Climate Policies and External Adjustment

Rudolfs Bems, Luciana Juvenal, Warwick McKibbin, Larry Weifeng Liu

Research output: Chapter in Book/Report/Conference proceedingChapterpeer-review

Abstract

Drawing on model-based analysis of a “net-zero emissions by 2050” scenario, this chapter analyzes how climate change mitigation policies—carbon tax, green subsidy, and infrastructure investment—could impact external balances over the next decade, examining the role of policy coordination, burden sharing, and countries’ structural characteristics.

Understanding the effects of climate mitigation policies not only on the global economy but on different regions and countries is critical to forging a consensus on how to combat global warming and moving that process forward.

This chapter contributes to the assessment of the economic effects of climate policies on different regions and countries. Drawing on model-based analysis of a “net-zero emissions by 2050” scenario, the chapter finds that a range of announced climate policies could have substantially different impacts on external balances over the next decade. A credible and globally coordinated carbon tax would decrease current account balances in greener advanced economies and increase current accounts in more fossil-fuel-dependent regions, reflecting a disproportionate decline in investment for the latter group. Green supply-side policies—green subsidy and infrastructure investment—would increase investment and saving but would have a more muted external sector impact, either because of the constrained pace of expansion for renewables or because of the symmetry of the infrastructure boost.

Ultimately, country characteristics, such as initial carbon intensity and net fossil fuel exports, determine the current account responses. For the global economy, a coordinated climate change mitigation policy package would shift capital toward advanced economies and reduce global current account balances. The global interest rate, following an initial rise, would fall over time with increases in the carbon tax.

These external sector effects, however, depend crucially on the degree of international policy coordination and on credibility. A unilateral carbon tax in Europe would reverse that region’s current account response—negatively impacting competitiveness—and increase global balances. Policies such as burden sharing of carbon emission reductions between advanced and developing economies and accelerating the pace of investment in renewables in developing economies could moderate the external sector impact of the climate change mitigation efforts.
Original languageEnglish
Title of host publicationPandemic, War, and Global Imbalances
Subtitle of host publicationExternal Sector Report
Place of PublicationWashington DC
PublisherInternational Monetary Fund
Chapter2
Pages39-61
ISBN (Electronic)979-8-40021-550-6 , 979-8-40021-578-0
ISBN (Print)979-8-40021-494-3
Publication statusPublished - Aug 2022

Publication series

NameExternal Sector Report
PublisherInternational Monetary Fund
ISSN (Print)2617-3832
ISSN (Electronic)2617-3840

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