Back Matter
Author: Ian Parry1
  • 1 https://isni.org/isni/0000000404811396, International Monetary Fund

Annex 1. G20 Countries Where Carbon Price Floors Would Be Binding

Annex Figure A.1 shows estimates (using the model described in Annex 2) of the percent reduction in fossil fuel CO2 emissions below baseline levels in 2030 needed to meet G20 countries’ mitigation pledges (updated for the latest submissions for COP26). The chart shows estimates of the emissions reductions from carbon pricing of $25, $50, and $75 per ton (on top of current mitigation policies). Assuming that countries achieve their stated 2030 targets, the figure suggests that a $25 price floor would be binding in six cases (China, India, Russia, Saudi Arabia, South Africa, Turkey); a $50 or $75 price floor would be binding in two cases (Argentina, Australia); while even a $75 price floor would not be binding in eleven cases (Brazil, Canada, France, Germany, Indonesia, Italy, Japan, Mexico, Korea, United Kingdom, United States). In the latter cases, a $75 price floor is more likely to bind, however, if countries are relying in part on other mitigation instruments—also, as noted in the text, the prospects for meeting the ambitious mitigation pledges (and for further strengthening their pledges) may be enhanced when other countries commit to binding price floors.

Figure. A.1.
Figure. A.1.

CO2 Reductions for 2030 Pledges/From Pricing

Citation: Staff Climate Notes 2021, 001; 10.5089/9781513583204.066.A999

Source: IMF staff calculations.Note: NDCs targets are from first-round or (if applicable) second-round Paris pledge. Estimates assume that CO2 must fall in proportion to other GHGs to achieve the target (i.e. non-CO2 GHGs must also fall in order for the target to be achieved). Where a country has a conditional NDC the target is defined as the average between the conditional and unconditional target. NDCs as of 2 June 2021.

Annex 2. Methodology Underlying the Quantitative Analysis

The IMF and World Bank have developed a spreadsheet model—the Carbon Pricing Assessment Tool—which provides, on a country-by-country basis for 180 countries, projections of fossil fuel CO2 emissions and assessments of the emissions, fiscal, economic, public health, and other impacts of carbon pricing and other mitigation policies.1

This tool starts with use of fossil fuels and other fuels by the power, industrial, transport, and building sectors and then projects fuel use forward in a baseline case using:

  • GDP projections;

  • Assumptions about the income elasticity of demand and own-price elasticity of demand for electricity and other fuel products;

  • Assumptions about the rate of technological change that affects energy efficiency and the productivity of different energy sources; and

  • Future international energy prices.

In these projections, current fuel taxes and carbon pricing are held constant in real terms.

The impacts of carbon pricing and other mitigation policies on fuel use and emissions depend on (1) their proportionate impact on future energy prices, (2) a simplified representation of fuel switching within the power generation sector, and (3) various price elasticities for electricity use and fuel use in other sectors.

The model is parameterized using data compiled from the International Energy Agency on recent fuel use by country and sector and carbon emissions factors by fuel product. GDP projections are from the latest (post-COVID) IMF forecasts.1 Data on energy taxes, subsidies, and prices by energy product and country is compiled from publicly available and IMF sources. International energy prices are projected forward using an average of different sources. Assumptions for fuel price responsiveness are chosen to be broadly consistent with empirical evidence and results from energy models (fuel price elasticities are typically taken to be between –0.5 and – 0.8).

One caveat is that the model abstracts from the possibility of mitigation actions (beyond those implicit in recently observed fuel use) in the baseline, which is a common approach to provide clean comparisons of new mitigation policies to the baseline. Another caveat is that, while the assumed fuel price responses are plausible for modest fuel price changes, they may not be for dramatic price changes that might drive major technological advances, or nonlinear adoption of technologies like carbon capture and storage (for this reason, results are not reported for carbon prices above $75 per ton). In addition, fuel price responsiveness is approximately similar across countries—in practice, price responsiveness may be more muted in some countries to the extent that energy price and production regulations are retained over the next decade. The model also does not explicitly account for the possibility of upward sloping fuel supply curves, general equilibrium effects (for example, changes in relative factor prices that might have feedback effects on the energy sector), and changes in international fuel prices that might result from simultaneous mitigation action in large emitting countries. However, parameter values in the spreadsheet are chosen such that the results from the model are broadly consistent with those from far more detailed energy models that, to varying degrees, account for these sorts of factors.

Annex 3. Impacts of a $50 Carbon Price on Energy Prices in 2030

Table A.3.

Illustrative Energy Price Impacts for US$$50 carbon tax p/tCO2e by 2030

article image
Source: IMF staff calculations.Note: Baseline prices are retail prices updated from Coady and others (2019) and include preexisting energy taxes. Baseline prices for coal and natural gas are based on regional reference prices. Baseline prices for electricity and gasoline are from cross-country databases. Impacts of carbon taxes on electricity prices depend on the emissions intensity of power generation. Carbon tax prices are per ton. GJ = gigajoule; kWh = kilowatt-hour. All prices are stated in real 2018 terms.

References

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  • Parry, Ian, Victor Mylonas, and Nate Vernon. Forthcoming. “Mitigation Policies for the Paris Agreement: An Assessment for G20 Countries.” Journal of the Association of Environmental and Resource Economists.

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1

The authors are grateful to Brendan Crowley, Vitor Gaspar, Lawrence Goulder, Michael Keen, Taryn Parry, Jim Prust, Nadia Rendak, Gregor Schwerhoff, and Michael Toman for very helpful comments and to Khamal Clayton and Danielle Minnett for first-rate research assistance.

1

Also known variably as “carbon neutrality,” “emissions neutrality,” or “climate neutrality,” with varying definitions such as coverage of GHGs and treatment of the land use sector.

3

With some exceptions, for example, the European Union has recently pledged to cut GHGs 55 percent below 1990 levels by 2030 (up from a previous 40 percent reduction pledge) and the United States has pledged to cut emissions 50–52 percent below 2005 levels by 2030.

4

As initially proposed in IMF (2019a, 2019b). The proposal shares some features of the “Climate Club” suggested in Nordhaus (2015) where a coalition of willing countries would implement a common carbon price while imposing a general tariff on nonparticipants. The current proposal differs by seeking to build off and reinforce, rather than substitute for, the Paris process, and to enhance practicality through pragmatic design. McKibbin and others (2014) also discuss integrating price targets into negotiations over countries mitigation commitments.

5

Besides carbon pricing (or other mitigation instruments), supporting policies will also be needed (for example, public investments in clean technology infrastructure networks and critical technologies, and measures to promote just transitions). These supporting measures can be largely decided at the national level, however.

7

Whereas the previous international climate agreement (Kyoto Protocol) comprised quantified and legally enforceable emissions targets, the Paris Agreement is based on voluntary contributions which are expected to increase over time.

8

In a broader context, there have been escalating tensions over trade and security issues between some of the potentially key players, though ring fencing climate may be possible (see, for example, www.state.gov/u-s-china-joint-statement-addressing-the-climate-crisis).

10

Staff calculations, including jurisdictions where the price is zero.

11

Current pledges for 2030 vary in terms of (1) target variables (for example, emissions, emission intensity of GDP, clean energy shares), (2) nominal stringency (for example, percent emission reductions), and (3) baseline years against which targets apply (for example, historical versus projected baseline emissions). See https://www4.unfccc.int/sites/NDCStaging/Pages/Home.aspx.

12

In fact, even acting unilaterally, most countries should be better off from carbon pricing because the domestic environmental co-benefits should outweigh any carbon mitigation costs—see, for example, Parry and others (2015).

13

See Keen and others (2021). The EU, for example, plans to transition to a BCA by 2023, which would apply charges to the carbon content of imports competing with EITE industries and perhaps rebate EITE exporters for domestic carbon charges (see https://ec.europa.eu/info/strategy/priorities-2019–2024/european-green-deal_en.). Other countries are considering this approach (see, e.g., www.aljazeera.com/economy/2021/2/5/bb-uk-pm-to-push-allies-to-agree-on-carbon-border-taxes-report) and the Biden Climate Plan contained a proposal for a BCA (see https://joebiden.com/climate-plan).

14

See Keen and others (2021).

15

Advanced countries pledged to mobilize $100 billion annually from 2020 onwards, through public and private sources, for mitigation and adaptation on a project-by-project basis in developing countries (OECD 2019a put flows at $71 billion for 2017, though there is much dispute over the additionality of these flows). The future accessibility of this funding to an individual country, and the potential dollar amount, is highly uncertain, however.

16

Additional practical and institutional details would need to be agreed, such as mechanisms for adjusting the minimum price, converting the agreed price into local currency, emergency clauses allowing temporary violations, and procedures for admitting new countries. These issues should be manageable, however, with a small number of countries involved. Legal issues must also be resolved, for example whether the agreement is voluntary as under a softer law instrument (for example, memorandum of understanding or some form of executive agreement) or takes the form of an international treaty (like the UN Convention and Paris Agreement). The former would be more feasible (for example, in the United States, a treaty would require ratification by Congress) but inclusion of possible compensation mechanisms may imply the creation of international legal obligations which would usually require a treaty.

17

For example, by the International Energy Agency for most countries.

18

In China, India, and the United States around 70 to 90 percent of the economy wide CO2 emissions reductions under a comprehensive $50 carbon price in 2030 would come from the power and industrial sectors alone (IMF 2019a, 2019b).

20

Agricultural emissions remain difficult to monitor directly, though proxy emissions pricing schemes may be feasible based on farm-level data on livestock, feed, crop production, and fertilizer use, and merged with default data on emission rates. Also, given the very different issues surrounding agricultural emissions, and different groups of large emitters, a separate price floor arrangement could be considered for these emissions.

21

See Keen and others (2021).

22

For comparison, IMF (2019a) put economic efficiency costs of a $50 carbon price in India (consumption benefits to fuel users less savings in supply costs) in 2030 at about $15 billion (though transition costs are not included). Such costs are swamped by health benefits from reduced exposure to local air pollution leaving India better off on net before considering climate benefits or transfers.

23

The federal government steps in with a backstop pricing scheme where provinces and territories are out of compliance. See Environment and Climate Change Canada (2020) and Parry and others (2021).

25

Some countries subsidize fossil fuel consumption by holding down domestic energy prices below international prices. These subsidies do not apply to coal (the most carbon-intensive fuel) and are relatively small for large emitting countries (Coady and others 2019).

26

First-pass estimates of effective carbon prices for 135 countries are provided in IMF (2019b, 91–93). Organisation for Economic Cooperation and Development (2019b) provides a more detailed profile of how countries are currently pricing emissions through energy taxes/subsidies, though their estimates do not account for differences in the price responsiveness of fuels in different sectors.

27

Participants might claim that road fuel taxes prior to the benchmark year were partially intended to charge for carbon emissions. The issue should be manageable, however—for example, prior fuel taxes contribute less than $5 per ton to the effective carbon price in China, India, and the United States (IMF 2019b).

28

All monetary figures are in 2018 US dollars. The emission impacts of pricing much beyond $75 a ton become highly speculative, given uncertainties over the future economic and practical viability of low-carbon technologies (for example, carbon capture and storage, advanced nuclear). Prices in carbon pricing schemes are mostly between about $5 and $35 per ton at present, though prices should rise over time, and several countries have considerably higher prices (World Bank Group 2021).

1

Basic versions of the model and its parameterization are described in IMF (2019b) and Parry, Mylonas, and Vernon (forthcoming).

2

Extrapolated beyond 2025. A modest adjustment in emissions projections is made to account for structural shifts in the economy caused by the pandemic (for example, more remote working) that will likely have some permanent effect on emissions.

Proposal for an International Carbon Price Floor Among Large Emitters
Author: Ian Parry, Mr. Simon Black, and Mr. James Roaf