A global climate-fiscal policy
In this paper, Ruud de Mooij and Vitor Gaspar, explore the fiscal implications for countries of global climate mitigation in the medium term. The authors propose a “policy scenario of global carbon mitigation, which includes both coordinated carbon pricing, other mitigation policies, compensation schemes, and a revenue sharing mechanism that breaches the financial divide between rich and poor countries. The scenario is designed to achieve a path toward 2°C above pre-industrial temperatures, as agreed in Paris in 2015.” The main assumptions of their suggested policies include:
- An eighty percent reduction of 2023 gross emission levels by 2050 for advanced economies and by 2060 for emerging market economies, with the assumption that carbon capture and storage will offset the remaining emissions.
- For a representative advanced economy, the policy includes a carbon price that increases from $40 a ton today to $130 by 2030 and $235 by 2050. Revenues from carbon pricing could peak around 2030 as decarbonization will gradually erode the carbon tax base.
- Thirty percent of the carbon revenues are used to compensate households through cash transfers. On the expenditure side, green public investment and green subsidies increase to around ½ percent of GDP.
- Climate-related fiscal spending under this policy scenario will increase the debt-to-GDP ratio of an advanced country by less than ten percentage points.
- A global side agreement on carbon mitigation for developing economies should be put in place. It assumes that high- and upper-middle-income countries agree to reduce their emissions in 2030 by 49 percent and 26 percent, respectively, below 2019 levels. Low-income and lower-middle-income countries would still be able to grow their emissions by 6 percent relative to 2019, but this is less than implied by current mitigation pledges .
This climate-fiscal policy relying on carbon pricing could have moderately positive to moderately negative impacts on fiscal balances in high-income countries. For example, while global decarbonization will have negative fiscal implications for most European countries, effects can be positive for the US and Japan if public spending is contained. However such policy will generally have positive and significant net fiscal impacts on middle and low-income countries.
While political-economy considerations are critical for the design and implementation of carbon mitigation policies, political red lines might be relaxed through carefully designed policy packages (including compensation measures and clear communication) and through international coordination.
How does decarbonization change the fiscal equation?
Authors: Ruud de Mooij, Vítor Gaspar
From: IMF
