Mr. Jiaqian Chen, Maksym Chepeliev, Mr. Daniel Garcia-Macia, Ms. Dora M Iakova, Mr. James Roaf, Ms. Anna Shabunina, Dominique van der Mensbrugghe, and Mr. Philippe Wingender
This paper aims to contribute to the debate on the choice of policies to reach the more ambitious 2030 emission reduction goals currently under consideration. It provides an analysis of the macroeconomic and distributional impacts of different options to scale up the mitigation effort, and proposes enhancements to the existing EU policies. A key finding is that a well-designed package, consisting of more extensive carbon pricing across EU countries and sectors, combined with cuts in distortionary taxes and targeted green investment support, would allow the EU to reach the emission goals with practically no effects on aggregate income. To enhance the social and political acceptance of climate policies, part of the revenue from carbon pricing should be used to compensate the most vulnerable households and to support the transition of workers to greener jobs. A carbon border adjustment mechanism could complement the package to avoid an increase in emissions outside the EU due to higher carbon prices in the EU (“carbon leakage”). From a risk-reward perspective, the benefits of reducing the risk of extreme life-threatening climate events and the health benefits from lower air pollution clearly outweigh the costs of mitigation policies.
Pierre Guérin, Felix Suntheim, and Miss Mahvash S Qureshi
The shutdown in economic activity due to the coronavirus disease (COVID-19) crisis has resulted in a short-term decline in global carbon emissions, but the long-term impact of the pandemic on the transition to a low-carbon economy is uncertain. Looking at previous episodes of financial and economic stress to draw implications for the current crisis, we find that tighter financial constraints and adverse economic conditions are generally detrimental to firms’ environmental performance, reducing green investments. The COVID-19 crisis could thus potentially slow down the transition to a low-carbon economy. In light of the urgent need to reduce global greenhouse gas emissions, these findings underline the importance of climate policies and green recovery packages to boost green investment and support the energy transition. Policies that support the sustainable finance sector, such as improved transparency and standardization, could further help mobilize green investments.
The standard growth accounting framework, which weights various inputs by their factor shares to measure their contributions to output growth, is known to underestimate the contribution of inputs in the presence of externalities and increasing returns. This paper develops a model in which, in the absence of such departures from the standard neoclassical framework, growth can occur through either embodied technological progress or firms replication of existing technology. The standard growth accounting framework fails to distinguish between these contrasting development processes. This failure thus reveals another limitation to the use of growth accounting in identifying the processes of economic developments.
Gail Cohen, João Tovar Jalles, Mr. Prakash Loungani, and Ricardo Marto
For the world's 20 largest emitters, we use a simple trend/cycle decomposition to provide evidence of decoupling between greenhouse gas emissions and output in richer nations, particularly in European countries, but not yet in emerging markets. If consumption-based emissions—measures that account for countries' net emissions embodied in cross-border trade—are used, the evidence for decoupling in the richer economies gets weaker. Countries with underlying policy frameworks more supportive of renewable energy and climate change mitigation efforts tend to show greater decoupling between trend emissions and trend GDP, and for both production- and consumption-based emissions. The relationship between trend emissions and trend GDP has also become much weaker in the last two decades than in preceding decades.
Ezequiel Cabezon, Ms. Leni Hunter, Ms. Patrizia Tumbarello, Kazuaki Washimi, and Mr. Yiqun Wu
Natural disasters and climate change are interrelated macro-critical issues affecting all
Pacific small states to varying degrees. In addition to their devastating human costs, these
events damage growth prospects and worsen countries’ fiscal positions. This is the first
cross-country IMF study assessing the impact of natural disasters on growth in the Pacific
islands as a group. A panel VAR analysis suggests that, for damage and losses equivalent to
1 percent of GDP, growth drops by 0.7 percentage point in the year of the disaster. We also
find that, during 1980-2014, trend growth was 0.7 percentage point lower than it would have
been without natural disasters. The paper also discusses a multi-pillar framework to enhance
resilience to natural disasters at the national, regional, and multilateral levels and the
importance of enhancing countries’ risk-management capacities. It highlights how this
approach can provide a more strategic and less ad hoc framework for strengthening both ex
ante and ex post resilience and what role the IMF can play.