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---

### Executive summary: urgency, projections, and major emitters
- Global mitigation requirement:
  - "Global carbon dioxide (CO2) and other greenhouse gas (GHG) emissions must be cut 25–50 percent below 2018 levels by 2030 to be on track with containing projected warming to 1.5o–2oC above preindustrial levels with rapid reductions to emissions neutrality thereafter."
- Pandemic and near-term trajectory:
  - "Projected global emissions in 2020 are about 7 percent below 2019 levels, but without strong mitigation policies emissions are likely to start rising again in 2021 as economies recover."
- Concentration of baseline emissions:
  - China and the United States account for half of projected baseline CO2 emissions worldwide in 2030; the EU another 7 percent.
- Paris Agreement context:
  - Paris pledges are due for revision ahead of COP 26 in November 2021; "Even if all countries achieved their pledges however, this would only cut global emissions in 2030 by about a third of the reductions" (text truncated in source).

### The Biden Plan: targets, investments, and instruments
- Targets and commitments:
  - Achieve zero net CO2 emissions at the national level by 2050.
  - Achieve zero net emissions from power generation by 2035.
  - Tighten fuel economy standards toward 100 percent deployment of electric light/medium vehicles and greater EV deployment for heavy vehicles; provide 500,000 new public charging outlets by 2030.
  - Reduce building emissions (direct and indirect) 50 percent by 2035; require all new buildings are zero carbon by 2030.
  - Reduce methane leaks from oil and gas extraction.
- Fiscal and investment commitments:
  - Invest $400 billion over ten years in research (electricity storage, small-scale nuclear, green hydrogen, CCUS, direct air capture).
  - Commit $1.7 trillion over ten years in federal funding for mitigation investments (subsidies for renewables and grid expansions, building upgrades).
- Policy tools highlighted:
  - Tax incentives for CCUS and EVs.
  - Border carbon adjustment (BCA) on carbon-intensive imports from countries failing to meet climate obligations.

### Fiscal strategy: rationale and high-level instruments
- Roles and options:
  - Nationwide: carbon tax or emissions trading system (ETS) to provide across-the-board incentives and raise revenues to (i) assist vulnerable groups in transition, (ii) finance green investment, or (iii) lower taxes on labor and capital.
  - Sectoral: feebates for transportation, power, industry, buildings, forestry, and agriculture to be cost effective, avoid fiscal cost, and limit new tax burdens.
  - International: carbon price floor arrangements among large emitters; carbon levy/feebate variants for international aviation and maritime to mobilize R&D funds.
- Policy sequencing:
  - Push multiple fiscal, regulatory, investment, and technology policies in parallel; federal-level approaches are more cost effective, transparent, and administratively simpler than multiple state policies.

### Nationwide carbon pricing: design, impacts, and revenue use
- Implementation options:
  - Carbon tax applied midstream integrated into existing federal gasoline and diesel excises; federal ETS administered by EPA applied downstream or midstream.
- Effectiveness and revenue:
  - A carbon price rising to $50 per ton in 2030 is estimated to deliver about two-thirds of the 2030 emissions reductions for the linear emissions target; a $75 price 85 percent.
  - Carbon prices of $50-75 per ton would raise revenues of 0.7-1.0 percent of GDP in 2030.
- Energy price impacts in the United States (for $50 per ton in 2030):
  - Coal +170 percent, Natural gas +103 percent, Retail electricity +39 percent, Gasoline +15 percent above BAU levels.
- Distributional and industry impacts (United States, $50 carbon price in 2030):
  - Average household burden before revenue use around 1.2 percent of consumption and after revenue recycling around 0.15 percent of consumption.
  - Increase industry production costs on average by 1.5 percent; the most vulnerable 20 percent of industries would face, on average, a 4 percent increase.
- Revenue recycling:
  - Cutting taxes on labor and capital reduces broader economic costs and yields efficiency benefits.
  - Returning revenues as lump-sum dividends yields no efficiency benefit and can make overall costs much higher.
- Competitiveness and BCA revenue implications:
  - BCA with $50 per ton could raise revenues of 0.1 percent of US GDP in 2030; about half from Chinese imports and about 10 percent each from Indian, Mexican and EU imports.
  - 40 percent and 33 percent respectively of BCA revenues would come from metals and chemical products.
  - Design issues (benchmarks, rebates, adjustments, use of revenues) and WTO/legal risks need resolution; delaying implementation should not hold up mitigation action.
- Political economy to enhance acceptability:
  - Balance national pricing and reinforcing sectoral instruments with progressive implementation.
  - Transparent, productive, and equitable use of revenues.
  - Assistance for vulnerable groups (low-income households, displaced workers, vulnerable regions, EITE industries).
  - Support investment and technology policies plus stakeholder consultations and public information.

### Sectoral mitigation instruments: design and illustrative impacts
- General principle:
  - Use price mechanisms (feebates) to contain costs while providing flexibility and revenue neutrality; feebates can reinforce carbon pricing or substitute where pricing is infeasible.

Road transport (19 percent of GHGs)
- Federal context and current taxes:
  - CAFE program targets: previously projected 46.7 mpg in model year 2026 under 5 percent annual increase; reduced to 1.5 percent annual implying 40.4 mpg in 2026.
  - Current federal excises: 18.4 and 24.4 cents per gallon on gasoline and diesel respectively (frozen in nominal terms since 1993).
- Feebate formula and illustration:
  - Fee = CO2 price × {CO2/mile ─ CO2/mile of the new vehicle fleet} × {average lifetime vehicle mileage}.
  - Illustrative $300 per ton CO2 feebate: subsidy of $7,500 for EVs and tax of $1,800 for a vehicle with fuel economy of 30 mpg (CO2 emission rate of 300 grams per mile).
  - Feebate maintains approximate revenue neutrality as average fleet emission rate updates over time.

Power generation (29 percent of GHGs)
- Feebate formula and illustration:
  - Fee = CO2 price × {CO2/kWh ─ industry-wide average CO2/kWh} × electricity generation.
  - Illustrative $50 per ton feebate: subsidy of 2.2 cents per kWh for zero-carbon generation plants; fee of 2.8 cents per kWh for coal plants; natural gas plants receive a small initial subsidy (0.2 cents per kWh) that would decline and become a fee as industry average emission rate falls.

Industry (17 percent of GHGs)
- Feebate formula:
  - Fee = CO2 price × {CO2/production ─ industry-wide average CO2/production} × production.
- Feebates yield lower burden on firms than an economy-wide carbon price and can reduce pressure for BCAs.
- Annex comparisons show steel and cement impacts are smaller under feebates.

Buildings (12 percent of GHGs)
- Product feebates:
  - Fee = CO2 price × CO2 per unit of energy × {energy consumption per unit ─ industry-wide energy consumption per unit} × number of units.
- Additional measures: appliance efficiency standards, tax credits for energy efficiency upgrades, building codes at state level, tax-subsidy schemes to shift from natural gas/oil heating to electric heat pumps.

Fugitive emissions (5 percent of GHGs)
- 2018 US fugitive emissions composition: natural gas 57 percent, oil 25 percent, coal 18 percent of fugitive emissions.
- Pricing approach:
  - Fuel suppliers taxed based on default leakage rates with rebates for firms demonstrating lower leakage through monitoring.
  - Illustration: emissions tax of $100 per ton on fugitive emissions applies charges approximately $2 per barrel of oil, $0.4 per thousand cubic feet of natural gas, and $8 per ton of coal under default rates — equivalent to about 4, 11, and 20 percent of current supply prices respectively.
  - Studies suggest this level of pricing would lower emission rates by around 60 percent.

Forestry
- Empirical sequestration and feebate design:
  - Forested land can sequester up to about 3 tons of CO2 per hectare a year during the growth cycle.
  - Potential aggregate sequestration cited: 0.2 billion tons a year by fully stocking forestland.
  - Feebates apply fees to landowners that reduce stored carbon relative to baseline and rebates to those that increase stored carbon.
  - Feebates should involve rental payments (CO2 price times the interest rate) on an annualized basis; partial exemptions for timber harvested for wood products may be warranted.
- Illustrative land-value impact:
  - Fully stocking a hectare that previously had no trees would increase the land value by about $2,000 under a $50 feebate (about 25 percent of current average agricultural real estate values).
  - Calculation assumptions: planting sequesters an additional 3 tons of CO2 each year over a 20-year growth cycle with payments discounted at 5 percent. Agricultural land values equivalent to $7,500 per hectare in 2019.
- Administration: fees and rebates could be administered based on the registry of landowners used for business tax collection; inventories estimated via satellite, aerial photography, and ground sampling.

Agriculture (9 percent of GHGs)
- Emissions composition:
  - Enteric fermentation (livestock) 30 percent of US agricultural GHGs; manure nitrous oxide 13 percent; crops for human and animal consumption 55 percent (soil nitrous oxide).
- Policy design considerations:
  - Pricing based on proxy estimates with default emissions factors; direct farm-level monitoring impractical.
  - Emissions taxes likely to face strong political opposition and risk leakage.
  - Feebate approaches merit study (e.g., pivot points by producer type); alternative is emissions fee with revenue recycled proportional to value of output.
- Illustrative $50 per ton fee impacts:
  - $50 per ton would amount to a charge of about 5 percent on average farm income.
  - With revenue returned in subsidies proportional to value product, on net modest subsidies for plant-based and poultry farming while taxing beef cattle at 9 percent of output value.

### International instruments: ICPF and transportation fuels
- International carbon price floor (ICPF) rationale:
  - Efficient, transparent parameter to scale mitigation beyond Paris pledges; addresses competitiveness and free rider concerns; can be designed equitably for income differences; accommodates different national approaches achieving equivalent outcomes.
- Illustrative ICPF scenario outcomes (exact figures preserved):
  - If the United States, China, and India were subject to price floors of $75, $50, and $25 per ton respectively in 2030 this would cut G20 emissions about 28 percent below baseline levels, which is just consistent with the 2oC target. Including all G20 countries would increase G20 emissions reductions to about 30 percent.
- Table 5: % reduction in G20 CO2 emissions below baseline, 2030 (IMF staff calculations)
  - Required for 2o (1.5) target: 28 (55)
  - Only China, India, and US implement their Paris pledges: 4.1
  - All G20 countries implement their Paris pledges and none join an ICPF: 10.4
  - China, India, US join a $50/25 price floor: 22.6
  - All G20 countries join a $50/25 price floor: 23.4
  - China, India, US join a $50 price floor: 28.6
  - All G20 countries join a $50 price floor: 29.9
  - China, India, US join a $75/50 price floor: 29.5
  - All G20 countries join a $75/50 price floor: 31.1
  - China, India, US join a $75/50/25 price floor: 28.4
  - All G20 countries join a $75/50/25 price floor: 29.8
- Implementation sequencing:
  - Initial focus on power and industry sectors; over time transition to countries’ ‘effective’ carbon prices accounting for incomplete coverage and pre-existing energy taxes.

Maritime and aviation
- Maritime:
  - International maritime CO2 currently accounts for 2 percent of global CO2 emissions.
  - IMO pledge: 50 percent CO2 reduction below 2008 levels by 2050; achieving this requires development and deployment of zero-emission vessels (ZEVs).
  - Carbon levy in the ballpark of $75 per ton would promote ZEV deployment and would raise tens of billions of dollars a year.
  - Feebate variant: tax difference between operator CO2/ton-km and pivot point CO2/ton-km multiplied by ton-km; pivot point can be chosen to meet revenue target.
  - Figure 12 note: CO2 price rises progressively to $75 per ton by 2030.
- Aviation:
  - ICAO pledge to stabilize industry emissions at current levels from 2026 via offsets; current offset price is below $1 per ton of CO2.
  - Deeper decarbonization requires more ambitious targets and a more robust price signal than current offset markets; a carbon levy would also reduce demand for flying and promote clean fuels.

### Economy-wide comparative figures and selected carbon prices (preserve values)
- US GHG breakdown: Fossil fuel CO2 78%; Industrial processes 6%; Fugitive 5%; Agriculture 9%; Waste 2%.
- Sector shares of fossil fuel CO2: Power 38%; Industry 22%; Transport 24%; Buildings 15%; Other 1%.
- Power generation by fuel type: Coal 24.1%; Nat. gas 28.8%; Oil 0.8%; Hydro 5.6%; Other renewable 23.8%; Nuclear 16.0%; Biomass 0.9%.
- Selected carbon pricing schemes, 2020 (price, $/Ton CO2):
  - Chile 5; Colombia 4; Denmark 26; Finland 68; France 49; Ireland 28; Japan 3; Mexico <1-2; Norway 3-53; Portugal 26; S. Africa 7; Sweden 119; Switzerland 99; California ETS 15.3; EU 35; Korea 33; New Zealand 14; Regional US 5; Canada price floor 22; UK price floor 22.
- Table 3 energy price impacts of $50 per ton carbon price, selected countries 2030 — US row:
  - Coal BAU price $2.9/GJ, % increase 170
  - Natural gas BAU price $2.6/GJ, % increase 103
  - Electricity BAU price $0.08/kWh, % increase 39
  - Gasoline BAU price $0.7/liter, % increase 15

### Conclusions and policy implications
- Multiple, complementary mitigation instruments are appropriate given uncertainties over effects and feasibility of individual instruments.
- Fiscal policies (carbon pricing, feebates) can efficiently enhance effectiveness and credibility of packages that include regulatory, infrastructure, and technology policies.
- Acceptability increases with revenue-neutral designs (feebates) or using revenues to fund the green transition or reduce labor taxes.
- The United States has a critical, urgent role in promoting international coordination; coordinated action via a carbon price floor can facilitate needed scaling up.

### Annex I — Spreadsheet tool for analyzing carbon pricing
- Coverage and purpose:
  - IMF staff developed a spreadsheet model for 150 countries projecting fossil fuel CO2 emissions and assessing emissions, fiscal, economic, public health and other impacts of carbon pricing and other mitigation policies.
- Inputs and structure:
  - Starts with fuel use by power, industrial, transport, and household sectors; projects forward using GDP projections, income and own-price elasticities, assumptions about technological change, and future international energy prices.
  - Prices projected using 2020 prices (50 percent weighting) and an average of IEA, US EIA, IMF and World Bank projections (50 percent weighting).
  - Current fuel taxes and carbon pricing held constant in real terms in baseline.
- Capabilities and limitations:
  - Flexible for many policies and sensitivity analysis; transparent across countries.
  - Limitations: does not explicitly incorporate gradual turnover of energy capital, abstracts from mitigation beyond BAU-induced actions, may not capture non-linear technological adoption or upward-sloping fuel supply curves, and does not account for some general equilibrium effects or simultaneous mitigation impacts on international fuel prices.

### Annex II — Miscellaneous emissions sources (highlights)
- Waste-site methane:
  - Emissions arise from bacterial decomposition; landfills predominantly public; mitigation responses straightforward to specify in regulation (capture for flaring, energy use, divert recycling).
  - EPA finalized standards in 2016 for new/modified/reconstructed municipal solid waste landfills (requirements postponed in 2019).
- Hydrofluorocarbons (HFCs):
  - HFCs have warming potentials hundreds of times higher than CO2.
  - 2016 Kigali Agreement requires advanced countries to reduce HFCs 85 percent (relative to 2011-2013 levels) by 2036 (United States has not yet ratified).
  - Recommendation: phase in a tax on HFCs proportional to global warming potential; international examples have implemented taxes equivalent to around US$5-40 per tonne of CO2 equivalent.

### Annex III — Burden of carbon mitigation policies on industries (highlights)
- Conceptual decomposition:
  - Burden from carbon mitigation comprises efficiency cost (resource cost of cleaner production) and transfer payment (payments to government for allowances).
  - Feebates reduce emissions intensity without charging for remaining emissions; to match emissions reductions, feebates require a higher price on emissions but eliminate transfer payments, often yielding a lower overall burden.
- Steel illustrative impacts (price $50/ton CO2):
  - Traditional integrated steel: about two tons CO2 per ton steel.
  - Alternative technologies: about 0.3–0.4 tons CO2 per ton steel.
  - Price impacts: integrated production increase in cost about $100/ton of steel through transfer payment; alternative technologies increase about $20/ton.
  - Under a feebate (industry average 1 ton CO2/ton steel): integrated production cost increase $50/ton; alternative technologies receive subsidy about $30/ton.
- Cement illustrative impacts (price $50/ton CO2):
  - Typical production: about 1 ton CO2 per ton cement; process emissions about 70 percent of these emissions.
  - Post-combustion CCUS reduces emissions about 55 percent while increasing capital costs about 25 percent.
  - Oxy-combustion reduces emissions about 85 percent while increasing capital costs about 100 percent.
  - Price impacts: traditional production increase about $50 per ton (about 40 percent); more efficient plants increase $30 per ton; CCUS-fitted plants increase $8–25 per ton through transfer payment.
  - Under a feebate with price $50/ton: traditional production cost increase $5 per ton; more efficient plants receive subsidy $10 per ton; CCUS-fitted plants receive subsidy $18–35 per ton.

*Italic: IMF working paper content excerpt (wpiea2021057-print-pdf).*

### REFERENCES _____________________________________________________________________________________________35

### REFERENCES

### Figures and Tables Inventory
- Figures listed: 1 through 12 and A1, including:
  - "Global Fossil Fuel CO2 Emissions Trends"
  - "Country Shares of Baseline CO2 Emissions 2030, percent"
  - "Breakdown of GHG Emissions, 2018"
  - "Emissions Trends and Targets"
  - "CO2 Reductions for Pledges/from Pricing"
  - "Economic Efficiency Costs of Alternative Mitigation Instruments for the United"
  - "Burden of $50 Carbon Price on Household Income Quintiles in 2030 Before Revenue Use, Selected Countries"
  - "Burden of a $50/Ton Carbon Price on Industries in 2030 Before Pass Through, Selected Countries (Percent)"
  - "Revenues Raised from $50 BCA on US EITE Imports, 2030"
  - "CO2-Based Components of Vehicle Taxes"
  - "Illustrative Feebate for Power Sector"
  - "Estimated Reductions in Maritime Emissions from $75 Carbon Price"
  - "A1. Burden of Carbon Mitigation Policies on Industry"

- Tables listed: 1 through 5, including:
  - "Summary of Fiscal Mitigation Instruments to Help Implement US Climate Goals"
  - "Selected Carbon Pricing Schemes, 2020"
  - "Energy Price Impacts of $50 per ton Carbon Price, Selected Countries 2030"
  - "Impact of Agricultural Emissions Fees, 2018"
  - "G20 CO2 Outcomes under Alternative ICP F Scenarios"

- Annexes listed: I through III:
  - I. Spreadsheet Tool for Analyzing Carbon Pricing
  - II. Miscellaneous Emissions Sources
  - III. Burden of Carbon Mitigation Policies on Industries

### Executive summary of introductory findings and projections
- Global mitigation urgency:
  - "Global carbon dioxide (CO2) and other greenhouse gas (GHG) emissions must be cut 25–50 percent below 2018 levels by 2030 to be on track with containing projected warming to 1.5o–2oC above preindustrial levels with rapid reductions to emissions neutrality thereafter."
- Pandemic effects and near-term trajectory:
  - "Projected global emissions in 2020 are about 7 percent below 2019 levels, but without strong mitigation policies emissions are likely to start rising again in 2021 as economies recover."
  - The pandemic increases urgency to ensure new investment is efficiently allocated to low-carbon technologies.
- Role of major emitter countries:
  - "China and the United States account for half of projected baseline CO2 emissions (i.e., emissions in the absence of stronger mitigation policy) worldwide in 2030, and the EU another 7 percent."
- International policy context:
  - "The 2015 Paris Agreement is the centerpiece of the international community’s efforts to address climate change. 195 countries signed the agreement, with almost all submitting pledges to reduce GHGs within their borders—these pledges are due for revision ahead of COP 26 in Glasgow, November 2021."
  - "Even if all countries achieved their pledges however, this would only cut global emissions in 2030 by about a third of the reductions" (text truncated in source).

### Policy instruments and analytical focus highlighted
- Emphasis on carbon pricing or similar measures to shift investment toward low-carbon technologies.
- Specific illustrative policy parameters referenced in figures/tables:
  - Carbon price levels: $50 per ton and $75 per ton appear as analytical benchmarks across figures and tables.
  - Distributional analyses include impacts "on Household Income Quintiles in 2030 Before Revenue Use" and "on Industries in 2030 Before Pass Through, Selected Countries (Percent)."
  - Border Carbon Adjustments (BCA) and EITE (energy-intensive, trade-exposed) import revenue implications: "Revenues Raised from $50 BCA on US EITE Imports, 2030."
  - Sectoral instruments referenced: vehicle taxes with "CO2-Based Components," feebates for power sector, agricultural emissions fees (2018), and maritime emissions pricing.

### Analytical tools and annex coverage
- Annex I: Spreadsheet Tool for Analyzing Carbon Pricing — indicating availability of a quantitative tool to assess carbon pricing impacts.
- Annex II: Miscellaneous Emissions Sources — covering additional emission categories.
- Annex III: Burden of Carbon Mitigation Policies on Industries — detailed industry burden assessment.

*Source: https://www.imf.org/-/media/files/publications/wp/2021/english/wpiea2021057-print-pdf.pdf*

### 1.5 degrees

### 1.5 degrees

### Overview and climate rationale
- United States GHG emissions (excluding land-use) were 6.7 billion tons in 2018, with 78 percent from fossil fuel CO2.
- By sector, power generation accounted for 38 percent of fossil fuel CO2 emissions, industry 22 percent, transport 24 percent, and buildings (direct fuel combustion in residential and commercial) 15 percent.
- By fuel type, coal accounted for 26 percent of fossil fuel CO2 emissions, oil 42 percent, and natural gas 32 percent.
- If unabated, global climate change could be permanently lowering annual US GDP by several percent by 2050.
- Determined US actions would significantly affect global emissions and help catalyze more ambitious mitigation in other countries through leadership and alleviating competitiveness concerns.

### The Biden Plan: targets and investment commitments
- Achieve zero net CO2 emissions at the national level by 2050.
- Achieve zero net emissions from power generation by 2035.
- Tighten fuel economy standards to ultimately promote 100 percent deployment of electric vehicles for light/medium vehicles and greater EV deployment for heavy vehicles; 500,000 new public charging outlets will be provided by 2030.
- Reduce direct (from gas and oil) and indirect (from electricity) building emissions 50 percent by 2035; require all new buildings are zero carbon by 2030.
- Reduce methane leaks from oil and gas extraction.
- Introduce or scale up tax incentives for CCUS and EVs.
- Impose a border carbon adjustment (BCA) on the carbon content of carbon-intensive imports from countries failing to meet climate obligations.
- Invest $400 billion over ten years in research for critical technologies (electricity storage, small-scale nuclear, green hydrogen, CCUS, direct air capture).
- Commit $1.7 trillion over ten years in federal funding for mitigation investments (subsidies for renewables and grid expansions, building upgrades).

### Fiscal strategy: rationale and high-level instruments
- Fiscal policies can be implemented at the national, sectoral, and international level to complement regulatory and investment approaches without a fiscal cost if designed appropriately.
- Nationwide: carbon tax or emissions trading system (ETS) to provide across-the-board incentives and raise revenues to (i) assist vulnerable groups in transition, (ii) finance green investment, or (iii) lower taxes on labor and capital.
- Sectoral reinforcement: feebates applied to transportation, power, industry, buildings, forestry, and agriculture to be cost effective, avoid fiscal cost, and limit new tax burdens on average households/firms.
- International: carbon price floor arrangements among large emitters and carbon levy/feebate variants for international aviation and maritime to mobilize R&D funds while limiting burdens on industries and consumers.
- Policy sequencing: push multiple fiscal, regulatory, investment, and technology policies given legal/political uncertainties; federal-level approaches are more cost effective, transparent, and administratively simpler than multiple state policies.

### Nationwide carbon pricing: design, impacts, and acceptability
- Implementation options: carbon tax applied midstream integrated into existing federal gasoline and diesel excises; federal ETS administered by EPA applied downstream or midstream.
- A carbon price rising to $50 per ton in 2030 is estimated to deliver about two-thirds of the 2030 emissions reductions for the linear emissions target, and a $75 price 85 percent.
- Carbon prices of $50-75 per ton would raise revenues of 0.7-1.0 percent of GDP in 2030.
- Energy price impacts of a $50 per ton carbon price in 2030 for the United States: coal +170 percent, natural gas +103 percent, retail electricity +39 percent, gasoline +15 percent above BAU levels.
- A $50 carbon price in 2030 would:
  - Impose an average household burden before revenue use around 1.2 percent of consumption and after revenue recycling around 0.15 percent of consumption (United States).
  - Increase industry production costs on average by 1.5 percent; the most vulnerable 20 percent of industries would face, on average, a 4 percent increase.
- Revenue recycling matters:
  - Using revenues to cut taxes on labor and capital reduces broader economic costs and yields efficiency benefits.
  - Returning revenues as lump-sum dividends yields no efficiency benefit and can make overall costs much higher.
- Competitiveness and leakage:
  - BCA with $50 per ton could raise revenues of 0.1 percent of US GDP in 2030; about half from Chinese imports and about 10 percent each from Indian, Mexican and EU imports.
  - 40 percent and 33 percent respectively of BCA revenues would come from metals and chemical products.
  - Design issues (benchmarks, rebates for low-carbon exporters, adjustments for partner policies, use of revenues, rebates for exports) and WTO/legal risks need resolution; delaying implementation should not hold up mitigation action.
- Political economy: a comprehensive strategy to enhance acceptability should include:
  - Balance between national pricing and reinforcing sectoral instruments with progressive implementation;
  - Transparent, productive, and equitable use of revenues;
  - Assistance for vulnerable groups (low-income households, displaced workers, vulnerable regions, EITE industries);
  - Supporting investment and technology policies;
  - Extensive stakeholder consultations and public information.

### Sectoral mitigation instruments (design and illustrative impacts)
- General role: reinforce carbon pricing or substitute where pricing is infeasible; rely on price mechanisms (feebates) to contain costs while providing flexibility and revenue neutrality.

Road transport (19 percent of GHGs)
- Federal context: CAFE program targets (previously projected 46.7 mpg in model year 2026 under 5 percent annual increase; reduced to 1.5 percent annual implying 40.4 mpg in 2026).
- Current federal excises: 18.4 and 24.4 cents per gallon on gasoline and diesel respectively (frozen in nominal terms since 1993).
- Feebate proposal:
  - Fee = CO2 price × {CO2/mile ─ CO2/mile of the new vehicle fleet} × {average lifetime vehicle mileage}.
  - Illustrative $300 per ton CO2 feebate: subsidy of $7,500 for EVs and tax of $1,800 for a vehicle with fuel economy of 30 mpg (CO2 emission rate of 300 grams per mile).
  - Feebate maintains approximate revenue neutrality as average fleet emission rate updates over time.

Power generation (29 percent of GHGs)
- Power sector relatively responsive to pricing due to coal and natural gas use and availability of low-carbon alternatives.
- Federal feebate formula:
  - Fee = CO2 price × {CO2/kWh ─ industry-wide average CO2/kWh} × electricity generation.
- Illustrative $50 per ton feebate:
  - Subsidy of 2.2 cents per kWh for zero-carbon generation plants.
  - Fee of 2.8 cents per kWh for coal plants.
  - Natural gas plants would receive a small initial subsidy (0.2 cents per kWh) that would decline and become a fee as industry average emission rate falls.

Industry (17 percent of GHGs)
- Competitiveness concerns for EITI industries; typical responses elsewhere include free allowance allocations or thresholds.
- Industry feebates:
  - Fee = CO2 price × {CO2/production ─ industry-wide average CO2/production} × production.
  - Feebates yield lower burden on firms than an economy-wide carbon price and can reduce pressure for BCAs.
- Annex comparisons (referenced) illustrate impacts for steel and cement showing smaller production cost impacts under feebates.

Buildings (12 percent of GHGs)
- Federal role: appliance efficiency standards, tax credits for energy efficiency upgrades, building codes implemented at state level.
- Product feebates:
  - Fee = CO2 price × CO2 per unit of energy × {energy consumption per unit ─ industry-wide energy consumption per unit} × number of units.
- Additional measures: tax-subsidy schemes to shift from natural gas/oil heating to electric heat pumps; feebates to promote efficient appliances and lighting.

Fugitive emissions (5 percent of GHGs)
- 2018 US fugitive emissions: natural gas 57 percent, oil 25 percent, coal 18 percent of fugitive emissions.
- Mitigation options: reinjection/storage, on-site/regional power generation, compression/liquification for sale, improved infrastructure maintenance.
- Pricing approach:
  - Fuel suppliers taxed based on default leakage rates with rebates for firms demonstrating lower leakage through monitoring.
  - Illustration: emissions tax of $100 per ton on fugitive emissions applies charges approximately $2 per barrel of oil, $0.4 per thousand cubic feet of natural gas, and $8 per ton of coal under default rates — equivalent to about 4, 11, and 20 percent of current supply prices respectively.
  - Studies suggest this level of pricing would lower emission rates by around 60 percent.

Forestry
- Federal policies should promote afforestation, reducing deforestation, and enhanced management of tree farms (larger trees, longer rotations, fertilizing, thinning).
- Historical US forestry net sink: 0.6-0.8 billion tons of CO2 per year.
- Potential to scale up storage rate noted (text cut off in source).

### Illustrative economy-wide and comparative figures
- US GHG sources breakdown: Fossil fuel CO2 78%; Industrial processes 6%; Fugitive 5%; Agriculture 9%; Waste 2%.
- Sector share of fossil fuel CO2: Power 38%; Industry 22%; Transport 24%; Buildings 15%; Other 1%.
- Power generation by fuel type (figures shown): Coal 24.1%; Nat. gas 28.8%; Oil 0.8%; Hydro 5.6%; Other renewable 23.8%; Nuclear 16.0%; Biomass 0.9%.
- Selected carbon pricing schemes, 2020 (price, $/Ton CO2 examples from table): Chile 5; Colombia 4; Denmark 26; Finland 68; France 49; Ireland 28; Japan 3; Mexico <1-2; Norway 3-53; Portugal 26; S. Africa 7; Sweden 119; Switzerland 99; California ETS 15.3; EU 35; Korea 33; New Zealand 14; Regional US 5; Canada price floor 22; UK price floor 22.
- Table 3 energy price impacts of $50 per ton carbon price, selected countries 2030 — BAU price and percent increases (selected US row): Coal BAU price $2.9/GJ, % increase 170; Natural gas BAU price $2.6/GJ, % increase 103; Electricity BAU price $0.08/kWh, % increase 39; Gasoline BAU price $0.7/liter, % increase 15.

### Recommended federal and international instruments (summary)
- Economy-wide: Carbon tax or ETS with price rising to $75 per ton by 2030 (this would cut emissions about 25 percent). Revenues might be used for: (i) supportive investment; (ii) lowering taxes on work effort and investment; (iii) assisting vulnerable groups.
- Power: Introduce feebate: sliding fees/rebates on generators by CO2/kWh.
- Road transport: Feebates for light-duty vehicles (generalize gas guzzler tax, EV tax credits).
- Industry: Feebates on firms by emissions per unit of production.
- Buildings: Tax-subsidy schemes promoting shift to electric heat pumps and feebates for appliances.
- Forestry: Nationwide feebate applied to landowners equal to annualized CO2 price times change in forest carbon storage relative to baseline year.
- Agriculture: Charge on farm-level emissions with revenues returned proportional to value of output.
- Fugitive emissions: Tax methane and CO2 from extractives based on default leakage rate with rebates for validated lower rates.
- Border carbon adjustment: Facilitate mitigation at home and promote pricing overseas but resolve design issues; should not hold up mitigation.
- International mitigation: Promote a carbon price floor among key emitters with stricter requirements for advanced countries and technology assistance for low-income countries.
- International transportation fuels: Promote a global carbon levy for deploying clean technologies and raising R&D funds; feebate variant may raise less revenue and be less efficient but more acceptable.

*Source: wpiea2021057-print-pdf - 1.5 degrees*

### 0.2 billion tons a year by fully  stocking forestland—forested land in the United  States can

### wpiea2021057-print-pdf - 0.2 billion tons a year by fully stocking forestland—forested land in the United States can

### Forest carbon sequestration and feebate design
- Key empirical points
  - Forested land in the United States can sequester up to about 3 tons of CO2 per hectare a year during the growth cycle.
  - Potential aggregate sequestration cited: 0.2 billion tons a year by fully stocking forestland.
  - Currently there are no federal policies that primarily target forest carbon sequestration.
- Feebate mechanism described
  - Feebates apply fees to landowners at the agricultural/forestry boundary that reduce stored carbon relative to a baseline level and rebates to landowners that increase stored carbon.
  - Fee formula (conceptual): {CO2 rental price} × {carbon storage on their land in a baseline year ─ stored carbon in the current year}.
  - Feebates can be designed to be revenue-neutral in expected terms through appropriate scaling of the baseline over time.
  - Feebates should involve rental payments—on an annualized basis, a CO2 price times the interest rate—rather than large one-off payments.
  - Partial exemptions from fees may be warranted for timber harvested for wood products because carbon emissions will be delayed.
- Illustrative economic impacts (preserve numeric values)
  - For illustration, fully stocking a hectare that previously had no trees would increase the land value by about $2,000 under a $50 feebate (about 25 percent of current average agricultural real estate values).
  - Calculation assumptions: the planting sequesters an additional 3 tons of CO2 each year over a 20-year growth cycle with payments discounted at 5 percent. Agricultural land values were equivalent to $7,500 per hectare in 2019.
- Implementation notes
  - Fees and rebates could be administered based on the registry of landowners used for business tax collection.
  - Forest carbon inventories are estimated through satellite monitoring, aerial photography, and on-the-ground tree sampling.

### Agriculture emissions and policy options
- Emissions composition and mitigation channels
  - Agriculture accounts for 9 percent of GHGs.
  - Reducing livestock herds (particularly beef and dairy cattle) reduces methane releases from enteric fermentation (30 percent of US agricultural GHGs) and nitrous oxide emissions from manure (13 percent).
  - Reducing crops for human and animal consumption (55 percent) reduces nitrous oxide emissions from soils, especially where there is intensive chemical fertilizer use.
  - Consumer dietary shifts from meat and dairy to plant-based and poultry diets would reinforce mitigation incentives.
  - Currently, a voluntary approach is used to promote emissions reductions from US agriculture.
- Feebate and fee design considerations
  - Pricing could be based on proxy estimates of emissions using farm-level data and default emissions factors because direct monitoring at farm level is currently impractical.
  - Emissions taxes would likely face strong political opposition and could cause significant emissions leakage by reducing international competitiveness of US farmers.
  - Feebate approaches merit study, perhaps based on GHG equivalent emission rates per hectare or nutritional value; feebates could be disaggregated with different pivot points for beef producers and crop producers.
  - Alternative: combine an emissions fee with revenues recycled to the agricultural sector as a rebate proportional to the value of farm output.
- Illustrative impacts of an emissions fee
  - An emissions fee of $50 per ton would amount to a charge of about 5 percent on average farm income.
  - With revenue returned in subsidies proportional to value product, on net the scheme would provide modest subsidies for plant-based and poultry farming while taxing beef cattle at 9 percent of output value.
- Data and references
  - Emissions shares are from CAT (2020). Voluntary program reference: USDA (2016). Emissions estimation guidance: IPCC (2019b).

### Fiscal policies for international mitigation — International carbon price floor (ICPF)
- Rationale and design principles
  - A complementary international mechanism is needed to scale up mitigation beyond Paris pledges; the arrangement should be limited to a few key countries and a small number of transparent parameters.
  - Focus on a carbon price floor because: (i) it is an efficient and easily understood parameter; (ii) it addresses competitiveness and free rider concerns via simultaneous increases in effective carbon prices; (iii) it can be designed equitably with stricter requirements for higher income countries or assistance for lower income countries; (iv) it can accommodate different national approaches that achieve equivalent emissions outcomes.
- Illustrative ICPF scenario outcomes (preserve numeric values exactly)
  - If the United States, China, and India were subject to price floors of $75, $50, and $25 per ton respectively in 2030 this would cut G20 emissions about 28 percent below baseline levels, which is just consistent with the 2oC target. Including all G20 countries would increase G20 emissions reductions to about 30 percent.
- Table 5: % reduction in G20 CO2 emissions below baseline, 2030 (IMF staff calculations)
  - Required for 2o (1.5) target: 28 (55)
  - Only China, India, and US implement their Paris pledges: 4.1
  - All G20 countries implement their Paris pledges and none join an ICPF: 10.4
  - China, India, US join a $50/25 price floor: 22.6
  - All G20 countries join a $50/25 price floor: 23.4
  - China, India, US join a $50 price floor: 28.6
  - All G20 countries join a $50 price floor: 29.9
  - China, India, US join a $75/50 price floor: 29.5
  - All G20 countries join a $75/50 price floor: 31.1
  - China, India, US join a $75/50/25 price floor: 28.4
  - All G20 countries join a $75/50/25 price floor: 29.8
- Implementation sequencing and coverage
  - Initial focus could be on power and industry sectors because these emissions are most responsive to pricing, most ETSs are limited to these sectors, and fuels in these sectors were largely untaxed historically.
  - Over time the focus could transition to countries’ ‘effective’ carbon prices that account for incomplete coverage of formal schemes and changes in pre-existing energy taxes.

### International transportation fuels — maritime and aviation
- Maritime sector
  - International maritime CO2 currently accounts for 2 percent of global CO2 emissions.
  - Achieving the International Maritime Organization pledge of 50 percent CO2 reduction below 2008 levels by 2050 will require development and deployment of zero-emission vessels (ZEVs).
  - A carbon levy with price needed to promote deployment of ZEVs as fleet turns over is in the ballpark of $75 per ton; such a levy would raise tens of billions of dollars a year.
  - Alternative: feebate variant taxing ship operators on the difference between their CO2 emissions per ton-km and a pivot point CO2 emission rate per ton-km, multiplied by total ton-km, allowing a pivot point chosen to meet a revenue target.
  - Figure 12 note: CO2 price rises progressively to $75 per ton by 2030. (Chart shows feebate with and without ZEVs and percent reductions from 2008 through 2050.)
- Aviation sector
  - ICAO has pledged to stabilize industry emissions at current levels from 2026 onwards via a scheme where operators purchase international emissions offsets for excess emissions above a benchmark.
  - Current offset market: the current offset price is below $1 per ton of CO2.
  - More ambitious emissions targets and a more robust price signal than current offset markets will be required for deep decarbonization; a carbon levy would also reduce demand for flying in addition to promoting clean fuels.

### Conclusions and policy implications
- Multiple, complementary mitigation instruments are appropriate given uncertainties over effects and feasibility of individual instruments.
- Novel fiscal policies can efficiently enhance effectiveness and credibility of a package that also includes regulatory, infrastructure, and technology policies.
- Acceptability of fiscal instruments can be increased by keeping them revenue neutral (feebates) or using revenues to fund the green transition or broader tax reductions on labor.
- The United States has a critical, urgent role in promoting international coordination to scale up mitigation, with coordinated action through a carbon price floor arrangement helping to facilitate needed scaling up.

### Annex — Spreadsheet tool for analyzing carbon pricing
- Tool coverage and purpose
  - IMF staff developed a spreadsheet model providing, on a country-by-country basis for 150 countries, projections of fossil fuel CO2 emissions and assessments of emissions, fiscal, economic, public health and other impacts of carbon pricing and other mitigation policies.
- Model inputs and structure
  - Starts with use of fossil fuels and other fuels by the power, industrial, transport, and household sectors and then projects fuel use forward using:
    - Projections of GDP;
    - Assumptions about the income elasticity of demand and own-price elasticity of demand for electricity and other fuel products;
    - Assumptions about the rate of technological change that affects energy efficiency and the productivity of different energy sources;
    - Changes in future international energy prices.
  - Prices are projected forward using a combination of 2020 prices (50 percent weighting) and an average of IEA, US Energy Information Administration, IMF and World Bank projections for international energy prices (50 percent weighting).
  - Current fuel taxes and carbon pricing are held constant in real terms in baseline projections.
- Capabilities and limitations
  - Flexible in incorporating many countries and a wide range of mitigation policies (comprehensive/partial carbon pricing, taxes, feebates, efficiency policies) and conducting sensitivity analysis on parameters and policy stringency.
  - Transparent: differences across policies and countries can be explained in basic economic terms familiar to policymakers.
  - Limitations include: does not explicitly incorporate gradual turnover of energy capital, abstracts from mitigation actions beyond those induced by current policies in the BAU, may not capture non-linear technological adoption or upward sloping fuel supply curves, and does not account for some general equilibrium effects or simultaneous mitigation impacts on international fuel prices.
  - Parameter values chosen to be broadly consistent with empirical evidence and with results from more detailed energy models.

*Italic: IMF working paper content excerpt (wpiea2021057-print-pdf).*

### Annex II. Miscellaneous Emissions Sources

### Annex II. Miscellaneous Emissions Sources

### Waste-site methane emissions
- Emissions leakage from waste sites results from the bacterial decomposition of organic waste.
- The case for fiscal instruments over regulation is less compelling because:
  - Landfills are predominantly managed by the public sector.
  - Mitigation responses are limited and relatively straightforward to specify in regulation; they include capturing the methane for flaring, for use in energy, and diverting waste for recycling and re-use.
- Regulatory action example:
  - The EPA finalized standards to reduce methane emissions from new, modified, and reconstructed municipal solid waste landfills in 2016 though requirements were postponed in 2019.

### Hydrofluorocarbons (HFCs)
- HFCs are used in refrigerants, foams, aerosols, and fire extinguishers and have warming potentials hundreds of times higher than CO2.
- International context:
  - Under the 2016 Kigali Agreement, advanced countries are required to reduce HFCs 85 percent (relative to 2011-2013 levels) by 2036 (though the United States has not yet ratified the treaty).
- U.S. regulatory history:
  - In 2015, the United States prohibited HFCs for uses where acceptable alternatives were available; enforcement of this rule was suspended in 2018.
- Policy recommendation:
  - Phasing in a tax on HFCs (in proportion to the global warming potential of the gas) would be an administratively straightforward way to progressively reduce their use and would be more flexible than a regulatory approach.
- International practice:
  - Denmark, Norway, Poland, Slovenia, Spain, for example, have implemented these taxes with rates equivalent to around US$5-40 per tonne of CO2 equivalent (e.g., Brack 2015).

*Source: Annex II. Miscellaneous Emissions Sources — wpiea2021057-print-pdf*

### Annex III. Burden of Carbon Mitigation Policies on Industries

### Conceptual analysis of industry burden
- The burden (increase in private production costs) from carbon mitigation policies is represented by:
  - Two behavioral-response components: reductions in emissions intensity of output and reductions in domestic industry output.
  - Two cost components under carbon pricing:
    - Economic efficiency cost (resource cost of adopting cleaner but costlier production methods) — depicted as the red triangle in Figure A1.
    - Transfer payment (payments to the government for emission allowances to cover remaining emissions) — depicted as the blue rectangle in Figure A1.
- Alternative instrument: feebate
  - A feebate applied to an industry reduces emissions intensity but (to an approximation) has no impact on output because it does not charge for remaining emissions.
  - To achieve equivalent emissions reductions as a carbon price, a higher price on emissions is needed under a feebate, implying a higher efficiency cost (the extra green triangle in Figure A1).
  - Under the feebate there is no transfer payment; the overall burden is therefore generally lower under the feebate.

### Illustrative impacts: Steel
- Traditional integrated steel process produces about two tons of CO2 per ton of steel.
- Alternative technologies produce CO2 emissions of about 0.3–0.4 tons per ton of steel (examples: electrified process using scrap metal, CCUS, direct reduction feeding an electric furnace).
- Price impacts given a carbon price of $50/ton of CO2:
  - Integrated production: increase in cost by about $100/ton of steel through the first-order transfer payment, about one sixth of recent steel prices.
  - Alternative technologies: increase in cost by about $20/ton of steel.
- Under a feebate (assumed industry average emission rate of 1 ton of CO2 per ton of steel):
  - Integrated production cost would increase $50 per ton of output.
  - Alternative technologies would receive a subsidy of about $30 per ton of output.

### Illustrative impacts: Cement
- Typical production:
  - About 90 percent of cement is produced using traditional kilns; the process produces about 1 ton of CO2 per one ton of cement, with process emissions contributing about 70 percent of these emissions.
- Alternatives:
  - State-of-the-art plants (currently about 10 percent of production) largely eliminate non-process emissions.
  - CCUS options: post-combustion (extract CO2 from exhaust gases) or oxy-combustion (burn fuel with pure oxygen and exhaust gases).
  - Post-combustion reduces emissions about 55 percent while increasing capital costs by about 25 percent.
  - Oxy-combustion reduces emissions about 85 percent while increasing capital costs by about 100 percent.
- Price impacts given a carbon price of $50/ton of CO2:
  - Traditional production: increase in cost about $50 per ton of cement, or about 40 percent.
  - More efficient plants: increase by $30 per ton of output.
  - CCUS-fitted plants: increase by $8–25 per ton of output through the first-order transfer payment.
- Under a feebate with price $50/ton of CO2:
  - Traditional production cost would increase by $5 per ton of cement.
  - More efficient plants would receive a subsidy of $10 per ton of output.
  - CCUS-fitted plants would receive a subsidy of $18–35 per ton of output.

*Source: Annex III. Burden of Carbon Mitigation Policies on Industries — wpiea2021057-print-pdf*

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_Source: https://www.imf.org/-/media/files/publications/wp/2021/english/wpiea2021057-print-pdf.pdf_