IMF Survey: Climate Change and the Global Economy

IMF News, November 6, 2007

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Most scientists agree that the global temperature is rising as a result of man-made emissions of greenhouse gases, and that the earth's climate is changing.
Physical and biological consequences are uncertain but can include:
- a rise in sea levels
- increased frequency or intensity of heat waves, droughts, hurricanes, floods
- a loss of biodiversity
Estimates of macroeconomic effects span a wide range, "ranging from negligible (even positive at low levels of warming) to a 10 percent reduction in world GDP for average global warming of 6 degrees Celsius."
Workshop participants underscored a high degree of uncertainty around estimates of economic costs; available models often report a central tendency that masks tail risks (relatively favorable to catastrophic scenarios).
Distributional effects:
- Small, poor, resource-dependent economies are likely to be most affected.
- Effects on economic growth, trade, financial flows, and migration depend on physical/biological system responses and how well countries adapt and cope with institutional and social stresses.

Policy robustness to uncertainty is essential; example:
- Under a quantity-based scheme (cap and trade), faster-than-expected economic growth raises abatement costs, making original targets hard to achieve and weakening incentives for participation.
- Costs increase would be considerably smaller under a price-based scheme (a carbon tax), or a "hybrid" scheme that converts a quantity-based scheme into a price-based plan using a safety valve if abatement costs rise above a certain threshold.
International competitiveness is a critical consideration for business sectors evaluating participation in international agreements.
Advanced economies should lead mitigation efforts, but participation of developing economies is crucial.
Proposed international approach highlighted:
- Combine strong individual emissions targets for developed countries with trading schemes open to developing countries.
Policy context:
- These issues are likely to remain high on the international policy agenda as countries debate the future of the Kyoto agreement, set to expire in 2012.

The IMF is building its capacity to assess the macroeconomic implications of climate change and policies to abate it as part of a strategic effort to understand long-term challenges to the global economy.
The IMF is not a center of expertise on the scientific aspects of climate change but aims to form a basis for policy advice to member countries and contribute to international efforts.
Ongoing IMF work (in coordination with the World Bank) includes, among other things, an appendix in the October 2007 World Economic Outlook (WEO) summarizing the state of knowledge and policy debate on key economic aspects of climate change.
A September workshop organized by the IMF's Research Department discussed likely effects on the global economy and debated policies to mitigate adverse effects at minimum cost.

IMF Survey: Climate Change and the Global Economy — By Natalia Tamirisa, IMF Research Department, November 6, 2007.