Fiscal Implications of Global Decarbonization

IMF Working Papers, March 1, 2024

Source details

Authors: Simon Black, Ruud de Mooij, Vitor Gaspar, Ian W.H. Parry, Karlygash Zhunussova
Published: March 1, 2024
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9798400269516.001

Internationally coordinated climate mitigation policies can effectively put the world on a path toward achieving the agreed Paris temperature goals.
Coordination could be initiated by large players, such as China, the US, India, the African Union, and the European Union.
Fiscal implications over time are shaped by a combination of rising carbon prices, the gradual erosion of existing fuel tax bases, and possible revenue sharing arrangements.
Public spending rises during the transition to build green public infrastructure, promote innovation, and support clean technology deployment.
Countries will need financing for compensating vulnerable households and industries, and to transfer funds to poor countries.
With well-designed climate-fiscal policy relying on carbon pricing, global decarbonization will have anything from moderately positive to moderately negative impacts on fiscal balances in high-income countries.
For middle and low-income countries, net fiscal impacts are generally positive and can be significant.
Revenue sharing at the global level would make an historical contribution to breaching the financial divide between rich and poor countries.

Rising carbon prices are a key driver of revenue generation under coordinated mitigation.
Existing fuel tax bases will gradually erode as decarbonization reduces fossil fuel consumption.
Possible revenue sharing arrangements would reallocate some carbon-related revenues across countries.

Increased public spending required to:
- build green public infrastructure;
- promote innovation;
- support clean technology deployment.
Additional financing needs to:
- compensate vulnerable households and industries;
- transfer funds to poor countries.

High-income countries:
- Net fiscal impacts range from moderately positive to moderately negative, conditional on well-designed climate-fiscal policy that relies on carbon pricing.
Middle- and low-income countries:
- Net fiscal impacts are generally positive and can be significant.
Global revenue sharing:
- Could historically narrow the financial divide between rich and poor countries.

Design climate-fiscal policy around carbon pricing to mobilize revenues and guide emissions reductions.
Plan for transitional public spending on infrastructure, innovation, and clean technology deployment.
Establish mechanisms for compensating vulnerable households and industries during the transition.
Consider international revenue sharing to support poor countries and address global equity concerns.