## clnea2022010 ## Source details **Canonical URL:** [clnea2022010](https://www.imf.org/-/media/files/publications/staff-climate-notes/2022/english/clnea2022010.pdf) ## Other formats - [Markdown version](/-/media/files/publications/staff-climate-notes/2022/english/clnea2022010.pdf.md) - [Structured JSON version](/-/media/files/publications/staff-climate-notes/2022/english/clnea2022010.pdf.json) --- ### Introduction: ambition, gaps, and policy framing - Limiting global warming to 2°C or 1.5°C requires cutting carbon dioxide (CO2) and other greenhouse gases (GHGs) by 25 or 50 percent by 2030 compared with 2019, followed by a rapid decline to net zero emissions near the middle of the century. - Global warming is already producing severe impacts (heatwaves, droughts, floods, hurricanes, sea-level rise, forest fires) and risks of “tipping points” such as melting permafrost that could lead to runaway warming. - A total of 139 countries have proposed or set ‘net-zero’ targets for mid-century. - 2030 targets in countries’ nationally determined contributions (NDCs) remain insufficient to meet Paris temperature goals. - Even if 2030 pledges (NDCs submitted by 2021) were achieved, they would only reduce global CO2 emissions 11 percent below 2019 levels; first-round NDCs (2015) would have cut emissions by 7 percent below 2019 levels by 2030. - Preexisting excise taxes on fuels are equivalent to a global carbon price of $9 per tonne, but two-thirds of global emissions are effectively unpriced and 15 percent have a negative price due to explicit fuel subsidies. - Carbon pricing schemes operate in 45 countries; the global average carbon price is only $5 per tonne. New measures equivalent to a global carbon price exceeding $75 per tonne are needed by 2030. - Global gas, coal, and oil prices increased about 850, 190, and 110 percent, respectively, between mid-2020 and mid-2022; projected fuel price declines create an opportunity to phase in higher carbon prices while recycling revenues and compensating vulnerable households. ### Scenario design and equity regimes (overview) - Five enhanced-ambition scenarios (all achieving Paris temperature goals while respecting international equity): - Emission intensity reduction (“Intensity”) 2°C: HIC, MIC, LIC cut CO2/GDP intensity by 36, 32, and 21 percent, respectively, relative to 2030 BAU. - International carbon price floor (“ICPF”) 2°C: minimum carbon price of $75, $50, and $25 per tonne in 2030 for HICs, MICs, LICs, respectively; implies CO2 cuts of 38, 29, and 24 percent below 2030 BAU for HICs, MICs, LICs, respectively. - High equity (“Equity”) 2°C: HICs, MICs, LICs reduce CO2 below BAU by 46, 27, and 17 percent, respectively. - High equity 1.8°C: raise reductions for each group from the 2°C high equity case by around 9 percentage points. - High equity 1.5°C: raise reductions for each group from the 1.8°C case by around 10 percentage points. - In all scenarios countries achieve the more stringent of their group’s target or their existing NDC. - Two additional approaches: targeting emission intensity of GDP and an international carbon price floor differentiated by income level. ### Key policy framing and metrics - Metrics for comparing mitigation burdens: welfare costs (pure abatement costs less fiscal benefits from recycling mitigation revenue and domestic environmental co-benefits) and GDP impacts (abatement costs plus changes in trade and investment). - Analysis presented for HICs, MICs, LICs and selected individual countries; focus is on fossil fuel CO2 emissions. ### High-level quantitative summary (2°C scenarios) - The three 2°C scenarios (Intensity, ICPF, Equity) would cut global CO2 emissions by 31 percent compared with BAU, equivalent to a 27 percent cut on 2019 levels. - Pure abatement costs worldwide in 2030 are about $0.5 trillion or 0.4 percent of GDP. - Costs by income group: HICs about 0.7 percent of GDP; LICs about 0.3 percent of GDP. - Implementing carbon taxes or emissions trading and using revenues for productive public investment (while compensating vulnerable households) could cut these costs for MICs and LICs by two-thirds or more. - Domestic environmental co-benefits are especially large in MICs (valued at 1.3 percent of GDP); including these makes net welfare costs negative for many countries. - Global GDP impacts in 2030 vary between a reduction relative to baseline of 0.6 and 1.5 percent depending on effort distribution and revenue recycling; the midpoint is 1.0 percent globally (equivalent to around 0.1 percentage point reduction in annual global GDP growth). - Fossil-fuel CO2 emissions projected to rise 12 percent from 31 billion tonnes in 2020 to 35 billion in the 2030 BAU (compared with 40 billion tonnes as projected in 2021). --- ### 1. Emissions Projections and Temperature Goals — findings and price implications - Per-capita convergence: - 2030 per capita emissions are broadly similar in HICs and MICs across scenarios; LIC per capita emissions decline relative to baseline but only moderately. - Temperature stabilization cuts: - 1.8°C and 1.5°C scenarios would cut global emissions by 37 and 47 percent compared with 2019 levels, respectively. - The 1.5°C scenario would imply emission cuts of 67 and 43 percent for HICs and MICs on 2019 levels, respectively. - Carbon pricing as least-cost instrument: - A $50 carbon price cuts emissions relative to BAU in 2030 by HICs: 17 percent; MICs: 27 percent; LICs: 29 percent. - Global-average carbon prices implied by scenario (weighted by BAU emissions in 2030): - 2°C scenarios: around $80 per tonne. - 1.8°C scenario: around $100 per tonne. - Average prices across 2°C scenarios by income group: - HICs: $115 per tonne - MICs: $65 per tonne - LICs: $45 per tonne - CO2 intensity and distribution: - Emissions intensity in 2030 is much higher in developing countries than developed countries; higher BAU CO2 intensity implies larger absolute emission cuts from a given percent reduction. ### Mitigation burden and welfare-cost assessment (2030) - Components estimated using CPAT for 170 countries: pure abatement costs, potential fiscal benefits (carbon pricing), domestic environmental co-benefits. - Abatement costs (before revenue recycling and co-benefits): - Around 0.4 percent of GDP for 2°C globally. - Around 0.8 percent of GDP for 1.8°C globally. - High equity 2°C example: HICs 0.7, MICs 0.4, LICs 0.3 percent of GDP. - After revenue recycling and domestic co-benefits: - Potential fiscal benefits reduce welfare costs for MICs by around 60 percent and for LICs by over 100 percent in 2°C scenarios. - Global welfare costs are slightly negative after co-benefits: –0.25 percent of GDP across the 2°C scenarios (climate benefits not included in co-benefits). ### Policy implications (from this section) - Achieving 2°C is consistent with global carbon prices around $80 per tonne in 2030; lower temperature goals require substantially higher prices and face greater uncertainty. - Carbon pricing yields fiscal revenue that can reduce net welfare costs, particularly in MICs and LICs. - Domestic co-benefits—especially air-quality-related health gains—materially reduce or reverse welfare costs in many scenarios. - Delays in ambition and implementation make stringent goals (particularly 1.5°C) increasingly infeasible. --- ### Box 1 — Economic Welfare Impacts of Carbon Pricing: components and patterns - Pure abatement costs: - Annualized costs of cleaner technologies net of lifetime savings and costs from reduced energy use; reflect integrals under marginal abatement cost schedules. - Potential fiscal benefits: - Efficiency gains from productive use of carbon pricing revenues; compensating bottom 20 and 40 percent of low-income households requires around 10 and 30 percent of revenues, respectively. - Illustrative analysis assumes countries use 70 percent of revenues productively. - Domestic environmental co-benefits: - Reduced local air pollution valued as emission reductions times co-benefit per tonne; co-benefits exclude climate benefits. - Rennert and others (2022) estimate discounted global climate benefits at $185 per tonne of CO2 reduced; under a global carbon price of $75 per tonne, this implies climate benefits five times pure abatement costs. - Welfare-cost patterns: - HICs: pure abatement costs 0.6 to 0.9 percent of GDP in high equity 2°C, largely offset by co-benefits. - MICs: pure abatement costs vary (example: Turkey 0.2 percent; South Africa 0.8 percent); potential fiscal benefits and co-benefits imply negative welfare costs in almost all cases. - Non-CO2 emissions account for 30 percent of GHG emissions globally. - GDP impacts versus welfare costs: - Global GDP costs around 0.8 of BAU GDP by 2030 for the 2°C scenarios. - A 1 percent GDP loss in 2030 ≈ 0.1 percentage point reduction in annual global GDP growth (projected average about 3 percent a year to 2030). - MIC GDP losses: 1 percent (high equity 2°C) to 1.2 percent (Intensity scenario). - LIC GDP losses: around 0.3 percent. - Oil producers: 1.6–2.2 percent GDP losses. - ICPF is most efficient globally (lower GDP cost). - Revenue recycling effects: - If revenues fund public investments, GDP losses fall substantially; if revenues fund lump-sum transfers, GDP losses rise. - Under high equity 2°C, if revenues fund public investments, GDP losses fall to 0.6 and 0.02 percent for MICs and LICs, respectively; if lump-sum transfers, losses rise to 1.5 and 0.7 percent, respectively. - Carbon revenues under 2C scenario equal 3, 2, and 2 percent of GDP in HIC, MIC, LIC regions, respectively. - Climate finance context: - HICs pledged to mobilize $100 billion a year from 2020; current flows fall about one-fifth short. Bilateral transfers from HIC government budgets for mitigation in developing countries amount to around $10 billion a year. - Illustrative transfer scales (2030): - Fully compensating all LICs for pure CO2 abatement costs under 2°C would require about $30 billion annually; for 1.8°C about $50 billion. - Including total GHG abatement costs, annual transfers of about $60 billion would be needed to fully compensate LICs under the 2°C high equity scenario. --- ### 1. Transfers Received (2030) — simulated outcomes and progressivity - Simulated transfers: $30 billion and $60 billion from HICs. - Funding requirement relative to potential carbon pricing revenues for HICs: 1.5 percent (for $30 billion) and 3 percent (for $60 billion). - United States contribution share varies between 26 to 46 percent across scenarios. - In the 2C-RR case, China is the largest contributor with 45 percent of the total. - Transfers received by LICs for the $60 billion case: range from 0.30 to 0.36 percent of GDP. - With the $60 billion goal, recipient country shares: - India: 15 to 35 percent. - Africa (excluding South Africa): 23 to 34 percent. - Indonesia may switch from recipient to contributor under 2C-RR as its per capita emissions exceed the global average. - Progressivity and costs: - Transfers make mitigation burdens more progressive; global cost savings relative to high equity 2°C are 0.03 to 0.06 percent of GDP for 2C-Compensate and 2C-Ability&Need. - Rajan-style transfers marginally increase global costs by 0.02 to 0.04 percent of GDP. - Increasing annual bilateral transfers from $10 billion to $30 or $60 billion makes GDP impacts more progressive while requiring only a small share of potential HIC carbon revenues. ### Macroeconomic trade-offs and financing roles - Pure abatement costs in 2030 for high equity 2°C: around 0.5 percent of GDP. - Net effect including domestic environmental co-benefits: net welfare costs become negative globally and for MICs and LICs. - Midpoint of global GDP losses in 2030 for 2°C-consistent scenarios: about 1.0 percent (range 0.6–1.5 percent). - Strategies to limit investment losses: use carbon revenues for public investment or use non-pricing instruments. - A robust and predictable carbon price helps catalyze private climate finance; private finance complements but cannot substitute for direct public support. --- ### Annex 2 — Business-as-Usual emissions projections and model notes - CPAT projected BAU CO2 emissions growth 2021–2030 examples: - HICs: varies from –9 percent (Saudi Arabia) to +25 percent (United Kingdom). - MICs: varies from 1 percent (South Africa) to 28 percent (Russia). - LICs: varies from 23 percent (Indonesia) to 45 percent (India). - IMF-ENV baseline global GHG emissions (including land use, land-use change, forestry): global increase by 23 percent between 2021 and 2030; HICs: 9 percent; MICs: 29 percent; LICs: 27 percent. - BAU drivers and divergence across models: - Main global driver: GDP growth. - CPAT assumes annual energy efficiency of 1 percent; IMF-ENV assumes 2 percent. - IMF-ENV baseline CO2 emissions projections are higher than CPAT; both models yield comparable global abatement costs as a share of GDP. - Abatement cost examples (ICPF scenario): - IMF-ENV CO2 abatement costs as percent of GDP: World 0.41; HIC 0.66; MIC 0.44; LIC 0.12. - CPAT CO2 abatement costs as percent of GDP: World 0.49; HIC 0.6; MIC 0.38; LIC 0.27. - CO2 versus non-CO2 shares in 2°C scenarios (IMF-ENV): - 70 percent of global abatement costs arise from CO2 mitigation. - HICs: CO2 share ~80 percent. - MICs: CO2 share between 75 to 78 percent. - LICs: CO2 mitigation accounts for about 41 to 44 percent of total abatement costs. - Modeling caveats: MACCs may not capture learning effects or radical technological change; welfare-cost approximation has simplifications. ### Practical policy takeaways (synthesized from content) - Collective mitigation ambition must rise to align with limiting warming to 1.5–2°C; delays make 1.5°C increasingly infeasible. - Carbon pricing at substantial levels (around $80 per tonne for 2°C in 2030) as a least-cost approach generates revenues that, if productively recycled and combined with household compensation, reduce net welfare costs and economic disruption. - Moderate increases in climate finance from HICs to developing countries (illustrative $30–$60 billion annually) can make mitigation burdens more progressive and support LIC development needs. - Domestic environmental co-benefits (notably health gains from improved air quality) materially improve the net welfare case for mitigation in many countries, especially MICs. - Policy design should consider revenue recycling, targeted transfers, and international transfers to manage distributional effects and support economic adjustment. *Source: Getting on Track to Net Zero: Accelerating a Global Just Transition in This Decade — IMF STAFF CLIMATE NOTE 2022/010 (clnea2022010).* ### Introduction ### Introduction ### Limiting global warming and emissions targets - Limiting global warming to 2°C or 1.5°C requires cutting carbon dioxide (CO2) and other greenhouse gases (GHGs) by 25 or 50 percent by 2030 compared with 2019, followed by a rapid decline to net zero emissions near the middle of the century. - Global warming is already producing severe impacts (heatwaves, droughts, floods, hurricanes, sea-level rise, forest fires) and risks of “tipping points” such as melting permafrost that could lead to runaway warming. - A total of 139 countries have proposed or set ‘net-zero’ targets for mid-century. - 2030 targets in countries’ nationally determined contributions (NDCs) remain insufficient to meet Paris temperature goals. ### Ambition and implementation gaps - Even if 2030 pledges were achieved (NDCs submitted by 2021), they would only reduce global CO2 emissions 11 percent below 2019 levels. - First-round NDCs (2015) would have cut emissions by 7 percent below 2019 levels by 2030. - Current global ambition achieves less than one half of what’s needed for 2°C and about one fifth for 1.5°C. - Policy implementation gap: without new policies, emissions are projected to grow to 2030 in the business as usual (BAU) scenario. - Preexisting excise taxes on fuels are equivalent to a global carbon price of $9 per tonne, but: - two-thirds of global emissions (largely coal and natural gas) are effectively unpriced, - 15 percent have a negative price due to explicit fuel subsidies. - Carbon pricing schemes operate in 45 countries but frequently have limited coverage and low prices. - The global average carbon price is only $5 per tonne. - New measures equivalent to a global carbon price exceeding $75 per tonne are needed by 2030. ### Policy tools, fuel prices, and timing - Global gas, coal, and oil prices increased about 850, 190, and 110 percent, respectively, between mid-2020 and mid-2022. - Projections suggest fuel prices will decline, creating an opportunity to phase in higher carbon prices as fossil fuel prices recede. - Illustration: phasing in a $75 carbon price on top of projected prices would imply 2030 gas prices that are 32 percent below mid-2022 levels, while oil and coal prices would be 3 and 28 percent higher, respectively. - Phasing in carbon pricing while recycling revenues to productive public investment and compensating vulnerable households can reduce net costs and improve political feasibility. ### Equity, international dialogue, and metrics - Parties to the Paris Agreement are to ratchet up pledged emissions cuts periodically; given the persistence of the ambition gap this will be discussed annually starting with COP27 in 2022. - Information is required on (1) regimes for aligning emissions commitments with alternative temperature goals and (2) mitigation burdens implied by these commitments. - Regimes should respect the Paris Agreement’s equity principle, generally understood as including that the speed of emissions cuts should rise with per capita incomes, complemented with climate finance. - Metrics for comparing mitigation burdens considered include: - welfare costs (pure abatement costs less fiscal benefits from recycling mitigation revenue and domestic environmental co-benefits), - GDP impacts (abatement costs plus changes in trade and investment). - Analysis is presented for HICs, MICs, and LICs and selected individual countries; an accompanying spreadsheet provides results for 135 countries. - The Note focuses on fossil fuel CO2 emissions given their dominant role in GHG emissions and greater confidence in measuring abatement costs for these gases. ### Scenario design and equity regimes - Five enhanced ambition scenarios considered, all achieving Paris temperature goals while respecting international equity: - Emission intensity reduction (“Intensity”) 2°C: All HIC, MIC, and LIC countries cut their CO2 emissions/GDP intensity by 36, 32, and 21 percent, respectively, relative to 2030 BAU. - International carbon price floor (“ICPF”) 2°C: All HIC, MIC, and LIC countries implement a minimum carbon price of $75, $50, and $25 per tonne in 2030, respectively. This implies HICs, MICs, and LICs cut CO2 emissions by 38, 29, and 24 percent below 2030 BAU, respectively. - High equity (“Equity”) 2°C: HICs, MICs, and LICs reduce their CO2 emissions below BAU levels by 46, 27, and 17 percent, respectively. - High equity 1.8°C: emissions reductions for each country group from the 2°C high equity case are raised by around 9 percentage points. - High equity 1.5°C: emissions reductions for each country group from the 1.8°C high equity case are raised by around 10 percentage points. - In all scenarios countries are assumed to achieve the more stringent of their group’s emissions reduction target or their existing NDC target. - Two additional approaches discussed: - Targeting emission intensity of GDP (gives more leeway to fast-growing countries). - International carbon price floor differentiated by income level as proposed by IMF analyses. ### Key quantitative findings and impacts (2°C scenarios) - The three 2°C scenarios (Intensity, ICPF, Equity) would cut global CO2 emissions by 31 percent compared with BAU, equivalent to a 27 percent cut on 2019 levels. - Example high-equity scenario reductions consistent with 2°C: about 46, 27, and 17 percent below 2030 BAU levels for HICs, MICs, and LICs, respectively. - Pure abatement costs worldwide in 2030 are about $0.5 trillion or 0.4 percent of GDP. - Costs by income group: HICs about 0.7 percent of GDP; LICs about 0.3 percent of GDP. - Implementing carbon taxes or emissions trading systems and using revenues for productive public investment (while compensating vulnerable households) could cut these costs for MICs and LICs by two-thirds or more. - Including domestic environmental co-benefits would make the net welfare costs of mitigation negative for many countries; domestic co-benefits are especially large in MICs (valued at 1.3 percent of GDP). - Global climate benefits (not estimated domestically here) would swamp abatement costs. - Global impacts on GDP in 2030 vary between a reduction relative to baseline of 0.6 and 1.5 percent depending on effort distribution and revenue recycling; the midpoint is 1.0 percent globally (equivalent to around 0.1 percentage point reduction in annual global GDP growth). - Given projected average global growth of 3 percent a year to 2030, these GDP costs are very small compared to broader welfare benefits. - GDP costs are larger for fossil-fuel exporters (2–2.5 percent) and carbon-intensive MICs (0.6–1.5 percent). - Moderate increases in climate finance flows from HICs to lower-income countries can ensure a progressive global distribution of mitigation burdens and support LIC development needs. ### Emissions projections and country group trends - Global fossil fuel CO2 emissions are projected to rise 12 percent from 31 billion tonnes in 2020 to 35 billion in the 2030 BAU, compared with 40 billion tonnes as projected in 2021. - BAU emissions growth by income group, 2020–2030: - LICs: 49 percent increase, - MICs: 7 percent increase, - HICs: 5 percent increase. - By 2030, MICs and LICs are expected to account for 66 percent of global BAU CO2 emissions, up from 44 percent in 1990. - By 2030, MICs and LICs will account for 54 percent of cumulative historical emissions, up from 39 percent in 1990. - Collectively, HICs, MICs, and LICs have pledged to reduce their emissions 35, 8, and 9 percent, respectively, below BAU levels in 2030 (as of the enhanced pledges reported). *Source: clnea2022010 - Introduction.* ### 1. Emissions Projections and Temperature Goals ### 1. Emissions Projections and Temperature Goals ### Emissions scenarios and per-capita outcomes (2030) - Shows energy-related CO2 emissions (exc. international aviation and maritime). - All scenarios imply some convergence in emissions per capita by 2030: - 2030 per capita emissions are broadly similar in HICs and MICs across scenarios, including when countries only meet their NDC commitments. - The difference between HIC/MIC and LIC per capita emissions is progressively reduced with more stringent temperature scenarios. - Emissions per capita of LICs decline relative to 2030 baseline levels but only moderately. - Illustrative per-capita metric: Per capita emissions (tCO2 in 2030) shown for HICs, MICs, LICs across scenarios. ### Temperature stabilization requirements and implied cuts - Stabilizing the climate at lower temperatures requires more drastic emissions cuts: - The 1.8°C and 1.5°C scenarios would cut global emissions by 37 and 47 percent compared with 2019 levels, respectively. - The 1.5°C scenario would imply emission cuts of 67 and 43 percent for HICs and MICs on 2019 levels, respectively. - COP26 resolved to pursue efforts to limit warming to 1.5°C, but further delays in action would likely put this temperature goal beyond reach. - For many G20 countries, 2030 NDC pledges are not yet aligned with 2°C; shortfalls tend to be larger for MICs and LICs than for HICs. - Some country-specific notes from the analysis: - South Africa’s NDC is already consistent with the 2°C scenario. - Some countries may go beyond existing targets with current policies (example noted: India). ### Cost assessment: carbon pricing as illustrative mitigation instrument - Assumed mitigation instrument for benchmark: comprehensive carbon pricing (least-cost strategy). - Carbon-price responsiveness examples: - A $50 carbon price cuts emissions relative to BAU in 2030 by: - HICs: 17 percent - MICs: 27 percent - LICs: 29 percent - Implied global-average carbon prices by scenario (weighted by BAU emissions in 2030): - The global average carbon price consistent with the 2°C scenarios is around $80 per tonne. - The 1.8°C scenario implies around $100 per tonne. - Average prices across 2°C scenarios by income group: - HICs: $115 per tonne - MICs: $65 per tonne - LICs: $45 per tonne - Carbon prices and costs for the 1.5°C scenario are not reported due to high uncertainties. - CO2 intensity of GDP in 2030 differs substantially across countries and groupings; higher BAU CO2 intensity implies a larger absolute emission cut from a given percent emissions reduction. - Emissions intensity in 2030 is much higher in developing countries than developed countries, with large within-group variation driven by coal use in power generation. ### Mitigation burdens and welfare cost assessment (2030) - Welfare-cost framework components estimated for 170 countries using CPAT: - Pure abatement costs - Potential fiscal benefits (from carbon pricing) - Domestic environmental co-benefits (e.g., health benefits from reduced local air pollution, road safety) - Abatement costs (before revenue recycling and co-benefits): - Around 0.4 percent of GDP for 2°C globally. - Around 0.8 percent of GDP for 1.8°C globally. - Costs generally higher for higher-income countries. - Example (high equity 2°C scenario): abatement costs for HICs, MICs, and LICs are 0.7, 0.4, and 0.3 percent of GDP, respectively. - After accounting for revenue recycling and domestic co-benefits: - Potential fiscal benefits substantially reduce welfare costs for MICs and LICs (where there is limited erosion of the tax base). - In the 2°C scenarios, potential fiscal benefits reduce welfare costs for MICs by around 60 percent and for LICs by over 100 percent; interactions with broader tax systems modestly increase costs for HICs. - Domestic environmental co-benefits are large for all country groups, especially MICs due to human health improvements in polluted cities. - Global welfare costs are slightly negative after co-benefits: –0.25 percent of GDP across the 2°C scenarios (co-benefits do not include climate benefits; global climate benefits are noted as very large but not included at the country level). - Economic interpretation: - Pure abatement costs rise faster than proportional when moving from 2°C to 1.8°C because of progressive exhaustion of low-cost mitigation opportunities (upward-sloping marginal abatement costs). - Beyond a point, revenue from carbon pricing may decline with further price increases as emissions fall (revenues approach zero as emissions reductions approach 100 percent). ### Summary implications for mitigation policy - Achieving 2°C is consistent with global carbon prices around $80 per tonne in 2030; achieving lower temperature goals requires substantially greater cuts and higher prices with greater uncertainty. - Carbon pricing as a least-cost instrument yields substantial fiscal revenue that can reduce net welfare costs, particularly in MICs and LICs. - Domestic co-benefits (notably air-quality-related health gains) materially reduce or reverse welfare costs in many scenarios. - Delays in ambition and implementation make stringent goals (particularly 1.5°C) increasingly infeasible given the scale of required cuts for HICs and MICs. *IMF Staff Climate Note — 1. Emissions Projections and Temperature Goals* ### Box 1. Economic Welfare Impacts of Carbon Pricing ### Box 1. Economic Welfare Impacts of Carbon Pricing ### Components of welfare impacts - Pure abatement costs: - Reflect (1) annualized costs of adopting cleaner but more expensive technologies, net of lifetime energy cost savings and avoided investment in emissions-intensive technologies; and (2) costs to households and firms from reduced energy use. - Largely reflect integrals under marginal abatement cost schedules and, for moderate emissions reductions, are measured with reasonable confidence. - Marginal abatement costs may overstate pure abatement costs in various regards (see Annex 4). - Potential fiscal benefits: - Reflect economic efficiency gains from productive use of carbon pricing revenues: revenue raised times the efficiency benefit per dollar recycled. - Smaller if some revenue is used for transfers (compensating the bottom 20 and 40 percent of low-income households under carbon pricing requires around 10 and 30 percent of revenues raised, respectively). - Illustrative analysis assumes countries use 70 percent of revenues productively (in middle-income and low-income countries this takes the form of productive public investment; in high-income countries cutting labor income taxes). - There is an offsetting effect as higher production costs and consumer prices lower the real returns to work effort and investment, which can deter labor supply and investment—this can dominate at higher emissions abatement when the tax base for carbon pricing is narrower. - Domestic environmental co-benefits: - Reflect reductions in local air pollution from less combustion of fossil fuels: total co-benefits = emission reduction times the co-benefit per tonne of carbon dioxide reduced. - Co-benefit estimates are based on detailed country-level estimates. - Climate benefits from cutting emissions are not included in co-benefits here; studies suggest these benefits would swamp pure abatement costs at the global level (Rennert and others (2022) put the discounted flow of global climate benefits at $185 per tonne of CO2 reduced; under a global carbon price of $75 per tonne, this would imply climate benefits that are five times the pure abatement costs). ### Welfare-cost patterns across country groups and examples - Within country groupings, disparities in pure abatement costs are more pronounced among MICs and LICs than HICs. - For HICs, pure abatement costs are 0.6 to 0.9 percent of GDP in the high equity 2°C scenario, though most of these costs are offset by domestic environmental co-benefits. - Among MICs, pure abatement costs vary from 0.2 percent of GDP (Turkey) to 0.8 percent (South Africa); potential fiscal benefits and domestic environmental co-benefits imply negative welfare costs in almost all cases. - Non-CO2 emissions account for 30 percent of GHG emissions globally; the IMF-ENV model captures costs of reducing all GHG emissions, including non-CO2 sources. ### GDP impacts versus welfare costs - Conceptual differences: - Welfare costs focus on changes in the level of consumption (including domestic co-benefits), while GDP impacts also include changes in investment and net exports but exclude domestic environmental co-benefits. - Net exports can change due to downward pressure on global demand for fossil fuels (hurting energy exporters) and competitiveness impacts on energy-intensive, trade-exposed industries; these effects can be significant domestically though they wash out approximately at the global level. - Key quantitative findings (2030, scenarios achieving 2°C and variants): - Global GDP costs are around 0.8 of BAU GDP by 2030 for the 2°C scenarios. - A 1 percent GDP loss in 2030 is equivalent to a reduction in annual global GDP growth (projected to average about 3 percent a year to 2030) of only around 0.1 percentage point. - For MICs, GDP losses vary from 1 percent in the high equity 2°C scenario to 1.2 percent in the Intensity scenario. - GDP losses for LICs are around 0.3 percent. - GDP losses for oil producers are much higher at 1.6–2.2 percent. - The ICPF scenario is the most efficient globally (lower GDP cost) because the common carbon price by income group targets reductions where they are cheaper. - Why GDP costs exceed pure abatement costs: - Larger GDP costs reflect reductions in investment (especially in MICs and oil producers) and trade effects (especially in oil producers). - Investment falls as production levels fall in power and industry; reductions in emissions intensity generally redirect investment to cleaner capital. - For oil producers, deterioration in terms of trade from lower international oil demand (especially for high-cost producers) lowers income, reducing private consumption and investment; real net exports increase if import volumes fall more than exports. - Heterogeneity within groupings (High equity 2°C scenario, 2030): - Mexico: 1.5 percent GDP impact. - China: 1.1 percent GDP impact (about half of China’s loss reflects reduced investment; actual GDP cost in China may be lower in practice due to existing overcapacity). - Argentina and Brazil: 0.5–0.7 percent GDP impact. - South Africa: 0.6 percent GDP impact. - Turkey: marginal gain of 0.03 percent. ### Revenue recycling and distributional effects on GDP - GDP impacts can be reduced through productive revenue use: - Global GDP costs are least when revenues fund productive public investments; largest when revenues are recycled as lump-sum transfers to households. - Under the high equity 2°C scenario: - If revenues fund public investments, GDP losses fall to 0.6 and 0.02 percent for MICs and LICs, respectively (implying a net increase in investment overall). - If revenues fund lump-sum transfers, GDP losses for MICs and LICs increase to 1.5 and 0.7 percent, respectively. - 2C-Mix scenario (countries allocate 30 percent of carbon tax revenues toward lump-sum transfers to households; remaining 70 percent reduces distortionary wage taxes in HICs while MICs and LICs use it as public investments) yields GDP costs between the full-public-investment and lump-sum-transfer extremes. - Carbon revenue size by region under the 2C scenario: - Carbon revenues generated in HIC, MIC, and LIC regions are equal to 3, 2, and 2 percent of GDP, respectively. - Assumed productive-investment parameters: - Calculations assume investments have benefit cost ratios of 1.33. - Illustrative baseline assumes countries use 70 percent of revenues productively (productive public investment in MICs/LICs; labor tax cuts in HICs). ### Climate finance and international transfers - Current pledges and flows: - HICs pledged to mobilize $100 billion a year from 2020 onwards in climate finance for developing countries; current annual flows fall about one-fifth short of this target. - Much current finance is from multilateral development banks and private sources; much is lending rather than transfers. Bilateral transfers from HIC government budgets for mitigation in developing countries amount to around $10 billion a year. - Scale of transfers to compensate for abatement costs (illustrative, 2030): - Fully compensating all LICs (per capita income below $5,500) for their pure CO2 abatement costs under the 2°C scenario would require annual transfers of about $30 billion. - Fully compensating LICs for CO2 abatement costs in the 1.8°C scenario would cost about $50 billion. - When total GHG abatement costs (including land use, land-use change, and forestry) are accounted for, annual transfers of about $60 billion would be needed to fully compensate LICs under the 2°C high equity scenario (mitigated non-CO2 emissions are disproportionately higher in LICs). - The illustrative transfer values of $30 billion and $60 billion illustrate differences between CO2-only and full-GHG abatement costs for LICs. - Simulation of annual transfers in 2030 from HICs to MICs/LICs of $30 and $60 billion (high equity 2°C scenario) under three allocation rules (international transfers assumed distributed as lump-sum payments to households in the simulations): - 2C-Ability&Need: - HICs (excluding oil producers) contribute in proportion to their share in total HIC BAU emissions. - MICs and LICs receive transfers in proportion to their population shares. - Among MICs, recipients include only countries that either expressed a need for financial support in any round of NDCs or have already received financial support for climate action from HICs. - 2C-Compensate: - HIC contributions and selection of potential recipients same as above. - Recipients are compensated starting from the poorest country up to the cumulative transfer amount; e.g., all LICs are compensated with the $60 billion mark, while $30 billion fully compensates Africa (except South Africa) and India and partially compensates Indonesia for about three quarters of total GHG abatement costs. - 2C-RR: - Based on Raghuram Rajan’s proposal; countries contribute or receive funding in proportion to the difference between their per capita emissions and the global average per capita emissions scaled by an emissions price and regional population. - The globally implied carbon price here is set at $4 per ton of CO2, implying total transfers of $60 billion. *Source: IMF staff (clnea2022010 - Box 1. Economic Welfare Impacts of Carbon Pricing).* ### 1. Transfers Received (2030) ### 1. Transfers Received (2030) ### Transfers received, contributors, and recipient shares - Transfers simulated: $30 billion and $60 billion from HICs. - Funding requirement relative to potential carbon pricing revenues for HICs: 1.5 percent (for $30 billion) and 3 percent (for $60 billion). - United States contribution share varies between 26 to 46 percent (across scenarios). - In the 2C-RR case, China is the largest contributor with 45 percent of the total. - Transfers received by LICs for the $60 billion case: range from 0.30 to 0.36 percent of GDP. - With the $60 billion goal, recipient country shares: - India: 15 to 35 percent. - Africa (excluding South Africa): 23 to 34 percent. - Indonesia may switch from recipient to contributor under the 2C-RR scenario as its per capita emissions exceed the global average. ### Progressivity in mitigation costs with international transfers - Transfers make mitigation burdens, measured in GDP cost terms, more progressive. - Even in the high equity 2°C scenario, HICs have relatively low GDP costs compared with MICs and LICs due to past emission reductions. - Global cost savings relative to the high equity 2°C scenario when international transfers from HICs to MICs and LICs are included: - 0.03 to 0.06 percent of GDP for scenarios 2C-Compensate and 2C-Ability&Need. - When transfers follow the Rajan proposal, global costs show a marginal increase relative to the high equity 2°C scenario: - 0.02 to 0.04 percent of GDP. - Increasing annual bilateral transfers from developed to developing countries from currently $10 billion to $30 or $60 billion would make GDP impacts more progressive while requiring only a small share of potential carbon pricing revenues from HICs. ### Macroeconomic costs, co-benefits, and adjustment dynamics - Pure abatement costs in 2030 for the high equity 2°C scenario: around 0.5 percent of GDP. - Net effect including domestic environmental co-benefits: net welfare costs of mitigation policies become negative at a global level and for MICs and LICs (i.e., net benefits). - Midpoint of global GDP losses in 2030 for 2°C-consistent scenarios: about 1.0 percent, with a range between 0.6 and 1.5 percent depending on effort distribution and recycling of revenues. - Implication: this implies a reduction of annual global growth of just 0.1 percentage point. - GDP impacts exceed pure abatement costs because of: - Changes in investment (large for MICs and oil exporters). - Trade effects (large for oil exporters). - Strategies to limit investment losses include using carbon pricing revenues for public investment or using non-pricing instruments instead of carbon pricing. - Upside risks: rapid innovation or learning-by-doing in low-carbon technologies could reduce costs. - Downside risks: stranded assets and difficult reallocation of labor across sectors could increase costs. ### Role of private finance and carbon pricing - A robust and predictable carbon price would help catalyze and efficiently allocate private climate finance flows. - Private financing is a key complement to, but cannot substitute for, direct public support. - Policy uncertainty is a key concern for private investors; commitment to carbon pricing can increase investor confidence and enable private climate finance. ### Conclusion and policy implications drawn in the text - Countries need to raise collective mitigation ambition to be consistent with limiting global warming to 1.5°C to 2°C. - Scenarios presented include reductions in emissions intensity, carbon price floors differentiated by development level, and progressive distributions of emission reductions; all imply further convergence of emissions per capita. - The 1.8°C and 1.5°C scenarios require substantial increases in ambition and may become technically infeasible if action is delayed further. - Assuming least-cost abatement strategies—through carbon pricing and productive allocation of revenues—substantially reduces abatement costs. - Large domestic environmental co-benefits from mitigation policies, notably human health improvements from better air quality, particularly benefit developing countries. ### Models and methodological notes (key features) - Climate Policy Assessment Tool (CPAT) - Provides country-by-country projections of fuel use and CO2 emissions for 200 countries by sector (power, industrial, transport, residential). - Baseline projections use: GDP projections; income elasticity of demand and own-price elasticity of demand for electricity and other fuel products; assumptions about rate of technological change affecting energy efficiency and productivity of energy sources; future international energy prices. - Current fuel taxes/subsidies and carbon pricing held constant in real terms in baseline. - Fuel demand curves largely based on constant elasticity specification; fuel price elasticities typically between about –0.5 and –0.8. - Extended to include “revenue-recycling” and “tax-interaction” effects following Parry and Williams 2010 parameterizations. - Caveats: abstracts from mitigation actions implicit in baseline; may not capture dramatic price-change-driven technological advances; does not explicitly account for upward sloping fuel supply curves, general equilibrium effects, or changes in international fuel prices from concurrent reforms in large countries. - IMF-ENV model - Recursive dynamic neoclassical global general equilibrium model built on GTAP version 10 database (141 countries, 65 commodities; base year data from 2014). - Represents firms, representative regional household, government, and markets; firms optimize profits, households optimize welfare under budget constraints. - Solved as sequence of comparative static equilibria; vintage capital stocks distinguish short- and long-term adjustment; labor and land mobile across sectors each year with some elasticity. - International trade modeled using Armington specification with full bilateral flows. - Links economic activity to environmental outcomes: emissions either with fixed coefficients or with emission intensities that decrease nonlinearly with carbon prices (marginal abatement cost curves). - Model projects to 2050 for scenario analysis and assesses costs and benefits of policies such as carbon pricing, including second-round effects on investment and labor over years. - Caveats: may overestimate long-term decarbonization costs by not incorporating radical future technological innovations; results sensitive to trade closure and other modeling assumptions. *Source: IMF staff using IMF-ENV (excerpts from clnea2022010 - 1. Transfers Received (2030))* ### Annex 2. Business as Usual Emissions Projections ### Annex 2. Business as Usual Emissions Projections ### Projected CO2 and GHG emissions growth (2021–30) - CPAT projected business as usual (BAU) CO2 emissions growth between 2021 and 2030: - High-income countries (HICs): varies from –9 percent (Saudi Arabia) to +25 percent (United Kingdom). - Middle-income countries (MICs): varies from 1 percent (South Africa) to 28 percent (Russia). - Low-income countries (LICs): varies from 23 percent (Indonesia) to 45 percent (India). - IMF-ENV baseline global greenhouse gas (GHG) emissions (including land use, land-use change, and forestry): - Global increase by 23 percent between 2021 and 2030. - HICs: 9 percent increase. - MICs: 29 percent increase. - LICs: 27 percent increase. - GDP growth example noted: over 50 percent in China and India between 2021 and 2030 (as context for emissions drivers). ### Drivers of emissions growth - Main global driver: GDP growth remains the major contributor to growing CO2 emissions at the global level and for MICs, LICs, and oil exporters in the baseline. - Energy intensity and energy demand: - Rapid GDP growth in many MICs and LICs offsets emission reductions from reductions in energy intensity of GDP. - HICs (for example, Canada, EU-27, and United Kingdom) are expected to grow moderately; combined with energy efficiency gains, this can keep CO2 emissions growth low or result in falling emissions (example: baselines project falling CO2 emissions in Japan compared to current levels). - Carbon intensity of energy: - CPAT baseline: reduction in the carbon intensity of the energy mix globally and in HICs and MICs, with no change in the LICs. - IMF-ENV baseline: carbon intensity of the energy structure is projected to increase globally and in each income group. - Model assumption divergence (footnote summary reflected in text): - CPAT assumes annual energy efficiency of 1 percent while IMF-ENV assumes 2 percent. - CPAT assumes a lower responsiveness of energy demand to GDP growth than IMF-ENV. - These offsetting assumptions result in similar projected developments in energy intensity of GDP across the two models but differing impacts on carbon intensity of energy. ### Model comparisons and implications for BAU and policy scenarios - Baseline emissions and price responsiveness: - Baseline CO2 emissions projections from IMF-ENV are higher than those of CPAT. - IMF-ENV has higher price responsiveness of emissions. - Despite differences, total CO2 emissions from fossil combustion from the two models end up in 2°C-consistent emissions range. - Global abatement cost comparability: - Global abatement costs measured as a share of GDP are broadly comparable across CPAT and IMF-ENV. - Abatement costs by income groups are progressive in all 2°C-compatible scenarios. ### Abatement cost examples (international carbon price floor scenario) - IMF-ENV CO2 abatement costs as percent of GDP: - World: 0.41 percent of GDP. - HIC: 0.66 percent of GDP. - MIC: 0.44 percent of GDP. - LIC: 0.12 percent of GDP. - CPAT CO2 abatement costs as percent of GDP: - World: 0.49 percent of GDP. - HIC: 0.6 percent of GDP. - MIC: 0.38 percent of GDP. - LIC: 0.27 percent of GDP. ### CO2 versus non-CO2 (GHG) abatement shares and costs (IMF-ENV) - In 2°C-aligned scenarios: - 70 percent of global abatement costs arise from CO2 mitigation. - By income group: - HICs: CO2 share of abatement costs ~80 percent. - MICs: CO2 share between 75 to 78 percent. - LICs: CO2 mitigation accounts for about 41 to 44 percent of total abatement costs (larger mitigation share from non-CO2 GHGs due to agriculture-related emissions, especially methane). - Total GHG abatement costs (international carbon price floor scenario) as percent of GDP: - World: 0.59 percent of GDP. - HICs: 0.82 percent of GDP. - MICs: 0.56 percent of GDP. - LICs: 0.27 percent of GDP. ### Observations on policy and analytical implications - Sectoral and technology considerations: - Policies to advance renewables are frozen in the BAU scenario, contributing to modest changes in emissions intensity of energy in CPAT. - Interventions that accelerate learning-by-doing for low-carbon technologies are important because unit costs can decline rapidly (example cited: solar costs declined by about 90 percent in 2010s). - Equity and policy design: - Abatement costs are progressive by income group in 2°C-compatible scenarios, implying larger relative burdens on higher-income countries. - Practical modeling caveats highlighted (related to abatement cost estimation, from broader annex discussion): - Marginal abatement cost curves (MACCs) may not capture learning effects, capital stock dynamics, negative abatement cost puzzle, or welfare co-benefits; 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Raftery, Hana Ševčíková, Hannah Sheets, James H. Stock, Tammy Tan, Mark Watson, Tony E. Wong, and David Anthoff. 2022. “Comprehensive Evidence Implies a Higher Social Cost of CO2.” Nature. https://doi.org/10.1038/s41586-022-05224-9 - Way, Rupert, Matthew C. Ives, Penny Mealy, and J. Doyne Farmer. 2021. “Empirically Grounded Technology Forecasts and the Energy Transition.” INET Oxf ord Working Paper 2021-01, Institute f or New Economic Thinking at the Oxf ord Martin School, Oxford, United Kingdom. - McKinsey & Company. 2007. “Costs and Potentials of Greenhouse Gas Abatement in Germany.” http://www.ecolo.org/documents/documents_in_english/CO2-abatement-Germany-07.pdf *Getting on Track to Net Zero: Accelerating a Global Just Transition in This Decade — IMF STAFF CLIMATE NOTE 2022/010* --- _Source: https://www.imf.org/-/media/files/publications/staff-climate-notes/2022/english/clnea2022010.pdf_