Urgent action to cut greenhouse gas (GHG) emissions is needed now. Early next year, all countries will set new emissions targets for 2035 while revising their 2030 targets. Global GHGs must be cut by 25 and 50 percent below 2019 levels by 2030 to limit global warming to 2°C and 1.5°C respectively. But current targets would only cut emissions by 12 percent, meaning global ambition needs to be doubled to quadrupled. Further delay will lead to an ‘emissions cliff edge’, implying implausible cuts in GHGs and putting put 1.5°C beyond reach. This Note provides IMF staff’s annual assessment of global climate mitigation policy. It illustrates options for equitably aligning country targets with the Paris Agreement’s temperature goals. It also provides guidance on modelling needed to set emissions targets and quantify climate mitigation policy impacts.
Sub-Saharan Africa needs to significantly accelerate its electricity generation. While hydropower is prominent in some countries, solar and wind power generation has lagged other world regions, even though sub-Saharan Africa has some of the most favorable conditions. A mix of domestic and external financing can increase both renewable electricity generation and GDP. In a scenario where about $25 bn in climate finance flows are allocated annually to renewable energy, renewable electricity production could be up to 24 percent higher than in a scenario excluding this financing, and annual GDP growth would be boosted by 0.8 percentage point on average over the next decade, accompanied by stronger labor demand in the electricity sector. Policies can help catalyze climate finance. An ambitious package of governance, business regulations, and external sector reforms is associated with a 20 percent increase in climate finance flows and a 7 percent increase in electricity generation over five years. In addition, implementing climate policies is linked to increases in green foreign direct investment announcements and green electricity production.
Meeting COP28 goals requires a substantial increase in clean energy investment by 2030, including in emerging market and developing economies (EMDEs). Amid domestic financial constraints, foreign direct investment (FDI) could play a key role in EMDEs’ ability to close their renewable energy investment gap and finance green projects, more broadly. This Note finds that strengthening climate policies boosts FDI into renewable energy in EMDEs, especially in those with solar power potential, while less clear effects are found for FDI into EVs and green hydrogen possibly due to their recent emergence. Closing the average climate policy gap with respect to AEs could secure 40 percent of the private finance needed for renewable energy investment in EMDEs, helping overcome the impact of high financing costs. Strengthening the macro-structural framework, such as through improving trade and capital account openness and institutional quality, would also raise green FDI inflows, complementing climate policies. Case studies show that countries that attracted FDI into renewable energy put in place a large and diverse set of policies in the electricity sector, including those that secure a revenue stream for investors in the initial phases, such as power-purchase agreements/feed-in tariffs, renewables targets, and complementary investments. Countries that successfully attracted FDI into EVs relied on the development of national sectoral strategies including production and adoption subsidies, prior comparative advantage in the sector, and bilateral alliances with key players in the EV market. Finally, comprehensive national hydrogen strategies that leverage international efforts to boost production, and good conditions for production of renewable energy, were key drivers of green hydrogen FDI. Global initiatives such as the Just Energy Transition Partnerships and the EU strategy for green hydrogen are benefitting FDI to EMDEs.
The need to decarbonize international aviation and maritime has long been overlooked. The two sectors account for a small but rapidly growing share of global CO2 emissions, and could rise to as much as 15 to 40 percent by 2040. Pricing these emissions could help global climate policy in two ways. First, it could accelerate technological development while incentivizing efficiency, kick-starting the sectors’ transition to net zero while addressing the sectors’ hitherto favorable tax treatment. Second, pricing could raise up to $200 billion a year in revenues by 2035, which could be allocated to climate finance or other uses. There are significant political obstacles, however, notably reaching consensus on revenue allocation and managing price impacts, which are substantive for flight tickets but less so for shipped goods. Pricing variants, like ‘fee and rebate’ schemes (feebates), have lower price impacts but raise fewer revenues. This paper discusses these policies, using a new model to quantify impacts on fuel use, emissions, revenues, production and economic costs, and on vulnerable states.