## EXECUTIVE SUMMARY

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**Canonical URL:** [EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/fiscal-monitor/2023/october/english/execsum.pdf)

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### Overview
- Global warming threatens the planet and human livelihoods, with 2023 set to become the warmest year on record.
- Many countries have committed to reducing greenhouse gas emissions to net zero by midcentury.
- Current and announced policies will fall short of achieving the 2015 Paris Agreement’s temperature goals.
- Transitioning to low-carbon energy sources requires strong complementarities between public and private actors and will entail uneven costs and benefits across people, firms, regions, and countries.

### Risks of Relying on Spending-Based Measures
- Several economies are pursuing emission reduction policies that rely heavily on spending measures, such as increasing public investment and subsidies for renewable energy.
- Fiscal context:
  - Debt-to-GDP ratios are projected to rise by 1 percentage point a year globally during 2023−28.
- Trade-off:
  - Relying mostly on spending-based measures to reach net zero goals by midcentury could raise public debt by 45−50 percent of GDP for a representative large-emitting country, putting debt on an unsustainable path.
  - Limited climate action would leave the world exposed to adverse consequences from global warming; macroeconomic risks would rise.
- Political economy:
  - Carbon pricing is cost-effective and generates revenues to relieve the debt burden, but is often unpopular, creating a trilemma between achieving climate goals, fiscal sustainability, and political feasibility.

### Policy Mix: Carbon Pricing plus Complementary Instruments
- No single policy measure can fully deliver climate goals; a practical mix should account for economic efficiency, administrative practicality, and political feasibility.
- Carbon pricing should be an integral part of the policy mix from a macro-fiscal perspective.
- Carbon pricing needs complements:
  - Feebates, green subsidies, regulation standards, and other mitigation instruments to promote innovation and deployment of low-carbon technologies and address market failures and network externalities.
- Equity and political feasibility:
  - Fiscal transfers to vulnerable workers, families, and communities can address concerns from higher energy prices and help mitigate political hurdles associated with carbon pricing.
  - Nearly 50 countries already have carbon pricing schemes in place (that will require further increases); more than 23 countries are currently contemplating their introduction.

### Fiscal Impacts and Scenarios
- Appropriate mix and sequencing of revenue- and spending-based climate measures enacted now can help limit fiscal costs of delivering necessary emission reductions.
- Indicative scenario for advanced economies:
  - Public debt would rise by 10−15 percent of GDP by 2050.
  - This is equivalent to an increase of primary deficits by 0.4 percentage point of GDP a year, on average, through 2050.
- Cost of delay:
  - Each year of delay in carbon pricing is estimated to contribute an additional 0.8−2.0 percent of GDP a year to public debt.

### Emerging Market and Developing Economies
- Emerging market economies account for a notable share of global emissions.
- Debt impact:
  - Expected increase in debt from a package of climate policies is estimated to be about 15 percent of GDP by 2050, similar to advanced economies.
- Distinguishing features and challenges:
  - Higher mitigation investment needs, larger carbon revenue potential, higher borrowing costs sensitive to debt.
  - Already facing high debt and rising interest costs, alongside sizable adaptation needs.
  - Limited access to low-carbon technologies, despite existing technologies enabling about 90 percent of the emission cuts required by 2030 to meet the temperature goals.
- Policy implications:
  - Need for improved expenditure efficiency, revenue mobilization, greater role for private sector financing, and external financial support alongside knowledge transfers and diffusion of established low-carbon technologies.
  - The IMF can help by providing long-term financing under the Resilience and Sustainability Trust.
- Analytical note:
  - Large uncertainty—arising from policy impacts and nonlinear impacts of climate change—suggests incorporating climate action in debt sustainability analyses is crucial.

### Firms and the Green Transition
- Firms are crucial for decarbonization; governments need to facilitate firm transformation to a low-carbon future.
- Firm-level evidence:
  - Regulations mandating firms to set or monitor emission targets are often associated with higher firm investment in low-carbon technologies.
  - The surge in energy prices in 2022 showed firms can invest in energy efficiency and reduce energy consumption when confronted with large energy price shocks.
- Policy design and implementation:
  - Fiscal incentives (via tax credits or subsidies) can boost firm investment, especially when firms are confident about policy horizon, coverage, and eligibility criteria.
  - Targeting fiscal incentives can help minimize fiscal costs because some firms would invest even without support.
  - Green subsidies must be consistent with World Trade Organization rules to avoid unintended trade distortions and a subsidy race across nations.
  - Domestic policies need clear communication to firms regarding horizon, coverage, and criteria for eligibility.

### Conclusions and Policy Recommendations
- A cleaner future is possible with the right mix of policies in place; carbon pricing should be central but complemented by targeted spending, regulation, and fiscal transfers to manage distributional effects and political feasibility.
- Advanced economies with ample fiscal space could likely accommodate an early policy mix; others with less fiscal space should prioritize spending reforms (such as removing fossil fuel subsidies) and raising revenues to maintain debt sustainability.
- Delayed action is costly; prompt adoption and coordination of carbon pricing and complementary measures reduce fiscal burdens and economic disruption.
- International cooperation, external financing, technology diffusion, and IMF support (including through the Resilience and Sustainability Trust) are important to help emerging market and developing economies manage the transition.

*Source: FISCAL MONITOR: CLIMATE CROSSROADS: FISCAL POLICIES IN A WARMING WORLD — Executive Summary*

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_Source: https://www.imf.org/-/media/files/publications/fiscal-monitor/2023/october/english/execsum.pdf_