Climate Change—Our Most Global Challenge

IMF News, June 2, 2021

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Climate Change—Our Most Global Challenge

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• Published: June 2, 2021

I. Introduction

• Speaker and context:
  • Tao Zhang, Deputy Managing Director, IMF.
  • BIS/BdF/IMF/NGFS “Green Swan” Conference, June 2, 2021.
• Framing:
  • Pandemic highlighted global fragility; renewed emphasis on the threat posed by climate change and the need for urgent action.
  • Plan of remarks: present a “globalist view,” discuss climate policy instruments, and discuss how domestic policy can be supported internationally.
• Notable quotation:
  • “the pandemic won’t be over anywhere until it’s over everywhere.”

II. A globalist view — climate as our most global challenge

• Core premises:
  • National origin of greenhouse gas emissions does not alter their global impact; “the externality here is perfect and complete.”
  • Collective assessment and joint decision-making are required on where and when to abate emissions and how to allocate economic costs.
  • The world will need to get to net-zero emissions, and “sooner rather than later.”
• Principles endorsed:
  • Work together (Paris Agreement, COP26).
  • Look for win-win opportunities where mitigation supports development and growth.
  • Be fair — recognize differing perspectives on responsibility (current emitters, cumulative historical emissions, emissions per dollar of GDP, emissions per capita) and respect poorer countries’ right to development while protecting the poor and vulnerable.
• Mechanisms that make win-wins plausible:
  • Modern technologies and a services-oriented economic structure reduce fossil-fuel dependence.
  • Climate policy induces technological change and positive spillovers to clean-energy sectors.
  • Local co-benefits from cutting coal and diesel (less air pollution, improved health) directly boost economic outcomes, particularly for the poor in developing countries.
  • Carbon pricing can yield substantial revenues that can be used to reduce distortionary taxes, finance green investment, and support those adversely affected.
• Empirical reference:
  • IMF’s World Economic Outlook report (October) showed that “a policy package including a rising carbon tax and a frontloaded green investment stimulus could actually boost growth and create millions of jobs over the medium term, all while effectively reducing emissions and protecting the vulnerable.”
• Policy anchor:
  • Paris Agreement expectation: advanced countries to pledge more stringent near-term mitigation, accompanied by a commitment to provide $100 billion per year to support climate action in developing economies.

III. Choice of policy instruments — national policies and the enabling environment

• Overarching point:
  • No one-size-fits-all solution; governments must create an enabling environment so that firms and financial actors change behavior away from carbon-intensive activities.
• Preferred economic approach:
  • Carbon pricing (charges on carbon content) is described as the most effective and efficient instrument: incentivizes reduced energy use, shifts to cleaner fuels, directs investment to clean technologies, and generates revenues.
• Implementation modalities:
  • Carbon tax:
  • Provides more certainty over emissions prices, aids investment mobilization.
  • Relatively straightforward to administer (can be built into existing road and fuel taxes; apply to petroleum products, coal, natural gas).
  • Revenues accrue directly to finance ministries.
  • Emission trading systems:
  • Can mimic advantages of carbon taxes but require auctioning allowances to generate revenues, price stability mechanisms (e.g., price floors), and potentially more onerous administrative requirements.
  • Examples: European Union, Korea (focused on power and industrial sectors).
  • China will launch a nationwide scheme “this month,” based on a tradable performance standard.
• Role of regulatory and sectoral tools:
  • Regulatory approaches, sectoral policies, feebates, and other tools have roles, though economic theory suggests they are less flexible and less efficient than market-based approaches.
• Financial sector role (conference focus):
  • Mobilize green finance and build resilience to physical and transition risks.
  • Regulatory/supervisory actions needed: improve availability of data, develop common taxonomies, improve disclosure of climate information, develop methodologies to quantify climate risks.
  • Such financial-sector measures require the underlying government incentives (e.g., carbon pricing) to be effective.

IV. Role of the international community

• Rationale:
  • It is difficult for any one nation to aggressively decarbonize on its own; international coordination can reduce competitiveness concerns and support equitable outcomes.
• Three emphasized international roles:

1. Coordinated carbon pricing — differentiated international carbon price floor:

• Could complement and reinforce the Paris Agreement.
• Could cover all emissions and begin with, for example, the G20 and the European Union.
• Could be differentiated to account for countries’ different levels of development and accommodate ambitious regulatory approaches that imply a shadow price.
• Would reduce the need for unilateral border carbon adjustments, which typically price emissions in trade flows (a small proportion of total emissions), but border adjustments require careful design (e.g., limit coverage to energy intensive, trade exposed industries) and face WTO legal risks.

2. Mobilize climate finance and technology transfers:

• These can incentivize increased climate ambition among recipient countries and reduce the need for differentiated price floors or border adjustments.
• Modalities discussed:
• Outright grant and loan assistance, and technology transfers (not charity; the $100 billion commitment was central to the Paris Agreement to exploit least-cost mitigation opportunities in developing economies and ensure equitable burden-sharing).
• Offsetting: voluntary corporate offsets and sovereign-level offsets; verifying additionality of abatement is a challenge under active work.
• Debt-for-climate swaps: being collaborated on with the World Bank; the ultimate scale remains to be seen.
• Transfer of financial resources and technologies from richer to poorer countries is critical.

3. Contributions of international organizations:

• Through analysis, policy advice, technical assistance, and convening power, international organizations can elevate policy effectiveness, harness momentum, raise awareness, and promote policy coordination.
• IMF-specific actions:
• Represent near-universal membership to ensure solutions work for all countries.
• Mainstream climate issues into surveillance and operational activities while remaining true to IMF mandate.
• Leverage external expertise via collaboration with World Bank, BIS, and others.
• Explore whether members with strong external positions would consider channeling a portion of potential new allocation of Special Drawing Rights, or “SDRs,” to members with financing needs, including for green purposes.

V. Conclusion — urgency and optimism

• Time horizon and urgency:
  • Actions taken during the next 5 or 10 years will determine whether global temperatures can be kept from rising more than 2 degrees.
• Tone:
  • Optimistic: there are ways to decarbonize that can be good for growth and jobs if implemented correctly.
• Call to action:
  • All actors—governments, the international community, the private and financial sectors—must play complementary roles and “join together to address climate change, our most global challenge.”

Tao Zhang, Deputy Managing Director, IMF — BIS/BdF/IMF/NGFS “Green Swan” Conference, June 2, 2021.

References

• Tao Zhang
• People's Republic of China and the IMF
• France and the IMF
• Republic of Korea and the IMF
• Speeches
• PRESS CENTER
• https://www.imf.org/en/home