IMF Working Papers

Climate change poses significant macroeconomic challenges due to its impacts and the energy transition needed to address it. Despite the Paris Agreement’s goal to keep global warming ‘well below 2°C’, and ideally to 1.5°C, the world is not on track. Temperatures are likely to pass 1.5°C this decade and would exceed 2°C by 2050, even if national targets are met. Limiting the ‘overshoot’ in peak temperatures by cutting global emissions of greenhouse gases would reduce climate risks. But current national emissions targets fall short, aiming for a 7 percent cut compared to the 30 to 45 percent needed by 2035. Using in-house models, we illustrate options and impacts of closing gaps to align emissions with temperature goals while minimizing climate risks. However, achieving these targets implies drastic changes in the energy system. Ensuring security of energy supply, which is critical for macroeconomic stability and growth, entails effective macroeconomic policies.