Climate change is likely to have an adverse impact on economic growth over the long run and will set back efforts to help the poorest countries unless the international community takes decisive action, IMF Deputy Managing Director Takatoshi Kato told the UN Conference on Climate Change in Bali, Indonesia.
“Climate change is perhaps the largest collective action problem that the world faces,” Kato said on December 14. “Early and sustained action is needed to avoid future harm.”
Kato joined high-level officials from more than 180 countries who were in Bali to create a road map for an international climate change agreement after the Kyoto Protocol expires in 2012. For the first time at UN-organized climate change talks, finance ministers held a forum alongside the main conference, reflecting a growing acknowledgment of the economic policy implications of climate change.
Speaking at the conference’s high-level segment, Kato said that economic challenges posed by climate change are “many and complex.”
Many countries will experience direct negative effects on output and productivity. Countries may also see a deterioration of their fiscal position resulting from a weakening of traditional tax bases and increased expenditure on efforts to mitigate the effects of climate change. Some countries could experience balance of payments problems owing to a reduction in exports of goods and services, such as agricultural products, fish, and tourism. And private economic costs are also likely to arise from mitigation efforts, Kato said.
The IMF’s membership includes most developed, emerging market, and low-income countries, which gives the IMF an advantage in studying the economic effects of climate change. “On the basis of a very universal membership, we can provide bilateral and multilateral analysis and monitoring,” Kato observed, adding that the IMF has been active in designing relevant tax mechanisms and other fiscal measures.
In addition to the challenges of climate change, Kato noted that efficient carbon pricing schemes could also present potential revenue opportunities for some countries. Precisely how countries use these revenues would have to be decided on a case-by-case basis, but Charles Collyns of the IMF’s Research Department, speaking to the press in Washington ahead of the Bali meeting, cautioned that it was important to ensure that these revenues were directed to efficient local spending or saved.
Need for carbon pricing framework
Despite the long-term nature of the problem, countries are already beginning to prepare for the effects of climate change. “But the response so far is relatively muted because we have not yet had an efficient and credible framework for carbon pricing,” Collyns noted, adding that investors will not fully respond to the incentives of the carbon trade until a credible carbon price path is established.
Collyns was referring to the system of trading in carbon credits developed since the signing of the Kyoto Protocol, giving firms and governments a financial incentive to reduce their carbon footprint. As it currently stands, however, trading in carbon credits is too low to provide for a meaningful reduction in emissions.
Although in some respects, climate change work represents a new area for the institution, many of the issues are ones that the IMF has perennially analyzed. “One large aspect of the problem is proper energy pricing, and that, of course, has been a key Fund concern for many years,” said Michael Keen of the IMF’s Fiscal Affairs Department. “So I think this is far from being a new area for us. It’s an additional part of the context.”
The IMF published an analysis of the implications of climate change in its October 2007 World Economic Outlook and is preparing a more in-depth study for the WEO’s April 2008 edition. Kato also noted that the IMF’s Executive Board will discuss, possibly in early 2008, the fiscal implications of climate change.