Global warming poses severe threats to the planet and human livelihoods The current year 2023 is projected to be recorded as the warmest year on record. Many countries have set climate goals like reducing greenhouse gas emissions to net zero level by the year 2050 and have taken a wide range of policy actions as well. However, according to a recent report released by the IMF, the current and announced policies may fall short of achieving the 2015 Paris Agreement’s temperature goals.
There is no doubt about the fact that if we can somehow mitigate the potential catastrophic consequences of climate change it will ultimately benefit every species occupying this world. However, it necessitates a combined effort of all the stakeholders all over the world. It requires radical economic transformation and that could impose costs and benefits across people, firms, regions, and countries.
Deployment of adequate resources for this pursuit continues to be a challenge as different countries have unequal contributions to both global warming as well as the resource required to deal with the harmful effects of global warming and so there is a need to explore ways such that every small effort counts and aligns with the overall objectives of achieving net zero levels at least by the 2050 deadline. Besides in each country, both the public and private sectors need to complement each other in the pursuit to achieve the transition to low-carbon energy sources.
Cost benefit trade-offs: A challenge to reckon with
Many economies of the world today are already having high debt burden coupled with rising interest rates regimes and weaker growth prospects. According to the IMF, the Debt-to-GDP ratios are projected to rise by 1 percentage point a year globally during 2023−28 and this is going to pose challenges to make enough efforts to contain forces causing climate change.
The emission reduction policies currently being followed in many economies rely heavily on spending measures either directly through increased public investment and or indirectly through subsidies for renewable energy. Such initiatives are welcome, but they do enhance fiscal burden for the countries that rely on such spending measures to contain emission.
Policymakers thus face a fundamental trade-off to deal with. On the one hand, continued reliance on the spending-based measures to reach net zero goals by the year 2050 may severely raise the debt burden on the large-emitting countries and on the other hand, insufficient climate action may expose the world to the adverse consequences from global warming.
Could carbon pricing the way out?
The IMF suggests that such trade-off can be relaxed using carbon pricing, which is cost-effective in reducing emissions while also generating revenues to relieve the debt burden. However, carbon pricing often involves political trade-offs and so the dilemma between achieving climate goals and fiscal sustainability could turn out to be rather a trilemma having to resolve trade-offs with political feasibility as well.
This trilemma is likely to be faced mainly by the emerging market and developing economies as their priorities are driven more by their growth and development goals. Many of these economies are also facing the consequences of climate change and need resources to deal with them. Besides they have limited access to low-carbon technologies and continue to rely on existing technologies to achieve the required temperature goals. Further, the countries that depend on Fossil fuels may face resource crunch due to declines in commodity revenues if the rest of the world is aiming to achieve net zero emissions.
Every country must evolve a feasible policy mix to suit its requirements
Since different countries have different set of challenges to meet the climate goals, it is but obvious that they may as well have different set of policies to meet their climate goals. It must be a viable mix of policies that that can help them move towards attainment of sustainable development goals keeping in view factors like economic efficiency, administrative practicality, and political feasibility from a macro fiscal perspective.
Whatever policy mix they adopt, IMF suggests that they should try to make carbon pricing its integral part of the policy mix. For instance, other mitigation instruments such as such as feebates, green subsidies, and regulation standards etc may as well promote innovation and deployment of low-carbon technologies and address issues like market failures and network externalities.
There are already 50 countries which are reportedly having with carbon pricing schemes in place already and around 23 countries are currently planning for their introduction. Depending on the mix of revenue and spending policies, various countries go for an appropriate policy mix whereby they can minimize the fiscal costs of delivering the necessary emission reductions.
Need for timely execution of emission control policies
IMF indicates that public debt in advanced economies would rise by 10 to15 percent of GDP by 2050 on account of an expected increase of primary deficits by 0.4 percentage point of GDP a year during this period which could still be managed by them given the fiscal space that they may still be having.
However, the emerging and developing economies which normally have limited fiscal space, well, they may have to prioritize subsidies needed to contain fossil fuels and try to raise revenues to maintain debt sustainability. But one thing is clear, that if there is a delay in the attainment of the targeted net zero level by the year 2050, it may increase the debt burden for all economies of the world.
Governments must facilitate green transition for businesses
The governments of both the advanced and other economies of the world may have to encourage businesses to make the necessary transformation to a low-carbon future. The firms may be subjected to mandatory norms or standards as regards the emission limits which may as well be associated with the extent of the investments made by the forms in developing or using low-carbon technologies.
Besides, fiscal incentives in the form of tax credits or subsidies should be widely publicized so that businesses clearly know what targets they need to follow to be able to get the advantages of incentives offered by the governments. This kind of public-private partnership may ease out the fiscal pressures for the government on one hand and create a better image for the firms aiming at sustainable production technologies for a safer environment for the future generations on the other.
To conclude, since climate affects the whole world, all countries of the world must contribute towards improving it. There has to be coordination among the policymakers with one another and with businesses in their respective jurisdictions if we have to ensure that we are able to provide a sustainable and resilient world for future generations.