{
  "title": "Further Delaying Climate Policies Will Hurt Economic Growth",
  "publication": "IMF Blog, October 5, 2022",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2022/10/05/further-delaying-climate-policies-will-hurt-economic-growth",
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  "summary": "The transition to a greener future has a price—but the longer countries wait to make the shift, the larger the costs",
  "sections": [
    {
      "heading": "Key findings",
      "content": "- The world must cut greenhouse gas emissions by at least a quarter before the end of this decade to achieve carbon neutrality by 2050.\n- A budget-neutral policy package (greenhouse gas taxes + transfers to households, subsidies to low-emitting technologies, and labor tax cuts) phased in immediately and over eight years would:\n  - Slow global economic growth by 0.15 percentage point to 0.25 percentage point annually from now until 2030.\n  - Raise inflation moderately in most regions by 0.1 percentage point to 0.4 percentage point.\n- For Europe, the United States, and China, average costs over eight years range between 0.05 percentage point and 0.20 percentage point.\n- Fossil-fuel exporters and energy-intensive emerging market economies face the highest costs and drive results for the rest of the world.\n- Partially credible climate policies could almost double the cost of transitioning to renewables by 2030.\n- Delaying implementation until 2027 (while still achieving the same long-term cumulative emissions reduction) would:\n  - Require a more rapid phase-in and a higher greenhouse gas tax because emissions accumulate from 2023 to 2026.\n  - Even with credible monetary policy and rapid electricity decarbonization, GDP would have to drop by 1.5 percent below baseline over four years to drive inflation back to target.\n- Delay beyond 2027 would require an even more rushed transition, with inflation containable only at significant cost to real GDP.\n- Policymakers should weigh short-term transition costs against potential long-term output losses from unchecked climate change, which could be orders of magnitude larger according to some estimates."
    },
    {
      "heading": "Model and assumptions",
      "content": "- The analysis uses a model that splits countries into four regions: China, the euro area, the United States, and a block representing the rest of the world.\n- Each region introduces budget-neutral policies combining:\n  - Greenhouse gas taxes increased gradually to achieve a 25 percent reduction in emissions by 2030.\n  - Transfers to households.\n  - Subsidies to low-emitting technologies.\n  - Labor tax cuts.\n- The macroeconomic cost depends on how quickly regions can wean off fossil fuels for electricity generation; a more difficult transition requires larger greenhouse gas tax increases or equivalent regulations."
    },
    {
      "heading": "Regional impacts and distributional considerations",
      "content": "- Global average growth cost: 0.15 percentage point to 0.25 percentage point annually (now until 2030).\n- Europe, the United States, China: 0.05 percentage point to 0.20 percentage point on average over eight years.\n- Highest costs borne by fossil-fuel exporters and energy-intensive emerging market economies.\n- Policy implication: increased international cooperation on finance, technology, and know-how transfer—especially for low-income countries—to reduce global costs."
    },
    {
      "heading": "Inflation, monetary policy, and credibility",
      "content": "- Gradual and credibly implemented climate mitigation policies:\n  - Give households and firms time and motive to transition.\n  - Require monetary policy adjustments to keep inflation expectations anchored.\n  - Pose smaller and more manageable costs for central banks than typical supply shocks that cause sudden energy-price surges.\n- Central bank choices illustrated for the United States:\n  - Stabilize a price index that includes greenhouse gas taxes, which would cost an additional 0.1 percentage point of growth annually.\n  - Or let the tax fully pass through to prices.\n- If monetary policy loses credibility and inflation expectations de-anchor, climate policies could trigger second-round effects, significantly raising the output-inflation trade-off.\n- Analytical chapter guidance: design climate policies to curb the greenhouse gas tax’s impact on inflation using subsidies, feebates, or labor tax cuts."
    },
    {
      "heading": "Delayed implementation scenario and implications",
      "content": "- Scenario: delay implementation until 2027, achieve same long-term cumulative emissions reduction via faster later cuts.\n- Consequences:\n  - Requires higher greenhouse gas taxes and a steeper emissions decline to offset emissions accumulated from 2023 to 2026.\n  - Even under favorable conditions (credible monetary policy; rapid electricity decarbonization), GDP would need to drop by 1.5 percent below baseline over four years to bring inflation back to target.\n  - Further delay beyond 2027 increases the severity of the required rapid transition and raises the cost to real GDP."
    },
    {
      "heading": "Policy recommendations and design principles",
      "content": "- Implement climate mitigation policies now and phase them in gradually to minimize near-term macroeconomic costs.\n- Ensure policy credibility so firms and households internalize future tax paths in investment decisions; partial credibility substantially raises transition costs.\n- Coordinate internationally to share finance, technology, and know-how—particularly to support low-income countries and reduce global adjustment costs.\n- Use policy instruments that offset inflationary pressure from greenhouse gas taxes, such as subsidies, feebates, or labor tax cuts.\n- Central banks should adjust policy to keep inflation expectations anchored; stabilizing a price index that includes greenhouse gas taxes is one option albeit with modest growth costs.\n\nSource: Further Delaying Climate Policies Will Hurt Economic Growth, Benjamin Carton and Jean-Marc Natal, October 5, 2022.\n\n---\n\n\n References\n\n- long-term benefits\n- World Economic Outlook\n- stoke wage-price spiral\n\nSource: https://www.imf.org/en/blogs/articles/2022/10/05/further-delaying-climate-policies-will-hurt-economic-growth"
    }
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    "Authors: Benjamin Carton, Jean-Marc-Natal",
    "Published: October 5, 2022",
    "The world must cut greenhouse gas emissions by at least a quarter before the end of this decade to achieve carbon neutrality by 2050.",
    "A budget-neutral policy package (greenhouse gas taxes + transfers to households, subsidies to low-emitting technologies, and labor tax cuts) phased in immediately and over eight years would:",
    "For Europe, the United States, and China, average costs over eight years range between 0.05 percentage point and 0.20 percentage point.",
    "Fossil-fuel exporters and energy-intensive emerging market economies face the highest costs and drive results for the rest of the world.",
    "Partially credible climate policies could almost double the cost of transitioning to renewables by 2030.",
    "Delaying implementation until 2027 (while still achieving the same long-term cumulative emissions reduction) would:",
    "Delay beyond 2027 would require an even more rushed transition, with inflation containable only at significant cost to real GDP.",
    "Policymakers should weigh short-term transition costs against potential long-term output losses from unchecked climate change, which could be orders of magnitude larger according to some estimates.",
    "The analysis uses a model that splits countries into four regions: China, the euro area, the United States, and a block representing the rest of the world.",
    "Each region introduces budget-neutral policies combining:",
    "The macroeconomic cost depends on how quickly regions can wean off fossil fuels for electricity generation; a more difficult transition requires larger greenhouse gas tax increases or equivalent regulations.",
    "Global average growth cost: 0.15 percentage point to 0.25 percentage point annually (now until 2030).",
    "Europe, the United States, China: 0.05 percentage point to 0.20 percentage point on average over eight years.",
    "Highest costs borne by fossil-fuel exporters and energy-intensive emerging market economies.",
    "Policy implication: increased international cooperation on finance, technology, and know-how transfer—especially for low-income countries—to reduce global costs.",
    "Gradual and credibly implemented climate mitigation policies:",
    "Central bank choices illustrated for the United States:",
    "If monetary policy loses credibility and inflation expectations de-anchor, climate policies could trigger second-round effects, significantly raising the output-inflation trade-off.",
    "Analytical chapter guidance: design climate policies to curb the greenhouse gas tax’s impact on inflation using subsidies, feebates, or labor tax cuts.",
    "Scenario: delay implementation until 2027, achieve same long-term cumulative emissions reduction via faster later cuts.",
    "Consequences:",
    "Implement climate mitigation policies now and phase them in gradually to minimize near-term macroeconomic costs.",
    "Ensure policy credibility so firms and households internalize future tax paths in investment decisions; partial credibility substantially raises transition costs.",
    "Coordinate internationally to share finance, technology, and know-how—particularly to support low-income countries and reduce global adjustment costs.",
    "Use policy instruments that offset inflationary pressure from greenhouse gas taxes, such as subsidies, feebates, or labor tax cuts.",
    "Central banks should adjust policy to keep inflation expectations anchored; stabilizing a price index that includes greenhouse gas taxes is one option albeit with modest growth costs.",
    "[long-term benefits](https://www.imf.org/en/Publications/WEO/Issues/2020/09/30/world-economic-outlook-october-2020)",
    "[World Economic Outlook](https://www.imf.org/en/Publications/WEO/Issues/2022/10/11/world-economic-outlook-october-2022)",
    "[stoke wage-price spiral](https://www.imf.org/en/Blogs/Articles/2022/10/05/wage-price-spiral-risks-appear-contained-despite-high-inflation)"
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