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International Monetary Fund. External Relations Dept.

In many countries, poverty and environmental problems are mutually reinforcing. The only way to break this vicious cycle is to promote sustainable economic growth, which is one of the IMF’s core objectives. To highlight possibilities for sustainable growth and environmentally friendly policies, the Statistics Department and the IMF Institute hosted a seminar on the environment and its implications for the IMF. The immediate motivation for the seminar was a new handbook on environmental accounting: Integrated Environmental and Economic Accounting 2003 (IEEA, 2003), now in its final draft version. Five international organizations—the United Nations (UN), the European Commission, the IMF, the Organization for Economic Cooperation and Development (OECD), and the World Bank—worked with the London Group on Environmental Accounting (mainly composed of national statisticians with an interest in environmental accounts) to draft and publish the handbook. Adriaan Bloem and Russel Freeman, both from the IMF’s Statistics Department, give an account of the seminar’s main findings.

Ms. Valerie Reppelin and Mr. John Norregaard

Abstract

In December 1997, 160 nations meeting in Kyoto, Japan agreed to cut back emissions of carbon dioxide and other greenhouse gases. While ratified by only a very small number of countries so far, the “Kyoto Protocol” calls for industrial countries to reduce their average emissions during 2008-12 to about 5 percent below 1990 levels. Some countries pledged to go further: the European Union set an 8 percent target, while the Unites States and Japan agreed to cut emissions by 7 and 6 percent, respectively. The Protocol allows some industrial countries to modestly increase their emissions in the near term, while special terms apply to members of the former Soviet Union. Since developing countries face potential technical and economic constraints, the Protocol does not oblige them to cut back their emissions.

Ms. Valerie Reppelin and Mr. John Norregaard

Abstract

Explores different ways of controlling pollution through -green-taxes or permits, and evaluates their advantages and disadvantages. While many countries use environmental taxes, interest in tradable permits is growing.

Mr. John Norregaard and Ms. Valerie Reppelin
This paper examines the relative merits of two dominant economic instruments for reducing pollution—”green” taxes and tradable permits. Theoretically, the two instruments share many similarities, and on balance, neither seems preferable to the other. In practice, however, most countries have relied more on taxes than on permits to control pollution. The analysis suggests a number of lessons to be learned from country experiences regarding the design and implementation of both instruments. While many, particularly European countries, currently have long-term programs involving environmental taxes, a willingness to experiment with tradable permits seems to be growing, especially given the Kyoto protocol emission targets.
Nicoletta Batini, Ian W.H. Parry, and Mr. Philippe Wingender
Denmark has a highly ambitious goal of reducing greenhouse gas emissions 70 percent below 1990 levels by 2030. While there is general agreement that carbon pricing should be the centerpiece of Denmark’s mitigation strategy, pricing needs to be effective, address equity and leakage concerns, and be reinforced by additional measures at the sectoral level. The strategy Denmark develops can be a good prototype for others to follow. This paper discusses mechanisms to scale up domestic carbon pricing, compensate households, and possibly combine pricing with a border carbon adjustment. It also recommends the use of revenue-neutral feebate schemes to strengthen mitigation incentives, particularly for transportation and agriculture, fisheries and forestry, though these schemes could also be applied more widely.
Can Sever and Manuel Perez-Archila
This paper builds a framework to quantify the financial stability implications of climate-related transition risk in Colombia. We explore risks imposed on the banking system based on scenarios of an increase in the domestic carbon tax by using bank- and firm-level data. Focusing on the deterioration of firms’ balance sheets and the exposure of banks to different sectors, we assess the extent to which such policy shock would transmit from nonfinancial firms to the banking system. We observe that sectors are affected unevenly by a higher carbon tax. Agriculture, manufacturing, electricity, wholesale and retail trade, and transportation sectors appear to be the most important in the transmission of the risk to the banking system. Results also suggest that a large increase in the carbon tax can generate significant but likely manageable financial stability risks, and that a gradual increase in the carbon tax to meet a higher target over several years could be preferable in terms of financial risks. A gradual increase would also have the benefit of allowing for a smoother adjustment to higher carbon tax for stakeholders.
Mr. Kenneth M. Miranda and Mr. Timothy R. Muzondo

For the latest thinking about the international financial system, monetary policy, economic development, poverty reduction, and other critical issues, subscribe to Finance & Development (F&D). This lively quarterly magazine brings you in-depth analyses of these and other subjects by the IMF’s own staff as well as by prominent international experts. Articles are written for lay readers who want to enrich their understanding of the workings of the global economy and the policies and activities of the IMF.

Mr. Ronald T. McMorran and Ms. Laura Wallace

TO SUSTAIN and improve living standards, countries must simultaneously pursue sound macroeconomic and environmental policies. This will require macroeconomists and environmentalists to work together.