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International Monetary Fund. Middle East and Central Asia Dept.

IMF Country Report No. 22/114

International Monetary Fund. Asia and Pacific Dept

The government of Japan has emphasized the need to develop a financial system that can support the transition to a low carbon economy and manages the financial stability implications of the transition and the impact of climate change. Regulatory initiatives are underway to achieve these goals yet more will be needed. Green financial products and markets are developing but remain still small. Climate-related reporting and disclosure, important for the development of green financial markets and the management of financial stability risks, are still limited. Progress is being made on assessing the financial risks associated with climate change.

Manuel Linsenmeier, Mr. Adil Mohommad, and Gregor Schwerhoff
Carbon pricing is considered the most efficient policy to reduce greenhouse gas emissions but it has also been conjectured that other policies need to be implemented first to remove certain economic and political barriers to stringent climate policy. Here, we examine empirical evidence on the the sequence of policy adoption and climate policy portfolios of G20 economies and other major emitters that eventually implemented a national carbon price. We find that all countries adopted carbon pricing late in their instrument sequence after the adoption of (almost) all other instrument types. Furthermore, we find that countries that adopted carbon pricing in a given year had significantly larger climate policy portfolios than those that did not. In the last part of the paper, we examine heterogeneity among countries that eventually adopted a carbon price. We find large variation in the size of policy portfolios of adopters of carbon pricing, with more recent adopters appearing to have introduced carbon pricing with smaller portfolios. Furthermore, countries that adopted carbon pricing with larger policy portfolios tended to implement a higher carbon price. Overall, our results thus suggest that policy sequencing played an important role in climate policy, specifically the adoption of carbon pricing, over the last 20 years.