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© 2022 International Monetary Fund
WP/22/242
IMF Working Paper
Research Department
Climate Policy Options: A Comparison of Economic Performance Prepared by Jean Chateau, Florence Jaumotte, and Gregor Schwerhoff
Authorized for distribution by Antonio Spilimbergo December 2022
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 use a global computable general equilibrium model to compare the economic performance of alternative climate policies along multiple dimensions, including macroeconomic outcomes, energy prices, and trade competitiveness. Carbon pricing which keeps the aggregate cost lower and preserves better the overall competitiveness than across-the-board regulation is the first-best policy, especially in energy intensive and trade exposed industries. Regulations and feebates are good alternatives in the power sector, where technological substitution is possible. Feed-in subsidies, if used alone, are not cost effective.
RECOMMENDED CITATION: Jean Chateau, Florence Jaumotte, and Gregor Schwerhoff. 2022 “Climate Policy Options: A Comparison of Economic Performance”. IMF Working Paper 2022/242
| JEL Classification Numbers: | C68, F42, H23, Q54, Q58 |
| Keywords: | Climate policy; policy coordination; carbon leakage; carbon tax; regulation. |
| Author’s E-Mail Address: | jchateau@imf.org; fjaumotte@imf.org; gschwerhoff@imf.org |
| JEL Classification Numbers: | C68, F42, H23, Q54, Q58 |
| Keywords: | Climate policy; policy coordination; carbon leakage; carbon tax; regulation. |
| Author’s E-Mail Address: | jchateau@imf.org; fjaumotte@imf.org; gschwerhoff@imf.org |
Title Page
WORKING PAPERS
Climate Policy Options: A Comparison of Economic Performance
Prepared by Jean Chateau, Florence Jaumotte, and Gregor Schwerhoff1
Contents
1. Introduction
2. The IMF-ENV model and scenario design
2.1 The model
2.2 Scenario design
2.3 Theoretical considerations on economic cost
2.4 Political economy
3. Decarbonization of power systems under alternative policies
3.1 Policy instruments
3.2 The electricity sector
3.3 Fiscal implications
3.4 Macroeconomic implications
3.5 Competitiveness effects
3.6 Ambition level
4. Decarbonization of industrial and power sectors with alternative policies
4.1 Macroeconomic implications
4.2 Competitiveness effects
4.3 Ambition level
5. International Spillovers
5.1 Carbon Leakages
5.2 Energy Security
5.3 Diverse climate policies across countries
6. Sectoral climate policy
7. Conclusion
Annex 1. Representation of the power sector in IMF-ENV
Annex 2. Detailed figures
Annex 3. Planned Policies
References
Figures
Figure 1. Economic impact on G7 countries
Figure 2. Power scenarios: Changes in power mix in 2030
Figure 3. Power scenarios: The effect of policies on electricity prices in 2030
Figure 4. Power scenarios: The effect of policies on the electricity supply in 2030
Figure 5. Power scenarios: Impacts on GDP and investment for two types of revenue recycling
Figure 6. Power scenarios: Household consumption and employment
Figure 7. Power scenarios: Impact on EITE sectors
Figure 8. Power scenarios: Effect of carbon tax and feed-in subsidies on EITE and other sectors for G7
Figure 9. Power scenarios: The role of policy ambition level for the ranking of policies for G7
Figure 10. Power and EITE sectors scenarios: Macroeconomic impacts
Figure 11. Power and EITE sectors scenarios: Sectoral results
Figure 12. Power and EITE sectors scenarios: Gross output and trade shares of EITE industries
Figure 13. Power and EITE sectors scenarios: The role of policy ambition level for the ranking of policies for G7 countries
Figure 14. Power and EITE sectors scenarios: Leakage rates in 2030
Figure 15. Power and EITE sectors scenarios: Fossil fuel imports
Figure 16. Asymmetric policies scenarios: Effect of policies on competitiveness of EITE sectors
Figure 17. Losses in market share of G7 countries and the influence of coalition size
Figure 18. Effect of planned policies on emissions
Figure 19. Effect of planned policies on electricity prices and expenditures in 2030
Figure 20. Effect of planned policies on real GDP and trade shares
Tables
Table 1. Power scenarios: Policy stringency in 2030
Table 2. Power scenarios: Tax changes for carbon tax and feed-in subsidy scenarios
Table 3. Power and EITE sectors scenarios: Carbon prices in 2030 (2018 USD/t CO2) by level of fragmentation of carbon market
Jaden Kim provided outstanding research support for this paper. We thank Antonio Spilimbergo, Romain Duval and Ian Parry for very useful comments and suggestions. Alimata Kini Kabore provided editorial assistance.