Climate Policies and External Adjustment

By Rudolfs Bems, Luciana Juvenal, Weifeng Liu, Warwick J. McKibbin

July 26, 2024

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Rudolfs Bems, Luciana Juvenal, Weifeng Liu, and Warwick J. McKibbin Climate Policies and External Adjustment, (USA: International Monetary Fund, 2024) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper assesses the economic effects of climate policies on different regions and countries with a focus on external adjustment. The paper finds that various 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 because of the constrained pace of expansion for renewables or the symmetry of the infrastructure boost. Country characteristics, such as initial carbon intensity and net fossil fuel exports, ultimately determine the current account responses. For the global economy, a coordinated climate change mitigation policy package would shift capital towards advanced economies. Following an initial rise, the global interest rates 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 credibility.

Subject: Balance of payments, Carbon tax, Current account, Environment, Greenhouse gas emissions, Production, Productivity, Taxes

Keywords: Carbon tax, Climate change mitigation policy package, Current account, Current account balances, Current account response, Dynamic general equilibrium modelling, Europe, G-Cubed, Global, Global climate policies, Greenhouse gas emissions, IMF working paper 24/162, Infrastructure investment, International capital flows, Investment response, Net-zero emissions, Productivity

Publication Details

Pages:

35
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2024/162
Stock No:

WPIEA2024162
ISBN:

9798400283116
ISSN:

1018-5941

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