Finding the Right Policy Mix to Safeguard our Climate
IMF Blog, October 7, 2020
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- Authors: the end of this century. Keeping temperatures to levels deemed safe by scientists requires bringing net carbon emissions to zero on net globally by mid-century.
- Published: October 7, 2020
Overview
- Global temperatures have increased by about 1°C since the pre-industrial era because of heat-trapping greenhouse gases accumulating in the atmosphere.
- Without strong action, global temperatures could increase by an additional 2–5°C by the end of this century.
- Keeping temperatures to levels deemed safe by scientists requires bringing net carbon emissions to zero on net globally by mid-century.
- The World Economic Outlook argues economic policy tools can pave a road toward net zero emissions by 2050 while supporting economic growth, employment, and income equality.
Policy tools and how they work
- Economic policies affect climate through two main channels:
- Composition of energy (high- vs. low-emission sources).
- Total energy usage.
- Carbon tax:
- Makes dirty fuels more expensive, incentivizing shifts toward greener fuels.
- Reduces total energy consumption because energy becomes more expensive.
- Green energy subsidies and direct public investment:
- Increase the share of low-emissions energy.
- By making energy cheaper overall, can stimulate or at least not reduce total energy demand.
Findings from the World Economic Outlook scenario analysis
- Recommendation: Pair carbon taxes with policies that cushion consumers’ energy costs and initially opt for a green investment stimulus (clean public transportation, smart electricity grids, retrofitting buildings).
- Two goals of green infrastructure push:
- Boost global GDP and employment in the initial years of the recovery from the COVID-19 crisis.
- Increase productivity in low-carbon sectors, incentivizing private investment and easing adaptation to higher carbon prices.
- Quantified impacts:
- A comprehensive mitigation strategy could boost global GDP in the first 15 years of the recovery by about 0.7 percent of global GDP on average.
- Employment could increase for about half of that period, leading to about 12 million extra persons being employed globally.
- Long-term effects:
- Preannounced and gradually rising carbon prices become a powerful tool to deliver the needed reduction in carbon emissions as the recovery takes hold.
- The net effect would approximately halve the expected output loss from climate change and provide long-term, real GDP gains well above the current course from 2050 onward.
Transition costs and heterogeneity across countries
- Aggregate transitional costs:
- Between 2037–50, the mitigation strategy would hold global GDP down by about 0.7 percent on average each year.
- By 2050, the drag would be about 1.1 percent relative to unchanged policies.
- Contextualization:
- These costs are manageable given global output is projected to grow by 120 percent between now and 2050.
- Drag on output could be reduced if policies incentivize technological development in clean technologies (e.g., R&D subsidies).
- The package would be neutral for output during that period if benefits from better health outcomes (due to reduced pollution) or less traffic congestion are considered.
- Cross-country variation:
- Some advanced economies may experience smaller economic costs or even gains throughout the transition due to earlier investments in renewables.
- Countries with fast economic or population growth (India, especially) and most oil producers should expect larger economic costs by forgoing cheap forms of energy, such as coal or oil.
- Output costs remain small for most countries and must be weighed against avoided climate damages and health benefits from reduced fossil fuel use.
Distributional impacts and measures to reduce the burden
- Low-income households are more likely to be hurt by carbon pricing because they:
- Spend a relatively large share of their income on energy.
- Are more likely to be employed in carbon-intensive manufacturing and transportation.
- Policy options to limit adverse effects:
- Rebate carbon revenues through cash transfers.
- To fully protect consumption of households in the bottom 40 percent of the income distribution:
- The U.S. government would need to transfer 55 percent of all carbon pricing revenues.
- The Chinese government would need to transfer 40 percent of all carbon pricing revenues.
- Higher public spending on clean public infrastructure to create new jobs in low-carbon, often labor-intensive sectors to offset job losses in high-carbon sectors.
- Retooling workers to smooth job transitions to low-carbon sectors.
Policy recommendation
- Governments should move swiftly to ensure a growth-friendly and just transition by:
- Implementing a green investment stimulus early in the recovery.
- Preannouncing and gradually raising carbon prices paired with measures to cushion consumer impacts.
- Supporting R&D in clean technologies and targeted transfers or public spending to protect vulnerable households and workers.
Based on Chapter 3 of the World Economic Outlook, “Mitigating Climate Change – Growth and Distribution-Friendly Strategies,” by Philip Barrett, Christian Bogmans, Benjamin Carton, Oya Celasun, Johannes Eugster, Florence Jaumotte, Adil Mohommad, Evgenia Pugacheva, Marina M. Tavares, and Simon Voigts.