Download Fiscal Implications of Climate Change

Macroeconomic and Fiscal
Consequences of Climate
Change—and of Policies to
Address it
Michael Keen and Natalia Tamirisa
April 11, 2008
Presentation draws on:
• Chapter 4 of current World Economic Outlook
• Paper on Fiscal Implications of Climate Change
Both available at www. imf.org
1
Outline
• The Economics of Climate Change
• Adaptation
• Mitigation
• Conclusions
2
The Economics of Climate
Change
• Climate change is one of the world’s greatest
collective action problems
• It is an ‘externality’—emitters of GHGs do not
face the full social consequences of their actions
• Economists have long prescribed corrective
taxes to deal with this
4
But climate change is a uniquely difficult
externality:
–
–
–
–
–
Costs of mitigation come long before benefits
(hence discount rate critical)
Uncertainty considerable
Possibility of catastrophic damages
Free-rider problem, requiring international
cooperation….
….exacerbated by differences in countries’
vulnerability and historical (and prospective)
responsibility
5
Future damages from climate change are
uncertain, but could be large
Baseline Climate, Market Impacts, Risk
of Catastrophe, and Nonmarket Impacts
Percent
decrease
increase
in cost
in cost
0
Percent loss in GDP per capita
Major Factors Causing Variation in the
Social Cost of Carbon
-10
Climate
sensitivity
Pure time preference
rate for consumption
Noneconomic
impact
-20
Central estimate
90% confidence interval
Equity weight
Climate change
half-life
-30
Economic impact
-40
2000
50
2100
50
2200 -100
Sources: Panel 1, Stern (2007); panel 2, Hope (2006).
-50
0
50
100
150
200
6
Damages are expected to fall disproportionally
on emerging and developing economies
6
Africa
Low
income
Middle income
High-income OPEC
OECD
(with catastrophic risk)
3
2
OECD
(without catastrophic risk)
Lower
middle income
China
4
India
(without catastrophic risk)
1
Japan
Transition economies
Other high income
Percent loss in GDP
5
India (with catastrophic risk)
0
United States
-1
0
5
10
15
20
25
30
GDP per capita in 1995 (thousands of 1990 U.S. dollars)
Source: Nordhaus and Boyer (2000).
7
United
States
Japan
Western
Europe
Russia
China
India
Brazil
1980–90
1990–20
2005–30
1980–90
1990–20
2005–30
1980–90
1990–20
2005–30
1980–90
1990–20
2005–30
1980–90
1990–20
2005–30
1980–90
1990–20
2005–30
1980–90
1990–20
2005–30
Energy intensity (energy use per GDP)
Fuel mix (emissions per unit of energy use)
Population
GDP per capita
Total Emissions
Source: International Energy Agency, World Energy Outlook (2007).
12
10
8
6
4
2
0
-2
-4
-6
-8
Average annual growth, percent
Growth in emissions is driven by
catching up economies
8
Growth in emissions is driven by
catching up economies
Source: International Energy Agency, World Energy Outlook (2007).
9
Growth in emissions in developing
countries reflects economic development
Sources: International Road Federation, World Road Statistics; World Bank, World
Development Indicators; projections from Chamon, Mauro, and Okawa (2008).
10
The share of non-OECD countries in the
stock of emissions is projected to rise
Sources: World Resources Institute’s Earth Trends database and Energy Information
Administration, International Energy Annual (2005).
11
This is true of both energy-related and
total emissions
Sources: World Resources Institute’s Earth Trends database and Energy Information
Administration, International Energy Annual (2005).
12
Adaptation
Much adaptation to slow moving climate change
can and should be left to private sector….
But potential role for public sector, in
– Climate-proofing public investments
– Responding to additional spending needs,
which (even with an expanded resource
envelope) will require trade-offs with other
development objectives
– Dealing with climate change as a fiscal risk,
through both self- and market insurance
14
• World Bank puts adaptation costs in tens of
billions of dollars per annum—but much more
needs to be known at country level
• Financial instruments also likely to play an
increasingly important role—for example,
catastrophe bonds and weather derivatives
• Good macroeconomic and structural policies
can help facilitate adjustment to climate shocks
15
Mitigation
• Classic prescription to deal with the externality is
a ‘carbon price,’ equal to the marginal social
damage from emissions
• Views differ greatly on the appropriate starting
level: often $15-60 /tC (and Stern closer to $100)
• But even more important is the expectation of a
modest but sustained increase over time
• Other policies (e.g., technology incentives and
performance standards) also needed to deal
with related market failures
17
Carbon pricing can be achieved through either:
1. Carbon taxation, or
2. Cap and trade: allocate rights to emit, but allow
them to be bought and sold, or
3. Hybrids combining elements of the above
18
Which is better?
• Equivalent if abatement costs certain and permit
rights sold…with additional revenue raised a
source of benefit (though likely to be modest in
most cases)
• If abatement costs uncertain, some preference
for taxation (since getting emissions wrong over
a short interval is not too costly)
19
What would mitigation measures of this kind
mean for macroeconomic performance?
WEO investigates this, using a global dynamic
macroeconomic model (G-cubed, developed by
Warwick McKibbin and Peter Wilcoxen)
20
Global emissions are assumed to follow a humpshaped profile, focus is on costs up to 2040
Global Emissions Targets and Paths, 1990–2100
(gigatons of carbon dioxide)
100
Baseline
path
90
80
96% below
baseline or
60% reduction
from the 2002 level
in 2100
70
60
50
40
30
2002 level
20
Target emission
path for the world
10
0
1990
2002 2013 20
40
60
80
2100
21
Emission and Carbon Price under Mitigation
Policies
United States
Japan
Eastern Europe and Russia
Western Europe
OPEC
China
Other developing and emerging economies
Emissions
Carbon Price
(percent deviation from baseline)
(US Dollar per tonne Carbon)
20
100
90
0
80
-20
70
-40
60
-60
50
40
-80
30
-100
20
-120
10
-140
2013
0
20
30
40
2013
20
30
40
22
Macroeconomic Effects of Mitigation Policies
(percent deviation from baseline unless otherwise indicated)
United States
Japan
Eastern Europe and Russia
Consumption
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
-3.0
-3.5
2013
Investment
Output
0
5
0
-5
-5
-10
-10
-15
-15
-20
-20
-25
-25
-30
20
30
40
Interest Rate
0.0
-0.1
-0.2
-0.3
-0.4
-0.5
-0.6
-0.7
-0.8
-0.9
-1.0
2013
Western Europe
OPEC
China
Other developing and emerging economies
2013
20
30
2013
40
Real Effect. Exchange Rate
(percentage points)
20
30
40
Current Account
(percent of GDP; percentage points)
10
2.5
5
2.0
1.5
0
1.0
-5
0.5
-10
0.0
-15
-0.5
-1.0
-20
20
30
40
2013
20
30
40
2013
20
30
40
NOTE: Output refers to gross national product, interest rate refers to 10-year real interest rate. For real effective exchange rate, a
23
positive value is an appreciate relative to the baseline.
Consumption Loss
(percent deviation from baseline)
United States
Japan
Eastern Europe and Russia
Cap and Trade,
Initial Emissionsbased Allocation
World Uniform Tax
1.0
Western Europe
OPEC
China
Other developing and emerging economies
Cap and Trade,
Population-based
Allocation
3
3
2
2
1
1
0
0
-1
-1
-2
-2
-3
2013
-3
2013
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
-3.0
-3.5
2013
20
30
40
20
30
40
20
30
40
24
Mitigation costs depend on countries’ efficiency in
abatement, allocation of emission rights and policy design
Total Costs of Mitigation, 2013–40
(percent deviation of consumption’s net present value from the baseline)
United States
Japan
Western Europe
Uniform
carbon tax
and hybrid
policy
Eastern Europe
and Russia
Cap-and-trade
(by population
shares)
Cap-and-trade
(by initial
emission shares)
-3
-2
-1
China
Other emerging
and developing
economies
OPEC
World, GNPweighted
World, populationweighted
0
1
2
3
25
Financial flows under cap-and-trade depend on how
emissions rights are allocated across countries and
countries’ efficiency in abatement
By Initial Emissions Shares
By Population Shares
(percent of GDP)
(percent of GDP)
United States
2020
2030
2040
Japan
Western Europe
China
Other emerging
and developing
economies
Eastern Europe
and Russia
OPEC
-3
0
3
6
9
12 -3
0
NOTE: A positive value denotes a receipt of transfers—the region is selling its emission rights.
3
6
9
12
26
Conclusions
• Quantitative results are model-specific…
–
–
Depend, among other things, on model structure,
countries’ abatement costs and design of policies
Coverage of emissions (deforestation not included)
• But they illustrate importance of a few key
economic principles:
28
• Carbon pricing needs to be
– Long-term and credible
– Broad-based
– Common price for emissions
– Flexible to accommodate changes in cyclical
economic conditions and new scientific information
– Equitable
• Supporting macroeconomic policies are needed:
– Capital flows
– Technology transfers
– Managing transfers
29
• Drawing on environmental expertise of others,
the Fund can
–
Advise where effects of climate change are
macroeconomically significant
–
Contribute to the wider debate
30