Reaching Net Zero Emissions
IMF Blog, July 22, 2021
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- Authors: Florence Jaumotte, Gregor Schwerhoff
- Published: July 22, 2021
Overview
- Since the 2015 Paris Agreement, countries have intensified climate action and many have committed to reach net zero emissions by 2050, meaning that any additional carbon emissions will be offset completely by carbon emissions withdrawn from the atmosphere.
- The carbon budget to limit global warming to well below 2°C is running out quickly; more frequent and intense disasters, a decline in agricultural productivity, and rising sea levels will grow more common if the goal is not met.
- The IMF analysis finds that delaying action on carbon pricing by 10 years would likely result in missing a mid-century net zero emission target by a large margin, since the prices required at that point to reach those goals would appear unviable.
Carbon price
- Carbon pricing (carbon tax or emissions trading schemes or equivalent measures such as sector-level regulations) is a key element of the decarbonization strategy.
- Green investment and R&D support alone are unlikely to be enough to reach net zero emissions by mid-century.
- Carbon pricing raises the cost of high-carbon energy, incentivizing a shift to cleaner fuels and energy efficiency; increasing the supply of clean energy without pricing carbon tends to lower energy cost but does not incentivize energy efficiency as much.
- An agreement on minimum carbon prices among key emitters, with differentiated prices according to level of development, could facilitate action by addressing concerns about competitiveness losses and carbon leakage for firms in energy-intensive and trade-exposed sectors.
Green investment
- Radically transforming the energy system requires scaled-up investments for:
- shifting from fossil fuels to renewables;
- smart electricity networks;
- energy efficiency measures;
- electrification in sectors like transport, buildings, and industry;
- R&D for low-carbon technologies.
- Investment dynamics:
- In many sectors, reducing emissions involves higher upfront investment for new infrastructure but lower recurrent costs due to reduced fuel consumption.
- Investment is described as hump-shaped: an increase in the next 20 years and a decrease to recent historical levels after that.
- Aggregate investment needs:
- An estimated additional $6 to 10 trillion in global investments, both public and private, are needed in the next decade to mitigate climate change.
- This amounts to a cumulative 6-10 percent of annual global GDP.
- According to International Energy Agency data, about 30 percent of additional investment, on average globally, is expected to come from public sources — that is a cumulative 2-3 percent of annual GDP for the decade 2021 to 2030.
- The remaining 70 percent would be private.
- Policy levers to mobilize investment:
- Use COVID-19 fiscal recovery packages to invest in a low-carbon transition.
- Move toward comprehensive green budgeting to examine “brown” and “green” incentives and align budgets with nationally determined contributions (NDCs) and the Paris Agreement goals.
- Improve investment frameworks, create pipelines of bankable projects, and use international public financing to reduce perceived risks and bring down the high cost of capital, especially in emerging and developing economies.
- Financial sector policies: require disclosures of climate-related risks and establish a common taxonomy of green and brown assets to channel financial flows into sustainable investments.
Just transition
- A just transition has domestic and international dimensions.
- Domestic measures:
- Help households struggling to afford basic necessities pay for higher energy costs.
- Support coal miners and other workers and communities dependent on high-carbon sectors for their livelihoods.
- International measures:
- Financial support is necessary for developing economies, which are expected to incur greater costs in the transition yet have limited means to pay.
- Many developing economies are prepared to ramp up their NDCs if they receive climate finance.
- Because many of the world’s lowest-cost mitigation opportunities exist in emerging and developing economies, climate finance advances global interest by enabling those opportunities.
Global dynamics and implications
- Major carbon emitters such as China, the EU, Japan, Korea, and the US have pledged to reach net zero emissions by mid-century, which will reduce a large share of global emissions and provide technology and policy solutions for other countries.
- Without a global climate policy, today’s smaller emitters could become major emitters as populations and incomes grow; these countries often face faster-growing energy needs and less budgetary space to finance green investments.
- Climate finance would allow for more even burden-sharing and help the global economy reach net zero emissions.
IMF Blog — Reaching Net Zero Emissions (July 22, 2021).