## Climate Change Mitigation Will Cause Large Adjustments in Current Account Balances

_IMF Blog, August 16, 2022_

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**Canonical URL:** [Climate Change Mitigation Will Cause Large Adjustments in Current Account Balances](https://www.imf.org/en/blogs/articles/2022/08/16/climate-change-mitigation-will-cause-large-adjustments-in-current-account-balances)

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## Bibliographic details
- Authors: Rudolfs Bems, Luciana Juvenal
- Published: August 16, 2022

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### Overview
- A climate mitigation policy mix of carbon taxes, green subsidies, and infrastructure investment could reduce global balances by a quarter by 2027.
- Analysis is drawn from the IMF’s External Sector Report and presented as the IMF’s Chart of the Week.
- Authors: Rudolfs Bems, Luciana Juvenal — August 16, 2022.

### Key findings
- The carbon tax has the biggest effect on current account balances.
- By discouraging energy usage, economic activity is likely to shift toward more labor-intensive, low-carbon sectors.
- Global interest rates are likely to fall in the longer term because of the decline in investment in fossil fuels, following an initial infrastructure investment-induced rise.
- Current account effects will differ across countries:
  - Greener economies: different (generally smaller) adjustments.
  - More fossil-fuel-dependent economies: current account balances may increase because of the sharp fall in investment in carbon-intensive sectors.
- The shift in global capital flows is likely toward greener advanced economies, imposing a disproportionate burden of economic adjustment on lower-income fossil-fuel-exporting developing countries, which historically have contributed little to carbon emissions.

### Mechanisms and scenarios
- Policy mix components considered:
  - Carbon taxes (largest single driver of current account changes).
  - Green subsidies.
  - Infrastructure investment (initially raises interest rates through investment demand; longer-term effect lowers interest rates via reduced fossil-fuel investment).
- Economic reallocation:
  - Reduced energy usage → increased activity in labor-intensive, low-carbon sectors.
  - Reduced investment in carbon-intensive sectors → capital reflows toward greener economies.

### Distributional implications
- Capital flows shift toward greener advanced economies.
- Lower-income fossil-fuel-exporting developing countries face a disproportionate adjustment burden despite historically low emissions contributions.
- Outcomes vary by country depending on fossil fuel dependency and green sector readiness.

### Policy recommendations and coordination
- Increased burden sharing in mitigation efforts could help limit the shift in capital flows. This includes:
  - Higher carbon taxes and emission cuts for advanced economies.
  - Accelerating investment in green energy and renewables in developing countries via increased financing and technology transfers from advanced countries.
- Emphasis: Both advanced and developing countries must participate in reducing emissions.
- To succeed, policy coordination and burden-sharing arrangements will be key.

*Rudolfs Bems and Luciana Juvenal — August 16, 2022*

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## References

- [Chart of the Week](https://www.imf.org/en/News/Chart-of-the-week)
- [External Sector Report](https://www.imf.org/en/Publications/ESR/Issues/2022/08/04/2022-external-sector-report)
- [https://www.imf.org/wp-content/uploads/2022/08/RES-Climate-Ch1.jpg](https://www.imf.org/wp-content/uploads/2022/08/RES-Climate-Ch1.jpg)

_Source: https://www.imf.org/en/blogs/articles/2022/08/16/climate-change-mitigation-will-cause-large-adjustments-in-current-account-balances_