## Fiscal Implications of Global Decarbonization

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---

### Glossary
- BCA  Border Carbon Adjustment
- CO2  Carbon Dioxide
- CPAT Climate Policy Assessment Tool
- EITE  Energy-Intensive, Trade Exposed
- ETS  Emissions Trading System
- EV  Electric Vehicle
- GHG  Greenhouse Gases
- ICEV  Internal Combustion Engine Vehicle
- IEA  International Energy Agency
- IRA  Inflation Reduction Act
- LCT  Low-Carbon Technology
- NDC  Nationally Determined Contribution
- TPS  Tradable Performance Standards
- VKT  Vehicle Km Travelled

### I. Introduction — Key findings and framing
- 2023 was the hottest year on record; temperatures are likely to increase by more than 1.5°C above pre-industrial levels already within the coming five years (per World Meteorological Organization).
- Even with moderate increases in global mitigation stringency, temperatures are expected to increase by more than 3°C by 2100 (Central estimate per the IPCC’s scenario ‘SSP2-4.5’ with a range of 2.1-3.5°C).
- Carbon emissions are responsible for 75 percent of total GHGs; methane accounts for 17 percent.
- Paris Agreement goal: “[hold] the increase in the global average temperature to well below 2°C above pre-industrial levels” and ideally to 1.5°C.
- Two principal gaps impede achievement of Paris goals:
  - Ambition gap: NDC targets for 2030 are insufficient to limit temperatures to 1.5 to 2°C.
  - Implementation gap: Actual and announced policies often fall short of delivering needed emission reductions.
- By 2030 the EU and the US together are expected to emit a little over 20 percent of global emissions; China and India will be responsible for almost 40 percent.
- International coordination is critical because unilateral actions alone are unlikely to suffice and may raise competitiveness concerns for EITE industries and reduce international support for clean transitions.
- This paper analyzes fiscal impacts of global mitigation policies designed to close the global mitigation gap in 2030 consistent with a path of 2°C warming; it builds on prior IMF and related research and emphasizes sectoral policies and international transfers.

### II. Current and Planned Mitigation Policies — Empirical inventory and implications
- Aggregate mitigation from existing and planned policies (NDCs and other government documents) in G20: combined reduction in emissions at 11 percent by 2030 relative to a counterfactual with no climate mitigation policy.
- Required reduction to be on track with Paris goals: 25–50 percent reduction by 2030 compared with 2019 levels (to be on track with 2°C and 1.5°C, respectively).
- Carbon pricing status:
  - Carbon pricing schemes operate in most G20 countries.
  - In eight G20 cases these cover more than 50 percent of national GHGs (Canada, France, Japan, Korea, Mexico, South Africa, Germany, and the UK).
  - Examples: EU and UK ETS apply to power generation and industry; Japan and South Africa apply carbon taxes midstream on fuel supply; Korea’s ETS covers power, industry, waste, buildings, and the public sector; Canada requires provinces and territories to implement a minimum carbon price via tax or ETS.
  - Among the G20, carbon pricing is absent in India and Saudi Arabia; under consideration in Turkiye and Brazil.
- Global carbon-pricing landscape:
  - Globally there are 73 national, subnational, and regional carbon pricing schemes in place, covering almost one quarter of global emissions.
  - The average price across these schemes is around $20 per ton of CO2.
- Sectoral policy summaries:
  - Power: nearly all G20 countries have renewable energy targets; eight have coal-scaling-back targets (including five with a complete ban on or before 2030). Instruments include feed-in tariffs, renewable portfolio standards, and investment or production tax credits.
  - Transportation: CO2 emission rate or fuel economy standards apply nationally in nine G20 countries and at the EU level. Fifteen countries have EV phase-in or ICEV phase-out targets. Feebates (fees/subsidies linked to vehicle emissions) operate in nine countries. These policies help transition new vehicle fleets but do not accelerate retirement of existing high-emission vehicles nor reduce vehicle kilometers travelled.
  - Buildings: France, Germany, Italy, and Japan have targets to reduce energy use from total building stock by 25-44 percent between 2020 and 2030. Nine other G20 countries have targets for new buildings to be approximately zero emissions by 2030 or later. Instruments include design codes, incentives for insulation and retrofitting, certification programs, clean fuel requirements, and appliance efficiency standards.
  - Industry: fewer binding sectoral emissions targets—only five G20 countries have binding emissions targets for industry. Tradable performance standards (TPSs) and clean-technology subsidies are less common; Canada and China are exceptions (Canada’s TPSs apply in many provinces; China intends to expand TPS from power to industry).
- Attribution and heterogeneity:
  - Combined policy effects up to 2022 produce CO2 reductions relative to a 2030 baseline varying across countries: reductions between 20 and 50 percent in 11 countries and less than 20 percent in eight countries (Figure 1 summary).
  - Renewable targets make significant contributions to reductions in 15 cases; explicit carbon pricing contributes substantively in eight cases.
  - Where policies overlap (e.g., carbon pricing of power and renewable targets) attributing reductions to individual policies is ambiguous; total CO2 reductions are more reliable than individual attributions.
  - Some economywide NDCs are weak or not binding in four cases—including two of the three largest global emitters (China and India).
  - In seven cases economywide emissions reductions from identified policies fall well short of NDCs; in several cases sectoral policies exceed economywide pledges (Australia, Canada, China, France, Germany, Italy, Saudi Arabia).
- Fiscal spending measures:
  - Some large economies have adopted expenditure-based measures (public funding for clean investment and green subsidies/tax expenditures).
  - The US Inflation Reduction Act of 2022 is estimated to cost nearly $400 billion over 10 years and envisages subsidies and tax incentives for clean electricity and transmission, clean transportation, and energy-efficiency upgrades in homes.
  - The EU has proposed a Green Deal Industrial Plan comprising tax breaks and relaxation of state aid rules to boost renewable private investment.
  - China has scaled up green public investment and solar deployment subsidies under its Made in China 2025 initiative.
  - Other countries (Canada, Japan, Korea) have adopted or are considering similar expenditure-oriented policies.

### Fiscal-policy focus and structure of analysis (paper scope)
- Revenue side: implications of a mix of carbon pricing and non-pricing policies; revenue effects from erosion of existing fuel tax bases as decarbonization proceeds.
- Spending side: public investment in green infrastructure; subsidies for low-carbon technological innovation and deployment.
- Distributional and compensatory measures: fiscal support for vulnerable households and affected firms; compensation payments to low and lower-middle-income countries; international revenue-sharing arrangements.
- Integration: Section IX combines revenue and spending pieces to discuss expected net fiscal impacts across countries; Section X concludes.

### Box 1: The Inflation Reduction Act in the US — Overview and fiscal implications
- The 2022 Inflation Reduction Act (IRA) forms the centerpiece of the US climate mitigation strategy.
- The law directs federal funding over a 10-year period (estimated at $394 billion, or 0.17 percent of GDP) to clean energy (especially for clean electricity and transmission, followed by clean transportation), mostly through tax credits.

Allocation of funding
- 55 percent of the funding is for corporations, including:
  - $30 per MWH for new zero-carbon generation (progressively reducing to $15 per MWH in 2035);
  - $15 per MWH for new nuclear;
  - $1.75 per gallon for sustainable aviation fuel;
  - $3 per kg for clean hydrogen.
- A projected $43 billion is allocated in consumer incentives including tax credits of up to:
  - $7,500 and $4,000 for new and used EVs;
  - $2,000 for heat pumps;
  - 30 percent of the costs of energy efficiency upgrades in homes.

Domestic-production and procurement requirements
- Many tax incentives contain domestic-production or procurement requirements. Example:
  - 80 percent of the critical minerals for EV batteries must have been recycled in the US (or a country with a free trade agreement with the US) for the vehicle to qualify for the full credit and the battery must have been manufactured in the US.

International response
- The EU has argued that the IRA’s tax credit for EVs and manufacturing subsidies for battery and wind turbine producers violate World Trade Organization (WTO) rules.
- In response, the EU has proposed the Green Deal Investment Plan, containing €250 billion in new tax breaks to further boost private sector renewable investment along with loosening of the bloc’s state aid rules.

Additional note
- In a recent IMF staff analysis, Voigts and Paret (forthcoming) arrive at a larger fiscal cost until 2030.

### Box 2: Border Carbon Adjustments — Design, revenue, and policy implications
- Definition and purpose:
  - BCAs are charges on embodied carbon in imports, potentially complemented by rebates for embodied carbon in domestic exports, in order to offset the impact of domestic carbon pricing.
  - Purposes:
    - Mitigate competitiveness effects for energy-intensive trade-exposed industries.
    - Level the playing field in domestic markets (for imports) and foreign markets (when rebates are provided on exports).
    - Mitigate carbon leakage effects.
    - Provide incentives for other countries to impose similar carbon prices to preempt the impact of the BCA.
  - Intuition: taxing carbon emissions on a destination basis—as opposed to an origin basis—does not induce production distortions.
- Design considerations and administration:
  - BCAs need to be designed and administered carefully to be effective.
  - Coverage should be limited to vulnerable firms and any export rates should be based on industry emission rates to preserve firm-level mitigation incentives.
- Revenue estimates and empirical findings:
  - Potential revenues from BCAs on imports are estimated at around 0.1-0.2 percent of GDP for a $50 per ton charge—for China, India, the EU, and the US (Figure 6).
  - With export rebates, net revenues are found to be negative for China and India.
  - Figure 6 axis and plotted range (visual): -0.4 -0.3 -0.2 -0.1 0.0 0.1 0.2 (Revenue gains from BCA, percent of GDP) for US, EU-27, India, China — shown with and without export rebate.
  - Note: estimates in Figure 6 are based on 2015 embodied carbon data and the figure source is Keen, Parry, and Roaf (2021).
- Broader fiscal and policy implications:
  - Taxing carbon on a destination basis leaves more scope for countries to exercise their domestic ambitions without hurting competitiveness; BCAs may enable higher domestic carbon prices and thus higher revenue.
  - Revenue losses from export rebates might be small compared to the overall revenue gain from comprehensive pricing of domestic carbon emissions.
  - Careful targeting of BCAs (limited coverage to vulnerable firms and export rebates set at industry emission rates) helps preserve mitigation incentives at the firm level while addressing competitiveness concerns.

### Renewable fuels and geographic potential
- Most current fuel exporters are well suited for the production of zero carbon fuels because of:
  - favorable renewable energy conditions,
  - available desert space in many cases,
  - existing infrastructure for exporting fuels.
- A quick increase in demand for raw materials requires careful planning of supply.
- Example geographic scale cited: 140.000 km2—about half of the area of Italy. The raw materials for this much renewable energy are available.

### Industrial decarbonization: technologies, costs, and policy roles
- Many types of LCTs in manufacturing and construction are still comparatively expensive.
- Some manufacturing processes consume electricity (with emissions attributed to electricity/heat) and also use fossil fuels directly, contributing close to 13 percent of global emissions.
- Technologies to decarbonize these processes exist but are expensive and would require government support to boost uptake.
- Example: steel production
  - Currently mostly produced with coke-based blast furnaces.
  - Options: couple with carbon capture systems or replace with “direct hydrogen reduction”.
  - Governments could support these technologies similarly to early-stage renewable energy support.
- Industrial process emissions and negative emissions:
  - Emissions from industrial processes (most importantly the production of cement) account for about 6 percent of global emissions (in addition to those associated with electricity consumption and direct fossil fuel consumption by the sector).
  - Emissions from industrial processes can be lowered by increasing material efficiency, but within limits.
  - Residual emissions need to be compensated through negative emission technologies to withdraw emissions at source or from the atmosphere.
  - Carbon storage options are limited; prioritizing carbon storage for emissions that cannot be avoided by other means is suggested.
  - Re-using or recycling carbon are further options.

### Agriculture: sources of emissions and policy options
- Agriculture contributes 12 percent to global emissions.
- Livestock production is the largest part of agricultural emissions and releases large amounts of methane.
- From 2001 to 2011, livestock-related sources were estimated to have accounted for two-thirds of global agricultural emissions, with contributions:
  - Enteric fermentation: 40 percent
  - Manure left on pasture: 16 percent
  - Manure management: 7 percent
  - Manure applied to soils: 3 percent
- Policy and mitigation options:
  - Tax meat and dairy products in proportion to the climate damage they cause (indirect extension of carbon pricing to agriculture).
  - Incentivize low-carbon farming practices, e.g., new feed additives, better slurry management, and biorefining.
  - Reduce fertilizer use to lower emissions from nitrogen chemical inputs.
  - Reduce food loss.
  - Support organic farming to sequester more carbon.
  - Note: “Even reducing whaling has a positive effect as whales play a role in capturing carbon from the atmosphere.”

### Feebates: design features and sectoral applications
- General characteristics of feebates:
  - Sliding scale of fees on products/activities with emission rates above a pivot point and sliding rebates for those below the pivot.
  - Promote the full range of behavioral responses for reducing emissions intensity of a sector, but do not promote a demand response (e.g., do not encourage people to drive less).
  - Automatically cost effective because the reward for reducing emissions by an extra ton is the same across behavioral responses within and across firms/households.
  - Need not impose a fiscal cost on the government if pivot point set at industry or market average and updated to maintain revenue neutrality; alternatively pivot point can be scaled to raise revenue.
  - May have greater political acceptability than carbon pricing as they do not impose a new first-order tax burden on the average household or firm (but government is deprived of new revenues).
  - Compatible with existing regulations and provide ongoing incentives to exceed regulatory standards.
- Transportation:
  - New vehicles subject to a fee equal to a CO2 price times the difference between their CO2 emission rate per kilometer and a pivot point emission rate, scaled by lifetime vehicle km driven.
  - Feebates could apply annually to existing vehicles to promote faster retirement of older vehicles (administratively more complex).
  - Some countries incorporate feebate elements in registration tax systems; tax schedules can produce implicit CO2 prices often around $600 per ton or more in European countries.
  - Subsidies for EVs would decline over time as average fleet emission rate declines and cost differentials fall (e.g., with improvements in EV battery technology).
- Carbon-intensive manufacturing (aluminum, steel, cement, chemicals):
  - Firms subject to a fee = CO2 price × (firm’s CO2 per unit output − pivot point emission rate) × firm output.
  - Feebates avoid a first-order burden on the average producer by not charging on remaining emissions, helping alleviate competitiveness concerns.
  - Separate scheme needed per distinct industry; emissions prices across schemes could be harmonized for cost effectiveness.
  - Capacity requirements simpler than ETSs: government monitors firm emission rates but not trading markets.
- Power sector:
  - Generators subject to a fee = CO2 price × (their CO2 per kWh averaged across plants − pivot point CO2 per kWh) × electricity generation.
  - Feebates could promote shifting from coal to gas and to nuclear, renewables, and fossil generation with carbon capture and storage.
  - Capacity requirements: monitoring CO2 emission rates for power generators and applying fees/rebates.
- Buildings and appliances:
  - Feebates might be integrated into annual property tax systems in countries with energy performance ratings to promote insulation upgrades.
  - Could promote energy-efficient appliances by levying fees on product sales proportional to difference between energy consumption rates and market-wide rate.
  - Schemes could tax gas- and oil-based heating systems and subsidize electric heat pumps.
- Forestry:
  - National forestry feebate could promote afforestation, reduced deforestation, and enhanced management practices (planting larger trees, lengthening rotations, fertilizing, tree thinning).
  - Landowners reducing carbon storage relative to a baseline year might face fees; those increasing storage receive subsidies.
  - Requires reasonably well defined property rights at agricultural/forestry border and capacity for regular measurement (satellites, aerial photography, on-the-ground tree sampling).
  - Feebates should involve rental payments (annualized: CO2 price times the interest rate) rather than large one-off payments due to non-permanence risks.
  - Fees/rebates might build off registries of landowners and be introduced sequentially, starting with the subsidy part.

### Methane mitigation in extractives
- Methane is an especially potent greenhouse gas and the bulk of low-cost mitigation opportunities are in the extractives sector.
- Mitigation options include:
  - Capturing methane at the mine mouth or wellhead and using it for on-site or regional power generation.
  - Compressing or liquifying the gas for sale.
  - Flaring methane (releases CO2, a less potent GHG than methane).
  - Improving maintenance of infrastructure for gas processing and distribution.
- Methane emissions could be subject to taxes integrated into existing fiscal regimes for extractives; trade exposure of sector (oil and gas) could lead to pressure for revenue-neutral taxes partially replacing other broader taxes.
- Feebate variant for methane:
  - Fee = CO2 price × (firm’s methane emissions per unit output in CO2 equivalent − pivot point emission rate) × firm output.
  - Complication: firm-level emissions not directly monitored presently; firms may need to develop metering capacity or face proxy emissions fees based on technological characteristics with ability to petition for lower taxes via demonstration.

### International maritime transport
- International maritime transport currently accounts for 2 percent of global CO2 emissions.
- The International Maritime Organization (IMO) pledged to reduce CO2 emissions from international maritime transport by 50 percent below 2008 levels by 2050.
- Achieving this requires development and deployment of zero emission vessels (ZEVs) such as hydrogen ships.
- With aggressive R&D, a carbon levy with price in the ballpark of $75 per ton in 2030 would be sufficient to promote ZEV deployment as the fleet turns over.
  - Such a tax would raise considerably more revenue (tens of billions of dollars a year) than needed for the R&D and would likely face stiff opposition at the IMO.
- Feebate alternative for shipping:
  - Ship operators taxed on the difference between their CO2 emissions per ton-mile and a pivot point CO2 emission rate per ton-mile, multiplied by total ton-miles.
  - Separate feebates needed for container and bulk shipping given different emissions intensities.
  - For a given feebate price, pivot point can be chosen to meet a revenue target; separate feebates (with harmonized prices) may be needed for bulk and container shipping.
  - Fees/rebates could be applied by a new fund under IMO supervision based on fuel use and ton-km data routinely reported to the IMO; port access could be denied to operators unable to verify payments.

*Italic: IMF WORKING PAPERS Fiscal Implications of Global Decarbonization, Working Paper No. WP/2024/045*

### References .............................................................................................................

### Fiscal Implications of Global Decarbonization

### Glossary
- BCA  Border Carbon Adjustment
- CO2  Carbon Dioxide
- CPAT Climate Policy Assessment Tool
- EITE  Energy-Intensive, Trade Exposed
- ETS  Emissions Trading System
- EV  Electric Vehicle
- GHG  Greenhouse Gases
- ICEV  Internal Combustion Engine Vehicle
- IEA  International Energy Agency
- IRA  Inflation Reduction Act
- LCT  Low-Carbon Technology
- NDC  Nationally Determined Contribution
- TPS  Tradable Performance Standards
- VKT  Vehicle Km Travelled

### I. Introduction — Key findings and framing
- 2023 was the hottest year on record; temperatures are likely to increase by more than 1.5°C above pre-industrial levels already within the coming five years (per World Meteorological Organization).
- Even with moderate increases in global mitigation stringency, temperatures are expected to increase by more than 3°C by 2100 (Central estimate per the IPCC’s scenario ‘SSP2-4.5’ with a range of 2.1-3.5°C).
- Carbon emissions are responsible for 75 percent of total GHGs; methane accounts for 17 percent.
- Paris Agreement goal: “[hold] the increase in the global average temperature to well below 2°C above pre-industrial levels” and ideally to 1.5°C.
- Two principal gaps impede achievement of Paris goals:
  - Ambition gap: NDC targets for 2030 are insufficient to limit temperatures to 1.5 to 2°C.
  - Implementation gap: Actual and announced policies often fall short of delivering needed emission reductions.
- By 2030 the EU and the US together are expected to emit a little over 20 percent of global emissions; China and India will be responsible for almost 40 percent.
- International coordination is critical because unilateral actions alone are unlikely to suffice and may raise competitiveness concerns for EITE industries and reduce international support for clean transitions.
- This paper analyzes fiscal impacts of global mitigation policies designed to close the global mitigation gap in 2030 consistent with a path of 2°C warming; it builds on prior IMF and related research and emphasizes sectoral policies and international transfers.

### II. Current and Planned Mitigation Policies — Empirical inventory and implications
- Aggregate mitigation from existing and planned policies (NDCs and other government documents) in G20: combined reduction in emissions at 11 percent by 2030 relative to a counterfactual with no climate mitigation policy.
- Required reduction to be on track with Paris goals: 25–50 percent reduction by 2030 compared with 2019 levels (to be on track with 2°C and 1.5°C, respectively).
- Carbon pricing status:
  - Carbon pricing schemes operate in most G20 countries.
  - In eight G20 cases these cover more than 50 percent of national GHGs (Canada, France, Japan, Korea, Mexico, South Africa, Germany, and the UK).
  - Examples: EU and UK ETS apply to power generation and industry; Japan and South Africa apply carbon taxes midstream on fuel supply; Korea’s ETS covers power, industry, waste, buildings, and the public sector; Canada requires provinces and territories to implement a minimum carbon price via tax or ETS.
  - Among the G20, carbon pricing is absent in India and Saudi Arabia; under consideration in Turkiye and Brazil.
- Global carbon-pricing landscape:
  - Globally there are 73 national, subnational, and regional carbon pricing schemes in place, covering almost one quarter of global emissions.
  - The average price across these schemes is around $20 per ton of CO2.
- Sectoral policy summaries:
  - Power: nearly all G20 countries have renewable energy targets; eight have coal-scaling-back targets (including five with a complete ban on or before 2030). Instruments include feed-in tariffs, renewable portfolio standards, and investment or production tax credits.
  - Transportation: CO2 emission rate or fuel economy standards apply nationally in nine G20 countries and at the EU level. Fifteen countries have EV phase-in or ICEV phase-out targets. Feebates (fees/subsidies linked to vehicle emissions) operate in nine countries. These policies help transition new vehicle fleets but do not accelerate retirement of existing high-emission vehicles nor reduce vehicle kilometers travelled.
  - Buildings: France, Germany, Italy, and Japan have targets to reduce energy use from total building stock by 25-44 percent between 2020 and 2030. Nine other G20 countries have targets for new buildings to be approximately zero emissions by 2030 or later. Instruments include design codes, incentives for insulation and retrofitting, certification programs, clean fuel requirements, and appliance efficiency standards.
  - Industry: fewer binding sectoral emissions targets—only five G20 countries have binding emissions targets for industry. Tradable performance standards (TPSs) and clean-technology subsidies are less common; Canada and China are exceptions (Canada’s TPSs apply in many provinces; China intends to expand TPS from power to industry).
- Attribution and heterogeneity:
  - Combined policy effects up to 2022 produce CO2 reductions relative to a 2030 baseline varying across countries: reductions between 20 and 50 percent in 11 countries and less than 20 percent in eight countries (Figure 1 summary).
  - Renewable targets make significant contributions to reductions in 15 cases; explicit carbon pricing contributes substantively in eight cases.
  - Where policies overlap (e.g., carbon pricing of power and renewable targets) attributing reductions to individual policies is ambiguous; total CO2 reductions are more reliable than individual attributions.
  - Some economywide NDCs are weak or not binding in four cases—including two of the three largest global emitters (China and India).
  - In seven cases economywide emissions reductions from identified policies fall well short of NDCs; in several cases sectoral policies exceed economywide pledges (Australia, Canada, China, France, Germany, Italy, Saudi Arabia).
- Fiscal spending measures:
  - Some large economies have adopted expenditure-based measures (public funding for clean investment and green subsidies/tax expenditures).
  - The US Inflation Reduction Act of 2022 is estimated to cost nearly $400 billion over 10 years and envisages subsidies and tax incentives for clean electricity and transmission, clean transportation, and energy-efficiency upgrades in homes.
  - The EU has proposed a Green Deal Industrial Plan comprising tax breaks and relaxation of state aid rules to boost renewable private investment.
  - China has scaled up green public investment and solar deployment subsidies under its Made in China 2025 initiative.
  - Other countries (Canada, Japan, Korea) have adopted or are considering similar expenditure-oriented policies.

### Fiscal-policy focus and structure of analysis (paper scope)
- Revenue side: implications of a mix of carbon pricing and non-pricing policies; revenue effects from erosion of existing fuel tax bases as decarbonization proceeds.
- Spending side: public investment in green infrastructure; subsidies for low-carbon technological innovation and deployment.
- Distributional and compensatory measures: fiscal support for vulnerable households and affected firms; compensation payments to low and lower-middle-income countries; international revenue-sharing arrangements.
- Integration: Section IX combines revenue and spending pieces to discuss expected net fiscal impacts across countries; Section X concludes.

*Source: IMF Working Paper — Fiscal Implications of Global Decarbonization (content from the supplied PDF excerpt).*

### Box 1: The Inflation Reduction Act in the US

### Box 1: The Inflation Reduction Act in the US

### Overview
- The 2022 Inflation Reduction Act (IRA) forms the centerpiece of the US climate mitigation strategy.
- The law directs federal funding over a 10-year period (estimated at $394 billion, or 0.17 percent of GDP) to clean energy (especially for clean electricity and transmission, followed by clean transportation), mostly through tax credits.

### Allocation of funding
- 55 percent of the funding is for corporations, including:
  - $30 per MWH for new zero-carbon generation (progressively reducing to $15 per MWH in 2035);
  - $15 per MWH for new nuclear;
  - $1.75 per gallon for sustainable aviation fuel;
  - $3 per kg for clean hydrogen.
- A projected $43 billion is allocated in consumer incentives including tax credits of up to:
  - $7,500 and $4,000 for new and used EVs;
  - $2,000 for heat pumps;
  - 30 percent of the costs of energy efficiency upgrades in homes.

### Domestic-production and procurement requirements
- Many tax incentives contain domestic-production or procurement requirements. Example:
  - 80 percent of the critical minerals for EV batteries must have been recycled in the US (or a country with a free trade agreement with the US) for the vehicle to qualify for the full credit and the battery must have been manufactured in the US.

### International response
- The EU has argued that the IRA’s tax credit for EVs and manufacturing subsidies for battery and wind turbine producers violate World Trade Organization (WTO) rules.
- In response, the EU has proposed the Green Deal Investment Plan, containing €250 billion in new tax breaks to further boost private sector renewable investment along with loosening of the bloc’s state aid rules.

### Additional note
- In a recent IMF staff analysis, Voigts and Paret (forthcoming) arrive at a larger fiscal cost until 2030.

*Source: wpiea2024045-print-pdf - Box 1: The Inflation Reduction Act in the US*

### Box 2: Border Carbon Adjustments

### Box 2: Border Carbon Adjustments

### Definition and purpose
- BCAs are charges on embodied carbon in imports, potentially complemented by rebates for embodied carbon in domestic exports, in order to offset the impact of domestic carbon pricing.
- Purposes:
  - Mitigate competitiveness effects for energy-intensive trade-exposed industries.
  - Level the playing field in domestic markets (for imports) and foreign markets (when rebates are provided on exports).
  - Mitigate carbon leakage effects.
  - Provide incentives for other countries to impose similar carbon prices to preempt the impact of the BCA.
- Intuition: taxing carbon emissions on a destination basis—as opposed to an origin basis—does not induce production distortions.

### Design considerations and administration
- BCAs need to be designed and administered carefully to be effective.
- Coverage and rate design guidance (footnote 29): coverage should be limited to vulnerable firms and any export rates should be based on industry emission rates to preserve firm-level mitigation incentives. See Parry, Dohlman, et al, (2021).

### Revenue estimates and empirical findings
- Potential revenues from BCAs on imports are estimated at around 0.1-0.2 percent of GDP for a $50 per ton charge—for China, India, the EU, and the US (Figure 6).
- With export rebates, net revenues are found to be negative for China and India.
- Figure 6 axis and plotted range (visual): -0.4 -0.3 -0.2 -0.1 0.0 0.1 0.2 (Revenue gains from BCA, percent of GDP) for US, EU-27, India, China — shown with and without export rebate.
- Note: estimates in Figure 6 are based on 2015 embodied carbon data and the figure source is Keen, Parry, and Roaf (2021).

### Broader fiscal and policy implications
- Taxing carbon on a destination basis leaves more scope for countries to exercise their domestic ambitions without hurting competitiveness; BCAs may enable higher domestic carbon prices and thus higher revenue.
- Revenue losses from export rebates might be small compared to the overall revenue gain from comprehensive pricing of domestic carbon emissions.
- Careful targeting of BCAs (limited coverage to vulnerable firms and export rebates set at industry emission rates) helps preserve mitigation incentives at the firm level while addressing competitiveness concerns.

*Source: Box 2, "Border Carbon Adjustments", IMF Working Paper content provided in the source PDF.*

### 140.000 km2—about half of the area of Italy. The raw materials for this much renewable energy are available,

### 140.000 km2—about half of the area of Italy. The raw materials for this much renewable energy are available,

### Renewable fuels and geographic potential
- Most current fuel exporters are well suited for the production of zero carbon fuels because of:
  - favorable renewable energy conditions,
  - available desert space in many cases,
  - existing infrastructure for exporting fuels.
- A quick increase in demand for raw materials requires careful planning of supply.

### Industrial decarbonization: technologies, costs, and policy roles
- Many types of LCTs in manufacturing and construction are still comparatively expensive.
- Some manufacturing processes consume electricity (with emissions attributed to electricity/heat) and also use fossil fuels directly, contributing close to 13 percent of global emissions.
- Technologies to decarbonize these processes exist but are expensive and would require government support to boost uptake.
- Example: steel production
  - Currently mostly produced with coke-based blast furnaces.
  - Options: couple with carbon capture systems or replace with “direct hydrogen reduction”.
  - Governments could support these technologies similarly to early-stage renewable energy support.

### Industrial process emissions and negative emissions
- Emissions from industrial processes (most importantly the production of cement) account for about 6 percent of global emissions (in addition to those associated with electricity consumption and direct fossil fuel consumption by the sector).
- Emissions from industrial processes can be lowered by increasing material efficiency, but within limits.
- Residual emissions need to be compensated through negative emission technologies to withdraw emissions at source or from the atmosphere.
- Carbon storage options are limited; prioritizing carbon storage for emissions that cannot be avoided by other means is suggested.
- Re-using or recycling carbon are further options.

### Agriculture: sources of emissions and policy options
- Agriculture contributes 12 percent to global emissions.
- Livestock production is the largest part of agricultural emissions and releases large amounts of methane.
- From 2001 to 2011, livestock-related sources were estimated to have accounted for two-thirds of global agricultural emissions, with contributions:
  - Enteric fermentation: 40 percent
  - Manure left on pasture: 16 percent
  - Manure management: 7 percent
  - Manure applied to soils: 3 percent
- Policy and mitigation options:
  - Tax meat and dairy products in proportion to the climate damage they cause (indirect extension of carbon pricing to agriculture).
  - Incentivize low-carbon farming practices, e.g., new feed additives, better slurry management, and biorefining.
  - Reduce fertilizer use to lower emissions from nitrogen chemical inputs.
  - Reduce food loss.
  - Support organic farming to sequester more carbon.
  - Note: “Even reducing whaling has a positive effect as whales play a role in capturing carbon from the atmosphere.”

### Feebates: design features and sectoral applications
- General characteristics of feebates:
  - Sliding scale of fees on products/activities with emission rates above a pivot point and sliding rebates for those below the pivot.
  - Promote the full range of behavioral responses for reducing emissions intensity of a sector, but do not promote a demand response (e.g., do not encourage people to drive less).
  - Automatically cost effective because the reward for reducing emissions by an extra ton is the same across behavioral responses within and across firms/households.
  - Need not impose a fiscal cost on the government if pivot point set at industry or market average and updated to maintain revenue neutrality; alternatively pivot point can be scaled to raise revenue.
  - May have greater political acceptability than carbon pricing as they do not impose a new first-order tax burden on the average household or firm (but government is deprived of new revenues).
  - Compatible with existing regulations and provide ongoing incentives to exceed regulatory standards.

- Transportation:
  - New vehicles subject to a fee equal to a CO2 price times the difference between their CO2 emission rate per kilometer and a pivot point emission rate, scaled by lifetime vehicle km driven.
  - Feebates could apply annually to existing vehicles to promote faster retirement of older vehicles (administratively more complex).
  - Some countries incorporate feebate elements in registration tax systems; tax schedules can produce implicit CO2 prices often around $600 per ton or more in European countries.
  - Subsidies for EVs would decline over time as average fleet emission rate declines and cost differentials fall (e.g., with improvements in EV battery technology).

- Carbon-intensive manufacturing (aluminum, steel, cement, chemicals):
  - Firms subject to a fee = CO2 price × (firm’s CO2 per unit output − pivot point emission rate) × firm output.
  - Feebates avoid a first-order burden on the average producer by not charging on remaining emissions, helping alleviate competitiveness concerns.
  - Separate scheme needed per distinct industry; emissions prices across schemes could be harmonized for cost effectiveness.
  - Capacity requirements simpler than ETSs: government monitors firm emission rates but not trading markets.

- Power sector:
  - Generators subject to a fee = CO2 price × (their CO2 per kWh averaged across plants − pivot point CO2 per kWh) × electricity generation.
  - Feebates could promote shifting from coal to gas and to nuclear, renewables, and fossil generation with carbon capture and storage.
  - Capacity requirements: monitoring CO2 emission rates for power generators and applying fees/rebates.

- Buildings and appliances:
  - Feebates might be integrated into annual property tax systems in countries with energy performance ratings to promote insulation upgrades.
  - Could promote energy-efficient appliances by levying fees on product sales proportional to difference between energy consumption rates and market-wide rate.
  - Schemes could tax gas- and oil-based heating systems and subsidize electric heat pumps.

- Forestry:
  - National forestry feebate could promote afforestation, reduced deforestation, and enhanced management practices (planting larger trees, lengthening rotations, fertilizing, tree thinning).
  - Landowners reducing carbon storage relative to a baseline year might face fees; those increasing storage receive subsidies.
  - Requires reasonably well defined property rights at agricultural/forestry border and capacity for regular measurement (satellites, aerial photography, on-the-ground tree sampling).
  - Feebates should involve rental payments (annualized: CO2 price times the interest rate) rather than large one-off payments due to non-permanence risks.
  - Fees/rebates might build off registries of landowners and be introduced sequentially, starting with the subsidy part.

### Methane mitigation in extractives
- Methane is an especially potent greenhouse gas and the bulk of low-cost mitigation opportunities are in the extractives sector.
- Mitigation options include:
  - Capturing methane at the mine mouth or wellhead and using it for on-site or regional power generation.
  - Compressing or liquifying the gas for sale.
  - Flaring methane (releases CO2, a less potent GHG than methane).
  - Improving maintenance of infrastructure for gas processing and distribution.
- Methane emissions could be subject to taxes integrated into existing fiscal regimes for extractives; trade exposure of sector (oil and gas) could lead to pressure for revenue-neutral taxes partially replacing other broader taxes.
- Feebate variant for methane:
  - Fee = CO2 price × (firm’s methane emissions per unit output in CO2 equivalent − pivot point emission rate) × firm output.
  - Complication: firm-level emissions not directly monitored presently; firms may need to develop metering capacity or face proxy emissions fees based on technological characteristics with ability to petition for lower taxes via demonstration.

### International maritime transport
- International maritime transport currently accounts for 2 percent of global CO2 emissions.
- The International Maritime Organization (IMO) pledged to reduce CO2 emissions from international maritime transport by 50 percent below 2008 levels by 2050.
- Achieving this requires development and deployment of zero emission vessels (ZEVs) such as hydrogen ships.
- With aggressive R&D, a carbon levy with price in the ballpark of $75 per ton in 2030 would be sufficient to promote ZEV deployment as the fleet turns over.
  - Such a tax would raise considerably more revenue (tens of billions of dollars a year) than needed for the R&D and would likely face stiff opposition at the IMO.
- Feebate alternative for shipping:
  - Ship operators taxed on the difference between their CO2 emissions per ton-mile and a pivot point CO2 emission rate per ton-mile, multiplied by total ton-miles.
  - Separate feebates needed for container and bulk shipping given different emissions intensities.
  - For a given feebate price, pivot point can be chosen to meet a revenue target; separate feebates (with harmonized prices) may be needed for bulk and container shipping.
  - Fees/rebates could be applied by a new fund under IMO supervision based on fuel use and ton-km data routinely reported to the IMO; port access could be denied to operators unable to verify payments.

_Italic: IMF WORKING PAPERS Fiscal Implications of Global Decarbonization, Working Paper No. WP/2024/045_

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_Source: https://www.imf.org/-/media/files/publications/wp/2024/english/wpiea2024045-print-pdf.pdf_