## clnea2023002

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### Stakes and current trajectory
- Limiting warming to 1.5 to 2 degrees Celsius requires cutting CO2 and other GHGs by 25 to 50 percent by 2030 compared with 2019.
- Current nationally determined contributions (NDCs) would reduce global GHG emissions by just 11 percent.
- In a business-as-usual (BAU) scenario with no new mitigation policies, global GHG emissions are projected to increase 4 percent to 51.5 billion tons in 2030—exhausting the carbon budget for 1.5°C by 2035.
- Measures equivalent to a global carbon price of at least $85 are needed to get emissions on track to 2°C (and even more for 1.5°C).

### Purpose, methodology, and focus
- Provides IMF staff’s annual assessment of global climate mitigation policy and advice for the Global Stocktake (GST) at COP28.
- Uses the IMF-World Bank Climate Policy Assessment Tool (CPAT) to assess NDCs for over 150 countries and to quantify pathways for achieving temperature goals.
- Focus: aligning emissions targets with temperature goals; policies and impacts of achieving targets; mobilizing finance, investment, and technology for global net-zero emissions by midcentury.

### Ambition trends, gaps, and country coverage
- Since 2015, initial NDCs would have cut emissions in 2030 by 2 percent versus 2019; current NDCs improve this to about 11 percent—still inconsistent with 2°C (25 percent cut by 2030) or 1.5°C (50 percent cut by 2030).
- HICs: as a group, more than quadrupled ambition (from 6 to 28 percentage points versus 2030 BAU).
- UMICs: doubled ambition; LMICs and LICs: largely unchanged.
- Developing countries account for 69 percent of annual BAU CO2 emissions by 2030 and 55 percent of historical cumulative CO2 emissions.
- Of 156 countries with quantifiable, economy-wide NDCs:
  - 45 countries (accounting for 23 percent of global GHGs) have 2030 emissions targets higher than CPAT’s BAU.
  - 111 countries reduce emissions versus BAU with a simple average of 27 percent below BAU (17 percent weighted average).
  - Of those 111: 97 have targets greater than 10 percent and 53 have ambition greater than 25 percent.
  - Fewer than half (63 countries, covering 33 percent of global emissions) have increased ambition substantively since 2015 (by 5 percentage points or more).
- Net-zero targets:
  - Countries accounting for over two-thirds of 2020 GHG emissions have committed to NZE targets in 2050 or 2060.
  - Countries accounting for about 20 percent of emissions have not set an NZE target.
  - Only 18 percent of total NZE commitments are enshrined in law.

### Illustrative equitable allocation scenarios (closing the 2030 ambition gap)
- Scenarios average several equity-based allocation approaches and scale to IPCC-required cuts.
- 2°C scenario:
  - Cuts global CO2 emissions by 29 percent compared with 2030 BAU levels (approximately same cut on 2019 levels).
  - HICs would reduce 2030 CO2 emissions by 39 percent below BAU; UMICs by 30 percent below BAU.
  - LMICs and LICs would increase the ambition implied by current NDCs by 8 percentage points.
- 1.5°C scenario:
  - Global emissions cuts of 50 percent compared with 2019 levels.
  - Implies cuts of 60 percent for HICs and 51 percent for UMICs compared with 2030 BAU levels.
- Per capita emissions:
  - Gradual convergence between HICs and UMICs under both scenarios; LMICs and LICs maintain lower per capita emissions but cut less in absolute terms.

### Implementation gap and energy sector focus
- Energy-related CO2 and other GHG emissions accounted for three quarters of global GHG emissions in 2021.
- By fuel: coal 45 percent, oil 30 percent, gas 25 percent of energy-related emissions.
- By sector: power 25 percent, industry 19 percent, transport 14 percent, buildings 7 percent.
- Decarbonization requires:
  - expanding renewables (solar, wind, hydrogen, hydro), fossil power with carbon capture, and possibly nuclear (with safeguards);
  - electrifying end-uses in buildings, factories, and vehicles;
  - promoting energy conservation.

### Sectoral policy adoption and carbon pricing coverage
- By 2022, at least half of G20 countries had policies covering power, industry, transport, buildings and agriculture and forestry (up from < a third in 2000).
- Carbon pricing:
  - 73 carbon taxes and ETSs operating in 47 countries, covering 25 percent of global GHGs (up from 12 percent in 2015).
  - National coverage varies from below 30 percent to more than 70 percent.
  - Carbon prices vary from below $5 to over $100 per ton.
  - Average (emissions weighted) price of covered emissions grew from $7 in 2015 to about $22 in 2023.
  - Including uncovered emissions, the global weighted average carbon price is $5.
  - Measures equivalent to a global carbon price of at least $85 would be needed to achieve 2°C.

### Effective carbon pricing, implicit measures, and fossil-fuel subsidies
- Effective carbon price (ECP) including fuel excises and renewables subsidies: about $30 per ton.
- Only about 20 percent of global CO2 emissions have a high price (above $60).
- About 40 percent are priced at less than $10 per ton of CO2.
- Due to explicit fuel subsidies, about 10 percent have a negative price.
- Emissions from coal are virtually unpriced globally; natural gas mostly unpriced; gasoline and diesel somewhat priced but less responsive to emissions pricing.
- Fossil fuel subsidies:
  - Total fossil fuel subsidies amounted to $7 trillion in 2022, equivalent to 7 percent of global GDP.
  - Explicit subsidies account for 18 percent of the total; implicit subsidies 82 percent.
  - Explicit subsidies rose from $0.5 trillion in 2020 to $1.3 trillion in 2022.
  - In 25 major emitters, compliance costs for renewables and low carbon standards grew from $16 billion in 2008 to almost $100 billion in 2019, implying an implicit carbon price of about $3 per ton in 2019 (up from $0.5 in 2008).

### Domestic policy recommendations to close implementation gaps
- Core recommendation: a predictable, reliable price on carbon—ideally carbon taxes—to:
  - shift private investment,
  - directly reduce energy use,
  - change fuel use, and
  - spur innovation in new technologies.
- Carbon pricing can support a just transition by:
  - compensating low-income households (around 10 percent of carbon pricing revenues needed to compensate the poorest 20 percent of households),
  - enabling labor income tax cuts or assistance for vulnerable households.
- Complementary measures:
  - subsidies or mandates to overcome up-front costs,
  - technology policies to accelerate LCT development,
  - public investments in enabling infrastructure (transmission lines, EV charging),
  - feebates, pricing schemes, and regulations to reduce non-CO2 GHGs and promote forest carbon storage.
- Border carbon adjustments or agreements with trading partners can support affected industries.

### International coordination and International Carbon Price Floor (ICPF)
- A supplementary international coordination mechanism among a small number of large emitters could:
  - address competitiveness concerns and policy uncertainties,
  - set transparent, monitorable parameters to align global emissions in 2030 with temperature goals.
- ICPF options (differentiated by development level):
  1. a minimum carbon price (example: $75 for HICs, $50 for UMICs, $25 for LMICs/LICs); or
  2. implement the mitigation pledge in their NDC.
- With complete coverage, global CO2 emissions would be aligned with staying below 2°C.
- A smaller group of six major emitters (Canada, China, European Union, India, United Kingdom, United States) would close much of the implementation gap.
- Phased scope: initially target power and industry, then add transport, buildings, forestry as monitoring capacity improves.
- Carbon price equivalence can accommodate countries where pricing is unlikely.

### Methane, international aviation, maritime, and sectoral regimes
- Methane:
  - Accounts for 20 percent of global GHGs from extractives, livestock, waste.
  - 125 countries signed the Global Methane Pledge to cut methane 30 percent below 2020 levels by 2030.
  - Differentiation by development level less critical given modest mitigation costs (Less than 0.1 percent of GDP in 2030 for most emitters in a 2°C-aligned scenario).
- International aviation and maritime:
  - Accounted for 1.9 percent of global GHGs in 2021 (0.6 percent aviation; 1.3 percent maritime).
  - Supervisory bodies have made net zero commitments by midcentury; an offsetting scheme for aviation is being developed.

### International initiatives, risks, and rationalization (Box 2)
- Notable initiatives: JETPs, the Breakthrough Agenda, the Global Methane Pledge, the G7 Climate Club, the Coalition of Finance Ministers for Climate Action, Canada’s Global Carbon Pricing Challenge, Partnership for Market Implementation.
- Risks:
  - JETPs could reward polluters if poorly designed.
  - Proliferation of overlapping initiatives may create “talking shops” instead of driving substantive action.
- Recommendation: a stocktake of existing initiatives to scale valuable ones and stop those that do not contribute to implementation.
- Policy notes:
  - Coordination is important for maritime due to mobility of tax base.
  - Feebates can provide robust price signals while avoiding large revenue collection challenges.

### Climate finance and investment needs
- Clean energy investment needs:
  - Clean energy investment needs to rise sixfold globally and fivefold in developing countries.
  - To achieve net-zero by 2050, mitigation investment needs to rise from $0.9 trillion in 2020 to $5 trillion annually by 2030.
  - About 60 to 70 percent of these needs are in the energy sector; about half in generation and distribution of electricity and about a quarter in energy efficiency.
- Developing country needs:
  - $2 trillion needed in developing countries ($1.2 trillion excluding China), a fivefold increase from $370 billion in 2020.
- Private versus public shares:
  - Global private share must rise from about 50 percent in 2021 to over 80 percent by 2030.
  - Developing countries (ex-China) private share: about 40 percent to about 90 percent by 2030.
- Mitigation share of total investment:
  - Needs to rise from 4 percent to 17 percent globally and from 3.4 to 12 in developing countries.
- Policy-based financing:
  - Financing to support policy reforms accounts for just 14 percent of total multilateral lending; policy-based financing should be scaled-up.

### International public finance flows and commitments
- Developed-country commitment: mobilize $100 billion a year from 2020 until at least 2025.
- This target is expected to be met late, in 2023.
- Actual flows in 2020: $83.3 billion from developed to developing countries.
  - Composition: bilateral public 31 percent, multilateral public (attributed) 37 percent, privately-leveraged 13 percent.
- Accelerating flow of climate finance (public and private) from developed to developing countries is needed to meet investment scale-up.

### Adaptation finance, offsets, and illustrative new collective goal
- Adaptation needs:
  - Average annual investment needs this decade: HICs ~0.3 percent of GDP a year; MICs ~1.1 percent of GDP a year.
  - Annual adaptation investment needs in vulnerable SDSs around 2 percent on average but can be as high as 10 percent.
- Carbon offsets:
  - Remain highly uncertain and may undermine ambition; Article 6 may currently hold back developing country ambition.
  - Any use of international carbon credits must raise country ambition or not disincentivize increases in ambition.
- Estimated grant needs (annual, 2030 estimates):
  - Adaptation in 2030: about $30 billion for LICs and $10 billion for SDSs.
  - Mitigation (abatement) annual costs in 2030 (2°C scenario): $0.5 billion for LICs and $1 billion for SDSs.
  - Total grants for abatement and mitigation (LICs + SDSs) about $42 billion per year (more than double 2020 grant-based climate finance of $18 billion).
- One illustrative new collective climate finance goal:
  - Rough targets: roughly $130 billion in 2025 and $200 billion by 2030.
  - Illustration combines 10 percent of $1.2 trillion needed by 2030 ($120 billion), current finance for adaptation and cross-cutting needs (~$42 billion), and a grant component for LICs and SDSs (~$38 billion) to yield $200 billion per year by 2030.
  - Example allocation evolution (annual, 2022 US dollars):
    - 2020: Mitigation $49 billion; Adaptation $35 billion; Grants/Other $83 billion total.
    - 2023 (revised date)*: Mitigation $58 billion; Adaptation $42 billion; Grants/Other $129 billion total.
    - 2025 (intermediate target): Mitigation $77 billion; Adaptation $51 billion; Grants/Other $100 billion total.
    - 2030 (illustrative target): Mitigation $124 billion; Adaptation $76 billion; Grants/Other $200 billion total.
- Conditional framing option:
  - New global finance target could be a joint goal, with the increase above $100 billion conditional on strong mitigation action by developing countries (for example, raising their effective carbon price).

### Potential new global revenue sources
- A tax on international aviation and maritime could raise nearly $100 billion by 2030.
  - Maritime: a carbon levy of $75 in 2030 would raise about $75 billion per year in 2030.
  - Aviation: assuming ICAO projections and the same carbon price, revenues would amount to nearly $20 billion in 2030.
  - Total under this scenario: about $93 billion in 2030.
- Illustration: the $41 billion increase in grants would be 6 percent of the $670 billion revenues if all HICs implemented an additional carbon price of $75 per ton by 2030.

### Technology development, diffusion, and costs of LCTs
- 85 percent of CO2 emissions cuts out to 2030 can be achieved from commercially proven technologies (IEA).
- Global mitigation investment needs must rise sixfold to meet diffusion rates.
- By 2050, almost half of emissions reductions will need to come from technologies under development or yet to be invented.
- Trade in LCTs:
  - Grew from $200 billion in 1999 (3.5 percent of total trade) to $1.1 trillion in 2021 (5.1 percent), growing about 8 percent per annum.
  - Developing countries excluding China grew LCT exports by 8 percent per annum and imports by 4.9 percent per annum between 2015 and 2021.
  - Developing countries’ share in LCT exports remains ~10 percent; imports share declined from ~21 to 18 percent.
- Concentration and patents:
  - More than 60 percent of green patents during 1980–2000 filed in nine countries (G7 plus China and Korea).
  - China is largest trader in LCTs; top 10 exporters account for 34 percent of global exports and 27 percent of imports.
- Cost declines and remaining challenges:
  - Solar and wind costs declined about 90 percent from 2010 to 2020.
  - Remaining early-stage technologies: green cement, green steel, hydrogen, shipping, aviation, NETs like direct air capture, AFOLU technologies.
- Innovation policy evidence:
  - A one standard deviation increase in policy stringency raises green patent filings 10 percent in five years (Hasna and others 2023).
  - Policy instruments like feed-in tariffs and R&D subsidies can have strong effects on accelerating green patents.
- Diffusion barriers and policy levers:
  - One standard deviation change in stock of climate policies estimated to increase bilateral green FDI inflows by 15 percent.
  - A one standard deviation reduction in import duties (about 1.5 percentage points) increases imports of LCT by about 5 percent.
  - Lowering tariffs could accelerate diffusion in developing countries by about 20 to 30 percent (assuming import elasticity 3.5 to 4).
- Financing and cost of capital:
  - Many LCTs have larger up-front capital costs; high borrowing costs are a key barrier.
  - IEA comparison: capital costs of renewables could be reduced by around 35 percent in emerging markets (excluding China) if they accessed capital at advanced economy rates.
  - Policy responses: strengthen macro fundamentals, deepen financial markets, expand guarantees by multilateral development banks, use blended finance.

### Fiscal, welfare, distributional impacts (2°C illustrative scenario, 2030)
- Carbon pricing revenues can more than compensate for base erosion from existing fuel taxes out to 2030.
- Net revenues typically around 0.5 to 2 percent of GDP and tend to be lower in HICs than most UMICs.
- Domestic welfare co-benefits (reduced premature deaths from air pollution, reduced congestion and accidents) offset a large portion of abatement costs and may more than offset them in China, India, Indonesia.
- Around 10 percent of carbon pricing revenues are needed to compensate the poorest 20 percent of households.
- GDP impacts: ex ante simulations generally suggest small negative impacts, some ex post studies suggest small positive impacts; near-term economic costs are likely small relative to the cost of inaction.

### Policy design principles, Green Industrial Policies, and transparency
- Policies should be time-bound/temporary with clear end or review dates.
- Policymakers should regularly reassess fiscal costs/benefits, targeted market failures, and governance risks.
- GIPs require institutional frameworks and transparency to minimize implementation risks and facilitate international coordination.
- Policies should be consistent with World Trade Organization obligations, minimize adverse spillovers, and avoid “subsidy wars.”

### Annex: typology and comparison of mitigation instruments
- Market-based instruments: carbon taxes, feebates, vehicle CO2 intensity taxes, ETSs, tradable performance standards, emissions intensity standards.
- Non-market instruments: technology mandates, energy market reform, subsidies for LCT development/deployment, public investment, feed-in tariffs.
- Non-climate policies with climate relevance: fuel excise taxes, explicit fossil fuel subsidies (negative carbon pricing), electricity excise taxes and subsidies, some industrial/agricultural subsidies, air pollution standards, fertilizer regulations, fuel efficiency regulations.
- Comparative attributes (summary):
  - Carbon taxes and ETSs score highest on economic efficiency (✔✔✔) and revenue mobilization (✔✔✔).
  - Feebates rank high on administrative practicality (✔✔✔).
  - No single instrument is uniformly superior across all sectors; complementary measures are needed where market failures or political constraints persist.
- Complementary policies to address impediments: R&D incentives, timebound technology subsidies, output-based rebates, tax relief, border adjustments, public investments, targeted assistance, equitable revenue use.

### Conclusion — priorities and implementation checklist
- Revise 2030 NDC targets to be Paris-aligned and equitable, narrowing the gap for 1.5 to 2°C.
- Implement policy packages including a robust and rising carbon price, reinforcing instruments in hard-to-abate sectors, and complementary measures for LCT adoption.
- Scale up international cooperation (including ICPF options) and significantly increase mitigation investment, especially private investment in developing countries.
- Set a new collective quantified goal on climate finance with transparent methodology (illustrative target: $200 billion per year by 2030) and scale policy-based financing.
- Accelerate development and diffusion of early-stage LCTs, pursue international collaboration on LCTs, and cut capital costs in developing countries via structural reforms and de-risking instruments.

*IMF | Staff Climate Note (clnea2023002)*

### Introduction

### clnea2023002 - Introduction

### Stakes and current global trajectory
- Limiting global warming to 1.5 to 2 degrees Celsius requires cutting carbon dioxide (CO2) and other greenhouse gases (GHGs) by 25 to 50 percent by 2030 compared with 2019.
- Current nationally determined contributions (NDCs) would reduce global GHG emissions by just 11 percent.
- In a business-as-usual (BAU) scenario with no new mitigation policies, global GHG emissions are projected to increase 4 percent to 51.5 billion tons in 2030—exhausting the carbon budget for 1.5°C by 2035.
- Measures equivalent to a global carbon price of at least $85 are needed to get emissions on track to 2°C (and even more for 1.5°C).

### Purpose of the Note and methodology
- Provides IMF staff’s annual assessment of global climate mitigation policy and advice for the Global Stocktake (GST) at COP28.
- Uses the IMF-World Bank Climate Policy Assessment Tool (CPAT) to assess NDCs for over 150 countries and to quantify pathways for achieving temperature goals.
- Focus areas: aligning emissions targets with temperature goals; policies and impacts of achieving targets; mobilizing finance, investment, and technology for global net-zero emissions by midcentury.

### Ambition trends and gaps
- Since 2015, initial NDCs would have cut emissions in 2030 by 2 percent versus 2019; current NDCs improve this to about 11 percent—still inconsistent with 2°C (25 percent cut by 2030) or 1.5°C (50 percent cut by 2030).
- High-income countries (HICs) have significantly enhanced ambition: as a group, HICs more than quadrupled their ambition (from 6 to 28 percentage points versus 2030 BAU).
- Upper-middle-income countries (UMICs) have doubled ambition; lower-middle-income countries (LMICs) and low-income countries (LICs) are largely unchanged.
- Developing countries account for 69 percent of annual BAU CO2 emissions by 2030 and 55 percent of historical cumulative CO2 emissions.

### Country-level ambition and coverage
- Of 156 countries with quantifiable, economy-wide NDCs:
  - 45 countries (accounting for 23 percent of global GHGs) have 2030 emissions targets that are higher than CPAT’s BAU (i.e., likely achieved without additional mitigation).
  - 111 countries have NDCs that reduce emissions versus BAU with a simple average of 27 percent below BAU (17 percent weighted average).
  - Of those 111: 97 have targets greater than 10 percent and 53 have ambition greater than 25 percent.
  - Fewer than half (63 countries, covering 33 percent of global emissions) have increased ambition substantively since 2015 (by 5 percentage points or more).
- Climate ambition generally rises with per capita income; major emitters show a stronger relationship.

### Net-zero targets and timing risks
- Countries accounting for over two-thirds of 2020 GHG emissions have committed to net-zero-emission (NZE) targets in 2050 or 2060 (some earlier or later; India 2070 cited).
- Countries accounting for about 20 percent of emissions have not set an NZE target.
- Only 18 percent of total NZE commitments are enshrined in law; the remainder are in policy documents or political pledges.
- Delayed action to 2030 would require significant (possibly infeasible) CO2 removals later in the century; priority is cutting emissions in this decade.

### Illustrative equitable allocations to close the 2030 ambition gap
- Scenarios are constructed by averaging several equity-based allocation approaches and scaling to IPCC-required cuts for temperature goals.
- 2°C scenario:
  - Cuts global CO2 emissions by 29 percent compared with 2030 BAU levels (approximately same cut on 2019 levels).
  - HICs and UMICs would reduce 2030 CO2 emissions by 39 and 30 percent below BAU by 2030, respectively.
  - LMICs and LICs would increase the ambition implied by current NDCs by 8 percentage points.
- 1.5°C scenario:
  - Global emissions cuts of 50 percent compared with 2019 levels.
  - Implies cuts of 60 and 51 percent for HICs and UMICs compared with 2030 BAU levels.
- Under both scenarios, per capita emissions show gradual convergence between HICs and UMICs; LMICs and LICs maintain lower per capita emissions but cut less in absolute terms.

### Gaps by income group and country examples
- Shortfalls between current NDCs and temperature-aligned targets are larger for UMICs and LIC/LMICs than for HICs.
- Some developing countries’ NDCs are nonbinding and assumed achieved in BAU; Brazil (and almost South Africa and Mexico) are already consistent with the 2°C scenario.
- Some countries may over-achieve current targets with existing policies (for example, India).

### Fiscal, welfare, and distributional impacts (Box 1 highlights)
- Fiscal impacts (2°C illustrative scenario, 2030):
  - Carbon pricing revenues can more than compensate for base erosion (reduction in receipts from existing fuel taxes) out to 2030.
  - Net revenues are typically around 0.5 to 2 percent of GDP and tend to be lower in high income countries than most upper-middle-income countries.
  - Some revenue fractions will be needed for compensating low-income households and public investment, but on net fiscal balances can be improved, or at least will not deteriorate, with carbon pricing.
- Welfare and co-benefits:
  - Abatement costs are manageable globally and are progressively distributed.
  - Domestic welfare co-benefits (reduction in premature deaths from local air pollution, reductions in congestion and accident externalities) offset a large portion of abatement costs, and may more than offset them in some countries (China, India, Indonesia).
  - In such cases, countries can move unilaterally and raise welfare (co-benefits less abatement costs) before counting climate benefits.
- Distributional measures:
  - Around 10 percent of carbon pricing revenues are needed to compensate the poorest 20 percent of households.
- GDP impacts:
  - Evidence is mixed; ex ante simulations generally suggest small negative impacts while a smaller number of ex post empirical studies suggest small positive impacts.
  - Any near-term economic costs are likely small and dwarfed by the cost of inaction.

_Italic: IMF staff climate note (clnea2023002) — Introduction_

### 0.5 to 1

### 0.5 to 1

### Background: implementation gap and energy focus
- Current targets and pledges are insufficient to getting on track to NZE.
- There is a gap in implementation and hence stronger mitigation policies are needed, especially in energy.
- Energy-related CO2 and other GHG emissions accounted for three quarters of global GHG emissions in 2021.
- By fuel: coal, oil, and gas accounted for 45 percent, 30 percent, and 25 percent of these emissions respectively.
- By sector: power, industry, transport, and buildings accounted for 25 percent, 19 percent, 14 percent, and 7 percent of these emissions, respectively.
- Decoupling energy from fossil fuels requires:
  - decarbonizing power generation through expanding renewables (like solar, wind, hydrogen, and hydro); fossil power generation with carbon capture, use, and storage, and possibly nuclear (with safeguards for waste disposal and radiation leakage);
  - electrifying uses of energy (in buildings, homes, factories, and vehicles); and
  - promoting energy conservation (to limit pressures on the grid).

### Sectoral policy adoption
- By 2022, at least half of Group of Twenty countries had policies covering power, industry, transport, buildings and agriculture and forestry, up from less than a third in 2000.
- Policies include regulations, direct investment, green subsidies, and carbon pricing or similar, across electricity and heat, industry, transport, buildings, and agriculture and forestry.

### Carbon pricing: coverage and levels
- To date, 73 carbon taxes and emissions trading systems (ETSs) are in operation in 47 countries, covering 25 percent of global GHGs, up from 12 per cent in 2015.
- National coverage varies from below 30 percent to more than 70 percent.
- Carbon prices vary from below $5 to over $100 per ton.
- The average (emissions weighted) price of covered emissions has grown from $7 in 2015 to about $22 in 2023.
- When including uncovered emissions, the global weighted average carbon price is $5.
- Measures equivalent to a global carbon price of at least $85 would be needed to achieve 2°C (higher for 1.5°C).

### Effective carbon pricing and implicit measures
- When adding fuel excises and renewable subsidies into a measure of implicit carbon pricing, the global effective carbon price (ECP) is about $30 per ton.
- Only about 20 percent of global CO2 emissions have a high price (above $60).
- About 40 percent are priced at less than $10 per ton of CO2.
- Due to explicit fuel subsidies, about 10 percent have a negative price.
- Emissions from coal are virtually unpriced globally; from natural gas are mostly unpriced; from gasoline and diesel are somewhat priced but relatively less responsive to emissions pricing.

### Fossil fuel subsidies
- Globally, total fossil fuel subsidies amounted to $7 trillion in 2022, equivalent to 7 percent of global GDP.
- Explicit subsidies account for 18 percent of the total while implicit subsidies account for 82 percent.
- Explicit subsidies more than doubled from $0.5 trillion in 2020 to $1.3 trillion in 2022.
- Total subsidies are expected to rise without corrective government policies.
- In 25 major emitters (about 85 percent of global CO2 emissions), compliance costs for renewable portfolio standards, feed-in tariffs, and low carbon fuel standards grew from $16 billion in 2008 to almost $100 billion in 2019.
- Weighted by global CO2 emissions, this amounts to an implicit carbon price of about $3 per ton of CO2 in 2019, up from $0.5 in 2008.

### Domestic policy recommendations to close implementation gaps
- A mix of policies is needed to cut emissions to Paris-aligned levels; especially important is a predictable, reliable price on carbon.
- Most investments needed to decarbonize must come from the private sector; policies should shift private investment effectively.
- Carbon pricing—ideally carbon taxes—is crucial for achieving this in all countries because it encourages:
  - shifts in investments,
  - direct reductions in energy use,
  - changes in use between fuels, and
  - innovation in new technologies.
- Carbon pricing can support a just transition by addressing poverty and raising equity of the fiscal system via revenue use (for example, labor income tax cuts and assistance for vulnerable households).
- Pricing can be complemented with measures to support affected industries (for example, border carbon adjustments or agreements with trading partners on minimum carbon prices).
- Policy packages should include measures beyond pricing to address market failures and support LCT deployment:
  - subsidies or mandates to overcome high up-front costs,
  - technology policies to accelerate development of new LCT,
  - public investments in enabling infrastructure (for example, transmission lines and EV charging stations),
  - feebates, pricing schemes, and regulations to reduce non-CO2 GHGs from extractives, agriculture, and waste, and measures to promote forest carbon storage.

### International coordination to reinforce implementation
- A supplementary international coordination mechanism can reinforce implementation under the Paris Agreement by addressing competitiveness concerns and policy uncertainties.
- The mechanism would ideally include a small number of large emitters to facilitate negotiation while covering a majority of global emissions (for example, China, the European Union, India, and the United States are currently responsible for 61 percent of global GHGs emissions).
- The mechanism could focus on limited, transparent, monitorable parameters set to align global emissions in 2030 with temperature goals.
- An international carbon price floor (ICPF) could be considered where participants agree to implement the more stringent of:
  1. a minimum carbon price, with prices differentiated by development levels (for example, $75 for HICs, $50 for UMICs, and $25 for LMICs/LICs); or
  2. the mitigation pledge in their NDC.
- Assuming complete coverage of countries, global CO2 emissions will be aligned with staying below 2°C.
- A smaller group of six major emitters (Canada, China, European Union, India, United Kingdom, United States) would close much of the implementation gap.
- The ICPF could initially target power and industry, then add transport, buildings, and forestry as monitoring capacity improves.
- For countries where pricing is unlikely, alternative policies that achieve equivalent emissions cuts could be accommodated using the ‘carbon price equivalence’ concept.

### Other GHGs and sectoral international approaches
- Methane:
  - Methane emissions from extractives, livestock, and waste account for 20 percent of global GHGs.
  - 125 countries signed the Global Methane Pledge committing to cut global methane emissions 30 percent below 2020 levels by 2030.
  - Differentiating commitments by development level is less critical as mitigation costs are modest (Less than 0.1 percent of GDP in 2030 for most emitters in a scenario aligned with 2°C).
  - A coalition of willing countries (for example, Global Methane Pledge signatories) could form an international regime with a minimum methane emission price.
- International aviation and maritime:
  - Account for 1.9 percent of global GHGs in 2021 (0.6 percent and 1.3 percent, respectively).
  - Supervisory bodies have made net zero commitments by (around) midcentury and an offsetting scheme for aviation is being developed.

*Source: clnea2023002 - 0.5 to 1*

### Box 2. International Sectoral and Policy-Specific Initiatives on Climate Mitigation

### Box 2. International Sectoral and Policy-Specific Initiatives on Climate Mitigation

### Multilateral and bilateral initiatives: scope and objectives
- Notable multilateral initiatives cited:
  - Just Energy Transition Partnerships (JETPs)
  - the Breakthrough Agenda
  - the Global Methane Pledge
  - the G7 Climate Club
  - the Coalition of Finance Ministers for Climate Action
  - Canada’s Global Carbon Pricing Challenge
  - the Partnership for Market Implementation
- Purposes of these initiatives:
  - raise ambition and complement the Paris Agreement
  - highlight key issues (e.g., methane abatement)
  - accelerate technological development
  - diffuse knowledge on mitigation policies
- Bilateral example:
  - Indonesia and Korea agreement to accelerate development of electric vehicle technology, leveraging Korea’s natural resources (notably, nickel) and Indonesia’s manufacturing know-how.

### Risks, effectiveness, and recommended rationalization
- Potential positive outcome:
  - Done well, JETPs could serve as a model for accelerating climate finance to developing countries.
- Potential negative outcomes:
  - Done poorly, JETPs could reward polluters and waste finite resources by not accelerating the energy transition beyond what would have happened in their absence.
  - Risk of creating overlapping institutions and “talking shops” instead of vehicles to drive substantive policy action.
- Recommendation:
  - A stocktake of existing initiatives on climate is needed with a careful assessment of which are valuable, scaling those that are and, given finite policy resources, stopping those that are not.

### Policy instruments and implementation notes
- Coordination is especially important for maritime where the mobility of the tax base discourages unilateral taxes.
- Feebates can establish a robust price signal needed to close the gap for LCTs while avoiding the need to reach country agreement on how to use the large revenues that would be raised from pure carbon charging, though this would preclude using revenues for climate finance.

### Growth in initiatives and further stocktake recommendation
- There has been a rapid growth in global initiatives on policy implementation at a policy, sector, or technology-specific level.
- Though it remains unclear whether these initiatives will substantively contribute to decarbonization, a stocktake leading to a scaling-down of initiatives that are not contributing to policy implementation (and hence are taking up scarce policymaking resources) and a scaling-up of those that are may be warranted.

---

### Climate finance and investment: current gaps and scale-up needs
- Clean energy investment needs:
  - clean energy investment needs to rise sixfold globally and fivefold in developing countries.
- To achieve net-zero by 2050:
  - climate mitigation investment (public and private) would need to rise from $0.9 trillion in 2020 to $5 trillion annually by 2030.
- Sectoral composition:
  - About 60 to 70 percent of these investment needs are in the energy sector, notably generation and distribution of electricity (about half) and energy efficiency (about a quarter).
- Developing country needs:
  - Of the total, $2 trillion is needed in developing countries ($1.2 trillion excluding China), a fivefold increase from $370 billion in 2020.

### Private versus public shares and targets
- Global private share requirement:
  - Globally, the private share of climate investment needs to rise from about 50 percent in 2021 to over 80 percent by 2030.
- Developing countries (ex-China) private share:
  - The largest increases would be in developing countries (excluding China), rising from about 40 percent to about 90 percent (shares would remain stable in developed countries).
- Historical context:
  - The private sectors’ share in climate finance has been flat since the signing of the Paris Agreement (CPI 2022) despite technology costs declining precipitously.
- Mitigation share of total investment:
  - The share of mitigation in total investment would need to rise from 4 percent to 17 percent globally and from 3.4 to 12 in developing countries, though some of this could come from a shifting away of investment from fossil fuel to renewable energy.
- Policy implication:
  - To facilitate the dramatic increases in private mitigation investment, substantive and credible climate policies are needed.
- Policy-based financing:
  - Financing to support policy reforms accounts for just 14 percent of total multilateral lending; given the central importance of policy reforms to accelerate mitigation action, policy-based financing should be scaled-up.

### International public finance flows and commitments
- Developed-country commitment:
  - Developed countries committed to mobilize $100 billion a year in climate finance from 2020 until at least 2025 in the context of “meaningful mitigation actions and transparency on implementation”.
  - This target is expected to be met late, in 2023.
- Actual flows in 2020:
  - In 2020 climate finance flows from developed to developing countries amounted to $83.3 billion.
  - Composition in 2020: bilateral public 31 percent, multilateral public (attributed) 37 percent, privately-leveraged 13 percent.
- Need:
  - To help achieve the fivefold increase in investment in developing countries, accelerating the flow of climate finance (both public and private) from developed to developing countries is needed.

### Adaptation finance needs
- Adaptation finance is especially needed in LICs and small developing states (SDSs) that are especially vulnerable.
- Wide variation of adaptation investment needs both between and within income groups.
- Average annual investment needs this decade:
  - HIC investment needs are estimated at around 0.3 percent of GDP a year this decade.
  - MICs estimated at 1.1 percent of GDP a year this decade.

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*IMF | Staff Climate Note (Box 2, excerpt provided in content unit)*

### 0.7 percent for LICs. Needs are significantly higher in vulnerable SDSs

### 0.7 percent for LICs. Needs are significantly higher in vulnerable SDSs

### Adaptation and mitigation investment needs; carbon offsets
- Annual adaptation investment needs in vulnerable SDSs are around 2 percent on average but can be as high as 10 percent.
- Carbon offsets remain a highly uncertain source of climate finance for developing countries and may undermine ambition within the Paris Agreement.
  - Any use of international carbon credits must raise country ambition (per Article 6) or, at worst, not disincentivize increases in ambition.
  - At present, Article 6 may be holding back developing country ambition because they may expect to generate credits for emissions below their NDC level.
  - Potential finance and revenues from offsets may be limited given questionable appetite in buyer countries (for example, the European Union has ruled out purchases of sovereign offsets as part of achieving its NDC).
- In the meantime, developing countries could abate domestic emissions through substantive mitigation policies, notably putting an additional price on carbon (which carbon credits do not) through explicit carbon pricing or similar instruments.

### New Collective Quantified Goal on Climate Finance — illustrative calculations and considerations
- Key considerations:
  - Adaptation and mitigation are distinct challenges; their respective shares in a new climate finance goal should not be assumed equal.
  - LICs and SDSs will find it difficult to self-finance mitigation and adaptation investments; concessional finance (grants or preferential loans) is strongly justified.
- Estimated needs and grant requirements (annual, 2030 estimates):
  - Adaptation investment needs in 2030: about $30 billion for LICs and $10 billion for SDSs.
  - Mitigation (abatement) annual costs in 2030 (2°C scenario): $0.5 billion for LICs and $1 billion for SDSs.
  - Total grants for abatement and mitigation (LICs + SDSs) would therefore be about $42 billion per year, more than double 2020 grant-based climate finance ($18 billion).
- One illustrative, bottom-up new collective climate finance goal:
  - Rough targets: roughly $130 billion in 2025 and $200 billion by 2030.
  - Illustration assumes global climate finance accounts for at least 10 percent (currently 13 percent) of the $1.2 trillion needed by 2030 ($120 billion), adds current finance for adaptation and cross-cutting needs of about $42 billion in 2030, and a grant component for LICs and SDSs of about $38 billion, yielding a total global finance target of $200 billion per year by 2030.
  - Example allocation evolution (annual, 2022 US dollars):
    - 2020: Mitigation $49 billion; Adaptation $35 billion; Grants/Other $83 billion total.
    - 2023 (revised date)*: Mitigation $58 billion; Adaptation $42 billion; Grants/Other $129 billion total.
    - 2025 (intermediate target): Mitigation $77 billion; Adaptation $51 billion; Grants/Other $100 billion total.
    - 2030 (illustrative target): Mitigation $124 billion; Adaptation $76 billion; Grants/Other $200 billion total.
- Conditional framing options:
  - New global finance target could be framed as a joint goal, with the increase above $100 billion being conditional on strong mitigation action by developing countries.
  - Example framing: the target could be flat at $100 billion in the unconditional case and higher than $100 billion conditional on developing countries’ enacting strong mitigation policies (for example, raising their effective carbon price). Note this excludes increases in adaptation finance which would be unconditional.

### Private investment incentives, effective carbon prices, and COP dynamics
- Incentives and private investment into mitigation in developing countries remain low; effective carbon prices are much lower in developing countries than developed countries.
  - Over 2010–12, the effective carbon price in high-income countries was about $50 per ton of CO2.
  - In middle- and low-income countries rates are much lower and have decreased since 2020.
- Failure to achieve the $100 billion target has been a major source of discontent at COP, overshadowing discussions.
- Domestic policies are needed to accelerate private finance to developing countries alongside scaled-up public finance from developed countries.

### Potential new global revenue sources
- The illustrative $200 billion by 2030 global target implies a tripling of climate grants to about $56 billion in 2030.
- Potential revenue sources:
  - A tax on international aviation and maritime could raise nearly $100 billion by 2030.
    - For maritime: a carbon levy of $75 in 2030 would raise about $75 billion per year in 2030.
    - For aviation: assuming ICAO emissions projections and the same carbon price, revenues would amount to nearly $20 billion in 2030.
    - Total revenues under this scenario would be about $93 billion in 2030.
  - Illustration: the $41 billion increase in grants would account for just 6 percent of the $670 billion revenues that would be raised if all HICs implemented an additional carbon price of $75 per ton of CO2 (on top of existing policies) by 2030.
- Note: aviation revenue estimates may be overestimated where calculations exclude behavioral responses.

### Getting technology on track — development, diffusion, and costs of LCTs
- Overview:
  - Decarbonization requires rapid diffusion of proven low-carbon technologies (LCTs) combined with investment in new technologies.
  - According to the IEA, about 85 percent of CO2 emissions cuts out to 2030 can be achieved from commercially proven technologies.
  - Global mitigation investment needs to rise sixfold to meet required diffusion rates.
  - By 2050, almost half of emissions reductions will need to come from technologies currently under development or yet to be invented.
- Trade and diffusion trends:
  - Trade in LCTs grew from $200 billion (a 3.5 percent share of total trade) in 1999 to $1.1 trillion (a 5.1 percent share) in 2021, growing at about 8 percent per annum.
  - Between 2015 and 2021, developing countries excluding China grew their LCT exports by 8 percent per annum and imports by 4.9 per annum.
  - Developing countries’ share in LCT exports remains flat at about 10 percent; their share of imports declined from about 21 to 18 percent.
  - More than 60 percent of green patents during 1980–2000 were filed in just nine countries (G7 plus China and Korea).
  - Production stages of LCTs are concentrated in a small number of countries; China is the largest trader in LCT followed by Germany, Japan, Korea, and the United States.
  - The top 10 exporters of LCT collectively account for 34 percent of global exports and 27 percent of imports.
- Cost declines and remaining technologies to accelerate:
  - Solar and wind costs declined by about 90 percent from 2010 to 2020; solar became the ‘cheapest source of electricity’ in history.
  - Several essential technologies remain at early stages and need acceleration: green cement, green steel, hydrogen, shipping, aviation, negative emissions technologies (NETs) like direct air capture, and AFOLU technologies.
  - Global collaboration is needed for R&D coordination, deployment (joint targets or subsidies), and standards to accelerate learning curves.
- Innovation policy evidence:
  - Studies find mixed but sometimes substantive effects of carbon pricing on innovation.
  - IMF studies find feed-in tariffs, R&D subsidies, and other technology support instruments can have strong effects on accelerating green patents.
  - A one standard deviation increase in policy stringency raises green patent filings 10 percent in five years (Hasna and others 2023).
  - International climate policies such as the Paris Agreement are also found to have had a large impact on green patent filings.
- Policy guidance for technology development:
  - Governments should target resources for LCT development toward identified market failures in technology markets.
  - Subsidies for basic research may be especially beneficial, but finance must also be available for intermediate-stage technologies.
  - Carbon pricing is especially important at deployment stages; deployment subsidies can provide a bridge for early adopters.
  - Where subsidy costs are high, consider revenue-neutral options such as “feebates” (fees on incumbent high-carbon technologies used to subsidize newer low-carbon technologies).
  - Green industrial policy (GIP) examples include China’s Five-Year Plans, the United States’ Inflation Reduction Act, and the European Union’s Green Deal.
    - Caveats: GIPs are subject to government failure, political risks, and high fiscal costs; domestic content standards can be costly for the global economy and undermine free trade principles.
    - Transparency about objectives, design, duration, and regular monitoring of costs and benefits against fiscal space is warranted.
- Diffusion barriers and policy levers:
  - Domestic mitigation policy (e.g., carbon pricing) raises imports of LCTs and leads to higher levels of green FDI inflows.
  - Lowering tariffs on LCTs and easing human and financial capital controls can accelerate knowledge flows (patent transfers) and imports of physical products.
  - Evidence:
    - A one standard deviation change in the stock of climate policies is estimated to increase bilateral green FDI inflows by 15 percent.
    - An increase of one standard deviation in tariff barriers decreased LCT patent transfers from developed countries by 15 percent and from developing countries by 26 percent.
    - An increase of one standard deviation in FDI restrictions reduced transfers of LCT patents from high-income economies to developing countries by 23 percent and transfers from developing countries by 41 percent.
    - A one standard deviation reduction in import duties (about 1.5 percentage points) increases imports of LCT by about 5 percent.
  - There is no evident “carbon subsidy” in global trade for LCT products; tariffs tend to be lower on LCTs than on other goods, but there is scope to lower barriers further.
  - Lowering trade barriers on LCTs could accelerate diffusion, especially in developing countries (by about 20 to 30 percent, based on assumed import elasticity with respect to tariffs of 3.5 to 4).
  - Tariffs are higher in developing countries; agreement on lowering them may require complementary transfers.
- Financing and cost of capital challenges:
  - Many LCTs have larger up-front capital costs relative to high-carbon incumbents, making high borrowing costs a key barrier.
  - Example: IEA comparison suggests capital costs of renewables could be reduced by around 35 percent in emerging markets (excluding China) if they had access to capital at the same rate as advanced economies.
  - Higher global interest rates may have worsened the problem.
  - Policy responses:
    - Structural policies to strengthen macroeconomic fundamentals, deepen financial markets, improve policy predictability, and foster institutional and governance frameworks to lower cost of capital and mobilize domestic resources.
    - Expanded use of guarantees by multilateral development banks and donors to reduce real and perceived risks.
    - Blended finance (public and private finance combined) to improve risk–reward profiles and broaden private investor participation.

*IMF | Staff Climate Note (excerpted content as provided).*

### Conclusion

### Conclusion

### Overall progress and gaps
- After eight years, the Paris Agreement shows progress on mitigation: ambition has been enhanced moderately, climate finance has advanced though the $100 billion target was missed, and diffusion of LCTs continues to grow gradually.
- Global ambition and implementation fall far short of what is needed; investment, finance, and technology are not progressing quickly enough.
- A robust response to the GST that scales up mitigation action in this decade is required.

### Getting climate ambition on track
- Revise 2030 targets in NDCs to be Paris-aligned and equitable.
  - Example approach: set targets depending on countries’ per capita income levels, with more ambitious targets for more developed countries.
  - Critical objective: narrow the gap between countries’ aggregated ambition and what’s needed for 1.5 to 2°C.

### Getting policy implementation on track
- Implement policies needed for Paris-aligned NDCs:
  - Policy packages should ideally include a robust and rising carbon price, reinforcing instruments in hard-to-abate sectors, and further measures to address impediments to clean technology and investment.
  - These reforms can be equitable (for example, reducing poverty), improve fiscal balances, and have substantial domestic welfare co-benefits even before considering climate benefits.
- Scale-up and reinforce international cooperation and coordination:
  - Could include new instruments such as an international carbon price floor (ICPF) among major emitters.

### Getting finance and investment on track
- Significantly increase total mitigation investment and the private sector’s share of it:
  - A sixfold increase in global clean energy investment is needed by 2030.
  - To substantially raise the private sector’s share in investment especially in developing countries, incentives are needed, notably a robust, rising carbon price or equivalent policies.
- Set a new collective quantified goal on climate finance, framed as a joint target for developed and developing countries:
  - A transparent methodology for the target beyond $100 billion is needed, for example, linked to investment needs as well as policy in developing countries.
  - Given the critical role of policy in developing countries for attracting private finance, the new target should be a joint target and policy-based climate finance should be scaled up.
- Consider new sources of funding:
  - A global tax on international aviation and maritime transport is proposed as a potential source.
  - A carbon tax on aviation and maritime of $75 per ton by 2030 could raise up to $100 billion by 2030.
- Cutting capital costs reduces investment costs (Figure referenced shows LCOE reductions when cutting costs of capital to developed country level).

### Getting technology on track
- Accelerate the development of early-stage LCTs:
  - Almost half of the technologies needed for achieving NZE by midcentury are in early stages of development.
  - Countries with capacity to lead should consider targeted support, ideally in a collaborative manner across countries.
- Pursue international collaboration on LCTs:
  - Possible instrument: a new free trade agreement on LCTs; cooperation can accelerate LCT development and diffusion.
  - Though LCT trade barriers are not higher than on other goods, they could be lowered and standards harmonized.
- Cut capital costs in developing countries:
  - Use structural reforms and financial instruments such as multilateral guarantees and blended finance.

### Annex highlights (G20 stocktake and carbon pricing emphasis)
- G20 mitigation stocktake (as of 2022):
  - Carbon pricing schemes are operating in 12 G20 countries.
  - Power generation: almost all countries have targets for renewables and eight have coal phase out plans.
  - Transportation: CO2 emission rate or fuel economy standards apply nationally in 9 G20 countries and at the EU level; 15 countries have targets for phasing in EVs or phasing out internal combustion engine vehicles; feebates apply in some form in 9 countries.
  - Buildings: France, Germany, Italy, and Japan have targets for reducing energy use from total building stock; nine other G20 countries have targets for making all new buildings net zero emissions by 2030 or later.
  - Industry: only five G20 countries have binding emissions targets for industry.
- Emissions impact of existing and planned mitigation policies (2030, no carbon pricing baseline):
  - Combined impacts would cut emissions between 20 and 50 percent in 11 countries but by less than 10 percent in 7 cases.
  - Renewables policies make a significant contribution to reductions in 15 cases and carbon pricing in 8 cases.
  - In four cases targets are not binding or barely binding (including China and India), and in another seven cases specified policies and targets fall well short of NDC needs.

- Why economists emphasize carbon pricing:
  - Carbon pricing leverages the largest number of behavioral responses and is the most effective and efficient single instrument to achieve emissions reductions given social cost constraints.
  - Example fiscal implications: carbon prices of $50 per ton would raise revenues of about 0.5–2 percent of GDP in 2030.
  - Pricing alone cannot achieve the cuts needed at the pace required; other policies are needed to address frictions and market failures impeding LCT adoption.
  - Explicit carbon pricing refers to carbon taxes and ETSs and does not usually include offsetting mechanisms (voluntary carbon credits, CDM CERs, ITMOs).

- Key impediments to LCT development and diffusion and optimal policies to address them (selected examples from Annex Table 2.1):
  - Research (basic): under-provision of general scientific research → subsidization/grants, prizes.
  - Innovation (applied R&D): spillovers → intellectual property, R&D subsidies, prizes.
  - Deployment (learning-by-doing & scale economies): slow deployment → deployment subsidies, advance market commitments, carbon contracts for difference.
  - Deployment (high financing costs): capital costs inhibit private investment in developing countries → international climate finance, de-risking instruments, blended finance.
  - Deployment (network externalities): underinvestment in enabling infrastructure → public investment in enabling infrastructure (e.g., smart grids, charging stations).
  - Deployment (slow capital turnover): long-lived capital goods/retrofits lock in emissions → targeted subsidies for retrofitting, accelerated depreciation, low-carbon long-life capital goods.

*IMF | Staff Climate Note*

### Annex 3. Comparison of Climate Mitigation Policies

### Annex 3. Comparison of Climate Mitigation Policies

### Typology of mitigation instruments
- Policies are classified by whether they are market-based (price incentives) or non-market based (regulations, subsidies, and investments).
- Policies are further delineated between those that seek to cut GHGs (climate mitigation policy) and those that cut emissions as a byproduct (non-climate policy).

- Market-based instruments (price-based / quantity-based):
  - Carbon taxes
  - Feebates
  - Vehicle CO2 intensity taxes
  - Emissions trading systems (ETSs)
  - Tradeable performance standards (TPSs)
  - Emissions intensity standards

- Non-market instruments (regulations; subsidies & investments):
  - Technology mandates
  - Energy market reform
  - Subsidies for LCT development and deployment
  - Public investment in enabling infrastructure
  - Feed-in tariffs & subsidies

- Non-climate policies with climate relevance:
  - Implicit carbon pricing: fuel excise taxes
  - Negative carbon pricing: explicit fossil fuel subsidies
  - Electricity excise taxes and subsidies
  - Some industrial/agricultural subsidies
  - Air pollution standards
  - Fertilizer regulations
  - Fuel efficiency regulations

### Comparative attributes and sectoral coverage (Annex Table 3.2 summary)
- Instruments are evaluated according to:
  - Economic efficiency
  - Revenue mobilization
  - Administrative practicality
  - Political acceptability
  - Sectoral coverage: Power, Industry, Transport, Buildings, Forestry/land use, Extractives (CH4), Livestock (CH4, NOx)

- Environmental effectiveness key:
  - ✔ = somewhat environmentally effective
  - ✔✔ = effective
  - ✔✔✔ = very effective

- Summary of instruments and attributes (as presented):
  - Carbon taxes
    - Economic efficiency: ✔✔✔
    - Revenue mobilization: ✔✔✔
    - Administrative practicality: ✔✔
    - Political acceptability: ✔✔
    - Coverage by sector: Power ✔, Industry ✔✔✔, Transport ✔✔✔, Buildings (not checked), Forestry/land use (not checked), Extractives (CH4) ✔ (implied from table layout), Livestock (CH4, NOx) ✔✔✔ (as shown)
  - Emissions trading systems (ETSs)
    - Economic efficiency: ✔✔✔
    - Revenue mobilization: ✔✔✔
    - Administrative practicality: ✔✔
    - Political acceptability: ✔✔
    - Coverage by sector: Power ✔, Industry ✔✔, Transport (not checked), Buildings (not checked), Forestry/land use (not checked), Extractives (CH4) ✔, Livestock (CH4, NOx) (not checked)
  - Feebate (fees/rebates for dirty/clean firms/products/activities)
    - Economic efficiency: ✔✔
    - Revenue mobilization: ✔✔
    - Administrative practicality: ✔✔✔
    - Political acceptability: ✔✔
    - Coverage by sector: Power ✔, Industry ✔✔, Transport ✔✔, Buildings (not checked), Forestry/land use (not checked), Extractives (CH4) ✔
  - Tradable performance standards
    - Economic efficiency: ✔✔
    - Revenue mobilization: ✔✔
    - Administrative practicality: ✔✔
    - Political acceptability: ✔
    - Coverage by sector: Power ✔, Industry ✔ (others limited)
  - Abatement subsidies
    - Economic efficiency: ✔
    - Revenue mobilization: ✔
    - Administrative practicality: ✔✔
    - Political acceptability: ✔
    - Coverage by sector: Power ✔, Industry ✔, Transport ✔, Buildings ✔
  - Requirements for green technologies/activities
    - Economic efficiency: ✔
    - Revenue mobilization: ✔
    - Administrative practicality: ✔✔
    - Political acceptability: ✔✔
    - Coverage by sector: Power ✔, Industry ✔, Transport ✔, Buildings ✔

- A general note from the comparison:
  - There is a decline in efficiency/revenues/practicality/acceptability across some instruments.
  - Different instruments perform variably across sectors; no single instrument is uniformly superior for all sectors.

### Impediments to decarbonization and complementary policies
- Identified impediments:
  - Network externalities for clean technologies
  - Spillovers from new knowledge/technologies
  - Burdens on households
  - Burdens on firms

- Complementary policies to overcome impediments (listed in the annex):
  - R&D incentives, timebound technology subsidies
  - Output-based rebates, tax relief, border adjustments
  - Public investments
  - Targeted assistance, equitable revenue use

### Desirability and feasibility considerations
- Economy-wide carbon pricing is identified as a core decarbonization approach (price-based, quantity-based options presented).
- Non-price interventions (regulations, subsidies, investments) are important complements where market failures, political economy constraints, or technology market failures persist.
- Policy design should weigh:
  - Environmental effectiveness by sector
  - Administrative practicality and political acceptability
  - Distributional impacts and targeted measures to address equity and acceptability concerns

*Source: IMF staff.*

### 3. Policies should be time-bound, cost-effective, and transparent while limiting fiscal

### 3. Policies should be time-bound, cost-effective, and transparent while limiting fiscal

### Key design principles
- Policies should be designed to be temporary, with clear end or review dates specified from the outset.
- Policymakers need regular re-assessment on:
  - (1) the fiscal costs and benefits relative to available fiscal space;
  - (2) the nature and magnitude of the targeted market failures and whether intervention is still warranted; and
  - (3) the risks related to government failure and weak governance.

### Institutional and transparency requirements for Green Industrial Policies (GIPs)
- GIPs should be conducted within an appropriate institutional framework to minimize implementation risks.
- Transparency is critical to ensure effective tax compliance and administration.
- Green policy goals need to be clearly identified, whether for development of new green technologies, their rapid deployment, or stimulation of consumer demand.
- Transparency can also help facilitate international coordination, allowing data on green industrial measures (especially subsidies) to be collected and shared through international institutions.

### International coordination, trade, and spillovers
- Policies should be consistent with World Trade Organization legal obligations, minimize adverse spillovers, and avoid barriers on technology transfers, especially to developing countries.
- Uncoordinated policies, particularly those that lead to a “subsidy war” or result “beggar-thy-neighbor” effects, are an ineffective way to address climate change and undermine the core rationale for interventions.
- A global approach with coordinated, nondiscriminatory subsidies can achieve decarbonization faster with less resources.
- Measures along these lines could include data sharing, sectoral agreements, harmonization of regulations, and patent pools.

*IMF Staff Climate Note 2023/002*

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_Source: https://www.imf.org/-/media/files/publications/staff-climate-notes/2023/english/clnea2023002.pdf_