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IMF Survey: Long-Term, Flexible Climate Policies Can Cut Mitigation Costs

April 3, 2008

  • Poor countries will be hit earlier and harder by climate change
  • Policies to cut greenhouse gas emissions need not hobble economies
  • Carbon pricing must be global, long term, and flexible

The economic costs of addressing climate change—one of the world's greatest collective action problems—can be contained by putting in place well-designed policies that are implemented across many countries, according to IMF analysis.

Long-Term, Flexible Climate Policies Can Cut Mitigation Costs

Putting price on emissions of greenhouse gases that contribute to climate change would adversely affect productivity, economic growth (photo: Newscom)


An analytic chapter in the IMF's April 2008 World Economic Outlook, entitled "Climate Change and the Global Economy," examines the macroeconomic and financial consequences of policies aimed at mitigating climate change. It finds that putting a price on emissions of greenhouse gases that contribute to climate change would have an adverse effect on productivity and economic growth. Saving and investment, capital flows, and exchange rates are also likely to be affected.

To minimize the costs of mitigation policies, it would be critical to aim at a long-term and credible policy framework that is flexible enough to adjust to emerging information and changing economic conditions. Also, the policies need to be implemented as broadly as possible, while ensuring that costs are equitably distributed across countries.

Finance & Development on climate change

The March 2008 issue of the IMF's quarterly magazine Finance & Development tries to further the debate on the effects of climate change, warning that farm production will fall dramatically—especially in developing countries—if steps are not taken to curb carbon emissions. Other articles in the magazine on this theme argue that policies to reduce greenhouse gas emissions need not hobble economies, that financial markets can help address climate change, that fiscal instruments can help countries adapt, and that the problems of climate change and sustainable development could be solved together.

Climate Change and the Economy
Natalia Tamirisa

Climate change can be addressed without either hurting macroeconomic stability and growth or putting an undue burden on the countries least able to bear the costs of policies. If policies are well designed, their economic costs should be manageable.

Global Warming and Agriculture
William R. Cline

If steps are not taken to curb carbon emissions, agricultural productivity could fall dramatically, especially in developing countries. It is therefore strongly in these countries' own interest that they participate actively in international emissions abatement programs.

Paying for Climate Change
Benjamin Jones, Michael Keen, and Jon Strand

Governments must manage the incentives for households and firms to counter and adapt to climate change. The role of fiscal instruments is central—indeed, indispensable—for both mitigating and adapting to climate change.

The Greening of Markets
Paul Mills

Recognizing how financial markets will react to climate change initiatives, and how they can best promote mitigation and adaptation, will become crucial to shaping future policy and minimizing its costs.

Rising Temperatures, Rising Risks
Mohan Munasinghe

Although climate change and sustainable development are complex, interlinked problems that pose a challenge to humanity, they could be solved together by integrating adaptation and mitigation response measures into the broader rubric of sustainable development strategies.

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