Finding the Right Policy Mix to Safeguard our Climate - blogs.imf

Unaddressed, climate change will entail a potentially catastrophic human and economic toll, but it’s not too late to change course.

 

Global temperatures have increased by about 1°C since the pre-industrial era because of heat-trapping green-house gases accumulating in the atmosphere. Unless strong action is taken to curb emissions of these gases, global temperatures could increase by an additional 2–5°C by the end of this century. Keeping temperatures to levels deemed safe by scientists requires bringing net carbon emissions to zero on net globally by mid-century.

In the latest World Economic Outlook we make the case that economic policy tools can pave a road toward net zero emissions by 2050 even as the world seeks to recover from the COVID-19 crisis. We show that these policies can be pursued in a manner that supports economic growth, employment and income equality.

 

The manageable costs of mitigation

 

Economic policies can help address climate change through two main channels: by affecting the composition of energy (high- vs. low-emission sources), and by influencing total energy usage. The costs and benefits of different policies are determined by how they exploit these distinct channels.

 

For example, a carbon tax makes dirty fuels more expensive, which incentivizes energy consumers to shift their consumption towards greener fuels. Total energy consumption falls too because, overall, energy is more expensive.

 

In contrast, policies that aim to make green energy cheaper and more abundant (subsidies or direct public investment in green energy) increase the share of low-emissions energy. However, by making energy cheaper overall, green energy subsidies continue to stimulate total energy demand or at least do not reduce it.

 

In line with this intuition, our latest analysis suggests pairing carbon taxes with policies that cushion the impact on consumers’ energy costs can deliver rapid emissions reductions without major negative impacts on output and employment. Countries should initially opt for a green investment stimulus—investments in clean public transportation, smart electricity grids to incorporate renewables into power generation, and retrofitting buildings to make them more energy efficient.

 

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