31 March 2011: The International Monetary Fund (IMF) has issued a factsheet on “Climate Change and the IMF,” which suggests that stabilizing global atmospheric concentrations of greenhouse gases will require a dramatic transformation of the entire global energy system, and recommends fiscal instruments to internalize environmental costs and large-scale and predictable financial assistance for developing countries to support action on climate change.

The fact sheet recognizes that broad-based taxes on greenhouse gas emissions are the most natural policy instrument as they exploit all possible behavioral responses for reducing emissions throughout the economy (regulatory policies, in contrast, are less effective as they focus on a narrower range of these responses), but recognize there are several challenges when designing carbon taxes, including needed international coordination. Regarding cap-and-trade systems, the IMF suggests they are another promising policy, but should be designed to look like fiscal instruments through revenue-raising and price-stability provisions.

The factsheet also suggests that large-scale financial assistance to developing countries is needed, the absence of which may render developing countries’ responses to climate change either insufficient, thereby endangering sustainable growth, or inconsistent with maintaining fiscal and broader macroeconomic sustainability. [Publication: IMF Factsheet on Climate Change]