The Managing Director's Statement on the Role of the Fund in Addressing Climate Change

The Fund has a role to play in helping its members address those challenges of climate change for which fiscal and macroeconomic policies are an important component of the appropriate policy response. The greenhouse gas mitigation pledges submitted by over 160 countries ahead of the pivotal Climate Conference in Paris in December represent an important step by the international community towards containing the extent of global warming. Strategies for reducing emissions will reflect countries’ differing initial positions, political constraints and circumstances. Carbon pricing can, however, play a critical role in meeting in the most efficient and effective way the commitments that countries are now entering into; it can also raise substantial revenues that can be used to reduce other, more distorting taxes. Through its incentive effects, carbon pricing will also help mobilize private finance for mitigation activities and spur the innovation needed to address climate challenges. Finance ministries have a key role to play in promoting and implementing these policies and ensuring efficient use of the revenue raised. The process of climate change is set to have a significant economic impact on many countries, with a large number of lower income countries being particularly at risk. Macroeconomic policies in these countries will need to be calibrated to accommodate more frequent weather shocks, including by building policy space to respond to shocks; infrastructure will need to be upgraded to enhance economic resilience. It will be important that developing countries seeking to make these adaptations have access to sufficient financial support on generous terms. Financial markets will play an important role in helping economic agents and governments in coping with climate change-induced shocks. And heightened climate vulnerabilities and the structural adjustments associated with a shift towards a low-carbon economy over the medium-term will have important implications for financial institutions and financial stability. This paper identifies areas in which the Fund has a contribution to make in supporting its members deal with the macroeconomic challenges of climate change, consistent with national circumstances. It draws on materials contained in a forthcoming Staff Discussion Note (Farid et al. 2015) and has benefited from the discussions at informal Board meetings on IMF work on climate change held on September 30 and November 24, 2015.

Abstract

The Fund has a role to play in helping its members address those challenges of climate change for which fiscal and macroeconomic policies are an important component of the appropriate policy response. The greenhouse gas mitigation pledges submitted by over 160 countries ahead of the pivotal Climate Conference in Paris in December represent an important step by the international community towards containing the extent of global warming. Strategies for reducing emissions will reflect countries’ differing initial positions, political constraints and circumstances. Carbon pricing can, however, play a critical role in meeting in the most efficient and effective way the commitments that countries are now entering into; it can also raise substantial revenues that can be used to reduce other, more distorting taxes. Through its incentive effects, carbon pricing will also help mobilize private finance for mitigation activities and spur the innovation needed to address climate challenges. Finance ministries have a key role to play in promoting and implementing these policies and ensuring efficient use of the revenue raised. The process of climate change is set to have a significant economic impact on many countries, with a large number of lower income countries being particularly at risk. Macroeconomic policies in these countries will need to be calibrated to accommodate more frequent weather shocks, including by building policy space to respond to shocks; infrastructure will need to be upgraded to enhance economic resilience. It will be important that developing countries seeking to make these adaptations have access to sufficient financial support on generous terms. Financial markets will play an important role in helping economic agents and governments in coping with climate change-induced shocks. And heightened climate vulnerabilities and the structural adjustments associated with a shift towards a low-carbon economy over the medium-term will have important implications for financial institutions and financial stability. This paper identifies areas in which the Fund has a contribution to make in supporting its members deal with the macroeconomic challenges of climate change, consistent with national circumstances. It draws on materials contained in a forthcoming Staff Discussion Note (Farid et al. 2015) and has benefited from the discussions at informal Board meetings on IMF work on climate change held on September 30 and November 24, 2015.

2015—ISSUES FOR THE PARIS COP21

The international community is coming together at the December 2015 UN Climate Change Conference (COP21) in Paris to lay the foundations for a transition to low-carbon development.

Climate change has potential to do significant economic harm, especially to some of the poorest countries, and poses worrying tail risks.1 It is a global externality—one country’s emissions affect all countries by adding to the stock of heat-warming gases in the earth’s atmosphere from which warming arises. So addressing it requires global cooperation.

Over 160 countries have submitted emissions mitigation pledges—’Intended Nationally Determined Contributions’, or INDCs—for the Paris conference. If implemented, these commitments will substantially reduce projected future warming, though not by enough to meet the (internationally agreed) 2OC target.2 At Paris, parties will seek to agree on a legal framework for assessing progress on, and updating, these pledges.

Parties will also discuss climate finance—the advanced countries’ pledge to mobilize funds rising to $100 billion a year by 2020, from public and private sources, for climate mitigation and adaptation in developing countries. Flows in 2014 have been estimated at $62 billion (see below).

Climate Mitigation

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Source. UNFCCC (2015b).Note. aRefers to all greenhouse gases except for China which refers only to carbon dioxide.

Climate Finance

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Source. OECD (2015).

National Action

Carbon pricing should be the centerpiece of climate mitigation efforts—but choosing the right instrument, and designing it to suit national conditions, are critical for meeting mitigation objectives at lowest cost.

Choosing Mitigation Instruments

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Figure 1.
Figure 1.

Top Twenty Carbon Dioxide Emitters, 2012

Citation: Policy Papers 2015, 075; 10.5089/9781498343954.007.A001

Source: IEA (2015).

Carbon Pricing Design

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Adaptation and Macroeconomic Policies

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Role of the Financial System

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Facilitating Global Progress

The potential for price floors and international fuel charges.

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The Fund’s Role

The Fund is not an environmental organization, but climate change poses significant risks for macroeconomic performance and several of the appropriate policy responses lie within the Fund’s expertise.

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References

  • Clements, Benedict, David Coady, Stefania Fabrizio, Sanjeev Gupta, Trevor Alleyene, and Carlo Sdralevich, eds., 2013. Energy Subsidy Reform: Lessons and Implications (Washington: International Monetary Fund).

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  • Farid, Mai, Michael Keen, Michael Papaioannou, Ian Parry, and Catherine Pattillo, Anna Ter-Martirosyan, and IMF Staff, 2015. “Fiscal, Macroeconomic and Financial Aspects of Global Warming.” Staff Discussion Note, forthcoming, International Monetary Fund, Washington, DC.

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  • IEA, 2015. World Energy Balances. International Energy Agency, Paris, France.

  • Keen, Michael, Ian Parry, and Jon Strand, 2013. “Ships, Planes, and Taxes: Charging for International Aviation and Maritime Emissions,” Economic Policy 28: 701749.

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  • OECD, 2015. Climate Finance in 2013 and the USD 100 billion Goal. Organization for Economic Cooperation and Development, Paris, France, in collaboration with Climate Policy Initiative, Venice, Italy.

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  • Parry, Ian W. H., Chandara Veung and Dirk Heine, 2014a. “How Much Carbon Pricing is in Countries Own Interests? The Critical Role of Co-Benefits.” Working paper 14/174 (Washington: International Monetary Fund).

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  • Parry, Ian W. H., Dirk Heine, Eliza Lis and Shanjun Li, 2014b. Getting Energy Prices Right: from Principle to Practice (Washington DC: International Monetary Fund).

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  • UNFCCC (2015a). Synthesis Report on the Aggregate Effect of the Intended Nationally Determined Contributions. UN Framework Convention on Climate Change, Bonn, Germany.

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  • UNFCCC (2015b). INDCs as communicated by Parties. UN Framework Convention on Climate Change, Bonn, Germany. Available at: www4.unfccc.int/submissions/indc/Submission%20Pages/submissions.aspx

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  • WBG, 2015. State and Trends of Carbon Pricing. Washington, DC: World Bank Group.

  • Weitzman, Martin, L., 2011. “Fat-Tailed Uncertainty in the Economics of Catastrophic Climate Change.” Review of Environmental Economics and Policy 5: 275292.

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3

Ranking countries by per capita emissions would give a very different picture, raising questions about equitable burden sharing across countries.

4

Under an ETS, firms need an allowance for each ton of their emissions and the government caps total emissions at a target level by restricting the number of allowances. Trading of those allowances sets a market price on emissions.

5

WBG (2015). Some countries of course have quite heavy taxes on a subset of fossil fuels, such as gasoline.

9

Keen et al. (2013). Due to international mobility of the tax base, especially for maritime, globally coordinated charges are needed. Compensation schemes for developing countries should be feasible, however.