## Countries Must Contain Global Warming While Keeping Debt in Check

_IMF Blog, October 2, 2023_

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**Canonical URL:** [Countries Must Contain Global Warming While Keeping Debt in Check](https://www.imf.org/en/blogs/articles/2023/10/02/countries-must-contain-global-warming-while-keeping-debt-in-check)

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## Bibliographic details
- Authors: Era Dabla-Norris, Ruud de Mooij, Raphael Lam, Christine Richmond
- Published: October 2, 2023

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### Executive summary
- 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.

### Major findings and projections
- 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.

### Policy analysis and recommendations
- 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").

### Roles and international cooperation
- 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.*

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## References

- [latest Fiscal Monitor](https://www.imf.org/en/Publications/FM/Issues/2023/10/10/fiscal-monitor-october-2023?cid=bl-com-AM2023-FMOEA2023002)
- [proposal](https://www.imf.org/en/Publications/staff-climate-notes/Issues/2021/06/15/Proposal-for-an-International-Carbon-Price-Floor-Among-Large-Emitters-460468)
- [analysis](https://www.imf.org/en/Publications/FM)
- [build greater capacity](https://www.imf.org/en/Publications/Staff-Discussion-Notes/Issues/2023/09/15/Building-Tax-Capacity-in-Developing-Countries-535449)
- [Resilience and Sustainability Trust](https://www.imf.org/en/About/Factsheets/Sheets/2023/Resilience-Sustainability-Facility-RSF)

_Source: https://www.imf.org/en/blogs/articles/2023/10/02/countries-must-contain-global-warming-while-keeping-debt-in-check_