A blog post published by IMF Staff on 7 October 2020 noted that economic policy tools can facilitate the achievement of net zero carbon emissions by the year 2050 despite the effects of the COVID-19 crisis. The arguments put forward in the blog post are based on Chapter 3 of the World Economic Outlook and indicate that emissions reduction can be combined with economic growth, employment and equality of income.
Economic policies can affect the composition of energy, nudging users towards low-emission sources, and can also have some influence on the total energy usage. The various policy mixes can be evaluated according to their effect on these factors. A carbon tax would for example make polluting fuels more expensive, providing an incentive to energy consumers to move to the use of greener fuels. As the carbon tax would make energy more expensive the total energy consumption would also fall.
Policies intended to reduce the cost of green energy and increase the supply, such as subsidies or direct public investment in green energy, increase the share of low-emissions energy in the overall mix. However, by reducing energy prices generally such green energy subsidies are likely to increase the overall demand for energy.
The correct policy mix may involve combining carbon taxes with measures to reduce the impact of the tax on energy costs for consumers. This policy mix can achieve emissions reductions without adversely impacting output and employment.
Countries should first consider a green investment stimulus to promote invest in smart electricity grids that can incorporate renewables into power generation. Governments could also introduce cleaner public transport and more energy-efficient buildings.
These policies would increase global GDP and employment during the recovery from the COVID-19 crisis, and could increase productivity in low-carbon sectors, incentivizing the private sector to invest in these sectors. Model-based analysis by IMF staff suggests that the correct overall policy measures could increase global GDP in the first 15 years of the recovery by around 0.7% of global GDP on average, with global increases in employment. The policies could lead to a sustainable global economy by limiting climate change.
The model does however suggest there would be transitional costs in the later years of the strategy. Although the initial years would boost economic activity, the model indicates that under the recommended policy mix global GDP would be reduced by 0.7% per year in the years 2037 to 2050, as compared to unchanged policies. This adverse effect could be reduced if incentives are given for technological development in clean technologies, for example through research and development (R&D) subsidies. There would also be improved health outcomes that would mitigate the adverse economic effects.
The suggested green policy mix would have the largest adverse effect on oil producing countries and on countries with large population or economic growth. These disadvantages should however be weighed against the advantages of sustainability, climate benefits and improved health outcomes.
Carbon pricing could potentially give a problem to low-income households, which spend a relatively large part of their income on energy and may be employed in carbon-intensive industries such as manufacturing and transportation. Policies can be introduced to limit the adverse effects of carbon pricing on these households though cash transfers or higher public spending.
