This Climate Change Policy Assessment (CCPA) takes stock of the Federated States of Micronesia (FSM)’s climate response plans, from the perspective of their macroeconomic and fiscal implications. CCPA explores the possible impact of climate change and natural disasters and the cost of FSM’s planned response. It suggests macroeconomically relevant reforms that could strengthen the national strategy and identifies policy gaps and resource needs. FSM has made progress toward its Nationally Determined Contribution mitigation pledge by beginning to expand renewable power generation and improve its efficiency. The authorities plan to continue this and encourage the take-up of energy efficient building design and appliances. Accelerating adaptation investments is paramount, which requires addressing critical capacity constraints and increasing grant financing. It is recommended that FSM needs to increase its capacity to address natural disaster risks following the expiry of Compact-related assistance in 2023. It is advised to improve climate data collection and use, including on the costs of high and low intensity disasters and disaster response expenditure.
Mr. Sebastian Acevedo Mejia, Claudio Baccianti, Mr. Mico Mrkaic, Natalija Novta, Evgenia Pugacheva, and Petia Topalova
We explore the extent to which macroeconomic policies, structural policies, and institutions can mitigate the negative relationship between temperature shocks and output in countries with warm climates. Empirical evidence and simulations of a dynamic general equilibrium model reveal that good policies can help countries cope with negative weather shocks to some extent. However, none of the adaptive policies we consider can fully eliminate the large aggregate output losses that countries with hot climates experience due to rising temperatures. Only curbing greenhouse gas emissions—which would mitigate further global warming—could limit the adverse macroeconomic consequences of weather shocks in a long-lasting way.
Manoj Atolia, Mr. Prakash Loungani, Helmut Maurer, and Willi Semmler
The Integrated Assessment Model (IAM) has extensively treated the adverse effects of climate
change and the appropriate mitigation policy. We extend such a model to include optimal
policies for mitigation, adaptation and infrastructure investment studying the dynamics of the
transition to a low fossil-fuel economy. We focus on the adverse effects of increase in
atmospheric CO2 concentration on households. Formally, the model gives rise to an optimal
control problem of finite horizon consisting of a dynamic system with five-dimensional state
vector consisting of stocks of private capital, green capital, public capital, stock of brown
energy in the ground, and emissions. Given the numerous challenges to climate change policies
the control vector is also five-dimensional. Our solutions are characterized by turnpike
property and the optimal policy that accomplishes the objective of keeping the CO2 levels
within bound is characterized by a significant proportion of investment in public capital going
to mitigation in the initial periods. When initial levels of CO2 are high, adaptation efforts also
start immediately, but during the initial period, they account for a smaller proportion of
government's public investment.