Recently, the International Monetary Fund has published several important studies on global climate policy.

This October 2019, the IMF published the study “long-term macroeconomic effects of climate change: A Cross-Country Analysis”.[1]

Previously, on September 4, 2019, the study “Macroeconomic and Financial policies for Climate Change Mitigation: A review of the literature” [2], was published, detailing the fiscal, financial and monetary dimensions of the mitigation policies.

In addition, the IMF Fiscal Monitor of October 2019[3] highlights the global consensus on global warming: it represents a serious threat to the planet’s climate and living standards in all countries. We know that the emissions of carbon dioxide (CO2), that keeps increasing, are a key engine of this phenomenon.

In my opinion, The IMF joins this way the conclusions of the Intergovernmental Panel on climate change of the United Nations, according to which the effects of inaction are harmful and deadly, causing, among others consequences, extreme weather events, future acceleration in sea level rise, flooding of coastal areas and disruption of food supplies.

A. Creating public policies on climate

We comment below on the executive summary of the last study, highlighting 7 elements considered fundamental to the creation of public policies in fiscal matters.:

• Technological and regulatory means continue to grow and are available to facilitate the transition from coal and fossil energy to renewable energy, maintaining economic growth and creating jobs. A key challenge to this transformation is to distribute its costs and benefits in a way that gathers sufficient political support.

• To reduce the CO2 emissions, the Monitor argues that the carbon taxes levied on the supply of fossil fuels are the most powerful and efficient tool, with measures to avoid passing the burden mainly on lower-income households, such as by paying tax dividend to citizens.

• Limiting global warming to less than 2°C requires ambitious measures, such as a global carbon tax that would rapidly increase to $ 75 per ton by 2030. Other mitigation strategies include emissions trading, “feebates”, which are fee and rebate systems for products or activities according to their emission intensity, and standards for emission rates and energy efficiency. In this scenario, electricity and gasoline prices would increase, on average, depending on the electricity generation system of nations.

• The change would generate immediate environmental benefits, such as health benefits for lower air pollution in cities, and new jobs would be generated in the renewable energy sector, which already reached 11 million jobs worldwide in 2017.

• The existing carbon taxes and emissions trading systems are totally insufficient. The average taxation of global emissions is currently $ 2 per ton. A start to strengthening the process would be a carbon price agreement among the countries with the highest emissions. Such an agreement between countries like the United States, China and India would already cover more than half of the world’s emissions.

• Global energy investment must shift to low-carbon sources. Companies that considering long-term investments need security about future tax and regulatory policies. Additional policies for research and development, fiscal incentives and green bond markets are needed for access to private capital.

• Finance ministers can address the crisis by imposing carbon taxes, in coordinated strategies at the international level, ensuring an adequate budget for investment in clean technologies.
  In this sense, the tax administrations that collect taxes must also study and adopt the good practices in term of carbon taxation, and determine the possible variations of approach between developed countries and developing countries.

B. Macroeconomic, financial and monetary tools for climate change mitigation

The study “macroeconomic and financial policies for climate change mitigation ” published in September 2019 by the IMF differentiates the following types of tools:

Fiscal tools include regulations such as national carbon taxes and energy efficiency standards. Examples of these are the carbon tax in Sweden, the system of emission rights of California or the regulations of the EU.

The financial policies of mitigation include requirements to collect data on climate risks, facilities and assets, evidence of climate stress and risks, to reform the criteria of governance of companies, and evaluate the balance sheets of multinational enterprises according to their ecological risks.  In this regard, the central banks of England, France, Brazil and China have issued several calls for mandatory disclosure of climate risks.[4]

The monetary tools involve integrating climate risks in the collateral structures and the management of the central banks portfolios, and quantitative easing (QE) as the means to ensure that climate risks are adequately reflected in the portfolios of central banks, promoting financing schemes to the banks that invest in projects in low carbon, and low-carbon bond purchases by the central banks. These policies are reflected in central bank statements from England, Japan, Bangladesh, Norway and India, among others.

C. A United Nations Manual to design carbon taxes for developing countries

How can tax administrations respond to the challenge of efficiently implementing carbon taxation? After the session of the UN Committee of Experts on International Cooperation in Tax Matters, a manual on the design and implementation of taxes on carbon emissions was published in April 2019. This manual is focused primarily on developing countries that are considering introducing or developing their carbon taxes. The link to this document is available.[5]

The manual includes the following elements:

• Design of a carbon tax: who has the power to create the tax, such as defining the scope and tax base of the tax, the various ways to determine tax rates and how to identify taxpayers.

• Interaction of the carbon tax with other fiscal and financial policy measures.

• Conceptual approach to carbon tax: it can be directed at sources of emissions or consumption.

• Tax administration issues.

• Experiences by countries, list and types of existing taxes and best practices.

The more detailed description of this manual will be the subject of our next blog post.

[1] View document: https://www.imf.org/en/Publications/WP/Issues/2019/10/11/Long-Term-Macroeconomic-Effects-of-Climate-Change-A-Cross-Country-Analysis-48691

[2] View document: https://www.imf.org/en/Publications/WP/Issues/2019/09/04/Macroeconomic-and-Financial-Policies-for-Climate-Change-Mitigation-A-Review-of-the-Literature-48612

[3] See: https://blogs.imf.org/2019/10/10/fiscal-policies-to-curb-climate-change/

[4] “Call to arms on climate risks” https://www.centralbanking.com/central-banks/economics/4238927/call-to-arms-on-climate-change

[5] See: https://www.un.org/esa/ffd/wp-content/uploads/2019/04/18STM_CRP4-Environmental-tax-issues.pdf

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