Paying for climate change

• Author: Benjamin Jones, Michael Keen, and Jon Strand
• Position: Economist/Advisor/Technical Assistance Advisor in the IMF's Fiscal Affairs Department
• Pages: 28-31

Page 28

Governments must manage the incentives for households and firms to counter and adapt to climate change

CLIMATE science tells that the earth is warming as a result of human activities. But considerable uncertainty regarding the precise nature and extent of the risks remains. Economists are needed to develop sensible policies to address these risks, which account for the uncertainties. In particular, the world needs public finance economists to consider what role fiscal instruments- notably, taxing and public spending-have to play in dealing with climate change.

Country efforts to adapt to and mitigate climate change are interrelated-broadly speaking, they are substitutes-but differ in important respects. Most adaptation, often involving relatively modest changes in behavior, will be carried out through private markets, though policy interventions may be needed to facilitate it-for example, by improving weather forecasting.

Mitigation, by contrast, generally needs to be driven by deliberate policy to a greater extent. Much adaptation can, and should, wait until the climate process has evolved: it makes little sense to adapt now to changes that will materialize mainly in, say, 30-100 years. However, mitigation needs to start well in advance of the damage it seeks to avoid because damage arises not from current emissions but from the slow-moving stock of greenhouse gases (GhGs) cumulated in the atmosphere.

This article argues that the role of fiscal instruments is cen-tral-indeed indispensable-for both mitigating and adapting to climate change. It looks at how efficient fiscal policies can help minimize the negative effects of climate change and examines the policy options available to governments. Fiscal instruments cannot provide a complete solution. But taxes and public spending are key to getting the incentives right for households and firms, as well as to ensuring a fair distribution of the associated costs and benefits. they can help ensure that those whose GhG emissions affect climate developments pay a proper price for doing so, and they can provide the resources needed to pay for dealing with it.

Page 29

Adaptation-how much could it cost?

Even with unchanged fiscal policies, climate change may have effects on both tax revenue (tax bases being eroded, perhaps, by declining agricultural productivity or by intensified extreme weather events, such as storms, flooding, and droughts) and public spending (perhaps to deal with increased prevalence of malaria). In some cases, the net effect might be beneficial, though the overall tendency is likely to amplify the problems faced by those countries-often among the poor-est-most adversely affected in general by climate change. the most likely negative effects of future climate change include sea-level rise, productivity losses in climate-exposed sectors such as tourism and agriculture, and more intense and perhaps more frequent and extreme weather events-all with potential adverse repercussions for fiscal positions and external stability.

Outside such catastrophic events as melting of the West Antarctic Ice Sheet, human societies are likely to adapt to most of these changes, although at a cost. how to minimize those costs, and how governments can best help, is not always clear. typically, it will not be optimal to adapt so fully as to eliminate the entire climate effect: averting all damage may simply be too expensive. And difficult choices arise between taking early precautions and waiting for better information to become available. For example, whereas sinking costs into strengthening coastal defenses will seem a wise decision if future storm surge problems worsen, it will look like a white elephant if they do not.

Very little is known about the aggregate extent of the costs of adaptation, but there are some rough estimates. One survey concludes that these costs typically make up at most 25 percent of total climate impact costs (tol, 2005). So if doubling GhG concentrations (a prospect under "businessas-usual" assumptions in this century) leads to an overall climate cost of 1-2 percent of world GDP...