Good afternoon. I would like to thank our co-organizers, the BIS, the Banque de France, the NGFS, and my colleagues at the IMF, as well as everyone attending this important conference.
This past year-and-a-half has been filled with challenges, and at times, displays of unprecedented resilience. Each of us has been touched in one way or another by the pandemic and economic lockdowns. But if there’s one silver lining to this dark cloud, it is that people now realize how fragile our existence on this planet can be. There is now renewed emphasis on the threat posed by climate change, as well as on the need to take urgent action.
In my remarks today, I want first to lay out what I will call a globalist view, emphasizing that climate change is our most global challenge. Then, I’ll discuss different climate policy instruments that governments have at their disposal. And I’ll conclude with a discussion of how domestic policy can be supported internationally.
A globalist view
Let me start with what we’re facing globally today—namely, fighting the pandemic. As the IMF’s Managing Director, Kristalina Georgieva, likes to say, the pandemic won’t be over anywhere until it’s over everywhere. The virus does not respect borders.
Borders are even more irrelevant, however, when it comes to climate change. The national origin of greenhouse gas emissions makes absolutely no difference in terms of their impact. We all share the same atmosphere. The externality here is perfect and complete.
So how should we address this most global challenge? I’d like to suggest a few principles.
First, we must work together. Of course, people already recognize this—that’s why we had the Paris Agreement, which has given us a global architecture under which to move forward, and that’s why we’ll soon have COP26. Indeed, it is exactly the same reason why we’re gathering in this conference.
But despite these important steps, we may need to go further to achieve a fully global outlook in our thinking. This means that we should collectively assess where and when it makes sense to abate emissions, and we should also collectively decide how to deal with any economic costs that this mitigation effort may bring.
Indeed, we may not have much of a choice in front of us—the entire world, after all, will need to get to net-zero emissions, and sooner rather than later. But to the extent that there are decisions to make, we should make them together.
Second, we must look for win-win opportunities—and we can succeed if we work together.
In decades and centuries past, of course, industrialization and development were unavoidably accompanied by greenhouse gas emissions. But if we infer from this that reducing emissions today will inexorably lead to economic contraction, we are taking far too narrow a view. In the 21st century, we are not condemned to tread the same path and make the same mistakes that our predecessors did, and we must lean forward to achieve win-win-opportunities. Indeed, good mitigation policy can often largely pay for itself, and combating climate change may actually further development, rather than hindering it. The evidence is quite strong that the tradeoff between the economy and climate is much smaller than people think.
Why is this?
First, we have modern technologies and an economic structure more tilted toward services that make production less dependent on fossil fuels. Furthermore, to the extent that we introduce climate policies, these themselves will induce additional technological change into clean-energy sectors of the future, with major positive spillovers to growth.
Second, cutting coal, diesel, and other fossil-fuel usage often yields substantial local co-benefits such as less air pollution and improved health, and these directly boost economic outcomes, as well as other, broader measures of welfare. These co-benefits are particularly important in developing countries, and especially among the poor in these economies.
Third, carbon pricing can yield substantial revenues, and these can be used to reduce other, more distortionary taxes, to finance productive investment—including green investment—and also to support individuals adversely affected by climate policies.
In our World Economic Outlook report last October, we showed that a policy package including a rising carbon tax and a frontloaded green investment stimulus could actually boost growth and create millions of jobs over the medium term, all while effectively reducing emissions and protecting the vulnerable.
Does this picture look too rosy? Well, we shouldn’t take win-win opportunities for granted. Achieving them in practice will take a lot of smart thinking and adept implementation. Along the way, some countries and population groups may face a wide range of economic costs.
This then leads to my third point, which is that we must be fair in order to succeed.
To start with, defining what’s fair is often very tricky, and it’s easy for people to end up pointing fingers at one another. Some observers look at today’s large emitters and say that they need to shoulder much of the responsibility for global mitigation. Others focus instead on cumulative historical emissions and identify another set of countries as the main culprits. In the same way, while much of the debate centers on total emissions (whether historical, current, or prospective), others emphasize emissions per dollar of GDP. Yet others focus on emissions per capita, reflecting, perhaps, a view on each individual’s intrinsic rights to use nature’s resources.
I don’t want to wade into this debate. But I do believe that we need to acknowledge these different perspectives—they were all represented at the Paris negotiating table, and they continue to inform the ongoing debate.
Nonetheless, we must recognize that poorer countries want—indeed, demand—the right to pursue their own development trajectories. We also have to factor the need to protect the poor and vulnerable—wherever they are—into any global solutions we come up with.
I strongly believe that, as we move forward, we need to respect these principles—working together, looking for win-wins, and being fair. Fortunately, the Paris agreement already gives us a framework to deal with these issues: advanced countries are expected to pledge more stringent near-term mitigation, accompanied by a commitment to provide $100 billion per year to support climate action in developing economies.
Choice of policy instruments
So let’s now move to the role of national policies and how to choose policy instruments to combat climate change.
Let me begin by emphasizing that in choosing policy instruments, there is no one-size-fits-all solution , or silver bullet. The journey in front us is unprecedented, and we must be humble. We have already seen countries pursue different policy approaches, reflecting their specific circumstances and preferences.
This conference is focused on the financial sector, and rightly so. The financial sector certainly has an important role to play, both in mobilizing the green finance that the world will need, and in making itself resilient to the physical and transition risks from climate change. Many speakers today have already shared their insights on these important issues, and many others will do so during the rest of the conference. For example, there are important steps that regulators and supervisors need to take, in terms of improving the availability of data, developing common taxonomies, improving the disclosure of climate information, and developing methodologies to quantify climate risks.
But let me be perhaps slightly provocative and say that none of this will work effectively unless the government creates an enabling environment. Without the fundamental incentives in place that only governments can introduce, people and firms—including those in the financial sector—simply will not fundamentally change their behavior and move away from carbon-intensive activities.
When economists think about which government policies can most effectively enable a pro-climate orientation, carbon pricing immediately comes to mind. Regulatory approaches certainly have their place—though economic theory would tell us they are less flexible and less efficient than market-based approaches. Sectoral policies, feebates, and a host of other tools also have a role. But charges on carbon content are believed to be the most effective and efficient instrument, providing incentives to reduce energy use, as well as to shift to cleaner fuels and to direct investment toward clean technologies, all while generating much-needed revenues.
Carbon pricing can be implemented in different ways. One possibility, of course, is a carbon tax, which can provide more certainty over emissions prices and thus help to mobilize investment. Carbon taxes are also relatively straightforward to administer—they can be built into existing road and fuel taxes, and similar charges can be applied to other petroleum products, coal, and natural gas. Carbon tax revenues also accrue directly to finance ministries, which are used to handling these flows as well as the budget.
Emission trading systems are another example. They can mimic the advantages of carbon taxes. But allowances would need to be auctioned (in order to generate revenues), price stability mechanisms like price floors would be needed, and in general, the administrative requirements may be more onerous than with a tax. Trading systems have been implemented in, for example, the European Union and Korea, although so far they have focused on the power and industrial sectors. And China will launch a nationwide scheme this month, based on a tradable performance standard.
Role of the international community
So we see a wide range of policy instruments are on the table. But no matter what policy instruments are chosen, it can be difficult for any one nation to aggressively decarbonize on its own. The international community can play an important role in helping to coordinate governments’ actions globally. Here I’d like to emphasize three aspects in particular.
First, we at the IMF believe that a differentiated international carbon price floor could complement and reinforce the Paris agreement. This would cover all emissions and could begin with, for example, the G20 and the European Union. Simultaneous action to scale up carbon pricing would be the most effective way to address countries’ concerns about industrial competitiveness, which could arise if they were to act unilaterally. The price floor could be differentiated to account for countries’ different levels of development, and it could be designed to also accommodate ambitious regulatory approaches that may not impose an explicit price on carbon but do imply a shadow price.
We believe the price floor would reduce the need for unilaterally imposed border carbon adjustments, which only price emissions in trade flows—typically a small proportion of total emissions. Border adjustments also need careful design to contain administrative costs—for example, by limiting their coverage to energy intensive, trade exposed industries. And they need to navigate legal risks under the rules of the World Trade Organization.
The international community can play a second critical role by mobilizing climate finance and technology transfers. These can incentivize increased climate ambition among recipient countries and reduce the need for either differentiated price floors or border carbon adjustments.
Of course, climate finance can take a number of forms.
Perhaps the simplest and most straightforward mechanism would be outright grant and loan assistance, as well as technology transfers. I want to emphasize that this is not a matter of charity. The $100 billion commitment was a critical part of the Paris agreement—a way of allowing the world to take advantage of its least-cost mitigation opportunities, many of which exist in developing economies, and an important tool to ensure equitable burden-sharing. The question now is whether the world will step up and meet this commitment.
Offsetting is another proposed vehicle for climate finance. With voluntary corporate offsets, those with cheap mitigation opportunities exercise them, and those without can pay instead. Offsetting applied at the level of the sovereign may also have a role to play. Verifying the additionality of abatement paid for by offsets could be a challenge, but it is one that many are working to address.
Debt-for-climate swaps are yet another possible form of climate finance and something that we are collaborating on with the World Bank, though it remains to be seen how large a role they will play.
These are just a few examples, but whatever the precise modality, the transfer of both financial resources and needed technologies from richer countries to poorer is of critical importance in the fight against climate change.
Finally, let me mention the contribution that international organizations can make. Through their analysis, policy advice, and technical assistance, these organizations can elevate the effectiveness of their member countries’ policies to fight climate change, harness momentum for climate action, and further raise awareness of climate issues. And through their convening power, they can also help to promote policy coordination across countries.
At the IMF, we are representing our near-universal membership to ensure solutions work for all countries. We are mainstreaming climate issues into our surveillance and other operational activities, while remaining true to our mandate, and we are leveraging external expertise through our close collaboration with other institutions, including the World Bank, BIS, and others. We are also exploring whether members with strong external positions would consider channeling a portion of their potential new allocation of Special Drawing Rights, or “SDRs,” to members with financing needs, including for green purposes.
So let me conclude by saying that we are at a critical moment. Actions we take during the next 5 or 10 years will determine whether we will succeed in keeping global temperatures from rising more than 2 degrees. I am actually quite optimistic, as there are ways to decarbonize that should also be good for growth and jobs if we do things right.
Each of us has our role to play—governments, the international community, and the private and financial sectors too. But we need to play those roles together, in a complementary fashion. Now more than ever, we need to join together to address climate change, our most global challenge.