Climate Policies and External Adjustment

Rudolfs Bems, Luciana Juvenal, Weifeng Liu and Warwick McKibbin

No 2024/162, IMF Working Papers from International Monetary Fund

Abstract: This paper assesses the economic effects of climate policies on different regions and countries with a focus on external adjustment. The paper finds that various climate policies could have substantially different impacts on external balances over the next decade. A credible and globally coordinated carbon tax would decrease current account balances in greener advanced economies and increase current accounts in more fossil-fuel-dependent regions, reflecting a disproportionate decline in investment for the latter group. Green supply-side policies—green subsidy and infrastructure investment—would increase investment and saving but would have a more muted external sector impact because of the constrained pace of expansion for renewables or the symmetry of the infrastructure boost. Country characteristics, such as initial carbon intensity and net fossil fuel exports, ultimately determine the current account responses. For the global economy, a coordinated climate change mitigation policy package would shift capital towards advanced economies. Following an initial rise, the global interest rates would fall over time with increases in the carbon tax. These external sector effects, however, depend crucially on the degree of international policy coordination and credibility.

Keywords: Global climate policies; carbon tax; net-zero emissions; current account balances; international capital flows; dynamic general equilibrium modelling; G-Cubed; climate change mitigation policy package; current account response; IMF working paper 24/162; infrastructure investment; investment response; Current account; Greenhouse gas emissions; Productivity; Global; Europe (search for similar items in EconPapers)
Pages: 35
Date: 2024-07-26
New Economics Papers: this item is included in nep-ene, nep-env and nep-int
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Related works:
Working Paper: Climate Policies and External Adjustment (2024)
Working Paper: Climate Policies and External Adjustment (2024)
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