FISCAL MONITOR FISCAL MONITOR INTERNATIONAL MONETARY FUND 2019 OCT How to Mitigate Climate Change FISCAL MONITOR INTERNATIONAL MONETARY FUND 2019 OCT How to Mitigate Climate Change 20971_Ch 00_FM_P2.indd 1 10/9/19 507 AM2019 International Monetary Fund Cover IMF CSF Creative Solutions Division Composition AGS, An RR Donnelley Company Cataloging-in-Publication Data IMF Library Names International Monetary Fund. Title Fiscal monitor. Other titles World economic and financial surveys, 0258-7440 Description Washington, DC International Monetary Fund, 2009- | Semiannual | Some issues also have thematic titles. Subjects LCSH Finance, PublicPeriodicals. | Finance, PublicForecastingPeriodicals. | Fiscal policyPeriodicals. | Fiscal policyForecastingPeriodicals. Classification LCC HJ101.F57 ISBN 978-1-49832-122-8 paper978-1-51351-532-8 ePub978-1-51351-533-5 PDF Disclaimer The Fiscal Monitor is a survey by the IMF staff published twice a year, in the spring and fall. The report analyzes the latest public finance developments, updates medium-term fiscal projections, and assesses policies to put public finances on a sustain- able footing. The report was prepared by IMF staff and has benefited from comments and suggestions from cutive Directors following their discussion of the report on March 21, 2019. The views expressed in this publication are those of the IMF staff and do not necessarily represent the views of the IMF’s cutive Directors or their national authorities. Recommended citation International Monetary Fund IMF. 2019. Fiscal Monitor How to Mitigate Climate Change. Washington, October. Publication orders may be placed online, by fax, or through the mail International Monetary Fund, Publication Services P .O. Box 92780, Washington, DC 20090, U.S.A. Telephone 202 623-7430 Fax 202 623-7201 E-mail publicationsimf.org www.imfbookstore.org www.elibrary.imf.org 20971_Ch 00_FM_P2.indd 2 10/9/19 507 AM International Monetary Fund | October 2019 iiiCONTENTS Assumptions and Conventions v Further Ination vi Preface vii cutive Summary viii Chapter 1. How to Mitigate Climate Change 1 Introduction 1 Policies to Reduce Fossil Fuel CO 2Emissions 3 How to Increase Ambition in Global Mitigation Targets 10 Making Mitigation Policy Acceptable in Domestic Politics 13 Supporting Policies for Clean Technology Investment 19 Conclusions 22 Box 1.1 Investment Needs for Clean Energy Transitions 23 Box 1.2. Fiscal Instruments to Reduce Broader Sources of Greenhouse Gases 24 Box 1.3. Operationalizing International Carbon Price Floors 25 References 26 Country Abbreviations 31 Glossary 33 ological and Statistical Appendix 35 Data and Conventions 35 Fiscal Policy Assumptions 38 Definition and Coverage of Fiscal Data 42 Table A. Economy Groupings 42 Table B. Advanced Economies Definition and Coverage of Fiscal Monitor Data 44 Table C. Emerging Market and Middle-Income Economies Definition and Coverage of Fiscal Monitor Data 45 Table D. Low-Income Developing Countries Definition and Coverage of Fiscal Monitor Data 46 List of Tables Advanced Economies A1–A8 47 Emerging Market and Middle-Income Economies A9–A16 55 Low-Income Developing Countries A17–A22 63 Structural Fiscal Indicators A23–A25 69 Selected Topics 73 IMF cutive Board Discussion of the Outlook, October 2019 81 20971_Ch 00_FM_P2.indd 3 10/9/19 507 AMFISCAL MONITOR HOW TO MITIGATE CLIMATE CHANGE iv International Monetary Fund | October 2019 Figures Figure 1.1. The Global Mitigation Challenge 2 Figure 1.2. Reduction in Fossil Fuel CO 2from Carbon Taxes in 2030, Selected Countries 7 Figure 1.3. Revenue from Comprehensive Carbon Taxation in 2030, Selected Countries 10 Figure 1.4. Unilateral Costs and Domestic Net Benefits of a 50/Ton Carbon Tax in 2030, Selected Countries 10 Figure 1.5. Country Shares of G20 CO 2Reductions below Baseline under a Uni 50/Ton Carbon Price in 2030, Selected Countries 11 Figure 1.6. CO 2Reduction for G20 Countries under Alternative Ambition Scenarios, 2030 13 Figure 1.7. Burden of Carbon Taxation on Households, by Income Quintile, 50/Ton Carbon Tax in 2030, Selected Countries 14 Figure 1.8. Burden of a 50/Ton Carbon Tax on Industries in 2030, Selected Countries 15 Figure 1.9. Impact of a 50/Ton Carbon Tax on Employment in the Coal Sector in 2030, Selected Countries 15 Figure 1.10. Efficiency Costs of Alternative Carbon Mitigation Instruments for the United States 50/Ton Carbon Tax, 2030 17 Figure 1.11. Burden of a 50/Ton Carbon Tax in 2030 under Alternative Revenue Uses, Selected Countries 18 Figure 1.12. Composition of Global Public Energy Research and Development Expenditure, 1990–2018 20 Figure 1.13. Electricity Cost, by Energy Source of Production, Selected Countries, 2015–30 21 Figure 1.1.1. The Investment Challenge 23 Tables Table 1.1. Selected Carbon Pricing Arrangements, 2019 3 Table 1.2. Features of Alternative Mitigation Approaches 5 Table 1.3. Impact of Carbon Taxes on Energy Prices, 2030 9 Table 1.4. Comparing Other Mitigation Policies with Carbon Taxes, 2030 11 Table 1.5. Options for Use of Carbon Tax Revenues 16 Table 1.6. Instruments for Offsetting Burdens on Trade-Exposed Firms 20 Online-Only Anns Annex 1.1. Baseline CO 2Emissions Projections by Country Annex 1.2. Mitigation Aspects of the Paris Agreement Annex 1.3. The Effects of Carbon Mitigation Policies A Diagrammatic Treatment Annex 1.4. Rationale for Feebates and Impact of Applying Them to Key Energy Sectors Annex 1.5. Carbon Taxes versus Feebates A Closer Look Annex 1.6. The Concentration of Coal-Related Employment within Countries Annex 1.7. Prior Experiences with Carbon Taxation Annex 1.8. Incidence Analysis Annex 1.9. Energy Investment Needs, ology, and Case Studies Annex 1.10. Fiscal Implications for Fossil-Fuel-Rich Countries Annex 1.11. The Oil Market Effect of a Carbon Tax Consistent with 2C Alternative Price Scenario Annex 1.12. Literature Review of Possible Financial Policies to Reinforce Mitigation Incentives 20971_Ch 00_FM_P2.indd 4 10/9/19 507 AM International Monetary Fund | October 2019 vThe following symbols have been used throughout this publication. . . to indicate that data are not available to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist– between years or months for example, 2008–09 or January–June to indicate the years or months covered, including the beginning and ending years or months/ between years for example, 2008/09 to indicate a fiscal or financial year “Billion” means a thousand million; “trillion” means a thousand billion. “Basis points” refers to hundredths of 1 percentage point for example, 25 basis points are equivalent to of 1 percentage point. “n.a.” means “not applicable.” Minor discrepancies between sums of constituent figures and totals are due to rounding. As used in this publication, the term “country” does not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis. ASSUMPTIONS AND CONVENTIONS 20971_Ch 00_FM_P2.indd 5 10/9/19 507 AMFISCAL MONITOR HOW TO MITIGATE CLIMATE CHANGE vi International Monetary Fund | October 2019 FURTHER INATION Corrections and Revisions The data and analysis appearing in the Fiscal Monitor are compiled by the IMF staff at the time of publication. Every effort is made to ensure their timeliness, accuracy, and completeness. When errors are discovered, corrections and revisions are incorporated into the digital editions available from the IMF website and on the IMF eLibrary see below. All substantive changes are listed in the online table of contents. Print and Digital Editions Print Print copies of this Fiscal Monitor can be ordered from the IMF Bookstore at imfbk.st/26165. Digital Multiple digital editions of the Fiscal Monitor, including ePub, enhanced PDF, and HTML, are available on the IMF eLibrary at www.elibrary.imf.org/OCT19FM. Download a free PDF of the report and data sets for each of the charts therein from the IMF website at www.imf.org/publications/fm, or scan the QR code below to access the Fiscal Monitor web page directly Copyright and Reuse Ination on the terms and conditions for reusing the contents of this publication are at www.imf.org/ external/terms.htm. 20971_Ch 00_FM_P2.indd 6 10/9/19 507 AM International Monetary Fund | October 2019 viiThe projections included in this issue of the Fiscal Monitor are drawn from the same database used for the October 2019 World Economic Outlook and Global Financial Stability Report and are referred to as “IMF staff projections”. Fiscal projections refer to the general government, unless otherwise indicated. Short-term projections are based on officially announced budgets, adjusted for differences between the national authorities and the IMF staff regarding macroeconomic assumptions. The medium-term fiscal projections incorporate policy measures that are judged by the IMF staff as likely to be implemented. For countries supported by an IMF arrangement, the medium-term projections are those under the arrangement. In cases in which the IMF staff has insufficient infor- mation to assess the authorities’ budget intentions and prospects for policy implementation, an unchanged cycli- cally adjusted primary balance is assumed, unless indicated otherwise. Details on the composition of the groups, as well as country-specific assumptions, can be found in the ological and Statistical Appendix. The Fiscal Monitor is prepared by the IMF Fiscal Affairs Department under the general guidance of Vitor Gaspar, Director of the Department. The project was directed by Paolo Mauro, Deputy Director; and Catherine Pattillo, Assistant Director. The main authors of this issue are Ian Parry team leader, Thomas Baunsgaard, William Gbohoui, Raphael Lam, Victor Mylonas, Mehdi Raissi, Alpa Shah, and Baoping Shang. The chapter also benefited from contributions by Eduardo Godinez, Josh Linn Resources for the Future, Akito Matsumoto, William Oman, Andrea Pescatori, and Dinar Prihardini. Excellent research contributions were provided by Juliana Arbelaez. The ological and Statistical Appendix was prepared by Yuan Xiang. Joni Mayfield and Meron Haile provided excellent coordination and editorial support. Rumit Pancholi from the Communications Depart- ment led the editorial team and managed the report’s production, with editorial assistance from Sherrie Brown, Susan Graham, Lucy Morales, James Unwin, and Vector Talent Resources. s, comments, and suggestions were received from other departments in the IMF, including area departments namely, the African Department, Asia and Pacific Department, European Department, Middle East and Central Asia Department, and Western Hemisphere Departmentas well as the Communications Department, Institute for Capacity Development, Legal Department, Monetary and Capital Markets Department, Research Department, Secretary’s Department, Statistics Department, and Strategy, Policy, and Review Department. The Fiscal Monitor also benefited from comments by William Cline Peterson Institute, Jim Cust World Bank, Stephane Hallegatte World Bank, Joanna Lewis Georgetown University, Gokul Iyer Pacific Northwest National Laboratory, Donald Marron Urban Institute, Adele Morris Brookings, Helen Mountford World Resources Institute, Grzegorz Peszko World Bank, William Pizer Duke University, Adrien Vogt-Schilb Inter-American Development Bank, and Emma Zinsmeister US Environmental Protection Agency. Both projections and policy considerations are those of the IMF staff and should not be attributed to cutive Directors or to their national authorities. PREFACEFISCAL MONITOR HOW TO MITIGATE CLIMATE CHANGE viii International Monetary Fund | October 2019 CUTIVE SUMMARY Global warming is threatening our planet and liv- ing standards around the world, and the window of opportunity for containing climate change to manage- able levels is closing rapidly. Carbon dioxide CO 2 emissions are a key driver of this alarming trend. Fiscal policy has an important role to play. This issue of the Fiscal Monitor argues that policymakers need to act urgently to mitigate climate change and thus reduce its damaging and deadly effects, including rising sea levels and coastal flooding, more frequent extreme weather events, and disruption to our food supplykey issues affecting all people globally. Action to date has been inadequate. The 2015 Paris Agreement goes in the right direction, but the com- mitments countries have made fall well short of those needed to limit global warming to the level considered safe by scientists2C, at most, above preindustrial temperatures. Furthermore, it remains uncertain whether countries are reducing emissions as agreed. The longer that policy action is delayed, the more emissions will accumulate in the atmosphere and the greater the cost of stabilizing global temperatureslet alone of failing to do so. A better future is possible. The technological and policy means are available to switch from coal and other polluting fossil fuels to cleaner energy while maintain- ing robust economic growth and creating jobs. For the needed transation to take place, a key challenge is to distribute its costs and benefits in a manner that can muster enough political supportboth domestically and internationally. Fiscal Policies to Mitigate Climate Change This Fiscal Monitor argues that, of the various mitiga- tion strategies to reduce fossil fuel CO 2emissions, carbon taxeslevied on the supply of fossil fuels for example, from oil refineries, coal mines, processing plants in proportion to their carbon contentare the most powerful and efficient, because they allow firms and households to find the lowest-cost ways of reducing energy use and shifting toward cleaner alternatives. The burden of the tax in proportion to household consump- tion is moderately larger for lower-income households than for higher-income households in some countries for example, China and the United States, but roughly equal or slightly smaller in others Canada, India. This chapter analyzes the carbon prices countries must impose to implement their mitigation strategies and the tradeoffs with other mitigation instruments. Limiting global warming to 2C or less requires policy measures on an ambitious scale, such as an immediate global carbon tax that will rise rapidly to 75 a ton of CO 2in 2030. Under such a scenario, over 10 years electricity prices would rise, on average, by 45 percent cumulatively and gasoline prices by 15 percent, for households, compared with the baseline no policy action. The revenue from such a tax 1.5 percent of GDP in 2030, on average, for the