ClimateMacroTradeandEffectsofClimateChangeonGlobal

Enterprise2016

Wherewillthefuturebetaken

TherisingcostofenergyhasfalselyinflatedeconomicgrowthandGDPfiguresworldwideandthecarbonbubbleofthelast~200yearsiscoming toanend

TheGreenhouseEffect

Astepforwardtomanagetheenvironment

• ThelandmarkDecember2015ParisAgreementonclimatechangeprovidesaframeworkformeaningfulprogressonclimatemitigation.• 186countriessubmittedemissionreductionpledges,covering96percentofglobalemissions,andpartiesagreedonproceduresforevaluatingprogresson,andupdatingthesepledges

• Withoutmitigation,globaltemperaturesareprojectedtorisebyabout3–4Coverpre-industriallevelsby2100,butwithrisksofmorecatastrophicwarming

• Manydevelopingcountries(those,forexample,thatarecoastalorhighlyagriculture-dependent)areespeciallyvulnerabletoclimateimpacts

• ThesuccessoftheParisAgreementwillrequiresizablereductionsinenergy-relatedcarbondioxide(CO2)inlargeemitters,includingindevelopingeconomies

• Thekeypracticalissueiswhatpoliciesarebestsuitedformakingprogressonthesemitigationpledges

PotentialproblemsofParisAgreement

• Thecentralproblemisthatnosinglefirmorhouseholdhasasignificanteffectonclimate,yetcollectively thereisahugeeffect—sopricingisnecessarytoforcethefactoringofclimateeffectsintoindividual-leveldecisions.Thispricingalignsprivateandsocialcosts,therebypromotingcleanerandlessenergyuse,andencouraginginnovationtowardtheseends.

• TheParisAgreementalsoreiteratesandmodestlyextendspreviouscommitmentsonfinance,butwithoutspecifics.Advancedeconomiesarestronglyurgedtoscaleuptheireffortswithaconcreteroadmaptoachievethegoalofproviding$100billionayearinfinancetosupportadaptationandmitigationindevelopingcountriesby2020;subsequently,by2025,thePartiestotheParisAgreementareexpectedtosetanewcollective,quantifiedgoalfromafloorof$100billionperyear.Thiscommitmentisseenasapre-requisitefordevelopingcountriesmovingforwardonmitigationpledgesthoughtheallocationoffinanceremainscontentious.Theimportanceofcompensationforclimatedisasters(‘lossanddamage’)wasrecognizedintheParisAgreement,butitdoesnotprovideabasisforcompensationliabilityforbadweathereventsindevelopingeconomies.

GlobalClimateChange:TrendsandScience

• Atmosphericcarbondioxide(CO2)concentrationsincreasedfrompre-industriallevelsof280partspermillion(ppm)tocurrentlevelsofabout400ppm.ThisincreasemainlyreflectsfossilfuelCO2emissions(halfofwhichentertheatmospherewheretheyremain,onaverage,forabout100years),theannualflowofwhichincreasedfrom2billion(metric)tonsin1900to32billionin2013.Withoutmitigation,emissionsareprojectedtoapproximatelytriplefromcurrentlevelsby2100,raisingatmosphericconcentrationstoabout700–900ppm(thoughsuchforecastsarehighlyuncertain).Developingcountriesaccountfornearlythree-fifthsofglobalCO2emissionsandessentiallyalloftherapidgrowthinprojectedfutureemissions.Land-usechanges(mainlydeforestation)addanother5billiontonsofCO2,thoughtheirprojectedgrowthisslowerthanthatoffossilfuels.Non-CO2greenhousegasses(GHGs)(suchasmethaneandnitrogenoxides)increasecurrentCO2-equivalentatmosphericconcentrationstoabout440ppm.Icecoredataindicatethatconcentrationshavenotexceeded300ppminthe last800,000years.

• Globally-averagedsurfacetemperaturehasrisenbyabout0.8°Csince1900,mostlyfromrisingGHGconcentrations.IfCO2equivalentconcentrationswerestabilizedat450,550,and650ppm,meanprojectedwarmingoverpre-industriallevelswouldbe2.0,2.9,and3.6°C,respectively,oncetheclimatesystemreachesequilibrium(whichtakesseveraldecadesduetogradualheatdiffusionintheoceans).Meanprojectedwarmingintheabsenceofmitigationisexpectedtoreachabout3–4°Cby2100.Actualwarmingmaybesubstantiallygreater(orless)thanprojectionsduetopoorlyunderstoodfeedbacksintheclimatesystem.

• Physicalrisksinclude:changedprecipitationpatterns,shiftingdesertsandmonsoons, sealevelrise(uptoseveralmetersificesheetsmelt),moreintenseandfrequentextremeweather,destructionofthemarinefoodchainfromoceanacidification,andchangesinoceancirculation.

Sources:IEA(2014), IPCC(2014).

GlobalClimateChange:TrendsandSciencecont.• Adaptationtoclimatechangereducestheseverityofimpactsand,beingincountries’owninterests,doesnotraisethesamecollectiveactionissuesasmitigation.However,itisdifficulttoprovidegeneralguidance,beyondlayingoutpolicyoptionsandissuesforconsideration,asappropriateactionsarehighlyspecifictolocalclimateimpacts,nationalcircumstances,andtheneedtoberobustacrossdifferentclimate-changescenarios.

• Thereisgrowingdebateonhowfinancialmarketscanfacilitatethetransitiontolow-carbon,climate-resilienteconomies.Centralissueshereincludeencouragingthedisclosureandeffectivemonitoringoffirms’carbonfootprints;developinganddeployingfinancialinstrumentsthatpromotethereductionandmitigationofclimate-relatedrisks;andensuringtheefficientchannelingoffinancialflowstolow-carbontechnologies.

• TheIMF’suniversalmembership,globalperspective,establishedexpertise,andcloserelationshipwithfinanceministriesandfinancialmarketparticipantsmakeitwellpositionedtocontributetothedevelopmentandimplementationofpoliciestoaddressthechallengesofclimatechange.Therestofthepaperstartsbytakingstockofclimatechangeimpacts,especiallyforlow-incomecountries(LICs)thenturnstopolicydesignissuesinregardtomitigationclimatefinanceadaptationandfinancialmarketsTheconclusionsummarizesthecontributionthattheIMFcanmake.

Sources:IEA(2014), IPCC(2014).

GlobalClimateChange:TrendsandSciencecont.• Climatechangeisexpectedtosignificantlyimpacttheglobaleconomyinthecomingdecades.Temperatureincreases

andotherphysicaleffectswouldtranslateintosignificantmarketimpacts,withoutput lossesthrougheffectsonclimate-sensitivesectors(forexample,agriculture,forestry,coastalrealestate,tourism).Non-marketimpactsincludeecosystemdisruption,healthdamages,waterstress,etc.Althoughtheaverageimpactfroma3°Cincreaseintemperatureisprojectedatabout2percentofglobalGDPthereisconsiderablevariationacrossstudiesandessentiallynothingisknownaboutpotentialdamagesfromextreme(andunprecedented)warmingscenarios.

• Vulnerabilitiesvaryconsiderablyacrossregions,withgreaterimpactsforregionswithlowerpercapitaincomeandhigherinitialtemperatures.Mostvulnerabletonegativeeffectsaresub-SaharanAfrica(SSA),SouthEastAsia(SEA),andMiddleEastandNorthAfrica(MENA),whilerisksfortheUnitedStates,Europe(EUR),andChinaaregenerallymoremoderate.AccordingtoastudybyRoson andvanderMensbrugghe (2012)sealevelriseandagriculturearethemainchannelsofimpactforSEA;waterscarcityforMENA;laborproductivityandhealthforSSA;negativeimpactsonlaborproductivity intheUnitedStatesmaybelargelyoffsetbytourismandagricultureintheUnitedStates;whileinChina,netpositiveeffectsaremostlyduetoincreasedcropproductivity. InEurope,effectsdifferacrosssub-regionswiththepositiveimpactinthenorthslightlyoffsettinglossesinotherregions.5Otherstudiesprojectbroadlysimilaroverallimpactsacrosstheregions(Figure2)butdifferintheirestimatesofthespecificsectoral effects(forexample,Bosello andothers,2010,projectgreaternegativeimpactsonagricultureinSSAadSEA).However,mostaggregatestudiesmayunderestimateeffectsofclimatechangeduetorelativelymodestunderlyingassumptionsandnarrowdistributions ofrisk(forexample,Stern2013).Ontheotherhand,partialimpactstudiesfocusingonspecificsectorsorregionstendtoshow largernegativeeffects.

Sources:IEA(2014), IPCC(2014).

Impactofclimatechangeacrosstheglobe

Sources:Verisk andMaplecroft (2015)

ClimateChange,NaturalDisasters,andDebtSustainability• Climatechangecanaffectdebtsustainabilitythroughdifferentchannels.Extremeweatherconditionscouldseverelyreduceoutputandincreasefiscalspending intheshortterm,generatingborrowing needswhileeroding thepublicsector’scapacityfordebtrepayment.Themacroeconomicshockfromnaturaldisasters,including balanceofpaymentpressuresandcurrencydepreciations, couldalsointensifyexternaldebtvulnerabilities.Climatechangecouldalsonegativelyaffectcountries’debtsustainabilityoverthemediumtolong term,asitcouldreducelong termgrowthpotentialandtheequilibrium exchangerate,andfiscalspendingmayhavetoincreasetoadapttotheimpactofclimatechange.

• Debtsustainabilityanalysis(DSA)canbeausefultooltohelpcountriesassessboththeshort-termandlong-termdebtsustainabilityimplicationsofnaturaldisastersandclimatechange. Thiscanbedoneby1)incorporating thegrowth implicationsandfiscalcostsofclimatechangeinthemacro-frameworkunderlyingtheDSA,and2)including intheDSAacustomizedscenariotoevaluatetheimpactofnaturaldisastersondebt.Afewcountrieshavealreadystartedtodoso:theKiribati2015DSAincorporatedconservativelong-termgrowthassumptionsanda31⁄2percent-per-annum fiscalcostofadaptingtoclimatechange.TheSamoa2015DSAincludedanaturaldisastershockscenario,calibratedusinghistoricalnaturaldisasters,whichwouldincreasepublicexternaldebtby10percentofGDPatitspeak.TheSt.KittsandNevis2015(marketaccesscountry)DSAalsoincludedanaturaldisastershock,underwhichpublicdebtin2020wouldbe13percentofGDPhigher thanbaselineowing tolowergrowthandhigh fiscaldeficits.Whiletheseissuesareparticularlyrelevantforthelong termprojectionhorizon intheLICDebtSustainabilityFramework(LICDSF), theyarealsoapplicablefora5–yearhorizon intheDSAframeworkformarketaccesscountries.

PotentialDomesticEnvironmentalBenefitsofCarbonPricing

Sources:Parry,Veung, andHeine(2014)

PotentialRevenuefromcarbondioxidepricing

Sources:Parry,Veung, andHeine(2014)

Casestudyofcarbonpricing:EUemissionstradingsystems

Carbontaxesaroundtheworld

Sources:WBG(2014,2015)

Estimatedcostsofcarbondioxidecostonlargeemitterswithandwithouteffectivetaxreveueinvestment

Sources:Parry(2015)

“Greengrowth”

• Overthepastfewyearsmuchattentionhasfocusedontheconceptof‘greengrowth’.Greengrowthhasarangeofinterpretations,fromweaktostrong.Greengrowthiseconomicgrowthwhichalsoachievessignificantenvironmentalprotection,wheresignificantprotectionisleastcontroversiallyunderstoodtobeatleastagreaterlevelofprotectionthanisdeliveredbybusinessasusualpatternsofgrowth(Jacobs,2012).Theweakversionofgreengrowtharguesthatbenefitsofsignificantenvironmentalprotectionoutweighthecostsandsoeconomicgrowthwillbehighercomparedtobusinessasusualasnetdamageswillbelower.Thestrongversionofgreengrowthmakesthecasethatenvironmentalprotectionnotonlyprotectstheeconomybutstimulatesitaswell.ThereareatleastthreetypesofstronggreengrowthaccordingtoJacobs(2012):

1. Keynesianargumentthatgovernmentstimulusinarecessionwillincreasegrowthandthatanenvironmentalstimuluswillboostgrowththemost;

2. Growththeoryexplanationwhereenvironmentalpolicycorrectsmarketfailures,particularlythemispricingofnaturalcapital;

3. Comparativeadvantageandtechnologicalrevolutionnarrativeinwhichgreaterenvironmentalprotectiongeneratesnewindustriesandgivesfirst-movereconomiesacomparativeadvantage.Initsstrongestversionenvironmentalprotectiondrivesthenextindustrialrevolution.

Frameworktoachieve“greengrowth”