## Further Delaying Climate Policies Will Hurt Economic Growth _IMF Blog, October 5, 2022_ ## Source details **Canonical URL:** [Further Delaying Climate Policies Will Hurt Economic Growth](https://www.imf.org/en/blogs/articles/2022/10/05/further-delaying-climate-policies-will-hurt-economic-growth) ## Other formats - [Markdown version](/en/blogs/articles/2022/10/05/further-delaying-climate-policies-will-hurt-economic-growth/index.md) - [Structured JSON version](/en/blogs/articles/2022/10/05/further-delaying-climate-policies-will-hurt-economic-growth/index.json) - [Bundle manifest](/en/blogs/articles/2022/10/05/further-delaying-climate-policies-will-hurt-economic-growth/bundle-manifest.json) ## Bibliographic details - Authors: Benjamin Carton, Jean-Marc-Natal - Published: October 5, 2022 --- ### Key findings - 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: - Slow global economic growth by 0.15 percentage point to 0.25 percentage point annually from now until 2030. - Raise inflation moderately in most regions by 0.1 percentage point to 0.4 percentage point. - 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: - Require a more rapid phase-in and a higher greenhouse gas tax because emissions accumulate from 2023 to 2026. - 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. - 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. ### Model and assumptions - 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: - Greenhouse gas taxes increased gradually to achieve a 25 percent reduction in emissions by 2030. - Transfers to households. - Subsidies to low-emitting technologies. - Labor tax cuts. - 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. ### Regional impacts and distributional considerations - 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. ### Inflation, monetary policy, and credibility - Gradual and credibly implemented climate mitigation policies: - Give households and firms time and motive to transition. - Require monetary policy adjustments to keep inflation expectations anchored. - Pose smaller and more manageable costs for central banks than typical supply shocks that cause sudden energy-price surges. - Central bank choices illustrated for the United States: - Stabilize a price index that includes greenhouse gas taxes, which would cost an additional 0.1 percentage point of growth annually. - Or let the tax fully pass through to prices. - 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. ### Delayed implementation scenario and implications - Scenario: delay implementation until 2027, achieve same long-term cumulative emissions reduction via faster later cuts. - Consequences: - Requires higher greenhouse gas taxes and a steeper emissions decline to offset emissions accumulated from 2023 to 2026. - 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. - Further delay beyond 2027 increases the severity of the required rapid transition and raises the cost to real GDP. ### Policy recommendations and design principles - 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. *Source: Further Delaying Climate Policies Will Hurt Economic Growth, Benjamin Carton and Jean-Marc Natal, October 5, 2022.* --- ## References - [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) _Source: https://www.imf.org/en/blogs/articles/2022/10/05/further-delaying-climate-policies-will-hurt-economic-growth_