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Carbon Price Floor Could Help Bring Tremendous Transformative Investment Opportunities

An International Carbon Price Floor (ICPF) could help bring tremendous opportunities for transformative investments, economic growth, and green jobs, an International Monetary Fund staff report issued today asserts.

“It is important that fiscal policy reorients private investment towards the development, adoption, and diffusion of low-carbon technologies while maintaining fiscal space. Carbon pricing achieves both objectives, by simultaneously providing the essential price signal needed to foster private investment in clean technologies and mobilizing much-needed revenues, which are especially valuable in the aftermath of the pandemic,” the authors say.

Unveiling the study at a Brookings Institution webinar, IMF Managing Director Kristalina Georgieva real success in combating global warning can only happen with a change in economic policy. She claims an ICPF would accelerate the transition to a low carbon world in part by encouraging energy innovation.

In trying to help make their case, the authors say there appears to be global momentum for carbon pricing with, for example, over 60 pricing schemes now implemented at regional, national, and subnational level, major pricing initiatives launched in China and Germany in 2021, and rising prices in the EU Emission Trading System.

They add at the international level, a well-designed carbon price floor agreement would yield benefits to individual countries as well as to the collective. All participants would be better off from stabilizing the global climate system, and countries would enjoy domestic environmental benefits from curbing fossil fuel combustion—most importantly, fewer deaths from local air pollution.

However, the IMF experts warn barriers to creating a floor exist, including the possibility some nations will lowball or renege on their commitments:

“Countries acting unilaterally under the Paris process may be reluctant to pledge greater mitigation ambition, and scale up mitigation policies, as they would bear the costs while the global climate benefits of their actions mostly accrue to other countries.”

Chances of achieving an ICPF would be enhanced by initially requiring carbon pricing for the power and industrial sectors, with progressive extension to other fossil fuel CO2 emissions and broader sources of greenhouse gases and focusing the floor at first on easily observed carbon prices, the report contends.

The authors say an International Carbon Price Floor is needed to complement and reinforce the Paris Agreement.

Carbon pricing needs to be supported by a broader package of measures to enhance its effectiveness and acceptability including public investment in clean technology networks (like grid upgrades to accommodate renewables) and measures to assist vulnerable households, workers, and regions, they add.

During the session, a Harvard Kennedy School specialist on climate change policy, energy policy, and regulatory policy Joe Aldy praised a potential the floor for complementing the Paris agreement effectively and significantly leading to a minimum level of reciprocal climate actions by governments.

He says the agreement for a floor might start with small number of companies at first, smaller than the G-20.

The IMF Executive Board cited climate change as having important implications for the financial sector in a review released in late May.

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