ProdukHukum BankIndonesia
ADAPTING FISCAL POLICY TO
DEAL WITH CLIMATE CHANGE
Nusa Dua, Bali, 1-2 August 2008
Teresa Ter-Minassian,
Director, Fiscal Affairs Department
International Monetary Fund
Introduction
• Climate change has important macro-economic and
fiscal implications for national economies
• It is also a global externality, with unique characteristics:
¾ Costs of mitigation come long before benefits (hence discount
rate critical)
¾ Major uncertainties; risks of catastrophe; and irreversibilities
¾ Substantial differences in impact across countries
¾ Free rider problem, requiring international cooperation
• Recent IMF papers (April 2008 WEO chapter and Board
paper, available on www.imf.org) focus on macro- and
fiscal consequences of climate change
Fiscal implications of Climate
Change
• Direct effects of climate change on public
finances:
¾ Productivity changes impacting output and revenue
growth in many countries
¾ Especially adverse impact on agriculture and tourism
in vulnerable countries
¾ Increased spending needs in infrastructure and health
• Fiscal measures can play a role both in
mitigating the extent of climate change, and
adapting to its consequences, to limit damage
Mitigation measures: basic
principles
•
Mitigation measures aim to raise the price of pollution
•
Classic prescription to deal with externalities is to set a price equal
to the marginal social damage
•
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 of emissions price over time
•
In addition to efficiency, emissions pricing raises issues of equity—
across generations, countries, individuals
7000
5
4000
450 ppm
4
3000
3
2000
2
550 ppm
1000
1
650 ppm
0
0
2020
2040
450 ppm
2060
550 ppm
2100
650 ppm
1000
7
Minicam
6
800
5
700
450 ppm
600
4
500
550 ppm
400
3
300
2
200
650 ppm
1
100
0
0
2020
2040
450 ppm
2060
550 ppm
2100
650 ppm
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IGSM
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a
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np
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ic
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sU
S
$
/tC
(2
0
0
0
)
6000
8
Mitigation measures: cap-andtrade, or carbon tax?
• Pollution pricing can be implemented in many ways
(carbon tax, cap-and-trade, hybrids), common objective
being to face emitters with a price reflecting the global
damage they cause
¾ Policies are equivalent if abatement costs are known and permit
rights sold (no grandfathering!)…with the additional revenue
raised representing a source of benefit
¾ If abatement costs are uncertain, taxes may be preferred to capand-trade (since getting emissions wrong over a short interval is
not too costly)
• Political economy considerations often facilitate
introduction of carbon taxes, if proceeds are earmarked
(e.g. to supporting climate change related R&D; or
development assistance); but earmarking has efficiency
costs
Mitigation measures: role of
subsidy reduction
In developing or emerging market countries, first
step is often a reduction in fossil fuel subsidies,
which are:
• Not an especially well-targeted way to help the poorest;
and
• Fiscally expensive
And present high oil prices have indeed led
several countries to reduce subsidies
International dimensions of capand-trade schemes
• International cap-and-trade leads to crosscountry flows, extent/direction of which depend
on how emission rights are allocated.
• Most schemes proposed so far would result in
OECD countries being net buyers of permits,
and Africa and India net sellers—but they differ
e.g. on whether China would be a buyer or a
seller.
• Results are also sensitive to the assessment
model used.
Promoting international cooperation
in mitigation
• Obstacles to cooperation:
¾
¾
¾
¾
¾
¾
Diverging interests of fossil fuels exporters and importers
Changing weight of countries in GHG emissions
Free-rider problems
Allocation of emission rights: efficiency vs. equity considerations
Enforcement mechanisms
What account to take of pre-existing fiscal regimes
• Options to encourage cooperation in mitigation:
¾ Adoption of minimum rates of carbon taxes
¾ Border tax adjustments (but consistency with WTO rules may be
an issue; trade risks; potential administration issues)
¾ Possible sectoral agreement
¾ Establish positive incentives for avoid deforestation
• Industrial countries should lead by example
Some thoughts on adaptation
• Approaches to adaptation are country-specific
and largely a matter of national responsibility—
although there is scope and need for
international solidarity, especially vis a vis
vulnerable LICs
• Adaptation requires increased spending on
transport, water, sea defenses, agricultural R&D
and extension services, health systems
• Such spending can be partly undertaken by
private sector or through PPPs
Some thoughts on adaptation
• Uncertainties and irreversibilities require difficult judgments on
time and extent of public interventions, especially given
competing demands on available fiscal space
• Climate change-related risks as part of broader contingent
liabilities management by governments
• Estimates of country-specific and global costs of adaptation
are scarce and vary widely. Much more work is needed,
including by relevant international organizations, in this area
• At a minimum, it is important to know how new public
investments can be climate-proofed, and the associated
country level costs
• More work is also needed on how financial mechanisms (e.g.
catastrophe bonds and weather derivatives) can be used for
market-based insurance against climate change risks
Role of IMF
• IMF is not an environmental organization. But, in collaboration
with those that are, it can exploit a comparative advantage in
macro, fiscal and financial aspects of environmental challenges
• Specifically, it can provide:
¾ Analysis and surveillance of macro-economically significant
effects, and international spillovers (such as from bio-fuels)
¾ Contributions to the wider debate on the economic impacts of
alternative fiscal responses
¾ Technical assistance on: energy and resource tax issues; design
and implementation of fiscal instruments for mitigation
¾ Financial support—the Exogenous Shocks Facility (currently
being revamped, to make it more user-friendly) already provides
for support to countries hit by extreme weather events
DEAL WITH CLIMATE CHANGE
Nusa Dua, Bali, 1-2 August 2008
Teresa Ter-Minassian,
Director, Fiscal Affairs Department
International Monetary Fund
Introduction
• Climate change has important macro-economic and
fiscal implications for national economies
• It is also a global externality, with unique characteristics:
¾ Costs of mitigation come long before benefits (hence discount
rate critical)
¾ Major uncertainties; risks of catastrophe; and irreversibilities
¾ Substantial differences in impact across countries
¾ Free rider problem, requiring international cooperation
• Recent IMF papers (April 2008 WEO chapter and Board
paper, available on www.imf.org) focus on macro- and
fiscal consequences of climate change
Fiscal implications of Climate
Change
• Direct effects of climate change on public
finances:
¾ Productivity changes impacting output and revenue
growth in many countries
¾ Especially adverse impact on agriculture and tourism
in vulnerable countries
¾ Increased spending needs in infrastructure and health
• Fiscal measures can play a role both in
mitigating the extent of climate change, and
adapting to its consequences, to limit damage
Mitigation measures: basic
principles
•
Mitigation measures aim to raise the price of pollution
•
Classic prescription to deal with externalities is to set a price equal
to the marginal social damage
•
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 of emissions price over time
•
In addition to efficiency, emissions pricing raises issues of equity—
across generations, countries, individuals
7000
5
4000
450 ppm
4
3000
3
2000
2
550 ppm
1000
1
650 ppm
0
0
2020
2040
450 ppm
2060
550 ppm
2100
650 ppm
1000
7
Minicam
6
800
5
700
450 ppm
600
4
500
550 ppm
400
3
300
2
200
650 ppm
1
100
0
0
2020
2040
450 ppm
2060
550 ppm
2100
650 ppm
o
fg
lo
b
a
lG
D
P
C
a
r
b
o
np
r
ic
e
sU
S
$
/tC
(2
0
0
0
)
900
g
lo
b
a
lG
D
P
6
5000
A
n
n
u
a
lc
a
r
b
o
nta
xr
e
v
e
n
u
ea
sp
e
r
c
e
n
ta
g
eo
7
IGSM
A
n
n
u
a
lC
a
r
b
o
nta
xr
e
v
e
n
u
ea
sp
e
r
c
e
n
ta
g
C
a
r
b
o
np
r
ic
e
sU
S
$
/tC
(2
0
0
0
)
6000
8
Mitigation measures: cap-andtrade, or carbon tax?
• Pollution pricing can be implemented in many ways
(carbon tax, cap-and-trade, hybrids), common objective
being to face emitters with a price reflecting the global
damage they cause
¾ Policies are equivalent if abatement costs are known and permit
rights sold (no grandfathering!)…with the additional revenue
raised representing a source of benefit
¾ If abatement costs are uncertain, taxes may be preferred to capand-trade (since getting emissions wrong over a short interval is
not too costly)
• Political economy considerations often facilitate
introduction of carbon taxes, if proceeds are earmarked
(e.g. to supporting climate change related R&D; or
development assistance); but earmarking has efficiency
costs
Mitigation measures: role of
subsidy reduction
In developing or emerging market countries, first
step is often a reduction in fossil fuel subsidies,
which are:
• Not an especially well-targeted way to help the poorest;
and
• Fiscally expensive
And present high oil prices have indeed led
several countries to reduce subsidies
International dimensions of capand-trade schemes
• International cap-and-trade leads to crosscountry flows, extent/direction of which depend
on how emission rights are allocated.
• Most schemes proposed so far would result in
OECD countries being net buyers of permits,
and Africa and India net sellers—but they differ
e.g. on whether China would be a buyer or a
seller.
• Results are also sensitive to the assessment
model used.
Promoting international cooperation
in mitigation
• Obstacles to cooperation:
¾
¾
¾
¾
¾
¾
Diverging interests of fossil fuels exporters and importers
Changing weight of countries in GHG emissions
Free-rider problems
Allocation of emission rights: efficiency vs. equity considerations
Enforcement mechanisms
What account to take of pre-existing fiscal regimes
• Options to encourage cooperation in mitigation:
¾ Adoption of minimum rates of carbon taxes
¾ Border tax adjustments (but consistency with WTO rules may be
an issue; trade risks; potential administration issues)
¾ Possible sectoral agreement
¾ Establish positive incentives for avoid deforestation
• Industrial countries should lead by example
Some thoughts on adaptation
• Approaches to adaptation are country-specific
and largely a matter of national responsibility—
although there is scope and need for
international solidarity, especially vis a vis
vulnerable LICs
• Adaptation requires increased spending on
transport, water, sea defenses, agricultural R&D
and extension services, health systems
• Such spending can be partly undertaken by
private sector or through PPPs
Some thoughts on adaptation
• Uncertainties and irreversibilities require difficult judgments on
time and extent of public interventions, especially given
competing demands on available fiscal space
• Climate change-related risks as part of broader contingent
liabilities management by governments
• Estimates of country-specific and global costs of adaptation
are scarce and vary widely. Much more work is needed,
including by relevant international organizations, in this area
• At a minimum, it is important to know how new public
investments can be climate-proofed, and the associated
country level costs
• More work is also needed on how financial mechanisms (e.g.
catastrophe bonds and weather derivatives) can be used for
market-based insurance against climate change risks
Role of IMF
• IMF is not an environmental organization. But, in collaboration
with those that are, it can exploit a comparative advantage in
macro, fiscal and financial aspects of environmental challenges
• Specifically, it can provide:
¾ Analysis and surveillance of macro-economically significant
effects, and international spillovers (such as from bio-fuels)
¾ Contributions to the wider debate on the economic impacts of
alternative fiscal responses
¾ Technical assistance on: energy and resource tax issues; design
and implementation of fiscal instruments for mitigation
¾ Financial support—the Exogenous Shocks Facility (currently
being revamped, to make it more user-friendly) already provides
for support to countries hit by extreme weather events