajectory is clearly specified). - Revenue generation: Yes. - Administrative burden: Small (if building on existing fuel or royalty tax systems). - Emissions Trading Systems: - Potential: Full, if applied comprehensively (in practice, often limited to powerful/large industries). - Price predictability: No (unless it includes price floors). - Revenue generation: Maybe (if allowances are auctioned). - Administrative burden: New capacity needed to monitor CO2 and trading markets. - Feebates: - Potential: Similar to regulations. - Use of market mechanism: Yes (within a narrower set of activities). - Revenue generation: No (recommended design is revenue neutral). - Administrative burden: New capacity needed. - Regulations: - Potential: Can exploit some key opportunities but not all. - Use of market mechanism: No. - Revenue generation: No. - Administrative burden: New capacity needed. ### CHAPTER 1 — Quantitative analysis: carbon tax scenarios and outcomes - Scenarios: uniform carbon tax rates of $25, $50, and $75 a ton of CO2 in 2030. - The $75 tax estimated to lead to the amount of emissions scientists estimate will lead to 2°C warming (if applied globally and combined with investment policies and measures for nonfossil CO2 emissions). - Key cross-country findings (G20 and selected countries): - Uniform carbon prices of $25, $50, and $75 a ton reduce CO2 emissions by 19, 29, and 35 percent, respectively, for the G20 group (with countries weighted by their future emission shares). - A $25 a ton price would be more than enough for some countries (for example, China, India, and Russia) to meet their Paris Agreement pledges; in other cases (for example, Australia and Canada) even the $75 a ton carbon tax falls short. - Price impacts with a $75 a ton tax: - Coal prices would typically rise by more than 200 percent above baseline levels in 2030. - Natural gas prices would rise by 70 percent on average. - Retail electricity price increases: less than 30 percent in Canada and in several European countries, and between 70 and 90 percent in Australia and several large emerging market economies. - Gasoline prices would rise by 5–15 percent in most countries. - Revenue mobilization: - For the $50 a ton tax in 2030, revenues for G20 countries range between ½ and 3 percent of GDP, depending on reliance on coal, energy efficiency, and the role of energy across sectors. - Economic efficiency costs: - The economic efficiency costs of a $50 a ton carbon tax (measured by the shift to cleaner but costlier technologies and equipment) are equivalent to less than 0.5 percent of GDP in 17 countries. ### Domestic environmental co‑benefits and distributional impacts - A $50 carbon tax would prevent 600,000 premature air pollution deaths in 2030 (the bulk of them in the largest emerging economies—60 percent in China alone). - A $75 carbon tax would prevent 725,000 premature air pollution deaths in 2030. - Household distributional outcomes for a $50 a ton carbon tax in 2030 (selected countries): - Carbon taxes would be moderately regressive in China and the United States, distribution-neutral in Canada, and moderately progressive in India. - Absolute burden on the bottom consumption quintile ranges from 2.2 percent of household consumption in Canada to 5.3 percent in China. - In all four examined countries, 90 percent of the total burden is borne by the top four consumption quintiles. - Industry impacts (for a $50 a ton carbon tax in 2030): - Average impact on industry costs ranges between 0.9 percent in Canada and 5.3 percent in China. - Cost increases for the 20 percent most vulnerable industries are 10.3 percent in China. ### Employment, regional impacts, and targeted assistance - Coal-related employment projected to decline under baseline policies; a $50 a ton carbon tax in 2030 would accelerate coal-sector job losses: - United States: increasing estimated job losses in this sector relative to 2015 levels from 8 to 55 percent. - China and India: up to 42–45 percent. - These job losses would amount to 0.3–0.9 percent of economywide employment in China and Poland, and less than 0.15 percent in other countries. - Global employment in the renewables sector in 2017 was 11 million. - Support measures and estimated costs: - Comprehensive programs for displaced workers and regions cost less than 2 percent of carbon tax revenues for China, India, the United Kingdom, and the United States under a $50 a ton carbon tax. - Examples of regional support: China restructuring fund in 2015 (0.15 percent of GDP); Germany planning to allocate €40 billion over the next 20 years to coal-mining regions. ### Options for use of carbon tax revenue — tradeoffs (selected) - Universal transfer payments (equal dividends): improve political acceptability but forgo efficiency benefits from productive revenue use. - Environmental investments: favor low-carbon infrastructure and R&D but must be balanced against competing priorities and quality scrutiny. - Cutting personal and corporate income taxes: likely provides significant efficiency gains but benefits skewed toward better-off households. - Reducing payroll or consumption taxes: promotes efficiency gains and benefits households roughly in proportion to their income. ### Supporting Policies for Clean Technology Investment - Market failures and impediments: knowledge spillovers, scale economies, network externalities, market distortions, and financial market imperfections. - Approaches: - Public R&D support; targeted fiscal incentives (capital grants, tax credits, per-unit subsidies, feed-in tariffs). - Public infrastructure investment (for example, charging stations for electric vehicles). - Financial sector policies to mobilize finance for climate mitigation (green bond prototypes, benchmark indices, amendments to prudential regulations and collateral eligibility). - Suggested sequencing: - Gradual doubling of public spending on energy R&D in advanced economies ($10 billion in 2018) focused on technologies furthest from the market. - Subsidies for deployment to be temporary and progressively phased out as cost parity is approached. - Public energy R&D composition shift in advanced economies: from 25 percent of total energy R&D spending in 1990 to 61 percent in 2018. - Employment in renewables projected to grow to 24 million by 2030 under a 2°C scenario. ### Fiscal instruments beyond domestic fuel CO2 and international mechanisms - Potential fiscal applications: international aviation and maritime fuels tax administered by UN agencies; feebates for forestry carbon storage; taxes on methane leakage using default leakage rates with rebates; F-gases taxes at rates about $5–$40 a ton of CO2 equivalent emissions; taxes on clinker production; agricultural greenhouse gas taxes on large-scale operations. - Precedents for international cooperation: 1987 Montreal Protocol; 2016 Kigali Agreement for F-gases. ### International carbon price floor — empirical illustration and rationale - With a uniform $25 a ton carbon price in 2030, China and India would account for an estimated 56 and 15 percent, respectively, of CO2 reductions (compared with baseline levels) from G20 countries; the United States for 12 percent; all other G20 countries combined for 18 percent. - Price-floor arrangement illustration (advanced G20 members at $50/ton minimum; nonadvanced members at $25/ton minimum in 2030): - Combined G20 CO2 emission reductions would be 24 percent below baseline levels—doubling reductions implied by current pledges. - Even under that scenario, mitigation would still fall a third short of consistency with the 2°C target. - An estimated $75 a ton across all G20 country emissions would still be needed to be consistent with the 2°C target. - Advantages: reassurance against competitiveness losses, transparency, efficiency, equity adjustments, and flexibility to accommodate different national approaches. ### Methodological and Statistical Appendix — key procedural notes and exact figures - Data vintage and coverage: compiled based on information available through September 30, 2019. - Country group classification: 35 advanced economies; 40 emerging market and middle-income economies; 40 low-income developing countries. - Low-income developing countries threshold: $2,700 in 2016 as measured by the World Bank’s Atlas method. - G20 member aggregate refers to the 19 country members and does not include the European Union. - Fiscal data conventions: most fiscal data refer to general government for advanced economies; for emerging market and developing economies, data often refer to central government or budgetary central government only. - Exact numeric figures cited (selected): - 0.3 percent of GDP for 2013 - 0.1 percent of GDP for 2014 - 0.1 percent of GDP for 2015 - 0.2 percent of GDP for 2016 - 2.4 percent of potential GDP for 2009 (US financial sector support) - 0.3 percent of potential GDP for 2010 (US financial sector support) - 0.2 percent of potential GDP for 2011 (US financial sector support) - 0.1 percent of potential GDP for 2012 (US financial sector support) - 0.0 percent of potential GDP for 2013 (US financial sector support) - FY2019/20 (Australia, New Zealand, Singapore fiscal year reference) - 2019–22 (Belgium multiyear horizon) - 2019–24 (Netherlands projection period; Russia 2019–24 projection horizon) - 2018–22 (France multiyear law) - 2019–21 (Turkey New Economic Program reference) - 2014 (reference to OECD elasticity) - Discount rate for net present value calculations: 1 percent a year in excess of GDP growth. ### Conclusions and Policy Recommendations (condensed) - Carbon taxation or other price-signal systems provide the most powerful and efficient incentives to reduce CO2 emissions; if not feasible at needed scale, alternatives (feebates, regulations) could be used but would need more aggressive implementation and would be more inefficient and disruptive. - Finance ministers’ roles: - Undertake carbon taxation or similar pricing. - Adjust broader tax and expenditure policy as part of a comprehensive strategy. - Ensure adequate budgeting for investment in R&D and support for cleaner technologies. - Coordinate strategies internationally. - Urgent actions needed in high-emitting countries for global impact and domestic benefits (for example, lower mortality from air pollution). - Emphasis on improving social and political acceptability of fiscal policies (for example, through judicious use of revenues) and effectiveness (for example, through international carbon price floors and supporting technology policies). *Source: Preface and Executive Summary, Fiscal Monitor: How to Mitigate Climate Change (October 2019), International Monetary Fund.* ### Preface vii ### Preface vii ### Projections and Assumptions - The projections included in this issue of the Fiscal Monitor are drawn from the same database used for the October 2019 World Economic Outlook and Global Financial Stability Report and are referred to as “IMF staff projections.” - Fiscal projections refer to the general government, unless otherwise indicated. - Short-term projections are based on officially announced budgets, adjusted for differences between the national authorities and the IMF staff regarding macroeconomic assumptions. - The medium-term fiscal projections incorporate policy measures that are judged by the IMF staff as likely to be implemented; for countries supported by an IMF arrangement, the medium-term projections are those under the arrangement. - In cases in which the IMF staff has insufficient information to assess the authorities’ budget intentions and prospects for policy implementation, an unchanged cyclically adjusted primary balance is assumed, unless indicated otherwise. - Details on the composition of the groups, as well as country-specific assumptions, can be found in the Methodological and Statistical Appendix. ### Fiscal Monitor Team and Contributions - Prepared by the IMF Fiscal Affairs Department under the general guidance of Vitor Gaspar, Director of the Department. - Project directed by Paolo Mauro, Deputy Director; and Catherine Pattillo, Assistant Director. - Main authors of this issue: Ian Parry (team leader), Thomas Baunsgaard, William Gbohoui, Raphael Lam, Victor Mylonas, Mehdi Raissi, Alpa Shah, and Baoping Shang. - Additional contributors: Eduardo Godinez, Josh Linn (Resources for the Future), Akito Matsumoto, William Oman, Andrea Pescatori, Dinar Prihardini. - Research contributions by Juliana Arbelaez; Methodological and Statistical Appendix prepared by Yuan Xiang. - Editorial and coordination: Joni Mayfield, Meron Haile; editorial team led by Rumit Pancholi with assistance from Sherrie Brown, Susan Graham, Lucy Morales, James Unwin, and Vector Talent Resources. - Inputs, comments, and suggestions received from numerous IMF departments and external experts (listed in the source). ### Executive Summary — Key Findings - Global warming is threatening the planet and living standards; the window to contain climate change to manageable levels is closing rapidly. - Carbon dioxide (CO2) emissions are a key driver of the trend. - Action to date has been inadequate; the 2015 Paris Agreement commitments fall well short of what is 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. - Technological and policy means exist to switch from coal and other polluting fossil fuels to cleaner energy while maintaining robust economic growth and creating jobs. - A key challenge is distributing costs and benefits to muster political support domestically and internationally. ### Fiscal Policies to Mitigate Climate Change — Findings and Scenarios - Carbon taxes (levied on the supply of fossil fuels in proportion to their carbon content) are identified as the most powerful and efficient mitigation strategy because they allow firms and households to find lowest-cost reductions and shifts to cleaner alternatives. - Distributional incidence examples: - The burden of the tax in proportion to household consumption is moderately larger for lower-income households than for higher-income households in some countries (for example, China and the United States). - The burden is roughly equal or slightly smaller in other countries (Canada, India). - Limiting global warming to 2°C or less requires ambitious policy measures, such as an immediate global carbon tax that will rise rapidly to $75 a ton of CO2 in 2030. - Under the $75 a ton scenario: - Over 10 years electricity prices would rise, on average, by 45 percent cumulatively for households, compared with the baseline (no policy action). - Gasoline prices would rise by 15 percent for households, compared with the baseline. - Revenue from such a tax could be 1.5 percent of GDP in 2030, on average, for the Group of Twenty (G20) countries. - Health and employment impacts under the $75 a ton tax for G20 countries: - 725,000 fewer premature deaths in 2030 from reduced air pollution. - Renewables sector employment already reached 11 million globally in 2017. ### Revenue Uses and Distributional Tradeoffs - Revenue from carbon pricing could be redistributed 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. - Tradeoffs: - 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—leaves three quarters of the revenues for other goals such as productive investments or cuts in income taxes. ### Alternative Mitigation Instruments and Comparisons - If carbon taxation is not feasible, emission trading systems would be equally effective if applied to as wide a range of economic activities. - If neither carbon taxes nor emission trading systems are available at scale, feebates (fees and rebates on products or activities with above or below-average emission intensity) or regulations (standards for emission rates and energy efficiency) could generate two thirds of the CO2 reduction opportunities of carbon taxation. - Feebates and regulations prompt switches to greener energy but do not discourage energy-using activities; to deliver full-scale reductions, they would need to be used more aggressively, causing greater disruption to production processes. - Economic costs of mitigating climate change through less-than-optimal tools would still be lower than the costs of unmitigated global warming. ### International Cooperation and Policy Architecture - Some advanced and emerging market economies already use carbon taxes and emission trading systems, but coverage and prices are insufficient. - 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 by providing a transparent target and reassurance against losses in international competitiveness. - 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. - The arrangement could accommodate different national policy approaches (emission trading systems, feebates, or regulatory approaches) with agreement on verification procedures. ### Investment, Technology, and Policy Stability - Meeting temperature stabilization goals does not imply that overall global energy investment must increase much further, but it does require an urgent shift of energy supply investment toward low-carbon sources because current infrastructure decisions determine emissions for decades. - Additional policies needed: - Incentives for research and development. - Temporary fiscal incentives to promote demand for low-emission technologies until economies of scale are achieved. - Development of green bond markets to facilitate access to private capital. - Policymakers should lock in mitigation policies for as long as possible, including making commitments to the global community, so businesses can make long-term investment decisions with greater certainty. ### Policy Recommendations for Finance Ministers - Undertake carbon taxation or similar pricing policies. - Make climate change mitigation more acceptable through complementary tax or expenditure measures (for example, targeted compensation). - Ensure adequate budgeting for clean technology investment. - Coordinate strategies internationally to enhance ambition and effectiveness. *Source: Preface and Executive Summary, Fiscal Monitor: How to Mitigate Climate Change (October 2019), International Monetary Fund.* ### Introduction ### Introduction ### Climate risks and the need for prompt action - Without substantial mitigation of greenhouse gas emissions, global temperatures are projected to rise by around 4°C above preindustrial levels by 2100 (they have already increased by 1°C since 1900). - Global warming causes major damage to the global economy and the natural world and engenders risks of catastrophic and irreversible outcomes such as rising sea levels, extreme weather events (already more frequent) leading to loss of life, and the possibility of much higher warming scenarios. - Carbon dioxide (CO2) emissions from fossil fuel combustion account for a dominant (63 percent) and growing share of global greenhouse gas emissions and are the most immediately practical to control. - The longer action is delayed, the greater the accumulation in the atmosphere, and the more abrupt and costly will be the necessary action to stabilize global temperatures. - Domestic policies are needed to give people and businesses incentives (through pricing or other means) to reduce emissions without derailing economic growth; international cooperation is key because greenhouse gases released by individual countries affect the global climate. ### Economic, health, and social co‑benefits of mitigation - Curbing fossil fuel use reduces local air pollution and can save millions of lives; for many countries, including large emerging market economies, the gains from fewer premature deaths caused by air pollution outweigh the costs of mitigation policies. - The shift from fossil fuels transforms production and livelihoods: firms and employees in energy-dependent sectors (aluminum, glass, chemicals, plastics, petroleum refining, pulp and paper, steel) and people in areas poorly served by public transportation are vulnerable to higher energy prices. - Coal-mining communities and regions lacking alternative jobs and fiscal revenues are especially at risk; policymakers should design assistance and measures to build a better future for groups especially affected by mitigation policies. - National governments and voters may lack incentives to act because benefits of temperature stabilization extend beyond short-term political horizons; commitments that lock in mitigation policies help provide investment certainty (infrastructure built today will determine emission levels for several decades). ### Paris Agreement goals and implementation gap - The long-term goal of the 2015 Paris Agreement is to limit projected global warming to 2°C, with an aspirational target of 1.5°C (IPCC 2018). - Meeting even the 2°C goal requires starting to reduce greenhouse gases immediately, bringing them to a third below baseline levels by 2030. - 190 parties submitted Nationally Determined Contributions; many developing economies pledged more aggressive action contingent on external financial and technical support. - Advanced economies committed to mobilize, from 2020 onward, $100 billion a year from public and private sources for climate projects in developing economies. - Even if current mitigation commitments are fully implemented—many countries are not on track, and the United States intends to withdraw from the Paris Agreement in 2020—these commitments are consistent with warming of 3°C: emission reductions by 2030 would be one-third of those required for 2°C. - The next opportunity for parties to make their mitigation pledges more ambitious is in 2020 when they must submit revised Nationally Determined Contributions. ### Fiscal policies and carbon pricing as central tools - Fiscal policies are a key tool to mitigate climate change; a higher price tag on carbon emissions is the most powerful and efficient way to do so. - Carbon taxes—charges on the carbon content of fossil fuels—are highlighted as the single most powerful and efficient tool to reduce domestic fossil fuel CO2 emissions, providing across-the-board incentives to reduce energy use and shift toward cleaner fuels, mobilizing revenue, and being administratively straightforward if built on fuel tax systems. - Current global average carbon price is $2 a ton (World Bank 2019a), compared with an estimated $75 a ton price in 2030 consistent with a 2°C target. - The combined value of underpricing of fossil fuels from all sources globally has been estimated at $5.2 trillion for 2017, with coal and oil accounting for 85 percent of the subsidy (Coady and others 2019). - Without consensus to raise the carbon price to the necessary level, other less-effective instruments should complement carbon pricing to reduce domestic fossil fuel CO2 emissions. ### Design considerations, political economy, and supporting policies - Carbon tax paths can be set in line with mitigation objectives based on fuel consumption projections and behavioral responses; people and firms will choose lowest-cost ways to reduce emissions, conserve energy, or switch to greener sources. - Policymakers should consider ways of locking-in mitigation policies for as long as possible, including commitments to the global community, to provide certainty for long-lived investments such as power generation. - Complementary support for technological and financial policies is needed to mobilize investment in clean energy. ### Alternative mitigation instruments (high-level) - Emission trading systems: firms hold allowances for each ton of emissions; a government cap sets total allowances and trading establishes the emissions price. If coverage is comprehensive and initial allowances are charged (for example, via auction), emissions and revenues are in principle the same as under an equivalent carbon tax; in practice coverage has usually been limited to power generators and large industrial firms. - Feebates: sliding-scale fees on products/activities with above-average emission rates and rebates for below-average emitters; typically designed to be revenue-neutral. - Regulations: standards for emission rates of vehicles and power generators, energy-efficiency standards for products, and minimum renewable use requirements in power generation. - Even under approaches that emphasize regulations (for example, zero net emissions targets), carbon pricing can play a role (for example, promoting retirement of emissions-intensive capital or allowing firms to pay out-of-compliance fees). ### Key statistics and projections (as presented) - Projected temperature rise by 2100 without mitigation: around 4°C above preindustrial levels. - Historical temperature increase since 1900: 1°C. - Share of global greenhouse gas emissions from CO2 emissions from fossil fuel combustion: 63 percent. - Paris Agreement mobilization commitment: $100 billion a year from 2020 onward for developing economies. - Current global average carbon price: $2 a ton. - Estimated carbon price in 2030 consistent with 2°C target: $75 a ton. - Estimated global underpricing of fossil fuels in 2017: $5.2 trillion; coal and oil account for 85 percent of that subsidy. - Many mitigation pledges, if fully implemented, are consistent with warming of 3°C; emission reductions by 2030 would be one-third of those required for 2°C. *International Monetary Fund | October 2019 — Introduction (text)* ### CHAPTER 1 HOW TO MITIGATE CLIMATE CHANGE ### CHAPTER 1 HOW TO MITIGATE CLIMATE CHANGE ### Comparison of mitigation approaches - Range of emission mitigation mechanisms and impact on end-user energy prices: - Carbon taxes and emission trading systems lead people and firms both to shift to greener energy and to cut back on the use of energy-consuming products or capital. - Feebates and regulations do not discourage activities that use energy; feebates can induce shifts within specific activities but not reduce overall energy consumption unless applied aggressively. - Fossil-fuel energy producers pass the cost of a carbon tax (or of tradable emission permits) to end users through higher prices for electricity or gasoline. - A feebate on vehicles (extra fee on lower-than-average fuel efficiency and rebate on more efficient vehicles) would lead consumers to purchase more efficient vehicles but would not reduce vehicle miles driven. - Use of the price mechanism: - Carbon taxes and emission trading systems utilize price signals broadly; feebates rely on market incentives within narrower activities (for example, fees/rebates per kilowatt-hour relative to industry average for power generators). - Regulations may not leave sufficient flexibility for least-cost options and must keep up with changing technology; excessive reliance on regulation could motivate collusion or evasion. - Likely political opposition and design trade-offs: - Carbon pricing may face stiffer opposition from energy-using industries and the public compared with feebates and regulations, which have smaller impacts on energy prices. - If comprehensive and equitable carbon pricing is not politically feasible, jurisdictions may adopt less ambitious carbon taxes or emission trading systems complemented by stronger feebates or regulations. - Predictability and investment: - Transparent pricing plans for years ahead are necessary to mobilize investment in high upfront cost, long-payoff technologies. - Carbon taxes and feebates can support such forward-looking plans; emission trading systems yield price variability unless combined with mechanisms such as price floors. - Regulations offer the weakest investment incentives because they do not reward investment that exceeds standards. - Revenue and administration: - Carbon tax with no exemptions has the broadest tax base and highest potential to mobilize general revenues. - Emission trading systems could, in principle, yield equivalent revenues, but practical factors (narrower base, free permit allocations, earmarking) can limit revenue available for general use. - Regulations do not raise revenues; feebates are generally revenue neutral. - Administrative burden: carbon taxes can build on existing fuel or royalty tax systems (small incremental burden); emission trading systems require new capacity to monitor CO2 and trading; feebates and expanded regulations require new capacity to apply and enforce across more products and sectors. ### Features of alternative mitigation approaches (summary of Table 1.2) - Carbon Tax: - Potential for exploiting mitigation opportunities: Full, if applied comprehensively (in practice, may contain exemptions) - Use of Price/Market Mechanism: Yes - Efficiency across mitigation responses induced by policy: People and firms choose most efficient way of reducing emissions - Energy price impacts and acceptability: Higher energy prices can be challenging politically - Price predictability: Yes (if trajectory is clearly specified) - Revenue generation: Yes (though exemptions may limit revenue base) - Administrative burden: Small (if building on existing fuel or royalty tax systems) - Emissions Trading Systems: - Potential: Full, if applied comprehensively (in practice, often limited to powerful/large industries) - Use of market mechanism: Yes - Efficiency: People and firms choose most efficient way of reducing emissions - Energy price impacts: Higher energy prices can be challenging politically - Price predictability: No (unless it includes price floors or similar mechanisms) - Revenue generation: Maybe (if allowances are auctioned, but revenue base may be limited) - Administrative burden: New capacity needed to monitor CO2/trading markets - Feebates: - Potential: Similar to regulations - Use of market mechanism: Yes (within a narrower set of activities) - Efficiency: People and firms choose most efficient approach within only one activity - Energy price impacts: Avoiding significant energy price increases may enhance acceptability - Price predictability: Yes (if trajectory is clearly specified) - Revenue generation: No (recommended design is revenue neutral) - Administrative burden: New capacity needed (for example, to apply fees/rebates to power generators) - Regulations: - Potential: Can exploit some key opportunities but not all (for example, reductions in vehicle use) - Use of market mechanism: No - Efficiency: No automatic mechanism - Energy price impacts: Avoiding significant energy price increases may enhance acceptability - Price predictability: No (implicit prices vary with technology costs, energy prices, and so forth) - Revenue generation: No - Administrative burden: New capacity needed (for example, to monitor and enforce emission rate standards for power generators) ### Quantitative analysis: carbon tax scenarios and emissions outcomes - Scenarios analyzed: uniform carbon tax rates of $25, $50, and $75 a ton of CO2 in 2030. - The $75 tax is estimated by IMF staff to lead to the amount of emissions scientists estimate will lead to 2°C warming (if applied globally and combined with investment policies and measures for nonfossil CO2 emissions). - The $25 a ton and $50 a ton scenarios are analyzed given many countries’ mitigation pledges and the possibility of combining lower carbon prices with other instruments. - Key cross-country findings (G20 and selected countries): - Uniform carbon prices of $25, $50, and $75 a ton reduce CO2 emissions by 19, 29, and 35 percent, respectively, for the G20 group (with countries weighted by their future emission shares). - A $25 a ton price would be more than enough for some countries (for example, China, India, and Russia) to meet their Paris Agreement pledges; in other cases (for example, Australia and Canada) even the $75 a ton carbon tax falls short. - Cross-country differences in emissions responsiveness reflect variation in pledge stringency and the carbon intensity of energy (for example, greater responsiveness in coal-reliant countries such as China, India, and South Africa). - These differences underscore the case for greater international price coordination. ### Price impacts on energy products under carbon taxation - With a $75 a ton carbon tax: - Coal prices would typically rise by more than 200 percent above baseline levels in 2030. - Natural gas prices would rise by 70 percent on average; the proportionate impact would be larger in North and South America compared with Europe and Asia. - Retail electricity price increases would vary across countries: less than 30 percent in Canada and in several European countries, and between 70 and 90 percent in Australia and several large emerging market economies. - Gasoline prices would rise by 5–15 percent in most countries. - Price impacts are lower under less ambitious tax scenarios. - Retail electricity and gasoline price changes of these magnitudes are within historical bounds of price fluctuations experienced in recent decades. ### Revenue mobilization and macro impacts - Carbon taxes on domestic fuel consumption can mobilize significant new revenues. - For the $50 a ton tax in 2030, revenues for G20 countries range between ½ and 3 percent of GDP, depending on reliance on coal, energy efficiency, and the role of energy across sectors. ### Economic efficiency costs of mitigation via carbon taxes - Economic efficiency costs are measured by how much worse off people are as a result of the policy action, excluding the benefits (costs arise from shifts to cleaner but costlier technologies and a decline in overall economic activity due to higher energy prices). - The economic efficiency costs of a $50 a ton carbon tax (measured by the shift to cleaner but costlier technologies and equipment) are equivalent to less than 0.5 percent of GDP in 17 countries. - For most G20 countries, these costs are lower than the domestic environmental benefits. _Italic: Source: CHAPTER 1 HOW TO MITIGATE CLIMATE CHANGE, International Monetary Fund | October 2019_ ### CHAPTER 1 HOW TO MITIGATE CLIMATE CHANGE ### CHAPTER 1 HOW TO MITIGATE CLIMATE CHANGE ### Domestic environmental co‑benefits of carbon pricing - A $50 carbon tax would prevent 600,000 premature air pollution deaths in 2030 (the bulk of them in the largest emerging economies—60 percent in China alone). - A $75 carbon tax would prevent 725,000 premature air pollution deaths in 2030. - Domestic environmental benefits are especially large for countries with especially severe air pollution, such as China, India, and Russia. - Carbon pricing also yields ancillary benefits such as reductions in traffic congestion and accidents, and reduced dependence on volatile energy markets (the latter not counted in the cited estimates). ### Economic efficiency and comparison with other mitigation instruments - Carbon taxes impose considerably lower economic efficiency costs than alternative mitigation instruments modeled: - Feebates/regulations promoting reductions in emission intensity of power generation and vehicles (and improving energy efficiency across household, industrial, and electricity-consuming sectors). - An emission trading system (ETS) applied to power generation and large industry combined with feebates and regulations for household and transportation sectors. - When other policies are scaled to provide the same incentive for reducing CO2 by an extra ton as under a $50 a ton carbon tax (for the emission sources each policy affects): - Feebate/regulation packages achieve CO2 reductions of 50–70 percent of those under the carbon tax. - ETS/feebate/regulation hybrid packages achieve CO2 reductions of 65–80 percent of those under the carbon tax. - When other policies are scaled to achieve the same economywide emission reduction as under a $50 a ton carbon tax: - Mitigation costs are 50–100 percent larger for the feebate/regulation packages relative to the carbon tax. - Mitigation costs are 20–40 percent larger for the ETS/feebate/regulation hybrid relative to the carbon tax. - Rationale: A carbon tax lowers costs by enabling switching to cleaner technologies across a wider range of products and activities and by encouraging lower energy consumption; feebate/regulation approaches concentrate adjustment on narrower actions, raising marginal costs of further reductions. ### International carbon price floor to increase mitigation ambition - Three obstacles for scaling up global mitigation: - Reluctance by a single country to scale up ambition because benefits accrue mostly to others and concerns about competitiveness. - Current mitigation pledges are not expressed using a common measure, hindering comparisons. - Most future low-cost mitigation opportunities are in large, rapidly growing emerging market economies, especially those relying heavily on coal. - With a globally uniform $25 a ton carbon price in 2030, China and India would account for an estimated 56 and 15 percent, respectively, of CO2 reductions (compared with baseline levels) from G20 countries; the United States for 12 percent; all other G20 countries combined for 18 percent. - Advantages of an international carbon price floor for high-emitting countries: - Provides reassurance against competitiveness losses and reduces free-rider incentives. - Improves transparency by using a common emission price requirement. - Is efficient because emissions are cut where it is cheapest globally. - Can accommodate equity adjustments (for example, higher floor for advanced economies or enhanced financial/technology support to emerging markets). - Retains flexibility for countries to exceed the floor and can be designed to accommodate carbon taxes, ETSs, and feebate/regulatory strategies. - Empirical illustration for G20: - Under a price-floor arrangement with advanced G20 members at a $50 a ton minimum and nonadvanced G20 members at a $25 a ton minimum on domestic CO2 emissions in 2030 (countries meet either the floor or current mitigation commitments, whichever is more stringent), combined G20 CO2 emission reductions would be 24 percent below baseline levels—doubling reductions implied by current pledges. - Even under that scenario, mitigation would still fall a third short of consistency with the 2°C target; a uniform $75 a ton price across all G20 emissions is estimated to be needed to meet that benchmark. - Precedents: - Canada federal requirements introduced in 2016 require provinces/territories to phase in a minimum carbon price rising to Can$50 (US$38) a ton by 2022 using a carbon tax or an ETS. ### Making mitigation policy acceptable domestically: political economy and implementation - Common political obstacles: - Voter opposition due to higher energy costs and cost of living. - Misperceptions that carbon taxes disproportionately burden low-income households, are ineffective, or are a way to expand government. - Opposition from energy-intensive, trade-exposed firms; labor groups; and regions dependent on energy production. - Four elements important for successful strategies to implement carbon pricing: - Increase carbon prices in the near term and lock in subsequent price hikes through legislation to provide clarity and certainty. - Conduct extensive stakeholder consultations and public communication campaigns to provide facts and address misperceptions. - Use revenues in a transparent, equitable, and productive manner. - Provide upfront targeted assistance for vulnerable households, firms, workers, and disproportionately affected communities. - Country experiences: - Sweden: tax on carbon emissions introduced at $28 a ton in 1991 and rising to $127 a ton in 2019; introduced as part of broader tax reform including reductions in taxes on energy, labor, and capital; higher social transfers and reductions in basic income tax rates helped offset burdens on low- and middle-income households; competitiveness concerns addressed by a lower initial rate for industries, phased out progressively by 2018; public consultations used. - France: rapid ramping up of a similar carbon tax was suspended in 2018 at $50 a ton following public backlash against perceived unfairness, particularly when introduced alongside broader tax reductions seen as benefiting the wealthy. - Where broad coalitions for revenue use are infeasible, policymakers may resort to feebate/regulatory policies instead of higher energy prices, though these are less effective. ### Distributional impacts across households, firms, and sectors - Household distributional outcomes for a $50 a ton carbon tax in 2030 (selected countries): - Carbon taxes would be moderately regressive in China and the United States, distribution-neutral in Canada, and moderately progressive in India. - The absolute burden on the bottom consumption quintile ranges from 2.2 percent of household consumption in Canada to 5.3 percent in China. - In most countries, one-third to one-half of the burden on households comes indirectly via higher general consumer prices; these indirect burdens are approximately proportional to total consumption across households. - In all four examined countries, 90 percent of the total burden is borne by the top four consumption quintiles. - Underpricing energy is an inefficient way to help low-income households because most benefits from energy subsidies accrue to wealthier groups. - Industry impacts (for a $50 a ton carbon tax in 2030): - The average impact on industry costs ranges between 0.9 percent in Canada and 5.3 percent in China. - Cost increases for the 20 percent most vulnerable industries are 10.3 percent in China. ### Key statistics and scenario figures (preserved as in source) - Premature air pollution deaths prevented in 2030: - $50 carbon tax: 600,000 deaths prevented. - $75 carbon tax: 725,000 deaths prevented. - 60 percent of the premature deaths prevented under a $50 tax occur in China. - International mitigation shares under uniform $25 a ton price in 2030 (G20): - China: 56 percent of CO2 reductions below baseline. - India: 15 percent. - United States: 12 percent. - All other G20 countries combined: 18 percent. - G20 CO2 emission reductions under illustrative price-floor arrangement (advanced members $50/ton; nonadvanced members $25/ton) in 2030: - Combined G20 CO2 emission reductions: 24 percent below baseline. - Under that scenario, mitigation still falls a third short of consistency with the 2°C target. - An estimated $75 a ton across all G20 country emissions would still be needed to be consistent with the 2°C target. - Sweden carbon tax trajectory: - Introduced at $28 a ton in 1991. - Reached $127 a ton in 2019. - Canada federal minimum carbon price requirement: - Phase in to Can$50 (US$38) a ton by 2022. - Household burden on bottom consumption quintile (absolute, selected countries, $50/ton in 2030): - Canada: 2.2 percent of household consumption. - China: 5.3 percent of household consumption. - Industry cost impacts for a $50 a ton carbon tax in 2030: - Average industry cost increase: 0.9 percent in Canada; 5.3 percent in China. - Cost increase for the 20 percent most vulnerable industries in China: 10.3 percent. _International Monetary Fund | October 2019 — CHAPTER 1 HOW TO MITIGATE CLIMATE CHANGE_ ### 6.8 percent in India. ### 6.8 percent in India. ### Household burdens of carbon taxation - Burdens are estimated prior to the use of carbon tax revenue; a full pass-through of taxes to consumer prices is assumed. - When emissions are cut by 100 units at home, they increase abroad by no more than 5–20 units (Böhringer, Carbone, and Rutherford 2012; Burniaux, Chateau, and Duval 2013). - Figure 1.7 scenario: $50/Ton Carbon Tax in 2030, selected countries (Percent of total household consumption) — households face burdens across income quintiles (Q1–Q5). (See Online Annex 1.7 for methodology and data sources.) ### Employment and regional impacts - Coal-related employment is projected to decline in many countries under baseline policies. - A $50 a ton carbon tax in 2030 would substantially accelerate coal-sector job losses: - United States: increasing estimated job losses in this sector relative to 2015 levels from 8 to 55 percent. - China and India: up to 42–45 percent. - These job losses would amount to: - 0.3–0.9 percent of economywide employment in China and Poland. - Less than 0.15 percent in other countries. - Global employment in the renewables sector in 2017 was 11 million (Roberts 2019). - Coal- (or fossil-fuel-) related jobs are highly geographically concentrated and can form a disproportionately large share of local employment in a few regions (Online Annex 1.6). - Mine closures can leave scarred local landscapes and impaired waterways, and bankrupt extraction firms may be unable to meet cleanup obligations, reducing prospects for attracting new industries (Morris 2016). ### Burdens on industries - Figure 1.8 (2030, $50/Ton carbon tax) shows production cost increases from higher energy prices as a result of the carbon tax (assuming no pass-through of higher costs to producer prices). - Most vulnerable industry groups are identified (for example, cement, metals) with output-weighted average cost increases by industry quintile. ### Options for use of carbon tax revenue - Key considerations: fiscal needs for environmental or general spending or deficit reduction, existing income distribution, effectiveness of transfer programs, and design/efficiency/progressivity of the broader tax system. - Possible uses and trade-offs: - Universal transfer payments (equal dividends) improve political acceptability but forgo efficiency benefits from productive revenue use. - Environmental investments (low-carbon infrastructure, energy networks, R&D) may be favored but must be balanced against competing priorities and scrutinized for quality. - Cutting personal and corporate income taxes likely provides significant efficiency gains (better incentives for work effort, investment, and lower tax-sheltering) but benefits tend to be skewed toward better-off households. - Reducing payroll or consumption taxes promotes efficiency gains and benefits households roughly in proportion to their income. - Table 1.5 (Options for Use of Carbon Tax Revenues) summarizes impacts on income distribution, economic efficiency, and administrative burden across instruments including environmental investment, general investments, universal transfers, payroll tax, personal income tax, consumption tax, corporate income tax, and deficit reduction. ### Efficiency costs comparison (United States, 2030) - All policies reduce economywide CO2 emissions 22 percent below baseline levels. Cost estimates exclude global climate and domestic environmental benefits from carbon mitigation (see Online Annex 1.3). - Average costs ($/ton of CO2 reduced) for a $50/Ton Carbon Tax: - Carbon tax with 75 percent of revenues used to cut income taxes: $20 a ton of CO2 reduced. - Feebate combination: lower than carbon tax + universal dividend, but specific number not stated here. - Carbon tax and dividend (equal dividends to everyone): $70 a ton of CO2 emission reduction. - The carbon tax with revenues used to cut income taxes is the least costly approach overall in this comparison. - The carbon tax with equal dividends is estimated to have efficiency costs twice as high as the feebate and 3½ times as high as the carbon tax with three-quarters of revenues used to lower income taxes. ### Distributional impacts and policy design - Imposing carbon taxes with revenue returned in equal dividends is highly progressive: the bottom two consumption quintiles are better off on net and the top two quintiles worse off (Figure 1.11). - Using revenues to enhance economic efficiency—reducing labor taxes in Canada and the United States and funding public investment in China and India—is regressive on net, aside from in India, although net burdens on each household group are reduced considerably. - An intermediate approach—compensating the bottom two quintiles through equal dividends and using 60–70 percent of remaining revenue for public investment (China and India) or reductions in labor taxes (Canada and the United States)—is highly progressive and can still generate large gains in economic efficiency. - Political considerations: combining carbon taxation with equal dividends creates a large constituency in favor (about 40 percent of the population gains, and gains rise if the carbon price increases over time). Locking in a gradual increase in carbon taxation—over a decade or more—is suggested to give certainty and predictability. ### Targeted assistance and support measures - Assistance to lower-income households: - Targeted assistance (means-tested cash, in-kind transfers) is efficient if administrative capacity is adequate; otherwise coverage errors can occur. - Lifeline energy pricing helps with direct energy costs but does not offset indirect price burdens from higher consumer prices. - Expanded support that incentivizes work (for example, Earned Income Tax Credit–type measures) can help maintain labor force attachment. - Universal transfers close coverage gaps and build broader support but are costlier for public finances. - Support for displaced workers and coal-mining regions: - Possible measures: extended unemployment benefits, training and reemployment services, financial assistance for job search, relocation, and health care, wage insurance or tax credits for older workers. - Programs should include outreach, tailored training, and sufficiently generous scale to be effective. - Estimated cost of programs providing comprehensive benefits is less than 2 percent of carbon tax revenues for China, India, the United Kingdom, and the United States under a $50 a ton carbon tax (Online Annex 1.6). - Assistance for reclaiming abandoned mining and drilling sites and temporary budget support for local governments can help create jobs and bridge transitions for affected communities. - Additional geographically targeted policies (subsidies, grants) may be warranted to help regions transition (World Bank 2018). - Examples: China established a restructuring fund in 2015 (0.15 percent of GDP) mainly for training and job search assistance to facilitate shutdown of coal mines and other overcapacity sectors; Germany is planning to allocate €40 billion over the next 20 years to coal-mining regions to support activities such as developing infrastructure, expanding public transportation, and promoting R&D, science, and innovation. - Assistance to firms: - Options to cushion energy-intensive, trade-exposed firms include general corporate tax cuts, targeted measures, or border carbon adjustments. - Border carbon adjustments might be compatible with WTO rules if meeting environmental objectives but require significant administrative capacity (for example, to assess carbon embodied in imports). _Source: International Monetary Fund | October 2019; text - 6.8 percent in India._ ### 0.03 percent of GDP in the United States (Morris 2016). ### text - 0.03 percent of GDP in the United States (Morris 2016). ### Supporting Policies for Clean Technology Investment - Market failures and impediments that can limit low-carbon investment: - Knowledge spillovers from R&D and technology diffusion that prevent firms from capturing the full social benefits of new technologies. - Scale economies that deter firms from investing until market size is clear. - Network externalities (for example, infrastructure to connect remote renewables sites to the power grid). - Market distortions (for example, regulated energy pricing or incomplete property rights). - Financial market imperfections: limited financial instruments for low-carbon investments and shorter-term horizons of investors. - Approaches to address these impediments: - Public R&D support, targeted fiscal incentives (capital grants, tax credits, per-unit subsidies, feed-in tariffs), and regulations to address knowledge spillovers and demand certainty. - Public infrastructure investment (for example, charging stations for electric vehicles) to tackle network externalities. - Price liberalization and land reforms to reduce market distortions. - Financial sector policies to mobilize finance for climate mitigation (standards, green bond prototypes, benchmark indices, amendments to prudential regulations and collateral eligibility, shifts in portfolio choices of central banks and institutional investors). - Design and sequencing of support: - Increase R&D support now and gradually reduce support over time when technologies are widely deployed and used by firms and households. - Suggestion of a gradual doubling of public spending on energy R&D in advanced economies ($10 billion in 2018), focused on technologies furthest from the market with strong social benefits (for example, carbon capture and storage, smart grids, infrastructure for electric vehicles, and batteries). - Subsidies that promote widespread deployment should be temporary and progressively phased out as cost parity is approached. - Production-based fiscal incentives (fixed subsidies per kilowatt-hour) can be more flexible than investment-based incentives or feed-in tariffs that do not permit supply responses to changing market conditions. - Support upstream development and manufacturing of clean technologies can be more cost effective than downstream consumption support. - Corporate income tax provisions (for example, amount and duration of loss carryovers) should be calibrated to account for upfront costs of renewable investments. - Policy coordination and consistency: - Avoid policy inconsistencies and redundancies (for example, subsidizing renewables and fossil fuels simultaneously). - Provide more predictability on R&D tax credit policies. - Greater coordination across ministries, levels of government, and public sector agents is appropriate. ### Public Energy R&D Trends and Employment - Public energy R&D composition shift in advanced economies: - From 25 percent of total energy R&D spending in 1990 to 61 percent in 2018 (shift toward cross-cutting research and technologies, renewables, and energy efficiency). - Employment in renewables: - Global employment in the renewables sector reached about 11 million in 2017. - More than 40 percent of worldwide jobs created in the renewables sector since 2012 have been in China. - Employment in the renewables sector is projected to grow to 24 million by 2030 under a 2°C scenario. ### Instruments for Offsetting Burdens on Trade-Exposed Firms (Table 1.6 — summary of features) - Instruments listed: Rebates for Direct/Indirect Emissions; Output-Based Rebate; Border Carbon Adjustments; General Corporate Tax Cut; International Carbon Price Floor. - Addresses Competitiveness of Trade-Exposed Industries: - Rebates for Direct/Indirect Emissions: Yes - Output-Based Rebate: Yes - Border Carbon Adjustments: Yes - General Corporate Tax Cut: Poorly targeted at exposed industries - International Carbon Price Floor: Yes - Preserves Mitigation Incentives for Trade-Exposed Industries: - Rebates for Direct/Indirect Emissions: Removes all incentives - Output-Based Rebate: Maintains incentive for reducing emission intensity - Border Carbon Adjustments: Maintains all incentives - General Corporate Tax Cut: Maintains all incentives - International Carbon Price Floor: Maintains all incentives - Revenue Loss from Instrument: - Rebates for Direct/Indirect Emissions: Moderate - Output-Based Rebate: Moderate - Border Carbon Adjustments: Increases revenue - General Corporate Tax Cut: High cost - International Carbon Price Floor: Not applicable - Added Administrative Burden: - Rebates for Direct/Indirect Emissions: Small - Output-Based Rebate: Need to identify industries and monitor their output - Border Carbon Adjustments: Need to identify imported products and measure their embodied carbon - General Corporate Tax Cut: Not applicable - International Carbon Price Floor: Monitoring by international organization required - Compatibility with World Trade Organization Rules: - All five instruments: Yes, if carefully designed (General Corporate Tax Cut: Yes) - Compatibility with Paris Agreement: - Rebates for Direct/Indirect Emissions: Yes - Output-Based Rebate: Yes - Border Carbon Adjustments: May penalize countries using indirect pricing - General Corporate Tax Cut: Yes - International Carbon Price Floor: Yes ### Investment Needs for Clean Energy Transitions (Box 1.1 highlights) - Model estimates for 2°C-consistent emissions: - Increase projected global energy investment in 2030 from 2.0 percent of GDP to 2.3 percent of GDP, with most of the increase concentrated in China and India. - Overhaul of investment composition required: - Share of low-carbon energy supply (renewables, nuclear, improved transmission and distribution networks, carbon capture and storage in power generation) to rise from 40 percent in 2020 to 70 percent in 2035 and 80 percent in 2050. - Investment implications: - Energy infrastructure has expected lifetimes of 30–60 years; choices today determine emissions for decades. - Demand-side investments in energy efficiency for buildings, transportation, and industry are needed and can speed reductions because of shorter life cycles. - Incremental investment needs would be greater if they also covered transportation and other infrastructure (water, sanitation, telecommunications) essential to deliver the Sustainable Development Goals. ### Fiscal Instruments Beyond Domestic Fuel CO2 - Potential applications of fiscal instruments: - CO2 emissions from international aviation and maritime sectors: A tax on carbon content of fuels administered by UN agencies could raise sizable revenue (for example, for climate finance). - Net CO2 emissions from forestry: National-level feebate programs could tax landowners who store less carbon relative to a baseline year and rebate those who increase carbon storage. - Methane leakage during extraction, processing, and transport of oil, natural gas, and coal: Tax extraction in proportion to a default leakage rate with rebates for firms demonstrating lower leakage. - Fluorinated (F-) gases: Some countries have introduced taxes with rates of about $5–$40 a ton of CO2 equivalent emissions. - CO2 emissions from clinker production (cement manufacture): Taxes levied on clinker production proportional to a default emission rate. - Agricultural greenhouse gases: Taxes could be imposed per head of cattle, on fertilizer inputs, and on profits for farming involving deforestation; administration might be limited to large-scale operations. - Precedents for international cooperation: - The 1987 Montreal Protocol framework effectively eliminated production of CFCs and similar substances by the mid-1990s. - F-gases are subject to the 2016 Kigali Agreement, under which all countries are required to largely phase out these chemicals over the next 25 years. ### Conclusions and Policy Recommendations - Carbon taxation or other price-signal systems provide the most powerful and efficient incentives to reduce CO2 emissions; if not feasible at needed scale, alternatives (feebates, regulations) could be used but would need more aggressive implementation and would be more inefficient and disruptive. - Finance ministers’ roles: - Undertake carbon taxation or similar pricing. - Adjust broader tax and expenditure policy as part of a comprehensive strategy. - Ensure adequate budgeting for investment in R&D and support for cleaner technologies. - Coordinate strategies internationally. - Urgent actions are needed in high-emitting countries for global impact and domestic benefits (for example, lower mortality from air pollution). - Emphasis on improving social and political acceptability of fiscal policies (for example, through judicious use of revenues) and effectiveness (for example, through international carbon price floors and supporting technology policies). *Source: IMF staff.* ### Box 1.2. Fiscal Instruments to Reduce Broader Sources of Greenhouse Gases ### Box 1.2. Fiscal Instruments to Reduce Broader Sources of Greenhouse Gases ### Ensuring consistent measurement of carbon prices - Some countries may provide favorable rates to selected emission sources or partially offset carbon taxation by reducing preexisting energy taxes. - The arrangement might focus on countries’ “effective” carbon prices. - Effective carbon prices can be calculated by: - expressing existing fuel taxes on a carbon dioxide (CO2)-equivalent basis (that is, dividing them by the fuel’s CO2 emission factor); and - weighting CO2-equivalent fuel taxes, and any direct carbon pricing, by their relative effectiveness at reducing CO2 emissions compared with a comprehensive carbon price and then aggregating across these tax and pricing systems. - First-pass estimates of effective carbon prices for 135 countries are provided in IMF (2019c). ### Recognizing past efforts - There is little efficiency basis for equating effective carbon prices across countries since these vary according to fiscal needs and the share of economy-wide emissions from fuels subject to excise. - The arrangement could focus on a required uniform increase in countries’ effective carbon prices relative to prices in an earlier year—for example, before the recent proliferation of carbon pricing programs—to avoid penalizing those who have already acted. ### Ensuring sustained participation — carrots - Participation among emerging market economies might be encouraged through side payments, technology transfers, or credit trading opportunities. - The Paris Agreement (UNFCCC 2016, Article 6.2) recognizes internationally transferred mitigation outcomes across national governments. - Countries needing prices lower than the floor price to meet their mitigation pledges could benefit from setting the floor price and selling internationally transferred mitigation outcomes at this price to other countries. ### Ensuring sustained participation — sticks - Nonparticipants could be coerced into joining through trade sanctions (for example, Nordhaus 2015) or border carbon adjustments (levying charges on the unpriced carbon emissions embodied in imports from nonparticipant countries to match the domestic carbon tax). - Penalties should ideally account for progress on meeting mitigation commitments (through pricing and other measures) in nonparticipating countries. - This approach would likely impose a considerable administrative burden. *International Monetary Fund. 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Detlef, P. van Vuuren, Willem Boskaljon, Maarten L. Neelis, Deger Saygin, and Martin K. Patel. 2016. “Long-Term Model-Based Projections of Energy Use and CO2 Emissions from the Global Steel and Cement Industries.” Resources, Conservation, and Recycling 112: 15–36. - Weitzman, Martin, L. 2016. “Voting on Prices vs. Voting on Quantities in a World Climate Assembly.” Research in Economics 71 (2): 199–211. - World Bank. 2012. Turn Down the Heat: Why a 4°C Warmer World Must Be Avoided. Washington, DC: World Bank. - ———. 2018. Groundswell: Preparing for Internal Climate Migration. Washington, DC: World Bank. - ———. 2019a. State and Trends of Carbon Pricing 2019. Washington, DC: World Bank. - ———. 2019b. Using Carbon Tax Revenues. Washington, DC: World Bank. - World Economic Forum (WEF). 2019. The Global Risks Report *Source: CHAPTER 1 HOW TO MITIGATE CLIMATE CHANGE — text - CHAPTER 1 HOW TO MITIGATE CLIMATE CHANGE (PDF).* ### 2019. Geneva: WEF. ### text - 2019. Geneva: WEF. ### Country abbreviations - Provides ISO-style three-letter codes mapped to country names (examples shown: AFG Afghanistan; AUS Australia; USA United States; CHN China; IND India; etc.). - Full list spans all entries included in the source (multiple pages). ### Glossary: key definitions and terms - Air pollution deaths: Premature mortality caused by human exposure to fine particulates caused by burning coal and petroleum products. - Border carbon adjustment: Levy charged on the unpriced carbon emissions embodied in imports (perhaps with remittances for domestic carbon taxes on exports). - Broader economic costs: The costs of economywide reductions in employment and investment caused by higher energy prices which in turn exacerbate the economic costs of taxes on labor and capital income. - Burden or incidence: Refers to whose economic welfare is reduced by a policy and by how much; distinct from formal or legal incidence. - Carbon dioxide (CO2): The main greenhouse gas, produced from burning fossil fuels, manufacturing cement, and forest practices. CO2 has an average atmospheric residence time of 100 years. - Carbon price floor arrangement: A proposal to complement the Paris Agreement with an agreement among large emitting countries to impose a minimum price on carbon emissions. - Carbon tax: A tax imposed on CO2 releases emitted largely through the combustion of carbon-based fossil fuels; administratively implemented by taxing the supply of fossil fuels in proportion to their carbon content. - Distribution-neutral policy: A policy that imposes approximately the same burden as a proportion of consumption (or some other measure of household well-being) on all different income groups. - Economic efficiency cost: Losses in consumer and producer surplus (net of any gains/losses to the government) from a policy change, leaving aside environmental effects. - Emissions trading system: Market-based policy (cap-and-trade) requiring allowances for emissions; auctioning allowances provides government revenue. - Externality: A cost imposed by the actions of individuals or firms on others that the former does not consider. - Feebate: Sliding scale of fees/subsidies based on emission rates or energy consumption rates to exploit mitigation opportunities without large energy price increases. - Greenhouse gas: Gas that traps heat radiated from the earth; CO2 is the predominant greenhouse gas. - Green bonds: Bonds specifically earmarked for climate and environmental projects. - Nationally Determined Contribution (NDC): Climate strategies submitted by 190 parties for the Paris Agreement; reporting and revision schedule described. - Network externality: When additional infrastructure for one investor could benefit other firms. - Output-based rebate: Payment per unit of output to compensate firms (particularly trade-exposed) for higher production costs due to energy price rises. - Paris Agreement: International accord ratified in 2016 aiming to contain global average temperature increases to 1.5–2°C above preindustrial levels. - Research and development: Innovative activities by corporations or governments developing new products or technologies. - Regressive policy: Imposes a larger burden as a share of consumption on lower-income households; progressive policy does the opposite. - Revenue recycling: Use of carbon tax revenues to lower other taxes or fund public investments. - Scale economies: Cost advantages from increasing scale of operation. - Sustainable Development Goals: 17 goals set in 2015 with 169 targets covering climate, poverty, health, education, and more. ### Methodological and statistical appendix: scope and conventions - Structure: Four sections — “Data and Conventions,” “Fiscal Policy Assumptions,” “Definition and Coverage of Fiscal Data,” and statistical tables on key fiscal variables. - Data vintage and coverage: - Data in statistical tables compiled based on information available through September 30, 2019. - Country-specific data and projections for key fiscal variables are based on the October 2019 World Economic Outlook database, unless indicated otherwise. - Historical data and projections based on IMF country desk officers’ information; updated continually. - IMF staff estimates serve as proxies when complete information is unavailable; series may be smoothed through splicing and other techniques. - Country group classification: - 35 advanced economies. - 40 emerging market and middle-income economies. - 40 low-income developing countries. - Group of Seven (G7) identified as the seven largest advanced economies by GDP: Canada, France, Germany, Italy, Japan, United Kingdom, United States. - Euro area presented as a subgroup; composite data cover current members for all years. - Low-income developing countries defined by per capita income threshold and other structural criteria; threshold: $2,700 in 2016 as measured by the World Bank’s Atlas method. - G20 member aggregate refers to the 19 country members and does not include the European Union. - Fiscal data conventions: - Most fiscal data refer to general government for advanced economies; for emerging market and developing economies, data often refer to central government or budgetary central government only. - All fiscal data refer to calendar years, except for specified economies where data refer to the fiscal year (Bangladesh, Egypt, Ethiopia, Haiti, Hong Kong SAR, India, Islamic Republic of Iran, Lao P.D.R., Myanmar, Nepal, Pakistan, Singapore, Thailand). - For fiscal years ending on or before June 30, data are recorded in the previous calendar year; for fiscal years ending after June 30, data are recorded in the current calendar year. - Composite data are weighted averages of individual-country data, weighted by annual nominal GDP converted to US dollars at average market exchange rates as a share of group GDP. - Majority of advanced economies and some large emerging market economies follow GFSM 2014 or national accounts using SNA 2008 or ESA 2010; most other countries follow GFSM 2001; some low-income developing countries use 1986 GFSM. - Fiscal gross and net debt data drawn from official sources and IMF staff estimates; efforts to align with GFSM definitions, but deviations can occur due to data limitations or country circumstances. - The overall fiscal balance refers to net lending (+) and borrowing (−) of the general government; in some cases defined as total revenue and grants minus total expenditure and net lending. - Data sources note: - Sources for fiscal data and projections not covered by the World Economic Outlook database are listed in respective tables and figures. ### Fiscal policy assumptions and country-specific accounting notes (selected items preserved verbatim) - Time horizons framed in the appendix: estimates and projections for 2019–20 and the medium-term scenario for 2021–24. - Argentina: - Total expenditure and the overall balance account are for cash interest only. - The primary balance excludes profit transfers from the Central Bank of Argentina. - Interest expenditure is net of interest income from the social security administration. - Australia, Canada, Hong Kong SAR, United States: - For cross-country comparability, gross and net debt levels reported by national statistical agencies for economies that have adopted the 2008 SNA are adjusted to exclude unfunded pension liabilities of government employees’ defined-benefit pension plans. - Brazil: - General government data refer to the nonfinancial public sector (federal, state, local governments, and public enterprises excluding Petrobras and Eletrobras) and are consolidated with those for the sovereign wealth fund. - Revenue and expenditures of federal public enterprises are added in full to the respective aggregates. - Gross public debt included Treasury bills on the central bank’s balance sheet, including those not used under repurchase agreements. - According to the national definition, gross debt amounted to 77.2 percent of GDP at the end of 2018. - China: - Public debt data include central government debt as reported by the Ministry of Finance, explicit local government debt, and shares—less than 19 percent, according to the National Audit Office estimate—of contingent liabilities the government may incur. - IMF staff estimates exclude central government debt issued for the China Railway Corporation. - Deficit numbers do not include some expenditure items, mostly infrastructure investment financed off budget through land sales and local government financing vehicles. - Colombia: - Gross public debt refers to the combined public sector, including Ecopetrol and excluding Banco de la República’s outstanding external debt. - Dominican Republic: - Public debt, debt service, and cyclically adjusted/structural balances are for the consolidated public sector; remaining fiscal series are for the central government. - Ireland: - General government balances between 2009 and 2012 reflect the impact of banking sector support. - Fiscal balance estimates excluding these measures are −11.4 percent of GDP for 2009, −10.9 percent of GDP for 2010, −8.6 percent of GDP for 2011, and −7.9 percent of GDP for 2012. - For 2015, if the conversion of the government’s remaining preference shares to ordinary shares in one bank is excluded, the fiscal balance is −1.1 percent of GDP. - Cyclically adjusted balances reported in Tables A3 and A4 exclude financial sector support measures. - Japan: - Gross debt is on an unconsolidated basis. - Norway: - Cyclically adjusted balances correspond to the cyclically adjusted non-oil overall or primary balance; these variables are in percent of non-oil potential GDP. - Spain: - Overall and primary balances include financial sector support measures estimated to be −0.1 percent of GDP for 2010, 0.3 percent of GDP for 2011, 3.7 percent of GDP for 2012. _International Monetary Fund | October 2019 — Text excerpt provided in the source PDF._ ### 0.3 percent of GDP for 2013, 0.1 percent of GDP for ### text - 0.3 percent of GDP for 2013, 0.1 percent of GDP for ### Country-specific data notes and adjustments - Sweden: Cyclically adjusted balances take into account output and employment gaps. - Switzerland: - Data submissions at the canton and commune level are received with a long and variable lag and are subject to sizable revisions. - Cyclically adjusted balances include adjustments for extraordinary operations related to the banking sector. - Thailand: Data are on a fiscal year basis. - Turkey: - The fiscal projections assume a more negative primary and overall balance than envisaged in the authorities’ New Economic Program 2019–21. - Differences are based partly on recent weak growth and fiscal outturns and partly on definitional differences: the basis for the projections in the World Economic Outlook and Fiscal Monitor is the IMF-defined fiscal balance, which excludes some revenue and expenditure items that are included in the authorities’ headline balance. - United States: - Cyclically adjusted balances exclude financial sector support estimated at 2.4 percent of potential GDP for 2009, 0.3 percent of potential GDP for 2010, 0.2 percent of potential GDP for 2011, 0.1 percent of potential GDP for 2012, and 0.0 percent of potential GDP for 2013. - For cross-country comparability, expenditure and fiscal balances of the United States are adjusted to exclude the imputed interest on unfunded pension liabilities and the imputed compensation of employees, which are counted as expenditure under the 2008 SNA adopted by the United States, but not for countries that have not yet adopted the 2008 SNA. - Data for the United States may thus differ from data published by the US Bureau of Economic Analysis (BEA). - Gross and net debt levels reported by the BEA and national statistical agencies for other economies that have adopted the 2008 SNA (Australia, Canada, Hong Kong Special Administrative Region, United States) are adjusted to exclude unfunded pension liabilities of government employees’ defined-benefit pension plans. - Uruguay: - Data are for the nonfinancial public sector (NFPS), which includes central government, local government, social security funds, nonfinancial public corporations, and Banco de Seguros del Estado. - The coverage of the fiscal data was changed from consolidated public sector to NFPS with the October 2019 submission. With this narrower coverage, central bank balances are not included in fiscal data. - Venezuela: - Fiscal accounts for 2010–23 correspond to the budgetary central government and Petróleos de Venezuela S.A. (PDVSA). - Fiscal accounts before 2010 correspond to the budgetary central government, public enterprises (including PDVSA), Instituto Venezolano de los Seguros Sociales (IVSS—social security), and Fondo de Garantía de Depósitos y Protección Bancaria (FOGADE—deposit insurance). ### Fiscal policy assumptions and projection methodology - Historical data and projections of key fiscal aggregates are in line with those of the October 2019 World Economic Outlook, unless noted otherwise. - Short-term fiscal policy assumptions: - Based on officially announced budgets, adjusted for differences between the national authorities and the IMF staff regarding macroeconomic assumptions and projected fiscal outturns. - Medium-term fiscal projections: - Incorporate policy measures that are judged likely to be implemented. - When IMF staff has insufficient information to assess authorities’ budget intentions and prospects for policy implementation, an unchanged structural primary balance is assumed, unless indicated otherwise. ### Country-specific projection bases (selected countries) - Argentina: Based on available information regarding budget outturns and budget plans for the federal and provincial governments, fiscal measures announced by the authorities, and IMF staff macroeconomic projections. - Australia: Based on data from the Australian Bureau of Statistics, the fiscal year (FY) 2019/20 budgets of the Commonwealth and States; and IMF staff estimates and projections. - Austria: Based on data from Statistics Austria, the authorities’ projections, and IMF staff estimates and projections. - Belgium: Based on the 2019–22 Stability Programme and other available information on the authorities’ fiscal plans, with adjustments for IMF staff assumptions. - Brazil: Fiscal projections for 2019 take into account the deficit target approved in the budget law. - Cambodia: Historical fiscal and monetary data are from the Cambodian authorities. Projections are based on the IMF staff’s assumptions following discussions with the authorities. - Canada: Projections use the baseline forecasts in the 2019 federal budget and latest provincial budgets as available, with IMF staff adjustments. - Chile: Based on the authorities’ budget projections, adjusted to reflect the IMF staff’s projections for GDP and copper prices. - China: Fiscal expansion is expected for 2019, resulting from a series of tax reforms and expenditure measures in response to the economic slowdown. - Colombia: Based on the authorities’ policies and projections reflected in the Medium-Term Fiscal Framework 2019, adjusted to reflect the IMF staff’s macroeconomic assumptions. - Croatia: Based on the macroeconomic framework and the authorities’ medium-term fiscal guidelines. - Cyprus: Based on the authorities’ budget plans and the IMF staff’s macroeconomic assumptions. - Czech Republic: Based on the authorities’ budget forecast for 2018–19, with adjustments for the IMF staff’s macroeconomic projections; projections for 2019 onward based on the country’s Convergence Programme and Fiscal Outlook. - Denmark: Estimates for 2018 aligned with the latest official budget numbers, adjusted for IMF staff macroeconomic assumptions; 2019 projections incorporate medium-term fiscal plan from the 2019 Convergence Program. - Estonia: Fiscal projections are on a cash basis and based on the authorities’ 2018 budget, adjusted for newly available information and for the staff’s macroeconomic scenario. - Finland: Based on the authorities’ announced policies, adjusted for the IMF staff’s macroeconomic scenario. - France: Projections for 2019 onward based on measures of the 2018 budget law, the multiyear law for 2018–22, and the 2019 budget law, adjusted for macroeconomic and revenue differences; historical fiscal data reflect the May 2019 revisions. - Germany: Estimates and projections based on the 2019 Stability Program and national statistical updates, adjusted for IMF staff macro framework and revenue elasticities; gross debt estimate includes portfolios of impaired assets and noncore business transferred to institutions that are winding up, and other financial sector and European Union support operations. - Greece: General government primary balance estimate for 2018 based on the April 2019 excessive deficit procedure release by Eurostat; historical data since 2010 reflect adjustments under the enhanced surveillance framework for Greece. - Hong Kong SAR: Based on the authorities’ medium-term fiscal projections on expenditure. - Hungary: Fiscal projections include IMF staff projections of macroeconomic framework and impact of recent legislative measures, and fiscal policy plans announced in the 2018 budget. - India: Historical data based on budgetary execution data; projections based on available information on authorities’ fiscal plans with IMF staff adjustments. Subnational data incorporated with a lag of up to one year. - Indonesia: Projections based on moderate tax policy and administration reforms, and a gradual increase in social and capital spending over the medium term in line with fiscal space. - Ireland: Based on the country’s Budget 2019. - Israel: Historical data based on Government Finance Statistics; medium-term fiscal projections are not in line with medium-term fiscal targets. - Italy: Estimates and projections informed by fiscal plans in the 2019 budget and the April 2019 Economic and Financial Document; IMF staff assumes automatic VAT hikes for future years will be canceled. - Japan: Projections reflect the consumption tax rate increase in October 2019, mitigating measures in the FY2019 budget and tax reform, and other announced fiscal measures. - Kazakhstan: Based on the budget code and IMF staff projections. - Korea: Medium-term forecast incorporates the medium-term path for public spending announced by the government. - Libya: Reliability of data and medium-term projections is low due to civil war and weak capacity. - Malaysia: Based on budget numbers, discussions with the authorities, and IMF staff estimates. - Malta: Based on the authorities’ latest Stability Programme Update and budget documents, adjusted for IMF staff macro assumptions. - Mexico: Fiscal projections for 2019 broadly in line with the approved budget; projections for 2020 onward assume compliance with rules established in the Fiscal Responsibility Law. - Moldova: Based on various bases and growth rates for GDP, consumption, imports, wages, and energy prices and on demographic changes. - Myanmar: Based on budget numbers, discussions with the authorities, and IMF staff estimates. - Netherlands: Projections for 2019–24 based on the authorities’ Bureau for Economic Policy Analysis budget projections, adjusted for macro assumptions; historical data revised following the June 2014 CBS release because of adoption of ESA 2010. - New Zealand: Based on the FY2019/20 budget and IMF staff estimates. - Nigeria: Projections assume unchanged policies and differ from the authorities’ active policy scenario. - Norway: Based on the latest 2019 revised budget. - Philippines: Revenue projections reflect IMF staff macro assumptions and anticipated improvements in tax administration; expenditure projections based on budgeted figures, institutional arrangements, and current data. - Poland: Data on ESA 1995 for 2004 and previous years; ESA 2010 beginning with 2005 (accrual basis). Projections based on the 2019 budget and legislated fiscal measures; announced but not legislated measures not reflected. - Portugal: Current year projections based on the authorities’ approved budget, adjusted to reflect IMF staff macro forecast; projections thereafter assume unchanged policies. - Romania: 2019 projections reflect full effect of 2018 budget measures (including wage and pension increases and labor taxation changes), further implementation of unified wage law, and legislated increase in pensions. Apart from gradual implementation of the unified wage law until 2022 and indexation of public pensions, no additional policy changes assumed beyond 2019. - Russia: 2019–24 projections are IMF staff estimates based on the new oil price rule, with IMF staff adjustments. - Saudi Arabia: Baseline projections of total government revenues, except exported oil revenues, based on understanding of government policies as announced in the 2019 budget and the Fiscal Balance Program 2019 Update. Exported oil revenues based on IMF WEO baseline oil prices and the assumption that Saudi Arabia will overperform the OPEC+ agreement. Expenditure projections take the 2019 budget and Fiscal Balance Program 2019 Update as starting point and reflect IMF staff estimates of policy changes and economic developments. - Singapore: For FY2019/20, projections based on budget numbers; for remainder of projection period, IMF staff assumes unchanged policies. - Slovak Republic: Current year projections consider both the budget and developments to date; next year and beyond reflect a no-policy-change scenario. - Spain: For 2019, projections assume expenditures under the 2018 budget extension scenario and already legislated measures (including pension and public wage increases) and IMF staff’s revenue projection. For 2020 and beyond, fiscal projections are IMF staff projections assuming an unchanged structural primary balance. - Sri Lanka: Projections based on the authorities’ medium-term fiscal framework and the revenue measures proposed. - Sweden (projections): Take into account the authorities’ projections based on the 2019 spring budget. The impact of cyclical developments on fiscal accounts is calculated using the 2014 OECD elasticity (Price, Dang, and Guillemette 2014) to take into account output and employment gaps. - Switzerland (projections): Assume that fiscal policy is adjusted as necessary to keep fiscal balances in line with the requirements of Switzerland’s fiscal rules. - Thailand (projections): For the projection period, IMF staff assumes an implementation rate of 50 percent for the planned infrastructure investment programs. - Turkey (projections): Assume a more negative primary and overall balance than envisaged in the authorities’ New Economic Program 2019–21, based partly on recent weak growth and fiscal outturns and partly on definitional differences. The IMF-defined fiscal balance excludes some revenue and expenditure items included in the authorities’ headline balance. - United Kingdom: Projections based on the UK’s Spring Statement 2019, with expenditure projections based on budgeted nominal values adjusted for the Spending Round 2019, and revenue projections adjusted for differences between IMF staff macro forecasts and authorities’ assumptions. IMF staff data exclude public sector banks and the effect of transferring assets from the Royal Mail Pension Plan to the public sector in April. ### Key exact figures cited - 0.3 percent of GDP for 2013 - 0.1 percent of GDP for 2014 - 0.1 percent of GDP for 2015 - 0.2 percent of GDP for 2016 - 2.4 percent of potential GDP for 2009 (US financial sector support) - 0.3 percent of potential GDP for 2010 (US financial sector support) - 0.2 percent of potential GDP for 2011 (US financial sector support) - 0.1 percent of potential GDP for 2012 (US financial sector support) - 0.0 percent of potential GDP for 2013 (US financial sector support) - FY2019/20 (Australia, New Zealand, Singapore reference for fiscal year) - 2019–22 (Belgium multiyear horizon) - 2019–24 (Netherlands projection period; Russia 2019–24 projection horizon) - 2018–22 (France multiyear law) - 2019–21 (Turkey New Economic Program reference) - 2019 (multiple country-specific projection bases and budget references) - 2014 (reference to OECD elasticity: Price, Dang, and Guillemette 2014) - 2010 (reference to adoption of ESA 2010 and SNA 2008 contexts) - 2004 and 2005 (Poland ESA basis transition) - 2010–23 (Venezuela fiscal accounts for budgetary central government and PDVSA) - 2010 (Venezuela fiscal account delineation change point) *International Monetary Fund | October 2019 — Methodological and Statistical Appendix (excerpts)* ### 2012. Real government consumption and investment ### 2012. Real government consumption and investment ### Fiscal data coverage and accounting conventions - Real government consumption and investment are part of the real GDP path; fiscal accounts are presented in terms of fiscal year (fiscal year GDP is different from current year GDP). - Projections do not take into account revisions to the accounting (including on student loans) implemented on September 24, 2019. - Data are compiled using the SNA 2008; when translated into government financial statistics this is in accordance with the GFSM 2014. - For cross-economy comparability, some country series are adjusted to exclude elements that are accounted differently under the 2008 SNA (example noted: United States adjustments described below). - Because of data limitations, most series begin in 2001. ### Country- and region-specific projection bases and caveats - United States: - Fiscal projections are based on the August 2019 Congressional Budget Office baseline adjusted for the IMF staff’s policy and macroeconomic assumptions. - Projections incorporate the effects of tax reform (Tax Cuts and Jobs Act, signed into law at the end of 2017), as well as the Bipartisan Budget Act of 2018 passed in February 2018, and the Bipartisan Budget Act of 2019 passed in July 2019. - Fiscal projections are adjusted to reflect the IMF staff’s forecasts for key macroeconomic and financial variables and different accounting treatment of financial sector support and of defined-benefit pension plans and are converted to a general government basis. - For cross-economy comparability, expenditure and fiscal balances of the United States are adjusted to exclude the imputed interest on unfunded pension liabilities and the imputed compensation of employees, which are counted as expenditures under the 2008 System of National Accounts (2008 SNA). - Venezuela: - Projection and assessment are complicated by lack of discussions with the authorities (the last Article IV consultation took place in 2004), incomplete understanding of reported data, and difficulties in interpreting certain reported economic indicators. - Fiscal accounts include the budgetary central government; social security; FOGADE (insurance deposit institution); and a sample of public enterprises including Petróleos de Venezuela, S.A. (PDVSA). - Data for 2018–24 are IMF staff estimates. - Effects of hyperinflation and lack of reported data mean projected macroeconomic indicators should be interpreted with caution. - Nominal GDP is estimated assuming the GDP deflator rises in line with the IMF staff’s projection of average inflation. - Public external debt in relation to GDP is projected using the IMF staff’s estimate of the average exchange rate for the year. - Vietnam: - Fiscal data for 2015–17 are the authorities’ estimate. From 2018 onward, fiscal data are based on IMF staff projections. - Yemen: - Hydrocarbon revenue projections are based on World Economic Outlook assumptions for oil and gas prices (the authorities use $55 a barrel) and authorities’ projections of production of oil and gas. - Non-hydrocarbon revenues largely reflect the authorities’ projections, as do most expenditure categories, with the exception of fuel subsidies, which are projected based on the World Economic Outlook price consistent with revenues. - Monetary projections are based on key macroeconomic assumptions about the growth rate of broad money, credit to the private sector, and deposit growth. ### Definitions, groupings, and table coverage (methodological notes) - Economy groupings are defined and used throughout the Fiscal Monitor (examples include Advanced Economies, Emerging Market and Middle-Income Economies, Low-Income Developing Countries, Euro Area, Emerging Market and Middle-Income Asia/Europe/Latin America/Middle East/North Africa and Pakistan/Africa, Low-Income Developing Asia/Latin America/Sub-Saharan Africa/Others, Oil Producers). - Coverage notation used in tables: CG = central government; GG = general government; LG = local governments; SG = state governments; SS = social security funds; TG = territorial governments; BCG = budgetary central government; NFPS = nonfinancial public sector; NFPC = nonfinancial public corporations; MPC = monetary public corporations; NMPC = nonmonetary financial public corporations; PS = public sector. - Accounting practice notation used in tables: C = cash; A = accrual; Mixed = combination of accrual and cash accounting; CB = commitments basis accounting. - Valuation of debt notation used in tables: Nominal = nominal values; Face = undiscounted principal to be repaid at maturity; Current market = market prices for debt securities, with conventions for insurance, pension, guarantees, and other instruments described. - Notes on specific table practices and exceptions (examples preserved as in source): - In many economies, fiscal data follow the IMF’s Government Finance Statistics Manual 2014. - The concept of overall fiscal balance refers to net lending (+) and borrowing (–) of the general government; in some cases it refers to total revenue and grants minus total expenditure and net lending. - For countries that adopted the 2008 SNA (examples listed in tables), reported gross/net debt levels are adjusted to exclude unfunded pension liabilities for cross-economy comparability. - Several countries have special coverage caveats (examples preserved exactly as in tables): e.g., data for the United States adjusted for imputed items; Cyprus, Ireland and others include or exclude financial sector support in specific years; Brazil’s gross debt refers to the nonfinancial public sector excluding Eletrobras and Petrobras; and Venezuela’s fiscal accounts series differ across years as noted. ### Statistical tables and key series (content and availability) - The document contains detailed country- and group-level time series and projections for 2010–24 for indicators including, but not limited to: - General government overall balance (percent of GDP) - General government primary balance (percent of GDP) - Cyclically adjusted balance and cyclically adjusted primary balance (percent of potential GDP) - General government revenue and expenditure (percent of GDP) - General government gross debt and net debt (percent of GDP) - Structural fiscal indicators: pension spending change 2018–30; net present value of pension spending change 2018–50; health care spending change 2018–30; net present value of health care spending change 2018–50; gross financing need 2019; average term to maturity 2019 (years); debt to average maturity 2019; projected interest rate–growth differential 2019–24; precrisis overall balance 2000–07; projected overall balance 2019–24; nonresident holding of general government debt, 2018 (percent of total). - Exact numeric series and country tables are provided in the Statistical Appendix (tables labeled A. through A25 and similar), with projections noted as “IMF staff estimates and projections” and “Projections are based on staff assessment of current policies (see ‘Fiscal Policy Assumptions’ in text).” ### Key procedural and projection assumptions (explicit) - Projections are based on staff assessment of current policies. - For net present value calculations of long-run pension and health spending changes, a discount rate of 1 percent a year in excess of GDP growth is used for each country. - For health care spending projections: staff projections are driven by demographic and other factors; “excess cost growth” is assumed to start at the country specific historic average and converge to the advanced economy historic average by 2050 (0.8 percent) (or where noted, assumed at the advanced economy historic average by 2050). - Gross financing need is defined as the projected overall deficit and maturing government debt in 2018 (data sources include Bloomberg Finance L.P., Joint External Debt Hub, and IMF staff projections). - Average term to maturity data largely refer to central government securities (source: Bloomberg Finance L.P. where cited). - Nonresident holding of general government debt data are from the Joint External Debt Hub (Quarterly External Debt Statistics), fourth quarter of 2018 or latest available; calculation notes indicate conversion and ratio conventions. *Italic line: Source: IMF staff estimates, projections, and methodological/statistical appendix (Fiscal Monitor: How to Mitigate Climate Change, October 2019).* ### Conclusion and Risk Assessment April 2012, Chapter 7 ### Conclusion and Risk Assessment April 2012, Chapter 7 ### Global outlook and near‑term risks - Global growth in 2019 is expected to slow to its lowest level since the global financial crisis. - Growth is expected to pick up modestly in 2020, but the outlook is precariously hinged on a turnaround in a small number of countries that are currently underperforming or under stress. - Directors noted increased downside risks in the near term, most notably intensifying trade, technology, and geopolitical tensions with associated increases in policy uncertainty. - Directors identified the risk of an abrupt tightening of financial conditions that could be triggered by a range of events. - Downside risks over the medium term remain elevated, reflecting increased trade barriers, further accumulation of financial vulnerabilities, and the consequences of unmitigated climate change. ### Policy recommendations — macroeconomic stance - Monetary policy: - Directors supported the more accommodative monetary policy stance in many economies while emphasizing the continued importance of remaining data‑dependent and clearly communicating policy decisions. - Fiscal policy: - Where fiscal space exists and debt is sustainable, high‑quality fiscal policy should be used to support aggregate demand where needed. - Ensuring debt sustainability requires rebuilding buffers in countries with relatively weaker fiscal positions, with the pace calibrated as market conditions permit to avoid prolonged economic weakness and disinflationary dynamics. - If downside risks materialize, policymakers should stand ready to implement a contingent, and possibly coordinated, response. - Coordination and multilateral cooperation: - Directors stressed the need to enhance multilateral cooperation, prioritizing de‑escalation of trade tensions, rolling back recent tariff increases, and resolving trade disagreements cooperatively. - Closer multilateral cooperation on international taxation and global financial regulatory reforms would help address vulnerabilities and broaden gains from economic integration. ### Financial vulnerabilities and regulatory response - Noted build‑up of financial vulnerabilities amid prolonged low interest rates in advanced economies, including: - Rising risks in non‑bank financial institutions. - Mounting corporate debt burdens. - Growing reliance on external borrowing by emerging and frontier market economies. - Policy responses urged by Directors: - Strengthen and broaden macroprudential policies to safeguard financial stability. - Address corporate vulnerabilities with stricter supervision and oversight. - Strengthen oversight and disclosures of institutional investors. - Adopt prudent sovereign debt management practices and frameworks. - Monitor U.S. dollar funding fragility closely. - Full implementation of the global regulatory reform agenda. ### Emerging market, frontier, and low‑income economy priorities - Emerging market and developing economies should implement an appropriate mix of fiscal, monetary, exchange rate, and macroprudential policies to ensure financial resilience, particularly where vulnerable to abrupt reversals of capital flows. - Low‑income developing economies should: - Adopt policies aimed at lifting potential growth, improving inclusiveness, and combating challenges to progress toward the 2030 Sustainable Development Goals. - Strengthen monetary and macroprudential policy frameworks and tackle debt vulnerabilities. - Ensure fiscal policy aligns with debt sustainability and development goals, importantly by building tax capacity while protecting the vulnerable. - Leverage complementarity between domestic revenues, official assistance, and private financing. - Invest in disaster readiness and climate‑smart infrastructure. - Improve education quality, narrow infrastructure gaps, enhance financial inclusion, and boost private investment. - Commodity exporters should continue diversifying their economies. ### Structural reforms and medium‑term growth - Directors emphasized the urgency of growth‑enhancing structural reforms across all economies to: - Raise medium‑term growth. - Improve inclusiveness. - Strengthen resilience and ease adjustment to shocks. - Many countries should continue strengthening institutions, governance, and policy frameworks to bolster resilience and growth prospects. ### Climate change, mitigation policy, and fiscal considerations - Directors broadly welcomed the Fiscal Monitor focus on climate change and concurred that carbon taxation, or similar pricing approaches such as emissions trading systems, is an effective tool for reducing emissions. - Other mitigation approaches, depending on country circumstances and preferences, such as feebates and regulations, are also worth considering. - For mitigation policies to be widely acceptable, they should be part of a comprehensive strategy that includes: - Productive and equitable use of revenues. - A social safety net for vulnerable groups. - Supportive measures for clean technology investment. - Many Directors noted that an international carbon price floor could help scale up mitigation efforts, but further work and greater global collaboration would be necessary to reach a broad‑based agreement on fair burden sharing. - Directors welcomed the Fund’s work on analyzing mitigation policy options and integrating such analysis into surveillance, and emphasized cooperation on sustainable finance that embraces environmental, social, and governance considerations. *Source: Executive Board discussion summary and related text provided (October 3, 2019).* --- _Source: https://www.imf.org/-/media/files/publications/fiscal-monitor/2019/october/english/text.pdf_