11 January 2016: In a report published as part of the International Monetary Fund (IMF) Staff Discussion Note (SDN) series, experts examine the role that fiscal polices can play in assisting countries to implement the Paris Agreement adopted at the end of 2015. The paper, titled ‘After Paris: Fiscal, Macroeconomic, and Financial Implications of Climate Change,’ considers how developing and developed countries alike can prevent deaths, raise revenue for adaptation and attract private finance flows for mitigation by getting fiscal policies right, with a focus on carbon pricing.

While the 196 Parties to the UNFCCC adopted the Paris Agreement, which will still require ratification by at least 55 Parties covering 55% of the world’s emissions to enter into force, the authors point out that practical policy implementation must now be the focus. They highlight fiscal, financial and macroeconomic policies that can help the world “come to grips with climate change,” and aid in the fulfillment of the 186 intended nationally determined contributions (INDCs) submitted by Parties.

The authors call for correctly pricing energy, using taxation to account for externalities such as carbon emissions. They recommend taxing international aviation and maritime fuels. If countries opt for emissions trading schemes, the authors suggest using price floors and auctioning allowances to raise revenue. Noting the proliferation of carbon pricing policies around the world, they add that countries may choose to interconnect these schemes, and, in doing so, should consider using carbon price floor arrangements.

For governments considering instituting carbon pricing or reforming their current system, the report offers a section on design principles and considers international coordination, in anticipation of more schemes being linked in the future.

Mai Farid, Michael Keen, Michael Papaioannou, Ian Parry, Catherine Pattillo, Anna TerMartirosyan and other IMF staff authored the paper. [Publication: After Paris: Fiscal, Macroeconomic, and Financial Implications of Climate Change] [IMF Blog Post]