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### Executive Summary
- The 2015 Paris Agreement was signed by "195 countries."
- IPCC (2018) projects "Global warming is likely to reach 1.5°C between 2030 and 2052."
- Limiting warming to well below 2°C requires a massive structural transformation of global economic activity.
- Rationale for action:
  - Markets alone cannot deliver sufficient mitigation due to market failures and government failures.
  - Some market failures can prevent needed long-term private investment even if public investments were sufficient and relative energy prices appropriate, justifying use of financial policies as complements to fiscal policies.
- Policy-tool taxonomy:
  - Fiscal policy: carbon pricing (explicit and implicit); spending and investment; public guarantees; taxes, subsidies, public investment to internalize externalities and secure low-carbon public infrastructure.
  - Financial policy: change financial asset structure; (i) correct lack of accounting for climate risks in financial institutions (redress mispricing; increase transparency); (ii) internalize externalities and co-benefits at the level of society.
  - Monetary policy: options within central bank mandates (reflecting climate risks in large-scale asset purchase programs or collateral frameworks) and more controversial options (green QE, credit allocation policies, adapting monetary policy frameworks).
- Policy interactions and gaps:
  - Broad menu of options exists but literature does not define an appropriate policy mix.
  - Fiscal policy and proper pricing of climate risk in financial institutions, financial stability frameworks and central bank portfolios are largely complementary and should feature in the policy package.
  - Active use of financial and monetary tools to promote green private investments may sometimes substitute for fiscal instruments as a second-best option.
  - Literature is scarce on desirable package composition, mixing/prioritization across fiscal, monetary and financial policies, and coordination and tool assignment.
- Research priorities:
  - Whether policies are complements or substitutes.
  - Policy trade-offs with business cycle stabilization and price stability.
  - Coordination across fiscal, monetary, and financial policy areas.
  - Political economy dimensions and approaches to break political deadlocks over burden-sharing.
- Scope:
  - Focus on policies to reduce CO2 or GHG emissions; adaptation policies are not addressed.
  - Emphasis on nationally implementable policies; international leakages and global coordination discussed briefly.

### A. Climate Science and the Cost of Climate Change
- Scientific context:
  - Scientific consensus indicates a dominant role of human activity in driving global warming (IPCC 2014, IPCC 2018, USGCRP 2017, USGCRP 2018).
  - Carbon dioxide emissions accumulated in the atmosphere have reached unprecedented levels (NOAA).
  - UNEP (2018a) estimates current NDCs are consistent with a baseline global emissions trajectory that stabilizes projected warming at "around 3oC by 2100."
- Non-linearities, tipping points, and tail risks:
  - Potential tipping points: thawing of permafrost releasing additional GHGs; changes to ocean streams.
  - Human behavioral tipping points (e.g., sudden onset of mass migrations) are possible.
  - Rockström et al. (2009) find three out of nine planetary boundaries may have already been breached.
  - Growing agreement that tail risks are material; risk of catastrophic and irreversible disaster is rising and may imply potentially infinite costs in extreme scenarios (Weitzman 2009).
- Economic channels and heterogeneous impacts:
  - Channels: rising temperatures, sea-level rise, ocean acidification, shifting rainfall patterns, extreme events (floods, droughts, heat waves, wildfires).
  - Economic impacts: wealth destruction, reduction and volatility of income and growth, redistributional effects on income and wealth.
  - Heterogeneity: impacts vary geographically and by income.
- Expected damages (selected quantitative estimates from literature):
  - IMF (2019a) simulations: BAU temperature increases will reduce GDP for a typical low-income country by "9 percent in 2100," taking into account current Paris pledges.
  - Burke et al. (2015): climate change will reduce global GDP by "23 percent by 2100," and reduce GDP per capita by "around 80 percent in South Asia, Southeast Asia and Sub-Saharan Africa" under an assumption of global warming of "3.7°C."
  - Diffenbaugh and Burke (2019): per capita GDP being "17-31 percent lower" for the poorest four deciles of the population-weighted country-level per capita GDP distribution under climate change, implying a ratio between the top and bottom deciles that is "25 percent larger" than in a counterfactual without global warming.
- Uncertainty:
  - High uncertainty around estimates; uncertainties may be more important than baseline scenarios and reveal hidden interdependencies and potentially enormous disruptions.

### B. Objectives, Risk Management, and the SVMA
- Two policy approaches:
  - Growth-maximization approach: chooses a GHG path that maximizes discounted expected growth by trading off mitigation costs against expected benefits (Nordhaus 2014); does not account for forecast uncertainty or distributional outcomes.
  - Risk-management approach: analogous to "Value-at-Risk" and "Growth-at-Risk"; chooses GHG path that maximizes discounted growth subject to a constraint on catastrophic irreversible climate risk, implying emissions should be reduced "as fast and as much as possible."
- International agreements and required targets:
  - SDGs, Paris Agreement and IPCC support limiting global warming to well below 2°C, ideally around 1.5°C, requiring a gradually-declining CO2 emissions path.
  - IPCC (2018) finding cited: by 2030, GHG emissions must be "45 percent lower than their levels in 2010" to limit warming to 1.5°C; and reaching net zero by "2050."
  - Current NDCs do not satisfy this aim.
- The Social Value of Mitigation Action (SVMA):
  - Definition: SVMA is the economic and environmental value of mitigation actions and related co-benefits.
  - Relationship to SCC and SPC:
    - SCC: net present social value of incremental damages of an additional ton of CO2 along an optimal scenario.
    - SPC: theoretical price used for business planning adding a hypothetical surcharge to market prices.
    - SVMA augments SCC by incorporating co-benefits (health, PPF shifts, spillovers) into the benefits of avoided GHG emissions.
  - Key economic proposition: moving, path-dependent PPF.
    - Early mitigation can positively affect future PPFs via learning-by-doing and Schumpeterian waves of innovation.
    - Explicit carbon prices lower than the SVMA may not trigger appropriate decarbonization; complementary policy instruments (technical standards, public procurement, loan subsidies, public guarantees, infrastructure and R&D) are important.
  - Operational uses of SVMA:
    - SVMA as gap between private and social returns; narrowing gap requires credible commitment to a stable shadow price of carbon.
    - Embedding options:
      - calibrate public guarantees to reward economically viable low-carbon choices (examples for advanced and developing economies described).
      - calibrate cross-border guarantees based on a common notional price for avoided GHG emissions.
      - issue carbon assets when certified emissions reductions are realized.
- Transition scale and timing:
  - Existing commitments imply a massive transformation to be achieved within a short time frame.
  - IPCC (2018) cited: by 2030, GHG emissions must be "45 percent lower than their levels in 2010" to limit warming to 1.5°C.
  - Emissions are still increasing.
- Price and investment implications:
  - Transition requires changes in relative prices and large-scale public and private investments in low-emission infrastructure, buildings, R&D and productive capital.
  - Relative price changes and investments are complements, not substitutes.
  - Agents’ ability to respond to higher relative energy prices depends on availability of alternative energy choices and supporting infrastructure.

### Policy Instruments: Roles and Trade-offs
- Fiscal instruments (front-line):
  - Carbon pricing (explicit and implicit), spending, investment, public guarantees, taxes, subsidies, public investment to internalize externalities and secure low-carbon infrastructure.
- Financial policy instruments:
  - Aim to change financial asset structure and support transformation of productive structure.
  - Two broad types:
    - Tools correcting lack of accounting for climate risks in financial institutions (redress mispricing; increase transparency).
    - Tools internalizing externalities and co-benefits at society level (raise tool-assignment and trade-off questions).
  - Can change demand for green versus carbon-intensive investments and secure appropriate private investment levels.
- Monetary policy instruments:
  - Options within central bank mandates: reflect climate risks in asset purchase programs or collateral frameworks.
  - Controversial options: green QE, credit allocation policies, adapting monetary policy frameworks.
  - Ensuring central bank balance sheets reflect climate risks can support mitigation by leading by example and affecting market prices when portfolios are sizeable.

### Section V — Political Economy Considerations
- Distributional and political constraints:
  - Low-carbon transition implies replacement of sectors, activities and technologies, producing negative impacts for many actors.
  - Carbon pricing likely to raise energy prices, with potential negative effects on access to relatively clean and modern energy (e.g., for cooking) and associated health issues.
  - Energy subsidy reform faces social and political acceptability issues; successful reforms typically include compensatory measures.
  - Historical examples: Middle East energy subsidy reforms (with compensatory measures); "yellow vest" protests in France illustrate political risks.
  - Carbon pricing may be regressive or progressive depending on design; reuse of carbon-tax proceeds is key to political feasibility.
  - Political viability often justifies combining carbon pricing with redistribution or spending components.
- Between-country impacts:
  - Climate change increases between-country inequality: per capita GDP "17-31 percent lower" for poorest four deciles in one empirical estimate, with a top-bottom decile ratio "25 percent larger" than without global warming.
- International coordination and burden-sharing:
  - Climate change creates a free-rider problem because benefits accrue mostly to other countries.
  - Lack of cooperation incentivizes free riding for competitive advantage.
  - Proposals include collective agreement on social value calibration and climate clubs to limit free riding by harmonizing efforts and sanctioning nonparticipants.
- Design principles for policy packages:
  - Packages must be attractive to a majority of voters and avoid impacts perceived as unfair or concentrated.
  - Compensation of concentrated losers may be needed because gains are diffuse and costs are concentrated and visible.
  - Country circumstances matter for policy design: incidence on households/firms and revenue reuse options (reducing distorting taxes, financing low-carbon public investments, lump-sum redistribution) are central.
- Opportunities:
  - Well-designed mitigation policies can generate co-benefits: health improvements, growth-enhancing innovation, more livable cities, robust agriculture, stronger ecosystems.
  - Unilateral mitigation can create future competitive advantage and partially internalize leakage of mitigation benefits.

### Key Research Needs (from Executive Summary and body)
- Identify effective policy mix for mitigation and role of mitigation in overall policy framework.
- Determine when policies are complements or substitutes for climate incidence.
- Quantify policy trade-offs with macroeconomic objectives (business cycle stabilization, price stability).
- Develop coordination mechanisms among fiscal, monetary, and financial policy areas.
- Explore political economy strategies and innovative approaches to resolve burden-sharing deadlocks within and between nations.

*Source: wpiea2019185-print-pdf.*

### Executive Summary ......................................................................................................

### Executive Summary

### The challenge and scientific context
- The 2015 Paris Agreement was signed by 195 countries.
- The Intergovernmental Panel on Climate Change (IPCC 2018) warns that global warming is expected to reach 1.5°C between 2030 and 2052, and to continue upwards from there.
- Limiting global warming to well below 2°C requires a transformation in the structure of global economic activity on a massive scale.

### Rationale for policy action
- Markets on their own cannot deliver sufficient mitigation because market failures, unaddressed and exacerbated by government failures, prevent an appropriate market response.
- Some market failures can prevent needed long-term private investment even if public investments were sufficient and relative energy prices appropriate, justifying the use of financial policies as complements to fiscal policies.
- The implied transformation of the economy is massive and unlikely to happen through the market alone, making policy action necessary.

### Policy instruments and their roles
- The review considers three categories of policy tools: fiscal, financial, and monetary. There are gray zones between these categories.
- Fiscal policy options:
  - Carbon pricing (explicit and implicit)
  - Spending and investment
  - Public guarantees
  - Fiscal tools (taxes, subsidies, public investment) are emphasized as front-line instruments to internalize externalities, reap co-benefits, and secure low-carbon public infrastructure.
- Financial policy tools:
  - Aim to change the underlying financial asset structure to support the transformation of productive structure.
  - Two broad types:
    - Those that correct the lack of accounting for climate risks for financial institutions (redress mispricing; increase transparency).
    - Those that internalize externalities and co-benefits at the level of society (raising questions of tool assignment, trade-offs, political economy).
  - Can support mitigation by changing demand for green versus carbon-intensive investments and relative prices, and by securing appropriate levels of private investment in green productive capital, infrastructure and R&D.
- Monetary policy tools:
  - Some options fall within most central bank mandates (e.g., reflecting climate risks in large-scale asset purchase programs or collateral frameworks).
  - Other options are more controversial (e.g., green QE, credit allocation policies, adapting monetary policy frameworks).
  - Ensuring that central bank balance sheets accurately reflect climate risks can play a supporting role, both by leading by example and via market price impact when portfolios are sizeable.

### Key findings on policy interactions and gaps
- There is a broad menu of policy options from which policymakers can choose, but the literature does not yet define an appropriate policy mix.
- Some macroeconomic and financial tools are complementary; others may substitute for each other, creating trade-offs.
- Fiscal policies and ensuring proper pricing of climate risk in financial institutions, financial stability frameworks and central bank portfolios and operations are for the most part likely to complement each other and should all feature in the policy package.
- The active use of financial and monetary policy tools to promote green private investments may in some cases substitute for fiscal instruments but could be justified as a second-best policy option.
- The literature is scarce on:
  - The desirable package of measures to address climate mitigation.
  - How to mix and prioritize fiscal, monetary and financial policies to mitigate climate change.
  - Coordination between policy areas and assignment of tools and goals.

### Research needs and priorities
- More research is needed on the most effective policy mix for climate change mitigation and the role of mitigation in the overall policy framework.
- Important research topics include:
  - Whether various policies are complements or substitutes in their incidence on the climate.
  - Policy trade-offs and interactions with other objectives (e.g., business cycle stabilization, price stability).
  - Coordination among fiscal, monetary, and financial policy areas.
  - Political economy dimensions and innovative approaches to break political deadlocks over burden-sharing within and between nations.
- Political economy considerations are of first-order importance and at least as important for achieving effective climate mitigation as conceptual understanding of the policy mix.

### Scope and focus of the review
- The paper focuses on policies to reduce CO2 or greenhouse gas (GHG) emissions and does not address adaptation policies.
- The focus is on nationally implementable policies; international leakages, global coordination, and differences across national income levels are discussed only briefly.
- While countries at different income levels face different mitigation challenges, those distinctions are complex and are not considered here.

*Source: Executive Summary, wpiea2019185-print-pdf.*

### Section V, and Section VI concludes. The Appendix contains supporting material.

### wpiea2019185-print-pdf - Section V, and Section VI concludes. The Appendix contains supporting material.

### A. Climate Science and the Cost of Climate Change

- Scientific consensus indicates a dominant role of human activity in driving global warming (IPCC 2014, IPCC 2018, USGCRP 2017, USGCRP 2018).
- Carbon dioxide emissions accumulated in the atmosphere have reached unprecedented levels (Figure 1). Source: NOAA.
- Scientific projections:
  - "Global warming is likely to reach 1.5°C between 2030 and 2052 as a baseline scenario (IPCC 2018)."
  - UNEP (2018a) estimates current NDCs are consistent with a baseline global emissions trajectory that stabilizes projected warming at "around 3oC by 2100."
- Non-linearities, tipping points and extreme complexity imply substantial uncertainty around baseline projections; risks and impacts are non-linear as temperature rises (IPCC 2014, 2018).
  - Potential tipping points include thawing of permafrost releasing additional GHGs and changes to ocean streams.
  - Human behavioral tipping points (e.g., sudden onset of mass migrations) are possible (Rigaud et al. 2018).
  - Rockström et al. (2009) find that three out of nine planetary boundaries may have already been breached.
- Channels through which climate change affects economic outcomes:
  - Rising temperatures, sea-level rise, ocean acidification, shifting rainfall patterns, extreme events (floods, droughts, heat waves, wildfires).
  - Economic impacts include wealth destruction, reduction and volatility of income and growth, and redistributional effects on income and wealth (Deryugina and Hsiang 2014, Mersch 2018, IMF 2017, Bathiany et al. 2018, De Laubier-Longuet Marx et al. 2019, Pigato, ed., 2019).
  - Impacts are heterogeneous geographically and by income (Hsiang et al. 2017, Tol 2019, Hsiang 2019).
- Expected damages and tail risks:
  - Broad consensus: unmitigated climate change will cause high damages and non-negligible probability of catastrophic tail-risk events.
  - IMF (2019a) simulations: business-as-usual (BAU) temperature increases will reduce GDP for a typical low-income country by "9 percent in 2100," taking into account current Paris pledges.
  - Burke et al. (2015): climate change will reduce global GDP by "23 percent by 2100," and reduce GDP per capita by "around 80 percent in South Asia, Southeast Asia and Sub-Saharan Africa" under an assumption of global warming of "3.7°C."
  - Tol (2018) summarizes literature as suggesting limited damages but notes many important impacts (water resources, transport, migration, violent conflict, energy supply) are insufficiently accounted for.
- Uncertainty considerations:
  - High uncertainty around estimates is difficult to incorporate into cost models (Hawkins and Sutton 2009, Hsiang and Kopp 2018, Stern 2016).
  - Pottier (2016) argues uncertainties may be more important than baseline scenarios, revealing hidden interdependencies and potentially enormous disruptions.
  - Growing agreement that tail risks are material; risk of catastrophic and irreversible disaster is rising and may imply potentially infinite costs in extreme scenarios (Weitzman 2009).

### B. What Needs to Be Achieved?

- Two conceptual approaches to climate policy:
  - Growth-maximization approach:
    - Chooses a GHG path that maximizes a discounted future expected path for growth by trading off mitigation costs against expected future benefits (Nordhaus 2014).
    - Does not account for uncertainty around forecasts or distribution of outcomes.
  - Risk-management approach:
    - Analogous to "Value-at-Risk" and "Growth-at-Risk" frameworks (Adrian et al. 2018).
    - Chooses a GHG path that maximizes discounted growth under the constraint that risk of catastrophic irreversible climate change remains below an agreed percentile.
    - Given high uncertainties and large tails, implies GHG emissions should be reduced "as fast and as much as possible" (Aglietta and Espagne 2016).
- Existing international agreements:
  - Based on maximization principle and thus do not fully account for extreme risk characterizing climate change.
  - SDGs, the Paris Agreement and the IPCC support limiting global warming to well below 2°C, ideally around 1.5°C, requiring a gradually-declining path for CO2 emissions.
  - Limiting warming to well below 2°C and ideally around 1.5°C requires:
    - "reductions of 45 percent in CO2 emissions by 2030 and reaching net zero by 2050."
  - Current NDCs do not satisfy this aim.
- Co-benefits and the Social Value of Mitigation Action (SVMA):
  - Co-benefits of mitigation may include increased health through reduced air pollution, growth-enhancing green innovation, preservation of nature and biodiversity, enhanced energy security, and reduced climate-related migration (Parry et al. 2015, Arezki et al. 2016, Coste et al. 2019, Heine and Black 2019, IMF 2019a).
  - Co-benefits are challenging to model and are rarely reflected in mitigation models.
  - SVMA conceptually encompasses all current and future co-benefits, costs and side effects of mitigation; it would be determined collectively (e.g., through a political process) and could be used to define notional (shadow) prices of mitigation action.
  - Exact implications of SVMA for an "optimal" GHG path are less clear, though operationalization attempts exist (see Box 1).

*Source: https://www.imf.org/-/media/files/publications/wp/2019/wpiea2019185-print-pdf.pdf*

### Box 1. The Social Value of Mitigation Action (SVMA)

### Box 1. The Social Value of Mitigation Action (SVMA)

### Definition and scope of the SVMA
- The social value of mitigation action (SVMA) is the economic and environmental value of climate change mitigation actions and related economic and non-economic co-benefits (Hourcade et al. 2018, UNFCCC 2016a, Article 108, High-Level Commission on Carbon Prices 2017).
- The SVMA highlights potentially substantial underpricing of co-benefits of carbon mitigation, in addition to benefits of reducing carbon emissions.
- The SVMA can help introduce a market for mitigation assets, compensating for its absence.

### Relationship to the social cost of carbon (SCC) and the shadow price of carbon (SPC)
- SCC: defined as the net present social value of incremental damages (e.g., to agriculture, health) of an additional ton of CO2 emissions along an optimal emissions scenario; expressed in monetary units and usually reflects worldwide damages.
- SPC: a theoretical price used for business planning and investment; it adds a hypothetical surcharge to market prices for goods or services that involve CO2 emissions in their production.
- The SVMA augments the conventional concept of the SCC by incorporating various co-benefits of mitigation action that impact social welfare (e.g., health co-benefits, the outward move in the PPF, and economic and technological spillovers) into the benefits of a ton of avoided GHG emissions along a given development trajectory.

### Key economic proposition: moving, path-dependent PPF
- Main proposition: the production possibility frontier (PPF) may be moving and path dependent, rather than fixed.
- Implication: if the economy is not at the PPF, the relation between the SCC, the SPC and the explicit carbon price is not straightforward and requires investigation of synergies between climate change mitigation and development (Hourcade et al. 2015).
- Early mitigation action can positively affect future PPFs through two main channels:
  - learning-by-doing effects that reduce the future cost of emissions reductions (Bramoullé and Olson 2005, Vogt-Schilb and Hallegatte 2014);
  - contribution of the low-carbon transition to Schumpeterian waves of innovation, which moves the PPF outward (Stern 2015).
- An explicit carbon price that is lower than the SVMA is not the appropriate ex ante signal to trigger more ambitious decarbonization paths, because development paths vary in both quantity and quality of growth and reflect structural features resulting from transformation processes supported by various policy mixes (technical standards, building codes, public procurement standards, loan subsidies, public guarantees, infrastructure and R&D, etc.).
- The SVMA incorporates all social welfare co-benefits of climate change mitigation, from health benefits to shifts in the PPF through technological and economic spillovers.
- Footnote note: Internalizing both climate and non-climate benefits of mitigation into a carbon price would not be appropriate, as the outcome would be an even higher gap between optimal and politically feasible carbon prices (see IMF 2019a). 1/

### SVMA as gap between private and social returns; operational uses
- Alternatively, the SVMA can be seen as the difference between the private and social return on low-carbon investments.
- To narrow this gap, a credible commitment to a stable shadow price of carbon is needed.
- Operational embedding options for the SVMA:
  - calibrate public guarantees to reward economically viable low-carbon choices; for example:
    - governments of advanced economies using a globally determined SVMA within the range of values given by the IPCC for the marginal costs of carbon for a 2°C target;
    - governments of developing countries using a domestic SVMA for the proportion of guarantees they would be willing to provide (Dastupta et al. 2019).
  - calibrate guarantees for cross-border investment based on a common notional price for avoided GHG emissions to help hedge against fragmentation and arbitrariness of low-carbon initiatives.
  - issue carbon assets when emissions reductions resulting from a project are realized and certified.

### Context: the scale and timing of the transition
- Existing global commitments imply a massive transformation in the structure of global economic activity that must be achieved within a short time frame.
- IPCC (2018) finding cited: by 2030, GHG emissions must be 45 percent lower than their levels in 2010 to limit global warming to 1.5°C.
- The challenge is compounded by the fact that emissions are still increasing. 12

### Implications for prices, investments, and policy complements
- The transition requires changes in relative prices as well as large scale public and private investments.
- It requires widespread adoption of new technologies and practices, changes in consumer behavior, changes in production and land use, agricultural processes and enhanced climate-driven innovation (IPCC 2018).
- To achieve the required transition and spur necessary innovation, relative prices of fossil fuels will have to increase for energy consumers.
- Massive investments in low-emission infrastructure, buildings, R&D and productive capital are required to complement and support relative price changes.
- Relative price changes and investments are complements, not substitutes.
- Economic agents’ ability to change behavior in response to changing relative energy prices depends on availability of alternative energy choices, which in turn depends on supporting infrastructure for delivering and making use of alternative energy (Fay et al. 2015).
- Investments will have to be both public and private in nature.

*Source: wpiea2019185-print-pdf - Box 1. The Social Value of Mitigation Action (SVMA)*

### Section V.

### V.   POLITICAL ECONOMY CONSIDERATIONS

### Political economy and distributional impacts
- The low-carbon transition implies replacement of entire sectors, economic activities and technologies, leading to negative impacts for a wide range of economic actors and various groups (Fay et al. 2015).
- Carbon pricing is likely to result in higher energy prices, with potentially large negative effects on consumers’ access to relatively clean and modern energy (for example for cooking), generating potentially large health issues.
- Within-country incidence:
  - Energy subsidy reform poses deep social and political acceptability issues; successful reforms have typically included compensatory measures.
  - Historical and recent examples: Middle East energy subsidy reforms (with compensatory measures) and the “yellow vest” protests in France illustrate political risks.
  - Carbon pricing may be regressive or progressive depending on design; reuse of carbon tax proceeds is key to political feasibility (IMF 2019a).
- Political viability considerations often justify combining carbon pricing with redistribution or spending components; carbon tax or subsidy reforms with only a revenue component face a much lower probability of success (Fay et al. 2015, Ruggeri Laderchi 2014).

### Between-country impacts and inequality
- Climate change affects between-country inequality:
  - Empirical evidence cited: per capita GDP being 17-31 percent lower for the poorest four deciles of the population-weighted country-level per capita GDP distribution under climate change, implying a ratio between the top and bottom deciles that is 25 percent larger than in a counterfactual scenario without global warming (Diffenbaugh and Burke 2019).

### International coordination, free-riding, and burden-sharing
- Climate change creates a free rider problem among countries because climate benefits accrue mostly to other countries (IMF 2019a, Krogstrup and Obstfeld 2018).
- Lack of international cooperation can incentivize countries to free ride to gain competitive advantage.
- Key normative and policy questions include who should contribute to financing mitigation and how much each actor should contribute (Bénassy-Quéré et al. 2018).
- Proposed institutional and policy responses:
  - Collective agreement on social value to enable calibration of economic policies aimed at closing the gap between private production and social desirability (Aglietta, ed., forthcoming).
  - Climate clubs to limit free riding by harmonizing emissions reduction efforts and sanctioning nonparticipants regionally.

### Political economy design principles for policy packages
- Climate policy packages must be attractive to a majority of voters and avoid impacts perceived as unfair or concentrated on a region, sector or group (Fay et al. 2015).
- In collective action contexts, compensation of losers from climate policy may be needed politically because climate policy gains are diffuse and costs are concentrated and visible (Olson 1977).
- Country circumstances matter for policy design: incidence of carbon pricing on households and firms, and the design of revenue reuse (e.g., reducing distorting taxes, financing low-carbon public investments, or lump-sum redistribution) are central to distributional outcomes and political feasibility.

### Opportunities: co-benefits, growth, development, and poverty reduction
- Well-designed mitigation policies can generate co-benefits and support growth and development:
  - Potential outcomes include a high rate of innovation, more livable cities, robust agriculture, and stronger ecosystems.
  - Unilateral mitigation can create future competitive advantage for a country, partly internalizing the global leakage of mitigation benefits.
- Careful policy design is essential to maximize co-benefits and achieve an inclusive transition (High-Level Commission on Carbon Prices 2017).

_Section V extracted from wpiea2019185-print-pdf - Section V._

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- Pigou, A., 1932. The Economics of Welfare, 4th ed., London, Macmillan.

### Central banking, financial stability, and climate-related financial risks
- Batten, S., 2018. “Climate Change and the Macro-Economy: A Critical Review,” Bank of England Staff Working Paper No. 706.
- Batten, S., R. Sowerbutts, and M. Tanaka, 2016. “Let’s Talk About the Weather: The Impact of Climate Change on Central Banks,” Bank of England Staff Working Paper No. 603.
- Campiglio, E., 2016. “Beyond carbon pricing: The role of banking and monetary policy in financing the transition to a low-carbon economy,” Ecological Economics 121:220–230.
- Campiglio, E., Y. Dafermos, P. Monnin, J. Ryan-Collins, G. Schotten, and M. Tanaka, 2018. “Climate change challenges for central banks and financial regulators,” Nature Climate Change 8:462–468.
- Carney, M., 2015. “Breaking the tragedy of the horizon – climate change and financial Stability,” Speech at Lloyd’s of London, September 29.
- Carney, M., 2019. “A New Horizon,” Speech at the European Commission Conference: A global approach to sustainable finance, Brussels, March 21.
- NGFS, 2019. NGFS First comprehensive report—A call for action: Climate change as a source of financial risk, Network for Greening the Financial System, April.
- NGFS, 2018. First Progress Report, Network for Greening the Financial System, October.
- Bank of England, 2019a. "Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change,” Supervisory Statement SS3/19, April.
- Bank of England, 2019b. “Insurance Stress Test 2019,” June 18.
- Bank of England, 2019c. "New economy, new finance, new Bank: The Bank of England’s response to the van Steenis review on the Future of Finance,” Bank of England Report, June.
- Bank of England, 2019d. "Bank of England to disclose assessment of how it manages climate-related financial risk in the 2019/20 annual report,” Bank of England News Release, April.
- Battiston, S., 2019. “The importance of being forward-looking: managing financial stability in the face of climate risk,” in Greening the financial system: the new frontier, Banque de France Financial Stability Review, June 2019.
- Battiston, S., A. Mandel, I. Monasterolo, F. Schütze, and G. Visentin, 2017. “A climate stress-test of the financial system,” Nature Climate Change 7:283–288.
- Dikau, S., and U. Volz, 2019a. “Central Banking, Climate Change, and Green Finance,” in Handbook of Green Finance, J. D. Sachs, W. T. Woo, N. Yoshino, and F. Taghizadeh-Hesary (eds.), Singapore, Springer.
- Dikau, S., and U. Volz, 2019b. “Central Bank Mandates, Sustainability Objectives and the Promotion of Green Finance,” SOAS Department of Economics, Working Paper No. 222.
- Monnin, P., 2018. “Central banks should reflect climate risks in monetary policy operations,” SUERF Policy Note, Issue No 41.
- IMF, 2018. “Euro Area Policies: Financial System Stability Assessment: Detailed Assessment of Observance—Basel Core Principles for Effective Banking Supervision,” International Monetary Fund, June.
- BCBS, 2016. Guidance on the application of the core principles for effective banking supervision to the regulation and supervision of institutions relevant to financial inclusion, Basel Committee on Banking Supervision, September.

### Green finance, investment platforms, and instruments
- Arezki, R., F. Samama, J. Stiglitz, P. Bolton, and S. Peters, 2016. “From Global Savings Glut to Financing Infrastructure: The Advent of Investment Platforms,” IMF Working Paper No. 16/18, Washington, DC.
- Aglietta, M., E. Espagne, and B. Perrissin Fabert, 2015. “A proposal to finance low-carbon investment in Europe,” La Note D’Analyse No. 4, France Stratégie, Paris.
- Aglietta, M., E. Espagne, and B. Perrissin Fabert, 2016. “Finance climat : le temps de l’action. Sept propositions pour la France et l’Europe,” Terra Nova, December.
- BlackRock Investment Institute, 2015. The price of climate change: Global warming’s impact on portfolios.
- Carbon Tracker, 2013. “Unburnable Carbon 2013: Wasted Capital and Stranded Assets,” Technical Report.
- Flammer, C., 2019. “Green Bonds: Effectiveness and Implications for Public Policy,” NBER Working Paper No. 25950.
- Flaherty, M., A. Gevorkyan, S. Radpour, and W. Semmler, 2017. “Financing Climate Policies through Climate Bonds – A Three Stage Model and Empirics,” Research in International Business and Finance 42:468–79.
- Orlov, S., E. Rovenskaya, J. Puaschunder, and W. Semmler, 2018. “Green Bonds, Transition to a Low-Carbon Economy, and Intergenerational Fairness: Evidence from an Extended DICE Model,” Laxenburg, International Institute for Applied Systems Analysis.
- Engle, N., C. Brandon, S. Hallegatte, P. Hannam, and D. Heine, 2018. “Strategic Use of Climate Finance to Maximize Climate Action: A Guiding Framework,” World Bank, Washington, DC.
- Dasgupta, D., J.-C. Hourcade, and S. Nafo, 2019. A Climate Finance Initiative.

### Modeling, assessment reports, and integrated approaches
- IPCC, 2014. Climate change 2014 Synthesis Report, Intergovernmental Panel on Climate Change, Switzerland.
- IPCC, 2018. Global Warming of 1.5°C, Intergovernmental Panel on Climate Change, Switzerland.
- Nordhaus, W. D., 1994. Managing the Global Commons: The Economics of Climate Change, The MIT Press, Cambridge.
- Nordhaus, W. D., 2014. A Question of Balance: Weighing the Options on Global Warming Policies, Yale University Press, New Haven and London.
- Nordhaus, W. D., 2015. “Climate Clubs: Overcoming Free-Riding in International Climate Policy,” American Economic Review 105(4):1339–1370.
- Meinshausen, M., N. Meinhausen, W. Hare, S. C. B. Raper, K. Frieler, R. Knutti, D. J. Frame, M. R. Allen, 2009. “Greenhouse-gas emission targets for limiting global warming to 2°C,” Nature 458:1158–1162.
- Dietz, S., A. Bowen, C. Dixon, and P. Gradwell, 2016. “‘Climate value at risk’ of global financial assets,” Nature Climate Change 6:676–679.
- Fay, M., S. Hallegatte, A. Vogt-Schilb, J. Rozenberg, U. Narloch, and T. Kerr, 2015. Decarbonizing Development: Three Steps to a Zero-Carbon Future, World Bank Group, Washington, DC.
- Grubb, M., J.-C. Hourcade, and K. Neuhoff, 2014. Planetary Economics: Energy, Climate Change and the Three Domains of Sustainable Development, Routledge, New York.
- Engle, N., C. Brandon, S. Hallegatte, P. Hannam, and D. Heine, 2018. “Strategic Use of Climate Finance to Maximize Climate Action: A Guiding Framework,” World Bank, Washington, DC.

### Institutions, reports, speeches, and policy perspectives
- IMF, 2017. “The Effects of Weather Shocks on Economic Activity,” in World Economic Outlook, Chapter 3, International Monetary Fund, October.
- IMF, 2019a. “Fiscal Policies for Paris Climate Strategies: From Principle to Practice,” IMF Board Paper, International Monetary Fund, March.
- IMF, 2019b. “The Rise of Corporate Market Power and Its Macroeconomic Effects,” World Economic Outlook, Chapter 2, International Monetary Fund, April.
- Lagarde, C., and V. Gaspar, 2019. “Getting Real on Meeting Paris Climate Change Commitments,” IMF Blog, May 3.
- Krogstrup, S., and M. Obstfeld, 2018. “A Planet at Risk Requires Multilateral Action,” IMF Blog, December 3.
- Cœuré, B., 2018. “Monetary policy and climate change,” Speech given at a conference on “Scaling up Green Finance: The Role of Central Banks,” November 8.
- Carney, M., 2015. “Breaking the tragedy of the horizon – climate change and financial Stability,” Speech at Lloyd’s of London, September 29.
- Rey, H., 2019. “Environnement : La myopie coupable des investisseurs,” Les Echos, April.
- Banques/central bank and regulatory items: Banco Central do Brasil, 2011. Circular 3, 547 of July 7, 2011; Banque du Liban, 2010. Intermediate Circular 236; Federal Reserve System, 2018. Federal Reserve Collateral Guidelines, March; Prudential Regulation Authority, 2015. The Impact of Climate Change on the UK Insurance Sector.

*Source: REFERENCES section (excerpt) from wpiea2019185-print-pdf.*

### 11. Retrieved from: https://www.lesechos.fr/amp/1008448

### References cited (excerpt)

### Climate science, impacts, and Earth system dynamics
- Rockström, J., W. Steffen, K. Noone, Å. Persson, F. S. Chapin III, E. F. Lambin, T. M. Lenton, M. Scheffer, C. Folke, H . J. Schellnhuber, and B. Nykvist, 2009. “A safe operating space for humanity,” Nature 461:472–475.
- Steffen, W., J. Rockström, K. Richardson, T. M. Lenton, et.al., 2018. “Trajectories of the Earth System in the Anthropocene,” Proceedings of the National Academy of Sciences of the United States of America 115(33):8252–8259.
- USGCRP, 2017. Climate Science Special Report: Fourth National Climate Assessment, Volume I, U.S. Global Change Research Program, Washington, DC.
- USGCRP, 2018. Impacts, Risks, and Adaptation in the United States: Fourth National Climate Assessment, Volume II, U.S. Global Change Research Program, Washington, DC.
- WWF, 2018. “A Warning Sign From our Planet: Nature Needs Life Support,” 30 October 2018, World Wide Fund for Nature. Retrieved from: https://www.wwf.org.uk/updates/living-planet-report-2018

### Climate policy, decarbonization pathways, and economic impacts
- Sachs, J., 2015. “Climate Change and Intergenerational Well-Being,” in Oxford Handbook of the Macroeconomics of Global Warming, L. Bernard and W. Semmler (eds.), Oxford University Press, Oxford.
- Sachs, J., L. Tubiana, E. Guerin, H. Waisman, C. Mas, M. Colombier, and G. Schmidt-Traub, 2014. Pathways to Deep Decarbonization: 2014 Report, Sustainable Development Solutions Network and Institute for Sustainable Development and International Relations.
- Rozenberg, J., A. Vogt-Schlib, and S. Hallegatte, 2014. “Transition to Clean Capital, Irreversible Investment and Stranded Assets,” Policy Research Working Paper No. 6859, World Bank Group, Washington, DC.
- Vogt-Schilb, A., and S. Hallegatte, 2014. “Marginal abatement cost curves and the optimal timing of mitigation measures,” Energy Policy 66:645–653.
- Tol, R. S. J., 2018. “The Economic Impacts of Climate Change,” Review of Environmental Economics and Policy 12(1):4–25.
- Tol, R. S. J., 2019. “A social cost of carbon for (almost) every country,” Working Paper Series 02-2019, University of Sussex.
- UNFCCC, 2016b. Paris Agreement, United Nations Framework Convention on Climate Change, New York City. Available at: https://unfccc.int/sites/default/files/english_paris_agreement.pdf.
- UNFCCC, 2016a. “Decisions adopted by the Conference of the Parties,” United Nations Framework Convention on Climate Change, New York City. Available at: https://unfccc.int/resource/docs/2015/cop21/eng/10a01.pdf.
- UNEP, 2018a. The Emissions Gap Report, United Nations Environment Program, Nairobi.
- UNEP, 2018b. Inclusive Wealth Report 2018, United Nations Environment Program, Nairobi.
- Rigaud, K. K., A. de Sherbinin, B. Jones, J. Bergmann, V. Clement, K. Ober, J. Schewe, S. Adamo, B. McCusker, S. Heuser, and A. Migley, 2018. “Groundswell: Preparing for Internal Climate Migration,” World Bank, Washington, DC.

### Finance, central banking, financial stability, and green finance
- Volz, U., 2017. “On the Role of Central Banks in Enhancing Green Finance,” Inquiry Working Paper, United Nations Environment Programme.
- Schoenmaker, D., 2019. “Greening Monetary Policy,” Bruegel Working Paper Issue 02.
- Schoenmaker, D., and R. V. Tilburg, 2016. “What role for financial supervisors in addressing environmental risks?” Comparative Economic Studies 58:317–334.
- Scott, M., J. van Huizen, and C. Jung, 2017. “The Bank of England’s Response to Climate Change,” Bank of England Quarterly Bulletin, Q2, 98-109.
- Sowerbutts, R. 2016. “No smog without fire: The financial stability risks around carbon-intensive investments,” Bank of England. Retrieved from: https://bankunderground.co.uk/2016/07/06/no-smog-withoutfire-the-financial-stability-risks-around-carbon-intensiveinvestments/
- Vermeulen, R., E. Schets, M. Lohuis, B. Kölbl, D.-J. Jansen, and W. Heeringa, 2018. “An energy transition risk stress test for the financial system of the Netherlands,” Occasional Studies Volume 16-7, De Nederlandsche Bank.
- Thomä, J., and A. Hilke, 2018. “The Green Supporting Factor: Quantifying the Impact on European Banks and Green Finance,” 2° Investing Initiative, Berlin.
- Villeroy de Galhau, F., 2015. “Climate change: the financial sector and pathways to 2°C,” Speech at COP21 Paris, Banque de France, November 30.
- Tooze, A., 2019. “Why Central Banks Need to Step Up on Global Warming,” Foreign Policy, July. Retrieved from: https://foreignpolicy.com/2019/07/20/why-central-banks-need-to-step-up-on-global-warming/
- van Lerven, F., and J. Ryan-Collins, 2017. “Central Banks, Climate Change and the Transition to a Low Carbon Economy: A Policy Briefing,” New Economics Foundation.
- Ryan-Collins, J., R. Werner, T. Greenham, and G. Bernardo, 2013. “Strategic Quantitative Easing: Stimulating Investment to Rebalance the Economy,” New Economics Foundation.
- World Bank, 2019a, “Finance Ministers Join Forces to Raise Climate Ambition,” Press Release, World Bank Group, Washington, DC, April 13.
- World Bank, 2019b. The Coalition of Finance Ministers for Climate Action: Helsinki Principles, World Bank Group, Washington, DC.
- World Bank, 2019c. “Coalition of Finance Ministers for Climate Action: Explanatory Note to the Coalition Principles,” World Bank Group, Washington, DC.
- Weidmann, J., 2017. “Welcome and Opening Speech,” OMFIF Global Public Investor Symposium on "Green bond issuance and other forms of low-carbon finance," July 13.
- Rogoff, K., 2019. “The Case for a World Carbon Bank,” Project Syndicate, July 8. Retrieved from: https://www.project-syndicate.org/commentary/world-carbon-bank-for-developing-countries-by-kenneth-rogoff-2019-07

### Modeling, uncertainty, discounting, and economic theory relevant to climate risks
- Weitzman, M. L., 1974. “Prices vs. Quantities,” Review of Economic Studies 41(4):477–491.
- Weitzman, M. L, 1998. “Why the far-distant future should be discounted at its lowest possible rate,” Journal of Environmental Economics and Management 36(3):201–208.
- Weitzman, M. L., 2009. “On Modeling and Interpreting the Economics of Catastrophic Climate Change,” Review of Economics and Statistics 91(1):1-19.
- Weitzman, M. L., 2010. “Risk-Adjusted Gamma Discounting,” Journal of Environmental Economics and Management 60:1–13.
- Weitzman, M. L., 2011. “Fat-Tailed Uncertainty in the Economics of Catastrophic Climate Change,” Review of Environmental Economics and Policy 5(2):275–292.
- Schneider, S., 1997. “Integrated assessment modeling of global climate change: Transparent rational tool for policy making or opaque screen hiding value‑laden assumptions?” Environmental Modeling & Assessment 2(4):229–249.
- Solow, R. M., 1956. “A Contribution to the Theory of Economic Growth,” The Quarterly Journal of Economics 70(1):65–94.
- Solow, R. M., 1971. “The Economist’s Approach to Pollution and Its Control,” Science 173(3996):498–503.
- Sargent, T. J., and N. Wallace, 1981. “Some Unpleasant Monetarist Arithmetic,” Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
- Shleifer, A., and R. W. Vishny, 1990. “Equilibrium Short Horizons of Investors and Firms,” American Economic Review Papers and Proceedings 80(2):148–153.
- Shleifer, A., and R. W. Vishny, 1997. “The Limits of Arbitrage,” Journal of Finance 52(1):35–55.
- Stiglitz, J. E., and A. Weiss, 1981. “Credit Rationing in Markets with Imperfect Information,” American Economic Review 71(3):393–410.
- Vayanos, D., and J.-L. Vila, 2009. “A Preferred-Habitat Model of the Term Structure of Interest Rates,” NBER Working Paper No. 15487.
- Svartzman, R., D. Dron, and E. Espagne, 2019. “From Ecological Macroeconomics to a Theory of Endogenous Money for a Finite Planet,” Ecological Economics 162:108–120.

### Industrial policy, subsidies, transitional measures, and political economy
- Rodrik, D., 2014. “Green Industrial Policies,” Oxford Review of Economic Policy 30(3):469–491.
- Rodrik, D., 2019. “Where are we in the economics of industrial policies?” VoxDev. Retrieved from: https://voxdev.org/topic/public-economics/where-are-we-economics-industrial-policies
- Rodrik, D., and C. Sabel, 2019. “Building a Good Jobs Economy,” mimeo, Harvard University.
- Ruggeri Laderchi, C. 2014. “Transitional Policies to Assist the Poor While Phasing out Inefficient Fossil Fuel Subsidies That Encourage Wasteful Consumption,” Contribution by the World Bank to G20 Finance Ministers and Central Bank Governors.
- Sdralevich, C. A., R. Sab, Y. Zouhar, and G. Albertin, 2014. Subsidy Reform in the Middle East and North Africa: Recent Progress and Challenges Ahead, International Monetary Fund, Washington, DC.
- Unruh, G., 2000. “Understanding Carbon Lock-In,” Energy Policy 28(2000):817–30.
- Schmidt, T., 2014. “Low-carbon investment risks and de-risking,” Nature Climate Change (4):237–239.
- Spencer, T., and J. Stevenson, 2013. “EU Low-carbon Investment and New Financial Sector Regulation: What Impacts and What Policy Response,” IDDRI, Sciences Po, Paris.
- Shukla, P. R., S. Dhar, M. Pathak, D. Mahadevia, A. Garg, 2015. Pathways to Deep Decarbonization in India, SDSN - IDDRI.

### Public commentary, speeches, and media pieces addressing climate policy
- Stone, J., 2018. “EU to refuse to sign trade deals with countries that don't ratify Paris climate change accord,” The Independent, 12 February. Retrieved from: https://www.independent.co.uk/news/world/europe/eu-trade-deal-paris-climate-change-accord-agreement-cecilia-malmstr-m-a8206806.html
- Tooze, A., 2019. “Why Central Banks Need to Step Up on Global Warming,” Foreign Policy, July. Retrieved from: https://foreignpolicy.com/2019/07/20/why-central-banks-need-to-step-up-on-global-warming/
- Rogoff, K., 2019. “The Case for a World Carbon Bank,” Project Syndicate, July 8. Retrieved from: https://www.project-syndicate.org/commentary/world-carbon-bank-for-developing-countries-by-kenneth-rogoff-2019-07

*Excerpted reference list from the source content.*

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_Source: https://www.imf.org/-/media/files/publications/wp/2019/wpiea2019185-print-pdf.pdf_