Getting Real on Meeting Paris Climate Change Commitments

IMF Blog, May 3, 2019

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Authors: Christine Lagarde, Vitor Gaspar
Published: May 3, 2019

Overview

Climate change is described as "the great existential challenge of our times" with "especially severe consequences for low-income countries."
Without mitigating actions, global temperatures are projected to rise by 4oC above pre-industrial levels by the end of the century—with increasing and irreversible risks including collapsing ice sheets, inundation of low-lying island states, extreme weather events, and runaway warming scenarios.
A warming climate could lead to increased extinction risk for a large fraction of species, the spread of diseases, undermining of food security, and reduced renewable surface water and groundwater resources.
190 parties submitted climate strategies for the 2015 Paris Agreement—nearly all with some form of mitigation commitment.

The need for effective carbon pricing

Carbon pricing—charging for the carbon content of fossil fuels or their emissions—is characterized as "the single most effective mitigation instrument."
Carbon pricing provides across-the-board incentives to reduce energy consumption, use cleaner fuels, and mobilize private finance, while also generating revenues that can be allocated to reorient public finances in support of sustainable and inclusive growth.
The IMF paper analyzes required carbon prices to meet Paris CO2 mitigation pledges and considers the impact on CO2 emissions of $35 and $70 per ton carbon prices.
Key quantitative findings:
- A carbon price significantly below $35 per ton would be sufficient to meet the pledge for the G20 countries, which together account for four-fifths of global emissions, and this is also true for key G20 members such as China and India.
- Although a $35 per ton price would roughly double coal prices, it would add only about 5 to 7 percent to pump prices for road fuels.
- For some countries with more ambitious pledges, even a $70 per ton price would fall short of what is needed.
- Even if current pledges were fully met, they would only contain projected warming to 3oC rather than the 1.5-2oC goal of the Paris Agreement.
- The 2oC target would require cutting emissions by roughly a third by 2030 and a global carbon price of around $70 per ton.
- There are over fifty carbon tax and emissions trading systems now in operation at the regional, national, and sub-national level.
- The global average carbon price is only $2 per ton.
- The IMF paper illustrates trade-offs for 135 countries using a tool that quantifies the emissions, fiscal, and economic impacts of a range of alternative mitigation instruments.
Political economy and implementation notes:
- Carbon pricing can be politically very difficult; thus implementation should be managed comprehensively, typically involving gradual phasing in and explicit communication on use of revenue.
- Revenue use must balance distribution, efficiency, and political considerations.
- Other instruments may be needed to reinforce or substitute for carbon pricing when political constraints limit price increases.
- A promising approach is complementing carbon pricing with revenue-neutral tax-subsidy schemes to incentivize cleaner power generation, cleaner vehicles, and energy efficiency.
International cooperation proposal:
- A voluntary carbon price floor arrangement among large emitters could scale up ambition by guaranteeing a minimum level of mitigation effort and mitigating competitiveness concerns.
- Advanced countries could accept a greater responsibility for mitigation through a higher minimum price requirement.
- The regime could be designed flexibly to accommodate national circumstances and policies.

Reforming energy subsidies

Fossil fuel use causes local air pollution deaths, road congestion, and accidents in addition to climate damage.
Many countries are "getting energy prices wrong at present," even aside from climate concerns.
Estimates in a new IMF working paper put global subsidies for fossil fuel energy implied by the underpricing of supply and environmental costs at $5.2 trillion in 2017, or 6.5 percent of world GDP, largely unchanged from previous estimates.
Many benefits of price reform are local, enabling countries to make themselves better off while also helping address global climate change—summarized as "solidarity is self-interest."

Policy implications and recommendations

Ministries of finance should seek opportunities to provide strong incentives through carbon and energy pricing reform, mindful of political and distributional constraints.
Revenue from carbon pricing should be allocated to reorient public finances in support of sustainable and inclusive growth; options include investing in people and infrastructure to attain the Sustainable Development Goals or reducing taxes that harm work incentives and growth.
Manage the political economy by:
- Gradually phasing in carbon pricing.
- Explicitly communicating the use of associated revenue and balancing distributional, efficiency, and political considerations.
- Using complementary instruments (e.g., revenue-neutral tax-subsidy schemes) to achieve mitigation where direct carbon price increases are politically difficult.
Internationally, consider voluntary mechanisms (e.g., carbon price floor among large emitters) with differentiated responsibilities to scale up ambition.

Source: Getting Real on Meeting Paris Climate Change Commitments — Christine Lagarde, Vitor Gaspar, May 3, 2019

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Getting Real on Meeting Paris Climate Change Commitments

Source details

Other formats

Bibliographic details

Overview

The need for effective carbon pricing

Reforming energy subsidies

Policy implications and recommendations

Content in this bundle

References