Transcript Climate Related Fiscal Policy Issues

CLIMATE RELATED FISCAL POLICY ISSUES:
POST COPENHAGEN & POST CRISIS
EUROPEAN PEOPLES’ PARTY HEARING
BRUSSELS, 14 APRIL, 2010
Victoria Perry
Fiscal Affairs Department, IMF
Introduction

Core fiscal and macro issues relating to climate change, and their
policy implications in the current context — focus on economic
recovery and addressing fiscal challenges ahead

How should the challenges of recovery affect climate policy? And
how should climate concerns be reflected in macro fiscal policies
over the short and longer terms?

Draws on series of recent IMF papers including:

IMF Staff Position Note “Climate Policy and Recovery”, written by
Benjamin Jones and Michael Keen

IMF Executive Board Paper “The Fiscal Implications of Climate
Change”

“Climate Change and the Global Economy”, World Economic Outlook,
Spring 2008
A word on climate externalities…

Climate change is an external social cost arising from increased
stocks of GHGs in the atmosphere

Classic policy prescription is to set a price equal to the marginal
social damage—but highly complex in practice!

Huge uncertainty (including small risk of catastrophe)

Asymmetric costs and benefits across/ within generations

Views differ greatly on the appropriate starting level (often
ranging from $15-60/tC, Stern closer to $100/tC)

But even more important is the credible expectation of a gradual
but sustained increase in emissions price over time

Technology market failures may also warrant policies on the
spending side, for example targeted support for energy R&D
Fiscal policies for mitigation

Fiscal policy incentives essential for economic transition— but
may not be “sufficient” (requiring wider measures, e.g.
strengthened property rights, subsidy regulation)

Pollution pricing can be implemented in many ways (carbon tax,
cap-and-trade, hybrids)—the common objective being to face
emitters with a price reflecting the global damage caused

Policies are equivalent if abatement costs are known and permit
rights sold — but taxes may be preferred (since getting emissions
wrong over a short interval is not too costly)

Broad based emissions pricing—with transfers both across and
within countries—more efficient (and potentially more equitable)
than piecemeal, often subsidy-based actions
Emission & carbon price under mitigation policies
United States
Japan
Eastern Europe and Russia
5
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
Macroeconomic effects of mitigation policies
(percent deviation from baseline unless otherwise indicated)
6
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
30
40
Current Account
Real Effect. Exchange Rate
(percentage points)
20
(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.
Projected financial flows under emissions trading in 2020:
upper tile—allocation based on equal per capita emissions rights;
lower tile—allocation based on rights per unit of emission
Carbon pricing reform & recovery

More moderate mitigation and energy costs justify doing more
rather than less — although economic fragility argues against
rapid or unanticipated price shocks

Emissions pricing can substantially contribute to medium term
fiscal consolidation, necessary in many member states — limiting
need for more distorting taxes, productive expenditure cuts, or
larger debts…

…but this requires that more emission rights be sold rather than
freely awarded! The latter creates windfall profits for firms, and
fails to protect consumers or address competitive concerns

Greater market stability in emissions trading markets desirable —
improved depth, liquidity, and transparency (e.g. through
expanded sectoral and geographical coverage)
‘Green’ fiscal Stimulus

Environmental measures have been a valuable part of fiscal
stimulus packages, and will continue to be so as enhanced public
spending continues

Some spending also reduces exposure to future energy or
emissions price shocks (e.g., subsidies to correct underinvestment in energy efficient buildings due to market failures)

$430 billion (roughly 15 %) of stimulus expenditure of 20
countries allocated to climate-related investment themes —
although UN suggests little has so far been spent

But much stimulus spending is on “dirty” investments (e.g. $270
billion allocated to road building projects in the G-20) — risks
entrenching inefficiencies from the under-pricing of emissions
Supporting longer-term, greener growth

Implementation, and withdrawal, of environmental (and other)
stimulus measures should reflect contribution to sustained
growth and employment — careful monitoring and evaluation key

Best practice is to undertake environmental assessments of both
policies and major projects — e.g. EU guidance on structural
funding incorporates such assessments into cost-benefit analysis

Important to guard against spending measures substituting for
more efficient emissions pricing—especially given the intense
fiscal challenges in many countries

Spending support to ‘renewables’ less important than credible
carbon pricing — e.g. poor returns to biofuels subsidies in EU/ US
Future climate related spending priorities are likely to include:

Reducing market barriers. e.g. limited subsidies to investments in
energy-savings in buildings

Supporting new markets for reducing deforestation. e.g. financing
new monitoring and verification arrangements.

Financing low carbon energy infrastructure. e.g. expenditure on
cleaner electricity grids

Energy research and development essential to reducing future
mitigation costs

Investment in adaptation. Sustained improvements in health,
education, water, and sanitation services key
Fiscal policies for adaptation

Much adaptation will be by private households and firms—
so getting price signals rights is key…
…however, adaptation requires increased spending, for
example, on transport, water, sea defenses, public
agricultural R&D, health etc

Public adaptation costs likely high even in some EU
countries—e.g. coastal protection in Netherlands

Substantial scope/need for supporting developing countries,
where adaptation costs are estimated at $50-60 billion per
year through 2020. More quantification work needed!

Uncertainties and irreversibilities require difficult judgments
on timing and extent of public interventions

Climate risks are part of broader contingent liabilities
management
Some concluding thoughts…

The basic climate challenge, or proper response to it, is little
affected by the crisis. Emissions pricing key — efficient
implementation need not impede the recovery…

Emissions pricing is an important potential source of revenue —
and limits future growth risks from more distorting taxes, cutting
productive expenditures, or higher levels of debt

“Green” stimulus measures can help sustain short term aggregate
demand and employment — while increased climate-related
public spending is also likely to be needed into the longer term

But spending policies should not substitute for more efficient
pricing of pollution — especially given the intense fiscal
challenges many countries now face