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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.
Mr. Simon Black, Ian Parry, Mr. James Roaf, and Karlygash Zhunussova
Achieving the Paris Agreement’s temperature goals requires cutting global CO2 emissions 25 to 50 percent this decade, followed by a rapid transition to net zero emissions. The world is currently not yet on track so there is an urgent need to narrow gaps in climate mitigation ambition and policy. Current mitigation pledges for 2030 would achieve just one to two thirds of the emissions reductions needed for limiting warming to 1.5 to 2oC. And additional measures equivalent to a global carbon price exceeding $75 per ton by 2030 are needed. This IMF Staff Climate Note presents extensive quantitative analyses to inform dialogue on closing mitigation ambition and policy gaps. It shows purely illustrative pathways to achieve the needed global emissions reductions while respecting international equity. The Note also presents country-level analyses of the emissions, fiscal, economic, and distributional impacts of carbon pricing and the trade-offs with other instruments—comprehensive mitigation strategies will be key.
Mr. Simon Black, Koralai Kirabaeva, Ian Parry, Mr. Mehdi Raissi, and Karlygash Zhunussova
This paper discusses a comprehensive strategy for implementing Mexico’s climate mitigation commitments. Progressively increasing carbon prices from current levels of US$3 per ton to US$75 per ton by 2030 would achieve Mexico’s mitigation pledges, while raising annual revenues of 1.8 percent of GDP and cumulatively averting 11,600 deaths from local air pollution. The carbon price would raise fossil fuel and electricity prices, imposing burdens of 2.7 percent of consumption on the average Mexican household. However, recycling carbon pricing revenues would offset most of this burden, and targeted transfers could make the reform pro-poor and pro-equity. Additionally, the economic efficiency costs of carbon pricing (0.3 percent of GDP in 2030) are more than offset by local air pollution and other domestic environmental benefits (before even counting climate benefits). Mexico would need a more ambitious 2030 target if it were to follow many other countries in adopting a midcentury ‘net-zero’ emissions target. To enhance the effectiveness of the mitigation strategy, carbon pricing can be reinforced with sectoral instruments, such as feebates in the transport, power, industry, building, forestry, extractive, and agricultural sectors. Complementary policies are also needed to support public investment in the clean energy transition.
Ian W.H. Parry, Mr. Peter Dohlman, Mr. Cory Hillier, Mr. Martin D Kaufman, Florian Misch, Mr. James Roaf, Mr. Christophe J Waerzeggers, and Miss Kyung Kwak
This Climate Note discusses the rationale, design, and impacts of border carbon adjustments (BCAs), charges on embodied carbon in imports potentially matched by rebates for embodied carbon in exports. Large disparities in carbon pricing between countries is raising concerns about competitiveness and emissions leakage, and BCAs are a potentially effective instrument for addressing such concerns. Design details are critical, however. For example, limiting coverage of the BCA to energy-intensive, trade-exposed industries facilitates administration, and initially benchmarking BCAs on domestic emissions intensities would help ease the transition for emissions-intensive trading partners. It is also important to consider how to apply BCAs across countries with different approaches to emissions mitigation. BCAs are challenging because they pose legal risks and may be at odds with the differentiated responsibilities of developing countries. Furthermore, BCAs provide only modest incentives for other large emitting countries to scale carbon pricing—an international carbon price floor would be far more effective in this regard.
Ian Parry, Mr. Simon Black, and Nate Vernon
This paper provides a comprehensive global, regional, and country-level update of: (i) efficient fossil fuel prices to reflect their full private and social costs; and (ii) subsidies implied by mispricing fuels. The methodology improves over previous IMF analyses through more sophisticated estimation of costs and impacts of reform. Globally, fossil fuel subsidies were $5.9 trillion in 2020 or about 6.8 percent of GDP, and are expected to rise to 7.4 percent of GDP in 2025. Just 8 percent of the 2020 subsidy reflects undercharging for supply costs (explicit subsidies) and 92 percent for undercharging for environmental costs and foregone consumption taxes (implicit subsidies). Efficient fuel pricing in 2025 would reduce global carbon dioxide emissions 36 percent below baseline levels, which is in line with keeping global warming to 1.5 degrees, while raising revenues worth 3.8 percent of global GDP and preventing 0.9 million local air pollution deaths. Accompanying spreadsheets provide detailed results for 191 countries.
Nicoletta Batini, Mr. Simon Black, Ms. Oana Luca, and Ian Parry
The Netherlands has ambitious greenhouse gas emission reduction targets for the future - to cut them by 49 percent below 1990 levels by 2030 and 95 percent by 2050. These targets and the likely new EU-wide targets under the recent EU Green Deal entail a rapid acceleration in decarbonization. This paper discusses the government’s mitigation strategy and advances several recommendations to complement and reinforce that strategy and to achieve better alignement of the effective carbon prices across sectors. The paper discusses alternatives to make the recently-introduced industry carbon levy more effcient and recomends the use of revenue-neutral feebate schemes in industry, transportation, buildings, and agriculture. For power generation, it recommends eliminating taxes on residential and industrial electricity, supplementing the coal phaseout plan with an increase in the CO2 emissions floor price. The impacts of these reforms on consumption would be low and relatively evenly split across the income distribution.
Ian Parry and Mr. Philippe Wingender
Finland has pledged to cut net greenhouse gas emissions to zero by 2035 and has sectoral targets for deploying electric vehicles, phasing out coal generation, and oil-based space heating. Fiscal policies at the national and sectoral level could play a critical role in achieving these objectives. Carbon dioxide emissions are already priced significantly in Finland but prices vary substantially across fuels and sectors. The paper discusses a reform to both scale up, and progressively harmonize, pricing while using revenues to address equity issues. It also discusses the potential use of revenue-neutral feebate schemes to strengthen mitigation incentives for the transportation, industry, building, forestry, and agricultural sectors.