economic planning and policy making Abidjan, February 2020 Andrew - - PowerPoint PPT Presentation

Using models to mainstream climate change into economic planning and policy making

Andrew Burns aburns@worldbank.org

Abidjan, February 2020

Climate-aware macroeconomic models help quantify both direct and indirect effects

• Make country-level climate-aware macroeconomic models

more available and user-friendly

• Provide Ministries of Finance, Planning Economy with a

consistent way of looking at and evaluating alternative CC policies alongside other policy priorities of the government (i.e. climate, vs labor market vs education or infrastructure)

• Help to integrate climate-change outcomes and considerations

into the day-to-day decision making of whole-economy ministries

Program objectives:

Evaluate climate’s effect on the economy, and the economy’s effect on climate

• Damages: Higher temperatures, changing weather patterns

& more extreme weather, reduce productivity, destroys capital, and generates structural change

• Adaptation: Infrastructure hardening, improved water

management, public-sector cooling solutions can limit negative effects

• Mitigation: Taxes, subsidies, sectoral and transport policies

all affect carbon intensity and GHG emissions

• Models are a work in progress

Macrostructural models allow for

• comprehensive
• consistent
• general equilibrium comparison

Model allows quantification of indirect benefits

Cost of climate policy Direct cost Revenue recycling Co-benefits Lower climate damages Net cost of climate policy may be negative! Examples:

Recent and ongoing climate ware modelling projects

CGE

• Pakistan
• Vietnam
• Indonesia
• Cote D’Ivoire
• Colombia
• Uganda

Macrostructural

• St. Lucia
• Jamaica
• Argentina
• Pakistan
• Uganda
• Kenya

A concrete example: Reduce emissions in a developing country

• Reduce GHG via carbon taxation (Introduce $50/ton Carbon

tax in 2025)

• Alternative scenarios: use fiscal revenues from carbon tax to:
• 1. Lower deficit / debt, which will reduce interest rates and stimulate

investment and growth

• 2. Increase revenue mobilization / government expenditures proportionately
• 3. Increase revenue mobilization / emphasize investment
• 4. Increase revenue mobilization / emphasize transfers to offset impacts

• 3.0
• 2.5
• 2.0
• 1.5
• 1.0
• 0.5

0.0 0.5 1.0 2020 2025 2030 2035

Impacts on GDP

Per cent deviation from baseline GDP responds strongest when carbon tax revenue is recycled toward investment spending. Debt reduction scenario Investment weighted scenario Household transfers Proportional spending increase

• 4.5
• 4.0
• 3.5
• 3.0
• 2.5
• 2.0
• 1.5
• 1.0
• 0.5

0.0 0.5 1.0 2020 2025 2030 2035

Impacts on Consumption

Per cent deviation from baseline Impacts on households, best measured by real consumption. Household transfer scenario has least negative effect. Debt reduction scenario Investment weighted scenario Household transfers Proportional spending increase

• 5.0
• 4.0
• 3.0
• 2.0
• 1.0

0.0 1.0 2020 2025 2030 2035 GDP HH Consumption

GDP and household welfare are not the same thing

Per cent deviation from baseline In debt repayment scenario, GDP rebound more strongly, due to higher investment. Higher prices weigh on household welfare/ consumption. GDP – Debt reduction scenario Household Consumption – Debt reduction scenario

Impact of $50 Carbon tax (after 10 years): Alternative tax recycling scenarios

• 14
• 12
• 10
• 8
• 6
• 4
• 2

2 4 GDP Consumption GG Bal.

• GG. Debt
• 30
• 25
• 20
• 15
• 10
• 5

Carbon Emissions Debt repayment Proportional Increase in gov’t spending Incrs Gov’t (focused on investment) Revenues spent on: Incrs Gov’t (Focus on transfers)

Summary of results after 10 years

Debt Reduction Proport Exp Invest weighted Transfers weighted GDP 0.1 0.5 0.8 0.0 Consumption

• 2.5
• 2.0
• 1.7
• 1.1

Investment 0.5 2.8 4.9

• 0.1

Exports 1.0 0.1 0.1

• 0.2

Imports

• 7.7
• 4.9
• 4.5
• 4.7

Current Account 1.1 0.3 0.3 0.3 Gov't revenues 0.8 1.6 1.7 1.7 Gov't Balance 1.5 0.4 0.5 0.5 Gov't Debt

• 12.3
• 2.4
• 2.6
• 3.3

Emissions

• 26.7
• 24.7
• 24.5
• 24.3

Scenarios

(% change from baseline) (Change as a % of baseline GDP) (% change from baseline)

Recycling of carbon taxes impacts on formal vs informal sector

• 1.5
• 1.0
• 0.5

0.0 0.5 1.0 1.5 2.0

Formal Sector Informal Sector

% change in value added from the baseline

HH Transfers Formal Prod Tax Reduce taxes on formal labor VAT reduction In this country formal sector is much more carbon intense so is harder hit in all scenarios. Production taxes mainly hits formal sector so reducing taxes on formal economy offsets most negative effects

Easy-to-use whole-economy models help mainstream climate into economic decision making

• Allow Finance, Planning, Environment Ministries to evaluate with consistent

framework the economy-wide effects of climate action (or inaction)

• Climate impacts: (GHG emissions; climate related damages to productivity

infrastructure, health)

• Fiscal impacts (revenues; resource mobilization; expenditures; debt; debt sustainability;)
• Growth effects (productivity impacts from higher temperatures; pollution; reduction of

highly distortionary taxes)

• Social impacts (replacement of subsidy of fuels with targeted transfers; impacts of

alternative use of CC policy revenues – transfers to the poor, extension of high-impact social policies)

• Help quantify the costs, benefits and co-benefits between climate and fiscal

policies including spending and tax policies that are not explicitly climate-

• riented