Climate Mitigation

IMF work analyzes the economic impact of policies to mitigate climate change.

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IMF work on the Environment

While economic development is critical for lifting people out of poverty and raising living standards for the broader population, it also causes harmful side effects—particularly for the environment—with potentially sizable costs for the macro-economy.

For example, rising atmospheric accumulations of greenhouse gases could substantially raise global temperatures, posing considerable risks. Poor air quality is a major human health problem. And road congestion can impose substantial burdens on urban economies, by reducing the productive time of the workforce.

Fiscal instruments (emissions taxes, trading systems with allowance auctions, fuel taxes, charges for scarce road space and water resources, etc.) can and should play a central role in promoting greener growth. These instruments are:

  •   - effective at reducing environmental harm—so long as they are carefully           targeted at the source of the problem (e.g., emissions);
  •   - cost-effective (i.e., they impose the smallest burden on the economy for a       given environmental improvement)—so long as the fiscal dividend from these   policies is exploited (e.g., revenues are used to strengthen fiscal positions or   reduce other taxes that discourage work effort and investment);
  •   - strike the right balance between environmental benefits and economic costs—   so long as they are set to reflect environmental damages.

And there is plenty of scope for fiscal reform. Many countries subsidize the production and consumption of fossil fuels (rather than charging to discourage their use). And even when energy is heavily taxed, these taxes may not be very effective from an environmental perspective (e.g., taxes may be imposed on electricity use or vehicle sales rather than emissions or traffic congestion).

The Fund promotes the use of fiscal reform to address environmental problems through:

  •   -analytical work—for example, staff published a collected volume of papers on designing fiscal policy to mitigate greenhouse gases; the IMF assesses the magnitude of energy subsidies; and staff quantify environmental damages to provide guidance on appropriate levels of energy taxes in different countries. 
  •   -technical assistance—to member countries interested in environmental tax reform. 
  •   -outreach activities—including regular presentations by staff at conferences (e.g., UN climate meetings) and events the IMF cosponsors with other international organizations and research institutes.
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    IMF Papers

    Nature’s Solution to Climate Change: A strategy to protect whales can limit greenhouse gases and global warming, Finance & Development (September, 2019)

    When it comes to saving the planet, one whale is worth thousands of trees.

    Fiscal Policies for Paris Climate Strategies—from Principle to Practice (May 1, 2019)

    This paper discusses the role of, and provides practical country-level guidance on, fiscal policies for implementing climate strategies using a unique and transparent tool laying out trade-offs among policy options.

    Carbon Taxation for International Maritime Fuels: Assessing the Options (September 11, 2018)

    This paper seeks to inform dialogue about the possibility of a carbon tax as a key element of GHG mitigation policy for international maritime transport. The paper discusses the case for the tax over alternative mitigation instruments, options for the practical design issues, and then presents estimates of the impacts of carbon taxation and other instruments from an analytical model of the maritime sector.

    Mitigation Policies for the Paris Agreement: An Assessment for G20 Countries (August 30, 2018)

    This paper provides an illustrative sense of this information for G20 member countries (which account for about 80 percent of global emissions) under plausible (though inevitably uncertain) projections for future fuel use and price responsiveness. Quantitative results underscore the generally strong case for (comprehensive) pricing over other instruments, its small net costs or often net benefits (when domestic environmental gains are considered), but also the potentially wide dispersion (and hence inefficiency) in emissions prices implied by countries’ mitigation commitments.

    Canada’s Carbon Price Floor (March 8, 2018)

    This paper discusses the rationale for, and design of, the price floor requirement; its (provincial-level) environmental, fiscal, and economic welfare impacts; monitoring issues; and (national-level) incidence. The general conclusion is that the welfare costs and implementation issues are manageable, and pricing provides significant new revenues. A challenge is that the floor price by itself appears well short of what will be needed by 2030 for Canada’s Paris Agreement pledge. 

    How Should Shale Gas Extraction Be Taxed? (November 16, 2017)

    This paper suggests that the environmental and commercial features of shale gas extraction do not warrant a significantly different fiscal regime than recommended for conventional gas. Fiscal policies may have a role in addressing some environmental risks (e.g., greenhouse gases, scarce water, local air pollution) though in some cases their net benefits may be modest. Simulation analyses suggest, moreover, that special fiscal regimes are generally less important than other factors in determining shale gas investments (hence there appears little need for them), yet they forego significant revenues.

    Reforming Energy Policy in India: Assessing the Options (May 3, 2017)

    Spreadsheet models are used to assess the environmental, fiscal, economic, and incidence effects of a wide range of options for reducing fossil fuel use in India. Among the most effective options is ramping up the existing coal tax. Annually increasing the tax by INR 150 ($2.25) per ton of coal from 2017 to 2030 avoids over 270,000 air pollution deaths, raises revenue of 1 percent of GDP in 2030, reduces CO2 emissions 12 percent, and generates net economic benefits of approximately 1 percent of GDP. The policy is mildly progressive and (at least initially) imposes a relatively modest cost burden on industries.