## Box 1. Effects of Climate Change

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---

### Physical climate impacts (global)
- More destructive hurricanes: number of hurricanes reaching the highest categories with more destructive effects has increased in recent decades; trend expected to continue, especially if global warming reaches beyond 1.5°C.
- Sea level increase:
  - Sea level is rising at an increasing rate, worsening high-tide flooding and storm surge.
  - Even if global warming stays below 2°C, sea levels are projected to surge 2-3 meters by 2300 and by 5-7 meters with faster global warming.
  - By 2100, once-in-a-century coastal flood events will occur at least once per year at more than half of coastlines across the globe.
- Widespread flooding and droughts:
  - Frequency of heavy downpours has already increased by about 30 percent and they contain about 7 percent more water.
  - More intense evaporation will lead to more droughts while warmer air can produce extreme rainfall.
- Extreme heat waves:
  - Existing warming of 1.2°C makes extreme heat waves about five times more likely to occur.
  - With global warming of 2°C, this frequency increases to 14 times as likely to occur.
  - With 2°C of global warming, the hottest temperatures would reach nearly 3°C higher than previous heat waves.
- Severe droughts:
  - Severe droughts that used to happen at an average of once per decade are now occurring about 70 percent more frequently.
  - If global warming reaches 2°C above the preindustrial average, severe droughts will occur between two and three times as often.
- Weather whiplash: increasing wild swings between dry and wet extremes—destructive floods in one year and extreme droughts in the next.
- Source citation in box: IPCC (2021).

### Macroeconomic and regional impacts (Caribbean focus)
- Vulnerability and historical losses:
  - Number of weather-related disasters increased fivefold during 1970-2019, with total losses amounting to US$3.6 trillion and 2 million deaths (WHO, 2021).
- Sea level and regional projections:
  - IPCC projects global sea level to increase 52-98 centimeters by 2100 with significant local variation.
  - An analysis based on historical sea-level trends estimates a rate of increase at 1.5 meters by 2100 in the Caribbean (Strauss and Kulp, 2018).
- Ecosystem degradation and hurricane damages:
  - Hurricane-related damages would triple in the Caribbean if protective ecosystems such as coral reefs and mangrove forests are degraded or lost due to climate change (Silver and others, 2019).
- Tourism sector:
  - Tourism is the main engine of economic activity across the Caribbean and is highly vulnerable to climate change.
  - Climate change vulnerability already has a statistically and economically significant negative effect on international tourism revenue in Caribbean countries (Cevik and Ghanzanchyan, 2021).
  - Rising sea levels and coastal erosion projected to reduce the quantity and quality of available beach space without significant adaptation measures, diminishing attractiveness as high-end tourism destination.
  - Carbon taxes on international aviation and maritime could reduce international tourism demand, especially from long-distance markets such as Europe, with significant balance-of-payments effects.
- Agriculture and fisheries:
  - Agriculture sector in the Caribbean accounts for about 5 percent of GDP and 23 percent of employment.
  - Consequently 90 percent of food is imported, making the region highly vulnerable to changes in international food prices.
  - Submergence of coastal areas and increased likelihood of droughts will reduce land for cultivation and agricultural productivity.
  - Climate change expected to have increasingly negative effects on key staple crop yields, disrupt global food trade, and directly affect oceans and fish populations.

### Mitigation commitments and policy gaps
- National commitments:
  - Caribbean countries have pledged to reduce GHG emissions by a range of 15 to 70 percent by 2030, conditional on financial and technical assistance.
  - Some countries (Barbados, Haiti, Jamaica, St. Vincent and the Grenadines) have also made unconditional NDC commitments.
- Emissions context:
  - Caribbean’s share of global CO2 emissions is 0.3 percent.
  - Average CO2 emissions per capita increased from 3.5 tons in 1990 to 5.1 tons in 2019, compared with the current global average of 4.6 tons.
- Energy subsidies:
  - Energy subsidies amount to as much as 18 percent of GDP in some Caribbean countries.
  - Fossil fuel subsidies larger in energy-rich countries (Suriname, Trinidad and Tobago); electricity subsidies more prevalent elsewhere.
  - More efficient pricing of energy would reduce CO2 emissions by more than a third relative to the baseline level, keep global warming below 1.5°C, raise additional revenues, and improve environmental quality (Parry, Black, and Vernon, 2021).
- Five priority mitigation areas identified:
  - Eliminating distortionary energy subsidies.
  - Introducing a carbon tax and fees on high-emission products combined with rebates on low-emission products.
  - Improving energy efficiency and decarbonizing the energy sector with higher share of renewables.
  - Electrifying mobility and transportation.
  - Developing sustainable land-use practices and smarter urbanization with better rules and regulations.

### Carbon pricing analysis and simulation results
- Fiscal instruments:
  - Fiscal measures, including a carbon tax on fossil fuels, are presented as the most efficient tool for mitigation.
  - Black and others (2021) proposes carbon taxes of $75, $50 and $25 per metric ton of CO2 emissions for advanced, high-income emerging markets, and low-income emerging markets, respectively.
- CPAT simulation scenarios:
  - Two alternative scenarios with a carbon tax set to gradually increase to (i) US$50 per metric ton of CO2 emissions and (ii) US$75 per metric ton of CO2 emissions by 2030 were analyzed using the CPAT framework.
  - Assuming a carbon tax of US$50 per ton is the only policy instrument:
    - Some countries (Dominica, Haiti, St. Lucia, Trinidad and Tobago) can achieve or come very close to meeting mitigation targets by 2030.
    - For others, a higher carbon tax would be necessary to meet NDC commitments.
- Revenue and growth impacts (examples from CPAT simulations at US$50 per ton):
  - Carbon tax would yield additional revenues amounting to 0.8 percent of GDP in Jamaica and 1.8 percent of GDP in Belize.
  - Growth impacts in these examples: nil in Jamaica and -0.1 percent in Belize, assuming revenue recycling through lower taxes or higher spending.
  - For oil-producing countries (Suriname, Trinidad and Tobago) negative growth impacts are larger but still described as marginal considering broader health and environmental benefits.
- Redistribution and labor effects:
  - Data constraints prevent precise estimation of employment impacts; evidence from other countries suggests job losses in carbon-intensive sectors and job gains in clean-energy sectors.
  - Compensatory policies recycling additional revenue into lower taxes, targeted cash transfers, and public investment can alleviate adverse effects on disposable household income.
  - Vogt-Schilb and others (2019) find that 30 percent of revenues from a carbon tax of $30 per metric ton of CO2 emissions could be enough to compensate poor and vulnerable households on average in Latin America and the Caribbean, leaving 70 percent for other priorities.

### Energy sector and decarbonization emphasis
- Energy sector responsibility:
  - Energy sector is responsible for more than 70 percent of CO2 emissions in the Caribbean.
  - CO2 emissions result from (i) population, (ii) GDP per capita, (iii) carbon content of energy resources, and (iv) energy consumption per unit of GDP.
- Energy efficiency trends:
  - Globally, the amount of energy used to produce a unit of GDP declined by 41.3 percent over the past three decades.
  - Over the same period, energy efficiency in the Caribbean improved by merely 1.7 percent.

### Energy efficiency and renewable energy in the Caribbean
- Key findings on energy matrix and emissions:
  - Almost 90 percent of electricity is produced using fossil fuels, compared to 57 percent in the rest of Latin America.
  - Renewable energy sources account for 2.7 percent of the total electricity consumption, compared to more than 10 percent in the rest of the world.
  - Caribbean countries are largely reliant on imported fossil fuels, creating vulnerability to global price fluctuations and environmentally damaging energy mixes.
- Empirical analysis of energy efficiency and CO2 emissions:
  - Sample and method:
    - Panel of 15 Caribbean countries over the period 1980–2019.
    - Fixed effects model with country fixed effects (ηi) and year fixed effects (μt).
    - Dependent variable: logarithm of CO2 emissions per capita.
    - Main regressor: logarithm of energy efficiency measured by energy consumption per unit of real GDP.
    - Controls (Xit): logarithm of real GDP per capita, trade openness, logarithm of population, and share of urban population.
    - Robust standard errors clustered at the country level.
  - Econometric result:
    - Estimated coefficient on energy efficiency: 0.59 (statistically highly significant).
    - Interpretation: a 10 percentage point increase in energy efficiency is associated with lower CO2 emissions of 6 percentage points in the long-run, after controlling for economic, demographic and institutional factors.
    - Counterfactual: if energy efficiency in the Caribbean had increased at the same rate as the world average over the past three decades, CO2 emissions in the region would have already been 25 percentage points lower.
  - Table 3 summary (selected coefficients and diagnostics):
    - Energy efficiency: -0.590*** [0.077]
    - Real GDP per capita: 0.994*** [0.421] and 0.364*** [0.092] (two specifications)
    - Trade openness: -0.001 [0.004] and -0.001 [0.001]
    - Population: -1.024* [0.543] and -0.896*** [0.146]
    - Urbanization: 0.010 [0.010] and 0.013 [0.004]
    - Number of observations: 478 and 332 (two specifications)
    - Number of countries: 15 and 15
    - Country FE: Yes; Year FE: Yes
    - Adj R2: 0.66 and 0.72
    - Note: Robust standard errors clustered at country level reported in brackets. *, **, and *** denote significance at the 10%, 5%, and 1% levels, respectively.
- Implication of findings:
  - Improving energy efficiency can play a fundamental role in mitigating CO2 emissions toward NDC targets for Caribbean countries.
  - Policies should aim to both improve energy efficiency in commercial and residential use and shift the energy matrix away from fossil fuels toward renewables.

### Transport electrification and sector-specific measures
- Transport sector contributions and potential:
  - Transport accounts for more than one-third of oil consumption and over 20 percent of CO2 emissions on average in the Caribbean.
  - Electric vehicles still only make up about 1 percent of the global fleet of passenger cars, but sales are increasing rapidly across the world including the Caribbean.
  - Shorter distances across archipelagos make electrification of transportation more feasible; vehicle-to-grid approaches can help manage intermittency and integrate more renewable energy onto the grid.
- Policy options and benefits:
  - Suggested measures:
    - Implement a “feebate” system for motor vehicles to raise the cost of more polluting vehicles and incentivize cleaner automobiles.
    - Promote electrification of both basic transportation and more flexible human mobility through technology uptake.
    - Leverage the geographic advantage (shorter distances) and growing renewable resources to expand electric transport.
  - Benefits of electrifying mobility:
    - Diversifying the fuel portfolio.
    - Lowering total cost of ownership.
    - Improving price stability.
    - Strengthening energy independence.
    - Attaining a healthier environment.

### Technology, innovation, and industrial policy
- Small island states have limited domestic R&D capacity; international technology and knowledge transfers can fast-track investments for mitigation and adaptation.
- Developing domestic capacity for innovation in low-carbon products and processes depends on competition in the energy, infrastructure and transportation sectors.
- Industrial policies and structural reforms can:
  - Streamline regulatory burdens.
  - Enhance competition to unlock private investment in the green transition.
  - Combine subsidies and direct public funding for R&D to promote technological change toward green technologies.

### Nature-based solutions and land use
- Nature-based solutions can address coastal hazards, floods, soil erosion, rising temperatures, and drought, while costing significantly less than traditional infrastructure in many cases.
- Advantages include:
  - Carbon sequestration and storage.
  - Biodiversity conservation.
  - Socioeconomic benefits: food provision, marketable products, jobs and livelihoods, improved health.
- Example: Jamaica’s nature-based restoration in the White River fish sanctuary achieved a 147 percent increase in coral coverage and 1,700 percent increase in fish biomass within the protected area.
- Potential revenue stream: carbon credit schemes and mechanisms such as REDD+.

### Climate change adaptation: strategy, costs, and insurance
- Strategic framework and priorities:
  - Adaptation must be mainstreamed into development plans to strengthen physical, financial, institutional and social resilience.
  - IMF’s Disaster Resilience Strategy (DRS) recommends a three-pillar approach:
    - Structural resilience: infrastructure and ex-ante investments (hard measures such as upgrading public infrastructure; soft measures such as early warning systems, zoning and building codes).
    - Financial resilience: creating fiscal buffers and prearranged financial instruments to manage recovery costs.
    - Post-disaster and social resilience: contingency planning and investments for speedy response.
- Costs and benefits:
  - Fiscal constraints:
    - Average public debt ratio standing above 100 percent of GDP limits fiscal space to finance adaptation.
    - Tiedemann and others (2021) estimate infrastructure spending would need to be scaled up by an additional 3.7 percent of GDP per year in small developing states to close the adaptation gap by 2030.
  - Long-run benefits:
    - Staff simulations indicate investing in climate-resilient infrastructure can boost the level of GDP in the long run between 2 and 6 percent for Caribbean islands.
    - Strengthening structural resilience could keep output around ¼ percent higher and public debt about ¾ percentage points lower on average three years after a natural disaster.
- Multilayered insurance framework:
  - Insurance coverage of 15-30 percent of GDP for Caribbean countries could cover 99 percent of the fiscal cost of natural disasters (Guerson, 2020).
  - Recommended measures to expand insurance coverage:
    - Establish a government savings fund of 2-5 percent of GDP with annual inflows for ½ percent of GDP during non-disaster years.
    - Introduce mandatory natural disaster insurance for all private residential and commercial properties with premiums adjusted according to building quality.
    - Issue state-contingent bonds to provide debt service relief for extreme events.
    - Raise access to parametric insurance under the Caribbean Catastrophe Risk Insurance Facility (CCRIF) against less frequent but larger natural disasters.

### Access to green financing and public financial management
- Market context and scale:
  - The sustainability-linked debt market has reached US$2.5 trillion with net new issuance of US$660 billion in 2020, of which 2.5 percent or US$19 billion was issued by countries in Latin America and the Caribbean.
  - Green bonds in Latin America and the Caribbean: US$7.9 billion of US$290 billion in global issuance in 2020.
  - Outstanding green bonds in Latin America and the Caribbean reached US$30.2 billion as of June 2021 out of over US$1 trillion globally.
  - Sovereign green bonds remain small—about 1 percent—compared to traditional government debt instruments.
- Institutional requirements and recommendations:
  - Climate-vulnerable countries must improve institutional frameworks, including robust and transparent public financial management systems and processes, to access global green financing.
  - Mobilizing additional resources and reforming public financial management are necessary given limited fiscal space and substantial upfront adaptation costs.

### Conclusion: policy balance and complementarity
- Climate mitigation (reducing CO2 emissions) and climate adaptation (reducing damages and adapting to economic transformations) are both required.
- Empirical evidence indicates that increasing energy efficiency and reducing fossil fuel use in electricity generation could lead to significant reductions in energy-related CO2 emissions.
- Environmental taxes, including a carbon tax on fossil fuels, could raise considerable revenues to:
  - Support domestic revenue mobilization.
  - Compensate vulnerable households.
  - Build multilayered safety nets.
  - Strengthen structural resilience.
- Investing in mitigation and adaptation can be complementary, yielding ecological, economic and social benefits and helping align energy supply and consumption with tourism and broader development objectives.

### Appendix Table A1. Summary Statistics
- CO2 emissions per capita
  - Obs.: 896
  - Mean: 3.8
  - Std. Dev.: 6.0
  - Min: 0.02
  - Max: 49.3
- Energy efficiency
  - Obs.: 465
  - Mean: 3.8
  - Std. Dev.: 1.5
  - Min: 0.5
  - Max: 7.7
- Real GDP per capita
  - Obs.: 859
  - Mean: 8,529
  - Std. Dev.: 7,618
  - Min: 666
  - Max: 32,237
- Trade openness
  - Obs.: 625
  - Mean: 100.2
  - Std. Dev.: 35.0
  - Min: 31.1
  - Max: 275.0
- Population
  - Obs.: 744
  - Mean: 1,384,490
  - Std. Dev.: 2,738,837
  - Min: 40,259
  - Max: 11,000,000
- Urbanization
  - Obs.: 744
  - Mean: 44.9
  - Std. Dev.: 16.7
  - Min: 15.6
  - Max: 83.2

*Source: Box 1, "Effects of Climate Change" and associated sections from the provided IMF PDF content.*

### Box 1. Effects of Climate Change

### Box 1. Effects of Climate Change

### Physical climate impacts (global)
- More destructive hurricanes: the number of hurricanes reaching the highest categories with more destructive effects has increased in recent decades; trend expected to continue, especially if global warming reaches beyond 1.5°C.
- Sea level increase:
  - Sea level is rising at an increasing rate, worsening high-tide flooding and storm surge.
  - Even if global warming stays below 2°C, sea levels are projected to surge 2-3 meters by 2300 and by 5-7 meters with faster global warming.
  - By 2100, once-in-a-century coastal flood events will occur at least once per year at more than half of coastlines across the globe.
- Widespread flooding and droughts:
  - Frequency of heavy downpours has already increased by about 30 percent and they contain about 7 percent more water.
  - More intense evaporation will lead to more droughts while warmer air can produce extreme rainfall.
- Extreme heat waves:
  - Existing warming of 1.2°C makes extreme heat waves about five times more likely to occur.
  - With global warming of 2°C, this frequency increases to 14 times as likely to occur.
  - With 2°C of global warming, the hottest temperatures would reach nearly 3°C higher than previous heat waves.
- Severe droughts:
  - Severe droughts that used to happen at an average of once per decade are now occurring about 70 percent more frequently.
  - If global warming reaches 2°C above the preindustrial average, severe droughts will occur between two and three times as often.
- Weather whiplash: increasing wild swings between dry and wet extremes—destructive floods in one year and extreme droughts in the next.
- Source citation in box: IPCC (2021).

### Macroeconomic and regional impacts (Caribbean focus)
- Vulnerability and historical losses:
  - Number of weather-related disasters increased fivefold during 1970-2019, with total losses amounting to US$3.6 trillion and 2 million deaths (WHO, 2021).
- Sea level and regional projections:
  - IPCC projects global sea level to increase 52-98 centimeters by 2100 with significant local variation.
  - An analysis based on historical sea-level trends estimates a rate of increase at 1.5 meters by 2100 in the Caribbean (Strauss and Kulp, 2018).
- Ecosystem degradation and hurricane damages:
  - Hurricane-related damages would triple in the Caribbean if protective ecosystems such as coral reefs and mangrove forests are degraded or lost due to climate change (Silver and others, 2019).
- Tourism sector:
  - Tourism is the main engine of economic activity across the Caribbean and is highly vulnerable to climate change.
  - Climate change vulnerability already has a statistically and economically significant negative effect on international tourism revenue in Caribbean countries (Cevik and Ghanzanchyan, 2021).
  - Rising sea levels and coastal erosion projected to reduce the quantity and quality of available beach space without significant adaptation measures, diminishing attractiveness as high-end tourism destination.
  - Carbon taxes on international aviation and maritime could reduce international tourism demand, especially from long-distance markets such as Europe, with significant balance-of-payments effects.
- Agriculture and fisheries:
  - Agriculture sector in the Caribbean accounts for about 5 percent of GDP and 23 percent of employment.
  - Consequently 90 percent of food is imported, making the region highly vulnerable to changes in international food prices.
  - Submergence of coastal areas and increased likelihood of droughts will reduce land for cultivation and agricultural productivity.
  - Climate change expected to have increasingly negative effects on key staple crop yields, disrupt global food trade, and directly affect oceans and fish populations.

### Mitigation commitments and policy gaps
- National commitments:
  - Caribbean countries have pledged to reduce GHG emissions by a range of 15 to 70 percent by 2030, conditional on financial and technical assistance.
  - Some countries (Barbados, Haiti, Jamaica, St. Vincent and the Grenadines) have also made unconditional NDC commitments.
- Emissions context:
  - Caribbean’s share of global CO2 emissions is 0.3 percent.
  - Average CO2 emissions per capita increased from 3.5 tons in 1990 to 5.1 tons in 2019, compared with the current global average of 4.6 tons.
- Energy subsidies:
  - Energy subsidies amount to as much as 18 percent of GDP in some Caribbean countries.
  - Fossil fuel subsidies larger in energy-rich countries (Suriname, Trinidad and Tobago); electricity subsidies more prevalent elsewhere.
  - More efficient pricing of energy would reduce CO2 emissions by more than a third relative to the baseline level, keep global warming below 1.5°C, raise additional revenues, and improve environmental quality (Parry, Black, and Vernon, 2021).
- Five priority mitigation areas identified:
  - Eliminating distortionary energy subsidies.
  - Introducing a carbon tax and fees on high-emission products combined with rebates on low-emission products.
  - Improving energy efficiency and decarbonizing the energy sector with higher share of renewables.
  - Electrifying mobility and transportation.
  - Developing sustainable land-use practices and smarter urbanization with better rules and regulations.

### Carbon pricing analysis and simulation results
- Fiscal instruments:
  - Fiscal measures, including a carbon tax on fossil fuels, are presented as the most efficient tool for mitigation.
  - Black and others (2021) proposes carbon taxes of $75, $50 and $25 per metric ton of CO2 emissions for advanced, high-income emerging markets, and low-income emerging markets, respectively.
- CPAT simulation scenarios:
  - Two alternative scenarios with a carbon tax set to gradually increase to (i) US$50 per metric ton of CO2 emissions and (ii) US$75 per metric ton of CO2 emissions by 2030 were analyzed using the CPAT framework.
  - Assuming a carbon tax of US$50 per ton is the only policy instrument:
    - Some countries (Dominica, Haiti, St. Lucia, Trinidad and Tobago) can achieve or come very close to meeting mitigation targets by 2030.
    - For others, a higher carbon tax would be necessary to meet NDC commitments.
- Revenue and growth impacts (examples from CPAT simulations at US$50 per ton):
  - Carbon tax would yield additional revenues amounting to 0.8 percent of GDP in Jamaica and 1.8 percent of GDP in Belize.
  - Growth impacts in these examples: nil in Jamaica and -0.1 percent in Belize, assuming revenue recycling through lower taxes or higher spending.
  - For oil-producing countries (Suriname, Trinidad and Tobago) negative growth impacts are larger but still described as marginal considering broader health and environmental benefits.
- Redistribution and labor effects:
  - Data constraints prevent precise estimation of employment impacts; evidence from other countries suggests job losses in carbon-intensive sectors and job gains in clean-energy sectors.
  - Compensatory policies recycling additional revenue into lower taxes, targeted cash transfers, and public investment can alleviate adverse effects on disposable household income.
  - Vogt-Schilb and others (2019) find that 30 percent of revenues from a carbon tax of $30 per metric ton of CO2 emissions could be enough to compensate poor and vulnerable households on average in Latin America and the Caribbean, leaving 70 percent for other priorities.

### Energy sector and decarbonization emphasis
- Energy sector responsibility:
  - Energy sector is responsible for more than 70 percent of CO2 emissions in the Caribbean.
  - CO2 emissions result from (i) population, (ii) GDP per capita, (iii) carbon content of energy resources, and (iv) energy consumption per unit of GDP.
- Energy efficiency trends:
  - Globally, the amount of energy used to produce a unit of GDP declined by 41.3 percent over the past three decades.
  - Over the same period, energy efficiency in the Caribbean improved by merely 1.7 percent.

*Source: Box 1, "Effects of Climate Change" from the provided IMF PDF content.*

### 16.1 percent between 2000 and 2018). Improving energy efficiency is therefore key to reduce

### Energy efficiency and renewable energy in the Caribbean

### Key findings on energy matrix and emissions
- Almost 90 percent of electricity is produced using fossil fuels, compared to 57 percent in the rest of Latin America.
- Renewable energy sources account for 2.7 percent of the total electricity consumption, compared to more than 10 percent in the rest of the world.
- Caribbean countries are largely reliant on imported fossil fuels, creating vulnerability to global price fluctuations and environmentally damaging energy mixes.

### Empirical analysis of energy efficiency and CO2 emissions
- Sample and method:
  - Panel of 15 Caribbean countries over the period 1980–2019.
  - Fixed effects model with country fixed effects (ηi) and year fixed effects (μt).
  - Dependent variable: logarithm of CO2 emissions per capita.
  - Main regressor: logarithm of energy efficiency measured by energy consumption per unit of real GDP.
  - Controls (Xit): logarithm of real GDP per capita, trade openness, logarithm of population, and share of urban population.
  - Robust standard errors clustered at the country level.
- Econometric result:
  - Estimated coefficient on energy efficiency: 0.59 (statistically highly significant).
  - Interpretation: a 10 percentage point increase in energy efficiency is associated with lower CO2 emissions of 6 percentage points in the long-run, after controlling for economic, demographic and institutional factors.
  - Counterfactual: if energy efficiency in the Caribbean had increased at the same rate as the world average over the past three decades, CO2 emissions in the region would have already been 25 percentage points lower.
- Table 3 summary (selected coefficients and diagnostics):
  - Energy efficiency: -0.590*** [0.077]
  - Real GDP per capita: 0.994*** [0.421] and 0.364*** [0.092] (two specifications)
  - Trade openness: -0.001 [0.004] and -0.001 [0.001]
  - Population: -1.024* [0.543] and -0.896*** [0.146]
  - Urbanization: 0.010 [0.010] and 0.013 [0.004]
  - Number of observations: 478 and 332 (two specifications)
  - Number of countries: 15 and 15
  - Country FE: Yes; Year FE: Yes
  - Adj R2: 0.66 and 0.72
  - Note: Robust standard errors clustered at country level reported in brackets. *, **, and *** denote significance at the 10%, 5%, and 1% levels, respectively.

### Implication of findings
- Improving energy efficiency can play a fundamental role in mitigating CO2 emissions toward NDC targets for Caribbean countries.
- Policies should aim to both improve energy efficiency in commercial and residential use and shift the energy matrix away from fossil fuels toward renewables.

---

### Transport electrification and sector-specific measures

### Transport sector contributions and potential
- Transport accounts for more than one-third of oil consumption and over 20 percent of CO2 emissions on average in the Caribbean.
- Electric vehicles still only make up about 1 percent of the global fleet of passenger cars, but sales are increasing rapidly across the world including the Caribbean.
- Shorter distances across archipelagos make electrification of transportation more feasible; vehicle-to-grid approaches can help manage intermittency and integrate more renewable energy onto the grid.

### Policy options and benefits
- Suggested measures:
  - Implement a “feebate” system for motor vehicles to raise the cost of more polluting vehicles and incentivize cleaner automobiles.
  - Promote electrification of both basic transportation and more flexible human mobility through technology uptake.
  - Leverage the geographic advantage (shorter distances) and growing renewable resources to expand electric transport.
- Benefits of electrifying mobility:
  - Diversifying the fuel portfolio.
  - Lowering total cost of ownership.
  - Improving price stability.
  - Strengthening energy independence.
  - Attaining a healthier environment.

---

### Technology, innovation, and industrial policy

- Small island states have limited domestic R&D capacity; international technology and knowledge transfers can fast-track investments for mitigation and adaptation.
- Developing domestic capacity for innovation in low-carbon products and processes depends on competition in the energy, infrastructure and transportation sectors.
- Industrial policies and structural reforms can:
  - Streamline regulatory burdens.
  - Enhance competition to unlock private investment in the green transition.
  - Combine subsidies and direct public funding for R&D to promote technological change toward green technologies.

---

### Nature-based solutions and land use

- Nature-based solutions can address coastal hazards, floods, soil erosion, rising temperatures, and drought, while costing significantly less than traditional infrastructure in many cases.
- Advantages include:
  - Carbon sequestration and storage.
  - Biodiversity conservation.
  - Socioeconomic benefits: food provision, marketable products, jobs and livelihoods, improved health.
- Example: Jamaica’s nature-based restoration in the White River fish sanctuary achieved a 147 percent increase in coral coverage and 1,700 percent increase in fish biomass within the protected area.
- Potential revenue stream: carbon credit schemes and mechanisms such as REDD+.

---

### Climate change adaptation: strategy, costs, and insurance

### Strategic framework and priorities
- Adaptation must be mainstreamed into development plans to strengthen physical, financial, institutional and social resilience.
- IMF’s Disaster Resilience Strategy (DRS) recommends a three-pillar approach:
  - Structural resilience: infrastructure and ex-ante investments (hard measures such as upgrading public infrastructure; soft measures such as early warning systems, zoning and building codes).
  - Financial resilience: creating fiscal buffers and prearranged financial instruments to manage recovery costs.
  - Post-disaster and social resilience: contingency planning and investments for speedy response.

### Costs and benefits
- Fiscal constraints:
  - Average public debt ratio standing above 100 percent of GDP limits fiscal space to finance adaptation.
  - Tiedemann and others (2021) estimate infrastructure spending would need to be scaled up by an additional 3.7 percent of GDP per year in small developing states to close the adaptation gap by 2030.
- Long-run benefits:
  - Staff simulations indicate investing in climate-resilient infrastructure can boost the level of GDP in the long run between 2 and 6 percent for Caribbean islands.
  - Strengthening structural resilience could keep output around ¼ percent higher and public debt about ¾ percentage points lower on average three years after a natural disaster.

### Multilayered insurance framework
- Insurance coverage of 15-30 percent of GDP for Caribbean countries could cover 99 percent of the fiscal cost of natural disasters (Guerson, 2020).
- Recommended measures to expand insurance coverage:
  - Establish a government savings fund of 2-5 percent of GDP with annual inflows for ½ percent of GDP during non-disaster years.
  - Introduce mandatory natural disaster insurance for all private residential and commercial properties with premiums adjusted according to building quality.
  - Issue state-contingent bonds to provide debt service relief for extreme events.
  - Raise access to parametric insurance under the Caribbean Catastrophe Risk Insurance Facility (CCRIF) against less frequent but larger natural disasters.

---

### Access to green financing and public financial management

### Market context and scale
- The sustainability-linked debt market has reached US$2.5 trillion with net new issuance of US$660 billion in 2020, of which 2.5 percent or US$19 billion was issued by countries in Latin America and the Caribbean.
- Green bonds in Latin America and the Caribbean: US$7.9 billion of US$290 billion in global issuance in 2020.
- Outstanding green bonds in Latin America and the Caribbean reached US$30.2 billion as of June 2021 out of over US$1 trillion globally.
- Sovereign green bonds remain small—about 1 percent—compared to traditional government debt instruments.

### Institutional requirements and recommendations
- Climate-vulnerable countries must improve institutional frameworks, including robust and transparent public financial management systems and processes, to access global green financing.
- Mobilizing additional resources and reforming public financial management are necessary given limited fiscal space and substantial upfront adaptation costs.

---

### Conclusion: policy balance and complementarity

- Climate mitigation (reducing CO2 emissions) and climate adaptation (reducing damages and adapting to economic transformations) are both required.
- Empirical evidence indicates that increasing energy efficiency and reducing fossil fuel use in electricity generation could lead to significant reductions in energy-related CO2 emissions.
- Environmental taxes, including a carbon tax on fossil fuels, could raise considerable revenues to:
  - Support domestic revenue mobilization.
  - Compensate vulnerable households.
  - Build multilayered safety nets.
  - Strengthen structural resilience.
- Investing in mitigation and adaptation can be complementary, yielding ecological, economic and social benefits and helping align energy supply and consumption with tourism and broader development objectives.

*Source: IMF working paper content (wpiea2022179-print-pdf).*

### Appendix Table A1. Summary Statistics

### Appendix Table A1. Summary Statistics

### Summary statistics by variable
- CO2 emissions per capita
  - Obs.: 896
  - Mean: 3.8
  - Std. Dev.: 6.0
  - Min: 0.02
  - Max: 49.3

- Energy efficiency
  - Obs.: 465
  - Mean: 3.8
  - Std. Dev.: 1.5
  - Min: 0.5
  - Max: 7.7

- Real GDP per capita
  - Obs.: 859
  - Mean: 8,529
  - Std. Dev.: 7,618
  - Min: 666
  - Max: 32,237

- Trade openness
  - Obs.: 625
  - Mean: 100.2
  - Std. Dev.: 35.0
  - Min: 31.1
  - Max: 275.0

- Population
  - Obs.: 744
  - Mean: 1,384,490
  - Std. Dev.: 2,738,837
  - Min: 40,259
  - Max: 11,000,000

- Urbanization
  - Obs.: 744
  - Mean: 44.9
  - Std. Dev.: 16.7
  - Min: 15.6
  - Max: 83.2

*Source: EIA; IMF; World Bank; author's calculations.*

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_Source: https://www.imf.org/-/media/files/publications/wp/2022/english/wpiea2022179-print-pdf.pdf_