Countries Must Contain Global Warming While Keeping Debt in Check

IMF Blog, October 2, 2023

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Managing the climate transition requires a fiscal balancing act with the right mix of policies to achieve climate goals, fiscal sustainability, and political feasibility.
Relying mostly on spending measures could raise public debt "by 45 percent to 50 percent of gross domestic product by midcentury."
An optimal mix of revenue- and spending-based mitigation measures enacted now can limit fiscal costs of emission reductions while achieving climate goals.

Scaling up spending-heavy decarbonization efforts can become increasingly costly and may raise debt "by 45 percent to 50 percent of gross domestic product by midcentury."
Without additional revenue or spending measures, public debt in advanced economies would rise "by 10 percent to 15 percent of GDP by 2050."
Postponing carbon pricing would be costly, adding "0.8 percent to 2 percent of GDP to public debt for each year of delay."
Nearly "50" advanced and emerging market economies already have carbon pricing schemes in place; more than "20" countries are contemplating their introduction.
Emerging market and developing economies face similar expected rises in debt from a climate policy package compared with advanced economies, but:
- They have larger carbon revenue potential.
- They have higher investment needs.
- They face higher borrowing costs that are sensitive to debt level.
- Many have already high debt and rising interest costs, alongside sizable adaptation needs and sustainable development aspirations.

Carbon pricing:
- Is necessary but not always sufficient to reduce emissions.
- Should be an integral part of any policy package.
- Political hurdles can be overcome, as shown by experiences in Chile, Singapore, and Sweden.
Complementary measures:
- Carbon pricing should be complemented by other mitigation instruments to address market failures and promote innovation and deployment of low-carbon technologies.
- A pragmatic and equitable proposal calls for an international carbon price floor, differentiated across countries at different levels of economic development.
- Associated carbon revenues could be partly shared across countries to facilitate the green transition.
Just transition and redistribution:
- Robust fiscal transfers to vulnerable households, workers, and communities are needed as part of a just transition.
Fiscal management:
- Governments must enhance spending efficiency.
- Governments must build greater capacity for raising tax revenues by broadening the tax base and improving fiscal institutions.
Sequencing and timing:
- An appropriate mix and sequencing of revenue- and spending-based climate measures enacted now can limit fiscal costs.
- Delays in implementing carbon pricing increase debt burdens materially ("0.8 percent to 2 percent of GDP to public debt for each year of delay").

No single country or the public sector alone can solve the climate threat; the private sector must fulfill the bulk of climate financing needs.
Firms can contribute through resilience, energy use reduction, and investments in energy efficiency (evidence from surveys in Germany and the United States following 2022 energy price spikes).
Emerging market and developing countries need more concessional financing, transfers of knowledge, and sharing of established low-carbon technologies.
Multilateral and international efforts to support the green transition include the IMF’s Resilience and Sustainability Trust.
Recent announcements and participation (for example, the Nairobi Declaration and the participation of the African Union in the Group of Twenty) can help push for a practical global deal on an international carbon price floor and support developing countries.

Source: Countries Must Contain Global Warming While Keeping Debt in Check — IMF blog, October 2, 2023.