IMF: Debt Hinders Transition To Green Economy, “Carbon Emission Pricing” Needed

The International Monetary Fund has sounded the alarm: debt financing of the green transition could become a big problem for certain countries.

Subsidies and incentives risk bringing highly indebted countries to their knees, but this does not mean that “too much” is being done to reduce emissions of climate-impacting gases; in fact, the goal of limiting temperature rise to 1.5 degrees seems difficult to achieve: “Current and announced policies will not achieve the goals of the 2015 Paris Agreement.”

“The fight against climate change leaves policymakers with difficult trade-offs. Relying primarily on spending measures and increasing them to achieve climate ambitions will become increasingly costly, with debt likely to rise by 45-50% of gross domestic product by mid-century,” IMF study says. “High debt, rising interest rates, and weakening growth outlook make balancing public finances even more difficult.”

A solution could be a “pollution tax” instrument that would be combined with subsidies and focus on carbon emission prices, i.e. making CO₂ emitters pay, shifting some of the burden of the transition to the private sector.

“Although not a single measure can fully achieve climate goals, carbon emission pricing is necessary, albeit not always sufficient, to reduce emissions,” the IMF explains, “and should be an integral part of any policy package. Successful experiences from countries at different stages of development, such as Chile, Singapore, and Sweden, show that policy barriers associated with carbon emission pricing can be overcome. The lessons learned from this experience could benefit not only the 50 or so advanced and emerging market economies that have already adopted carbon emission pricing schemes, but also the more than 20 countries that are considering introducing them.”

An international minimum price on carbon emissions should be established and differentiated for countries at different levels of economic development. The associated carbon emissions revenues could then be partly shared between countries to facilitate the transition to a green economy, including financial assistance to the most vulnerable families, workers, and communities. According to IMF analysis, “an appropriate mix and sequencing of climate policies based on revenues and expenditures implemented now could limit the fiscal cost of reducing emissions, while achieving climate goals.”

This would lead to an increase in public debt in advanced economies from 10% to 15% of the GDP by 2050, the IMF concludes.