Valentina Bosetti, Carlo Carraro, Sergey Paltsev, and John Reilly
, remove GHGs from the atmosphere. The Copenhagen pledges for 2020 still keep the 2° C target within reach—should these technologies be successfully developed—but highly aggressive actions would be needed immediately after that.
Even the 550 ppm target would become technically out of reach if action by all countries is delayed beyond about 2030. And required near-term emissionsprices (in developed economies) consistent with this target escalate rapidly with delayed action to control emissions in developing economies. Postponing mitigation actions, especially in
The need to restore economic prosperity after the crisis may have weakened political support for climate mitigation measures—centered on strong and broad carbon pricing to address basic market failures—which could increase production costs and reduce household incomes. And the effects could be persistent: compromising climate policy objectives when times are hard could seriously undermine, for example, the credibility of future emissionspricing, which is a critical guide to efficient long-term energy investments. Hasty investment decisions to stimulate
Benjamin Jones, Mr. Michael Keen, and Mr. Carlo Cottarelli
these two challenges . How should the challenges of recovery affect climate policy? And how should climate concerns be reflected in macroeconomic and fiscal policies over the short and longer terms? Section II discusses the impact of the crisis and recession on emissionspricing objectives and policies. Section III considers the role of climate-related expenditure programs both as part of fiscal stimulus packages and in the longer term. Section IV concludes.
II. E missions P ricing P olicies and R ecovery
A. Climate Objectives Amid Macroeconomic Weakness
Negotiations toward a successor to the Kyoto Protocol on climate change have come to a critical point, and domestic climate policies are being developed, as the world seeks to recover from the deepest economic crisis for decades and looks for new sources of sustainable growth. This position paper considers the challenge posed by these two policy imperatives: how to exit from the crisis while developing an effective response to climate change. Blending the objectives of a sustained recovery and effective climate policies presents both challenges and opportunities. Although there are potential “win-win” spending measures conducive to both, the more fundamental linkages and synergies lie in the broader strategies adopted toward each other. Greater climate resilience can promote macroeconomic stability and alleviate poverty; and carbon pricing, essential for mitigation, can contribute to the strengthening of fiscal positions that is expected to be needed in many countries. There are, nevertheless, also difficult trade-offs to face, notably in the somewhat greater caution now warranted in moving to more aggressive emissions pricing. However, the simple policy guidelines for addressing climate issues remain fundamentally unchanged; the need to deploy a range of regulatory, spending, and emissions pricing measures.
Following submission of greenhouse gas (GHG) mitigation commitments or pledges (by 190 countries) for the 2015 Paris Agreement, policymakers are considering specific actions for their implementation. To help guide policy, it is helpful to have a quantitative framework for understanding: i) the main impacts (on GHGs, fiscal balances, the domestic environment, economic welfare, and distributional incidence) of emissions pricing; ii) trade-offs between pricing and other (commonly used) mitigation instruments; and iii) why/to what extent needed policies and their impacts differ across countries. This paper provides an illustrative sense of this information for G20 member countries (which account for about 80 percent of global emissions) under plausible (though inevitably uncertain) projections for future fuel use and price responsiveness. Quantitative results underscore the generally strong case for (comprehensive) pricing over other instruments, its small net costs or often net benefits (when domestic environmental gains are considered), but also the potentially wide dispersion (and hence inefficiency) in emissions prices implied by countries’ mitigation commitments.
Ian W.H. Parry, Victor Mylonas, Nate Vernon, and Mr. Michael Keen
is modelled implicitly by the emissionsprice established by the cap (set equal to the price in the carbon tax scenario), applied to the carbon content of fuels used by power generators and other large energy users; 35 allowances are assumed to be fully auctioned with no earmarking of revenues (in practice many allowances, e.g. in the EU, are often given away for free).
Some G20 countries impose coal excises, but not at meaningful levels from a climate change perspective. 36 A simple excise is modelled here, mimicking the coal charge portion of the broader
Front Matter Page Fiscal Affairs Department
Prepared by Benjamin Jones and Michael Keen
Authorized for distribution by Carlo Cottarelli
DISCLAIMER: The views expressed herein are those of the author(s) and should not be attributed to the IMF, its Executive Board, or its management .
II. EmissionsPricing Policies and Recovery
A. Climate Objectives Amid Macroeconomic Weakness
B. Entering Carbon Pricing and Exiting Recession
C. Pricing Carbon and Strengthening Public Finances