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By IMF Staff
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Unaddressed, climate change will entail a
potentially catastrophic human and economic toll, but it’s not too late to
change course
Global temperatures have increased by about 1°C
since the pre-industrial era because of heat-trapping green-house gases accumulating
in the atmosphere. Unless strong action is taken to curb emissions of these
gases, global temperatures could increase by an additional 2–5°C by the end of
this century. Keeping temperatures to levels deemed safe by scientists requires
bringing net carbon emissions to zero on net globally by mid-century
…economic policy tools can pave a road toward net zero emissions by 2050 even as the world seeks to recover from the COVID-19 crisis
In the latest World Economic Outlook we make the
case that economic policy tools can pave a road toward net zero emissions by
2050 even as the world seeks to recover from the COVID-19 crisis. We show that
these policies can be pursued in a manner that supports economic growth,
employment and income equality
The manageable costs of
mitigation
Economic policies can help address climate
change through two main channels: by affecting the composition of
energy (high- vs. low-emission sources), and by influencing total energy
usage. The costs and benefits of different policies are determined by how they
exploit these distinct channels
For example, a carbon tax makes dirty fuels more
expensive, which incentivizes energy consumers to shift their consumption
towards greener fuels. Total energy consumption falls too because, overall,
energy is more expensive
In contrast, policies that aim to make green
energy cheaper and more abundant (subsidies or direct public investment in
green energy) increase the share of low-emissions energy. However, by making
energy cheaper overall, green energy subsidies continue to stimulate total
energy demand or at least do not reduce it
In line with this intuition, our latest analysis
suggests pairing carbon taxes with policies that cushion the impact on
consumers’ energy costs can deliver rapid emissions reductions without major
negative impacts on output and employment. Countries should initially opt for a
green investment stimulus—investments in clean public transportation, smart
electricity grids to incorporate renewables into power generation, and
retrofitting buildings to make them more energy efficient
This green infrastructure push will achieve two
goals
First, it will boost global GDP and employment
in the initial years of the recovery from the COVID-19 crisis. Second, the
green infrastructure will increase productivity in low-carbon sectors, thereby
incentivizing the private sector to invest in them and making it easier to
adapt to higher carbon prices. Our model-based scenario analysis suggests that
a comprehensive policy strategy to mitigate climate change could boost global
GDP in the first 15 years of the recovery by about 0.7 percent of global GDP on
average, and employment for about half of that period leading to about 12
million extra persons being employed globally. As the recovery takes hold,
preannounced and gradually rising carbon prices will become a powerful tool to
deliver the needed reduction in carbon emissions
If implemented, such a policy program would put
the global economy on a sustainable path by reducing emissions and limiting
climate change. The net effect would approximately halve the expected output
loss from climate change and provide long-term, real GDP gains well above the
current course from 2050 onward
Transition costs
Despite the long-run benefits, and an initial
boost to economic activity, such policies do impose costs along the transition.
Between 2037–50, the mitigation strategy would hold global GDP down by about
0.7 percent on average each year and by 1.1 percent in 2050 relative to
unchanged policies. These costs seem manageable, however, considering that
global output is projected to grow by 120 percent between now and 2050. The
drag on output could be further reduced if climate policies incentivize
technological development in clean technologies—through R&D subsidies, for
instance. Moreover, the package would be neutral for output during that period
if important benefits in the form of better health outcomes (due to reduced
pollution) or less traffic congestion are considered
The transitional output costs associated with
the policy package vary significantly across countries. Some of the advanced
economies may experience smaller economic costs or even see gains throughout
the transition. Given their earlier investments into renewables, these
economies can more easily ramp up their use and avoid large adjustment costs.
Countries with fast economic or population growth (India, especially) and most
oil producers should expect larger economic costs by forgoing cheap forms of
energy, such as coal or oil. Yet these output costs remain small for most
countries and need to be weighed against avoided climate change damages and the
health benefits from reducing the use of fossil fuels
Reducing the burden
Low-income households are more likely to be hurt
by carbon pricing, as they spend a relatively large share of their income on
energy and are more likely to be employed in carbon-intensive manufacturing and
transportation. Governments can use various policies to limit the adverse
effects of higher carbon prices on households
First, they can fully or partially rebate the
carbon revenues through cash transfers. For example, our research found that to
fully protect consumption of households in the bottom 40 percent of the income
distribution, the U.S. government would need to transfer 55 percent of all
carbon pricing revenues, whereas the Chinese government would need to transfer
40 percent
Second, higher public spending—for instance on
clean public infrastructure—could create new jobs in low-carbon sectors that
are often relatively labor intensive to offset job losses in high-carbon
sectors. Retooling workers will also help to smoothen job transitions to
low-carbon sectors
Governments should move swiftly to ensure a growth-friendly and just transition
Based on Chapter 3 of the World Economic Outlook, “Mitigating Climate Change – Growth and Distribution-Friendly Strategies,” by Philip Barrett, Christian Bogmans, Benjamin Carton, Oya Celasun, Johannes Eugster, Florence Jaumotte, Adil Mohommad, Evgenia Pugacheva, Marina M. Tavares, and Simon Voigts
https://blogs.imf.org/2020/10/07/finding-the-right-policy-mix-to-safeguard-our-climate/
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