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© 2022 International Monetary Fund
WP/22/107
IMF Working Paper
Monetary and Capital Market Department
The Great Carbon Arbitrage* Prepared by Tobias Adrian1, Patrick Bolton2, and Alissa M. Kleinnijenhuis3
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
ABSTRACT: We measure the gains from phasing out coal as the average social cost of carbon times the quantity of avoided emissions. By comparing the present value of benefits from avoided emissions against the present value of costs of ending coal and replacing it with renewables, our conservative baseline estimate is that the world can realize a net gain of $85 trillion. This global net social benefit can be attained through an international agreement to phase out coal. We also explore how this net benefit is distributed across countries and find that most countries would benefit from a global coal phase-out even without any compensatory cross-country transfers. Finally, we estimate the size of public funds that must be committed under a blended finance arrangement to finance the cost of replacing coal with renewables.
| JEL Classification Numbers: | Q20, Q48, Q50, Q51, Q54, G00 |
| Keywords: | Climate, Carbon; Environment; Climate Policy; Valuation of Environmental Effects; Financial Economics |
| Author’s E-Mail Address: | TAdrian@imf.org pb2208@columbia.edu amklein@stanford.edu |
| JEL Classification Numbers: | Q20, Q48, Q50, Q51, Q54, G00 |
| Keywords: | Climate, Carbon; Environment; Climate Policy; Valuation of Environmental Effects; Financial Economics |
| Author’s E-Mail Address: | TAdrian@imf.org pb2208@columbia.edu amklein@stanford.edu |
Contents
1 Introduction
2 Literature
3 The Great Carbon Arbitrage
3.1 Benefits of Avoiding Coal Emissions
3.2 Costs of Avoiding Coal Emissions
3.3 Climate Finance to Phase Out Coal
4 Data
5 Results
5.1 The Great Carbon Arbitrage
5.2 Climate Finance to Phase Out Coal
6 Coasian Bargain and Climate Finance
7 Country Costs and Benefits: An Economic Basis for Coasian Bargaining on Climate Finance
8 Conclusion
A Online Appendix
The views expressed in this paper do not necessarily reflect the views of the International Monetary Fund, its Management, or its Executive Directors. The authors would like to thank Viral Acharya, Ananthakrishnan Prasad, Helge Berger, Darrell Duffie, Charles Goodhart, Robin Greenwood, Lawrence Goulder, Emmanuele Massetti, Robert Pindyck, Rick van der Ploeg, James Roaf, Suphachol Suphachalasai, Rupert Way, and Johannes Wiegand for helpful suggestions. Funding from the European Research Council (ERC) under the ERC Advanced Grant program (grant agreement No. 885552 Investors and Climate Change) for this research is gratefully acknowledged. We thank Asset Resolution for offering access to their data. We are thankful to the participants at the seminars of the Free University of Amsterdam, the University of Amsterdam, the Dutch Central Bank, the International Monetary Fund, the Institute for New Economic Thinking at the Oxford Martin School, Fidelity Investments, the Climate Policy Initiative, the World Resources Institute, and the Office of the Comptroller of the Currency for their feedback. We also thank the participants of the Sustainable Capital Conference, the Cornell University ESG Investing Conference, the Climate Finance Innovation and Challenges for Policy Conference at the Stanford Department of Economics, the Workshop on Fiscal Policy and Climate Change at the European Central Bank, and the Political Economy of Environmental Sustainability Conference of the Stanford Graduate School of Business and Stanford Doerr School of Sustainability for their comments. We would like to thank Moritz Baer, the Environmental Stress Testing and Scenarios Programme (ESTS) at the Oxford Sustainable Finance Group and 2° Investing Initiative for valuable research support. We further thank Liumin Chen, Yanzhe Xiao, and in particular, Rudy Tanin for their excellent research assistance. A computational tool and extra analysis can be found at https://greatcarbonarbitrage.com.
International Monetary Fund
Columbia Business School and Imperial College
Institute for New Economic Thinking at University of Oxford