IMF releases paper on implications of climate change for fiscal, financial, and macroeconomic policies

Washington, 11th January, 2016 (WAM) - The International Monetary Fund (IMF) today released a paper onthe implications of climate change for fiscal, financial, and macroeconomic policies.

The paper takes stock of the wide-ranging implications for fiscal, financial, and macroeconomic policies of coming to grips with climate change.

The paper: After Paris: Fiscal, Macroeconomic and Financial Implications of Global Climate Change, says the December 2015 Paris Agreement lays the foundation for meaningful progress on addressing climate change now the focus must turn to the practical policy implementation issues.

''Most pressing is the use of carbon taxes (or equivalent trading systems) to implement the emissions mitigation pledges submitted by 186 countries for the December 2015 Paris Agreement while providing revenue for lowering other taxes or debt. Carbon pricing in developing countries would effectively mobilize climate finance, and carbon price floor arrangements are a promising way to coordinate policies internationally,'' it stresses.

''Targeted fiscal measures that are tailored to national circumstances and robust across climate scenarios are needed to counter private sector under-investment in climate adaptation. And increased disclosure of carbon footprints, stress testing of asset values, and greater proliferation of hedging instruments, will facilitate low-emission investments and climate risk diversification through financial markets,'' it says.

At the heart of the climate change problem is an externality: firms and households are not charged for the environmental consequences of their greenhouse gases from fossil fuels and other sources. This means that establishing a proper charge on emissions that is, removing the implicit subsidy from the failure to charge for environmental costs has a central role.

Also critical are establishing a clear pathway to meeting complementary commitments onclimate finance, effective adaptation, and ensuring financial markets play a full andconstructive role. Fiscal policies are key to efficiently mobilizing both public and private sources offinance, while the need to adapt economies to climate change raises issues that have implicationsfor the design of national tax and spending systems (for example, strengthening fiscal buffers andupgrading infrastructure in response to natural disaster risks). There is also a growing need toenhance the contribution of the financial sector to addressing climate challenges, by facilitatingclean investments and pooling climate-related risks.

For reducing carbon emissions (?mitigation?), carbon pricing (through taxes or tradingsystems designed to behave like taxes) should be front and center. These are potentially themost effective mitigation instruments, are straightforward to administer (for example, building offfuel excises already commonplace in most countries), raise (especially timely) revenues for loweringdebt or other taxes, and establish the price signals that are central for redirecting technologicalchange towards low-emission investments. The challenges lie in gauging appropriate price pathsand dealing with the adverse effects on vulnerable households and firms, and the consequentpolitical sensitivities.

Moving ahead unilaterally with carbon pricing is likely to be in many countries? own interests,because of the domestic (non-climate) benefits of doing so, most notably fewer deaths fromexposure to local air pollution. As national pricing schemes emerge, a natural way to enhance theseefforts and address concerns regarding lost competitiveness would be through international carbonprice floor arrangements, analogous to those developed to counter some cases of internationalcompetition over mobile tax bases.

For climate finance, carbon pricing in developing countries would establish price signalsneeded to attract private flows for mitigation. Substantial amounts could also be raised fromcharges on international aviation and maritime fuels. These fuels are a growing source of emissions,