Information about Western Hemisphere Hemisferio Occidental
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Fiscal Affairs Department

Prepared by Benjamin Jones and Michael Keen

Authorized for distribution by Carlo Cottarelli

DISCLAIMER: The views expressed herein are those of the author(s) and should not be attributed to the IMF, its Executive Board, or its management.

Executive Summary

Negotiations towards a successor to the Kyoto Protocol on climate change have come to a critical point, and domestic climate policies are being developed, as the world seeks to recover from the deepest economic crisis for decades and looks for new sources of sustainable growth. This position note considers the challenge posed by these two policy imperatives: how to exit from the crisis while developing an effective response to climate change. It argues that:

  • The economic crisis does not change the basic climate challenge, or the proper response to it. Even a serious recession, with prolonged output losses, has limited implications for appropriate mitigation objectives.
  • The crisis should not distract from efforts to address the externality that is at the heart of the climate challenge, which requires that firms and households pay for the social damage that their emissions cause (through carbon pricing).
  • A cautious shift towards more aggressive carbon pricing (though taxation or tradable emission permits) need not impede recovery.
  • Stronger emissions pricing could make a substantial and efficient contribution to restoring fiscal positions damaged by the crisis.
  • Achieving such pricing requires resisting political pressures to overcompensate producers, notably by awarding them emissions permits free of charge.
  • While carbon pricing is important,“green” stimulus measures have a useful role to play in sustaining aggregate demand and employment in the short term.
  • Increased climate-related public spending is likely to be needed into the longer term to correct market failures (including in technological development) and reduce the adverse effects of climate change, especially on the most vulnerable.
  • Spending policies should not substitute for more efficient pricing of pollution—especially given the intense fiscal challenges many countries now face.

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