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CARBON PRICING AND
DEVELOPING COUNTRIES
—KEY ISSUES
Michael Keen
Fiscal Affairs Department, IMF
New York, June 17 2008
CONTEXT
Developing countries are:
• Responsible for relatively small part of GHG stock
• Likely to generate bulk of future emissions
• Most vulnerable to CC
Curbing emissions raises issues of both:
• Efficiency—to avoid wasting resources
• Equity—across generations, countries, individuals
CARBON PRICING—PRINCIPLES
Can be implemented in many ways—carbon
tax, cap-and–trade, hybrids—common
objective being to face emitters with a price
reflecting global damage they cause
Price path needs to be:
 Credible, with price rising over a long period
 In ‘first-best’, uniform across sources and
countries (will return to this…)
A quick reality check…
Initial levels of carbon price commonly proposed—
$15-$60 per tC (= $2-$8 per barrel of oil)—are
dwarfed by recent oil price increases
BUT that does NOT mean carbon pricing now
unnecessary:
 The external damage is still there…
 …and whether it is higher or lower than we thought
depends on whether current prices reflect demand or
supply shock
 Credibility of increasing future prices critical
THE UNIFORMITY ISSUE
• Intuition: Since damage is the same
wherever and however emissions arise, so
should be their price
• But ‘first-best’ presumes that any equity
concerns (across and within countries) are
dealt with by other means (including, in
principle, cross-country transfers)…
• …which is likely to be the case in
developed countries—but, otherwise,
there is a case for a lower charge on poorer
individuals
Caveats to case for lower carbon pricing in
some countries:
• In terms of equity, low fuel prices:
 Are expensive in foregone revenue, and may
 Not be the best-targeted way to help the poor
 Exacerbate local pollution
• ‘Leakage’ is a concern
 Likely extent remains unclear, though a few
sectors seem key
 Possible policy responses: Border tax
adjustment; Sectoral agreements
REVENUE ISSUES
Both carbon taxation and international
cap-and-trade are possible sources of
revenue (in latter case, so long as
emissions rights not ‘grandfathered’)—a
potential benefit:
7
IGSM
6
5000
5
4000
450 ppm
4
3000
3
2000
2
550 ppm
1000
1
650 ppm
0
0
2020
2040
450 ppm
2060
550 ppm
2100
650 ppm
1000
900
7
Minicam
6
Carbon prices US$/tC (2000)
800
5
700
450 ppm
600
4
500
550 ppm
400
3
300
2
200
650 ppm
1
100
0
0
2020
2040
450 ppm
2060
550 ppm
2100
650 ppm
Annual Carbon tax revenue as percentage
of global GDP
Carbon prices US$/tC (2000)
6000
8
Annual carbon tax revenue as percentage of
global GDP
7000
• Proper use of this will be country-specific
• Earmarking—to roads, environmental
spending…—may help politically, but in
economic terms is not necessary and can
be damaging
• International cap-and-trade (which in itself
will imply uniformity across countries)
leads in addition to cross-country flows,
extent/direction of which depend on how
emission rights are allocated
• Most schemes analyzed have OECD as net
buyers of permits, and Africa and India as
sellers—but differ e.g. on whether China a
buyer or a seller
MACROECONOMIC EFFECTS
These are examined in IMF’s Spring 2008
World Economic Outlook, using G-cubed, a
calibrated intertemporal general
equilibrium model
Common tax imposed to achieve a 60
percent reduction relative to the 2002 level
in world (energy-based) carbon dioxide
emissions by 2100
Macroeconomic impacts generally modest:
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
positive value is an appreciate relative to the baseline.
Implied financial flows under cap-and-trade:
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