11 April
Erich Vogt, IUCN, moderator
- Climate
Change is a cross-sector challenge
- IMF
used to say climate change "is not of concern to the IMF", not on their
radar screen
- But
IMF staff have worked on this and worked with others outside the IMF
Michael Keen, FAD, former head of tax policy division, IMF
Natalia Tamirisa, IMF Research deputy
division chief, IMF
Joint presentation by Michael and Natalia
Michael Keen, presentation
- IMF EDs discussed climate change, IMF won't be a lead
organisation, but it sees a mandate to make a contribution based on issues
of macroeconomic and fiscal significance
- The
economics of climate change
- this
is a collective action problem, externalities are key, corrective taxes are
usually the best way to deal with this
- Complications
of dealing with climate change:
- Costs
of mitigation long before benefits - discount rate is critical; but need
quick action because of long-term stocks of GHGs
- Uncertainty
is considerable
- Possibility
of catastrophic damages
- Free-rider
problem - requiring international cooperation
- Differences
in vulnerability and historical and perspective responsibility
Natalia
- Economics
of climate change
- Future
damages uncertain, but could be large (3-35% loss of GDP loss)
- Problem
of non-market impacts - things that have no values in the market (like
increase likelihood of disease, biodiversity, water etc)
- Factor
contributing to uncertainty: climate sensitivity; time preference,
equity, nonmarket factors, etc
- Distribution
of damages is quite uneven - developing and emerging markets most at risk
- Emissions
growth driven by catching up economies - reflecting economic development
Michael
- Adaptation
- For
slow moving aspects of climate change - adaptation should be left to
private sector
- Potential
role for public sector: climate-proofing investments; responding to
additional public spending needs will require trade-offs; dealing with
fiscal risk through self- and market-insurance (especially cautious
fiscal position)
- Magnitude
- WB est is tens of
billons of dollars - how much to fall on the public sector? Country distribution
of costs?
- Financial
instruments also to play a role - catastrophe bonds, weather derivatives
- Macro
and structural policies can help facilitate adjustments - need flexible
exchange rates and financial liberalisation for quick recoveries from
shocks
- Mitigation
- Carbon
pricing and taxes - differing views of appropriate prices ($15-60, up to
$100)
- Modest
but sustained increase over time (market expectations)
- Other
policies - performance standards, technology incentives, deal with
related market failures
- Methods:
taxation; cap and trade; hybrids
- Difference
- do you fix quantities of emissions or price of carbon
- Which
is better? Depends if you know abatement costs or not? Also requires
auctions of permits in cap and trade
- If
abatement costs uncertain, preference for taxation as getting emissions
wrong over short interval is not too costly - damage comes from stock;
if you get price wrong then it can be very costly
Natalia
- Mitigation
models
- Used
G-cubed global dynamic macro-economic model - not technological, sectoral modelling
- Category
3 levels from IPCC - to 550 ppm atmospheric level
- Assume
global uniform carbon tax and look at macroeconomic effects
- Focus
on consumption loss - three scenarios (world uniform tax, trade based on
initial emissions and population-based allocation)
- Financial
transfers sensitive to allocation scheme - population share allocation
better for developing countries
- Also
very sensitive to assumptions on the costs of reducing emissions - so
country-specific results are not robust
Michael - Conclusions and role of the Fund
- Long-term
and credible prices, broad-based pricing is needed, common price,
flexible, equitable
- Supportive
macro policies - capital flows, tech transfers, managing transfers (Dutch
disease)
- Role
of the Fund- to advise where macro-relevant issues, contribution to wider
debate
Questions
Noah of EDF - where do marginal
abatement cost curves come from?
Natalia - abatement costs depend solely on energy intensity
of the economy
Noah - timing of policy introduction?
Natalia - in the publications all at once; we did some
models of mixed introduction but this means costs too high for rich countries
Noah - Greater uncertainty of damage means we should use
quantity as the target
Michael - Damage occurs on which instrument you use; in
practice it has to be changed all the time; we don't know a critical threshold;
we can't worry too much about fat-tail damage
Joseph of Nigeria - involved in renewable energy projects
- Effectiveness
of emissions trading on mitigating change; transaction costs are quite
high (50%) of the emissions reduction because of assessment, monitoring,
etc.
Michael:
- yes many problems in trading schemes now, but
carbon markets can operate more smoothly
- Africa
can be a significant seller - meaning it is an opportunity to LICs
Questioner - investment and output deviation in OPEC?
Natalia - reduced demand for oil is the link to lower
investment and output
Italian foreign ministry - cap and trade
scheme vs. taxation - implementation?
- Carbon
pricing and performance standards?
Michael - preference is a uniform carbon price; no detail on
floors on schemes; but linking schemes will be a future research agenda
- No
comparison of pricing vs performance standards
explicitly; no work on the welfare cost trade-offs of this
- Performance
standards are not the first best instrument
- Though
we know fiscal instruments are not the only instruments to be used, but a
natural area of IMF work
Natalia - performance standards useful for dealing with
market failures like diffusion
Bhumika - what about the role of
the IMF in LICs? ESF? Other loan instruments to discuss for adaptation and disaster
response?
- Fiscal
space by rationalising expenditure? What does that mean? Where to WB
climate funds come in? Where is external borrowing?
Michael - additional instruments not being considered
- Need
to know more info on costs and countries - we need more specific info on
demands on public sectors in these countries
- We
are reliant on other institutions to find volume of fiscal costs
- Reform
- PEM pension etc - the normal kinds of advice on fiscal reduction
- We
know fiscal space is hard to create - we don't say this lightly
Miguel from Chile - very wary of solutions that require interventions because of corruption risks;
is there literature on the risks
Michael - see upcoming paper on fiscal instruments towards
energy policy in the G7
- We recognise
that there is a mess of ad-hoc measures out there in countries - so uniform
carbon pricing for example is very hard to achieve
- First
step might have to be rationalisation/reform of fiscal aspects of energy
policy
Tanim from Bangladesh
- usage of funds from carbon taxation?
Michael - We don't have a view on allocating revenue, but
this is fundamental question, we can advise on implications
Peter Chowla - choice of
stabilisation level?
Natalia:
- We picked middle range from IPCC at 550 ppm, not the least ambitious but we are not experts
- Focus
was not on the stabilisation goal, just one of the assumptions to
calibrate the mechanism
Michael - fiscal paper does 450, 550, 650 words
Paul of UDC and New Rules for Global
Finance - relation of FDI to adaptation/mitigation; investment relation to
unemployment?
Michael - we are agnostic on both of these.
Natalia - opportunities from mitigation not discussed, but
yes green sector is interesting
Benjamin from Nigeria - collaboration with
countries on impacts
Michael - the IMF will do advice and expertise on our
traditional areas of expertise
Natalia - WB needs to address this question more, as they
deal with development issues
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Published: 11 April 2008 , last edited: 15 April 2008
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