Climate Change Mitigation Will Drive Large Adjustments to Current Account Balances – IMF Blog

By Rudolfs Bems and Luciana Juvenal

A combination of climate change mitigation policies including carbon taxes, green subsidies and infrastructure investment could cut global balances by a quarter by 2027. But only if countries coordinate their response.

our latest Chart of the weekfrom the IMF External Sector Reportshows the impact that a globally coordinated mitigation package could have on current account balances.According to our model-based scenario analysis, the carbon tax has the largest effect. By discouraging energy consumption, economic activity will likely shift to more labor-intensive and low-carbon sectors.

Global interest rates are also expected to decline over the longer term due to lower fossil fuel investment, after an initial rise led by infrastructure investment.

However, the precise effects will be different for each country. Unlike greener economies, current account balances in economies that are more dependent on fossil fuels may rise due to sharp declines in investment in carbon-intensive sectors. This would likely shift global capital flows to greener advanced economies, placing a disproportionate burden of economic adjustment on low-income fossil fuel-exporting developing countries, which have historically contributed little to carbon emissions.

Greater burden sharing in climate change mitigation efforts could help limit the displacement of capital flows. This would mean higher carbon taxes and emission reductions for advanced economies. Accelerating investments in green energy and renewable energy in developing countries could also contribute, in particular through increased financing and technology transfers from advanced countries.

Clearly, both advanced and developing countries will have to play their part in reducing emissions. To succeed, policy coordination and burden-sharing agreements will be essential.