Band 15, Heft 2 - Special Issue on Climate Change and Development; Guest Editors: Aasheerwad Dwivedi & Abebe Shimeles

The International Monetary Fund (IMF) has proposed an International Carbon Price Floor (ICPF) arrangement among six major emitting economies (the US, EU, UK, Canada, China, and India) to scale up global climate mitigation action. Our quantitative analysis of the IMF’s ICPFs indicates that, compared to the committed policies of National Determined Contributions (NDCs), differentiated price floors are non-binding for developed countries – and therefore have a limited impact on their climate actions. However, for developing countries (e.g. China and India), the ICPFs effectively translate into substantial increases in carbon prices. Essentially, the ICPFs place additional responsibilities of emission reductions and economic costs fully on China and India. Given this gap between the participation incentives of developed and developing economies, we believe that the ICPF arrangement, in its current form, is unlikely to be adopted by major economies. To address this, we recommend that the IMF devote efforts to: (1) estimating the price equivalents of non-price policy instruments, as well as re-calibrating the desirable floors for broadly defined carbon prices; and (2) considering options to redistribute the economic benefits between developed and developing countries by increasing the availability of climate mitigation funds and low-carbon technologies to developing countries.

This paper looks at India’s expected energy transition towards a low carbon future and studies how government revenues from fossil fuels will be affected over the next two decades. It takes the International Energy Association (2021) scenarios for India and studies how both tax revenues and non-tax revenues for national (central) and sub-national (state) governments would be affected. The study finds that under fairly standard assumptions on growth, prices, and taxes, there would be continued growth in revenues from fossil fuels till 2040; however, as a share of the GDP and overall government budget it would fall significantly and this would impose challenges for both the state and central governments in India. Moreover, since the central government is the greatest beneficiary of fossil fuels, it would face the brunt of the pressure. The paper also briefly discusses the possible impact of net zero and carbon taxes if India were to take that route, as well as how subsidies are expected to impact and be impacted by such considerations.

Climate change poses a significant challenge for Latin America and the Caribbean, exposing its vulnerabilities to hydrometeorological shifts and rising temperatures that threaten economic stability. We examine the macroeconomic consequences of climate change through the lens of six distinctive country cases. Our results suggest that compensating for the drag on economic growth caused by climate change would require public and private investments of 5.3 % of GDP to 10.9 % of GDP per year. Faced with existing fiscal constraints and restrictive financial conditions, we explore the macrofiscal implications of an investment push in line with the Nationally Determined Contributions (NDCs). Our results suggest that front-loaded public adaptation investments would improve growth over the medium term, although not fully compensating for climate losses. However, resulting public debt trajectories would become untenable in most countries. We find that a key factor for a fiscally sustainable NDC investment push is the financial costs that countries face when issuing sovereign debt. Debt sustainability could be significantly improved if countries could finance their climate investments at lower cost or concessional terms.

This article studies the interdependence between Argentina’s public over-indebtedness and climate change. It addresses the following questions: What type of productive model does the Argentine public debt profile promote, and what is its impact on climate change? In a debt-servicing scheme marked by fiscal consolidation, which strongly conditions the state budget, what public funds are available to invest in adaptation and mitigation? Finally, what is the role of the IMF in this fiscal-environmental scheme? The article first presents the international commitments of the Argentine State in the face of climate change and the estimated fiscal cost of implementing the necessary adaptation and mitigation measures. It then describes the situation of Argentina’s debt in historical perspective up to the present and explains how the external debt has been determining the productive specialization of the national economy, which seeks to boost the country’s primary export capacity, particularly agribusiness, the fossil fuel sector, and open-pit metalliferous mining. It also analyzes the role of the IMF in Argentina as a catalytic actor in the climate crisis, describing the IMF’s centrality in the national economy, its economic-environmental policy on the production pattern that accelerates climate change, and the incidence of this phenomenon in Argentina.

Average temperature in Africa has been rising steadily from the baseline of climatology prevailing during 1951–1980. The findings in this paper suggest that real GDP growth would start declining for annual temperature higher than 0.7 °C. About 45 African countries already registered annual temperature rise above 0.7 °C in 2020 underscoring the seriousness of climate change induced risks for long term growth. In addition, frequency of major natural disasters tends to exacerbate political instability and conflict. Combined, these shocks have a direct effect on the sustainability of debt. Using a simple debt dynamics framework, the paper shows that the debt-burden could increase 2.4 times due to climate change induced shocks. In addition, modelling results show that carbon pricing could be an effective way of helping to meet the Nationally Determined Contributions. However, carbon pricing would have negative impacts on energy-intensive industries and increase the prices of the goods and services they provide. There will also be job losses in these industries. The combined effect of these impacts could be reduction in GDP growth and real incomes. It is recommended that part of the revenues generated from the carbon tax could be used to address the negative impacts on vulnerable groups.

We explore the extent of the fiscal resource gap described by climate-vulnerable developing countries which have called for debt flexibility. We compute indices of fiscal sustainability, defined as the difference between an economy’s current tax rate and the “sustainable” tax rate, or the rate which, if constant, would enable the debt-to-GDP ratio at time n to be equal to the debt-to-GDP ratio at time 0, given current policy rules. We estimate short- and medium-term gap indices for 2010 to 2020, and a “climate change gap” (CCG) which incorporates countries’ reported climate change needs for the period 2021–2030. Estimated short- and medium-term gaps capture the 2020 disruption to fiscal sustainability, while CCGs indicate a highly diverse picture: one-third of the sample have CCGs ranging from 10 to 99 % of GDP, another third have CCGs from −8.6 to −0.3 %. Negative CCGs, which imply that immediate adjustments in taxes or spending are not required for fiscal policy sustainability, are surprising but come with a crucial caveat: CCGs are likely to be significantly understated because of data gaps, especially regarding adaptation requirements. This highlights the urgent need for finance and technical assistance dedicated to building national capacities for determining and costing climate change needs.