Climate Change Can Be Addressed with Minimal Economic Pain
Climate change can be addressed with minimum damage to the economy, if policy solutions follow some basic principles, according to the International Monetary Fund.
An article in the IMF’s forthcoming World Economic Outlook lays out a base set of guidelines for international “effective mitigation policies” for global warming.
Carbon pricing should be credible and long term. If it is, then even small and gradual increases in carbon prices will be sufficient to induce businesses and people to shift away from emission-intensive products and technologies.
“Increases in world carbon prices need not be large—say a $0.01 initial increase in the price of a gallon of gasoline that rises by $0.02 every three years. Such gradual increases, if started early, would allow the cost of adjustment to be spread over a longer period of time.”
The total cost to the global economy of such policies could be moderate for policies introduced in 2013 that aim to stabilize CO2e concentrations at 550 ppm by 2100—entailing only a 0.6 percent reduction in the net present value of world consumption by 2040. Even with this loss, world GNP would still be 2.3 times higher in 2040 than in 2007.
Carbon pricing should be global. It is not feasible to contain climate change unless all major GHG emitters start pricing their emissions. “Any policy framework that does not include emerging and developing economies (particularly, large and fast-growing economies such as Brazil, China, India, and Russia) in some way (for example, with a lag or with initially less-stringent targets) would be extremely costly and would be politically untenable. That is because during the next 50 years, 70 percent of emissions are projected to come from these and other emerging and developing economies. Some countries may need to strengthen their institutional capacity, however, to implement carbon pricing.
Carbon pricing should seek to equalize the price of GHG emissions across countries to maximize the efficiency of abatement. Emissions would then be reduced more where it is cheaper to do so, for example in the BRIC countries.
Carbon pricing should be flexible, allowing firms to adjust the amount of abatement in response to changes in economic conditions, to avoid excessive volatility in carbon prices. High carbon price volatility could augment macroeconomic volatility and generate spillovers across the world. Policy frameworks should also provide scope to adjust policy parameters in response to new scientific information and experiences with policy implementation.
Carbon pricing should be equitable. No undue burdens should be put on countries least able to bear them. In the IMF’s model, non-harmonized solutions to global warming would contain “total costs at least double for other emerging and developing economies, eastern and western Europe, Russia, and Japan, compared with the costs of the uniform global carbon tax.”
Lastly, the report notes that less ambitious plans would save the world economy relatively little. “Less-stringent emission targets—aiming to stabilize GHG concentrations at about 650 ppm in CO2e terms, rather than 550 ppm, by 2100— would be less costly to achieve, but the difference in costs would not be dramatic.”
CIBC World Markets advocates a carbon tariff on nations that refuse to reduce their carbon emissions, in a new research paper examining the potential effects of such a policy.
The paper begins by noting the massive disparity in carbon emission growth rates: a 50% growth by non-OECD states since the beginning of the decade, in comparison to just 5% among OECD states.
the cumulative increase in CO2 emissions in China since the beginning of the decade is equivalent to the total current level of emissions of Canada, India, Spain and Japan combined
“If China had the same energy intensity and carbon efficiency as the American economy, its emissions growth since the beginning of the decade would have been only a fifth of the 120% increase it has been since 2000. That, in turn, would have saved the atmosphere 2,700 million metric tonnes in needless CO2 emissions.”
An additional benefit of a carbon tariff for China alone: Roughly $55 billion in revenue for the US federal government. The study assumes a tariff based on the current US market’s estimation of a cost of roughly $45 per metric ton of carbon.
With the OECD’s carbon tolerance diminishing with every tonne of CO2 spread into the atmosphere by non- OECD countries, environmentalism will soon become a significant barrier to trade.
Such a tariff, the study predicts, would add roughly 0.6% annually onto the US inflation rate.
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