## Finding the Right Policy Mix to Safeguard our Climate

_IMF Blog, October 7, 2020_

## Source details

**Canonical URL:** [Finding the Right Policy Mix to Safeguard our Climate](https://www.imf.org/en/blogs/articles/2020/10/07/blog-finding-the-right-policy-mix-to-safeguard-our-climate)

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## Bibliographic details
- 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

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### 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.*

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## References

- [عربي](https://www.imf.org/ar/News/Articles/2020/10/07/blog-finding-the-right-policy-mix-to-safeguard-our-climate)
- [日本語](https://www.imf.org/ja/News/Articles/2020/10/07/blog-finding-the-right-policy-mix-to-safeguard-our-climate)
- [Português](https://www.imf.org/pt/News/Articles/2020/10/07/blog-finding-the-right-policy-mix-to-safeguard-our-climate)
- [latest World Economic Outlook](https://www.imf.org/en/Publications/WEO/Issues/2020/09/30/world-economic-outlook-october-2020)

_Source: https://www.imf.org/en/blogs/articles/2020/10/07/blog-finding-the-right-policy-mix-to-safeguard-our-climate_