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A macroeconomic perspective on climate change mitigation: Meeting the financing challenge

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  • Alex Bowen
  • Emanuele Campiglio
  • Massimo Tavoni

Abstract

Transitioning to a low-carbon economy will require significant investment to transform energy systems, alter the built environment and adapt infrastructure. A strategy to finance this investment is needed if the limit of a 2�C increase in global mean temperatures is to be respected. Also, high-income countries have pledged to pay the �agreed full incremental costs� of climate-change mitigation by developing countries, which are not necessarily the same as incremental investment costs. Building on simulations using Integrated Assessment Models and historical evidence, this paper explores some of the issues posed by this dual financing challenge. We discuss the fiscal self-reliance of the energy sector, finding that carbon pricing would generate sufficient fiscal revenues within each region to finance total energy investment. Even when allowing for trade in emission permits regional carbon fiscal revenues should still suffice to cover both their own energy sector investment and permit purchases from abroad. We show that incremental investment (and saving) needs are well within the range of past variation, and argue that the challenge is rather to ensure that the revenues are complemented by investment in the appropriate sectors. But fairness and equity are likely to warrant transfers from advanced industrial countries to developing nations.

Suggested Citation

  • Alex Bowen & Emanuele Campiglio & Massimo Tavoni, 2013. "A macroeconomic perspective on climate change mitigation: Meeting the financing challenge," GRI Working Papers 122, Grantham Research Institute on Climate Change and the Environment.
  • Handle: RePEc:lsg:lsgwps:wp122
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    References listed on IDEAS

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    1. Speller, William & Thwaites, Gregory & Wright, Michelle, 2011. "Financial Stability Paper No 12: The Future of International Capital Flows," Bank of England Financial Stability Papers 12, Bank of England.
    2. Ben S. Bernanke, 2009. "Financial reform to address systemic risk: a speech at the Council on Foreign Relations, Washington, D.C., March 10, 2009," Speech 448, Board of Governors of the Federal Reserve System (U.S.).
    3. Nicola Spatafora & Oana Luca, 2012. "Capital Inflows, Financial Development, and Domestic Investment; Determinants and Inter-Relationships," IMF Working Papers 12/120, International Monetary Fund.
    4. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Chapters,in: NBER Macroeconomics Annual 2000, Volume 15, pages 339-412 National Bureau of Economic Research, Inc.
    5. repec:fip:fedgsq:y:2009:x:6 is not listed on IDEAS
    6. Brett, Craig & Keen, Michael, 2000. "Political uncertainty and the earmarking of environmental taxes," Journal of Public Economics, Elsevier, vol. 75(3), pages 315-340, March.
    7. Claudio Borio & Piti Disyatat, 2011. "Global imbalances and the financial crisis: Link or no link?," BIS Working Papers 346, Bank for International Settlements.
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    Cited by:

    1. Sarah Wolf & Franziska Schütze & Carlo C. Jaeger, 2016. "Balance or Synergies between Environment and Economy—A Note on Model Structures," Sustainability, MDPI, Open Access Journal, vol. 8(8), pages 1-11, August.
    2. Kober, Tom & Summerton, Philip & Pollitt, Hector & Chewpreecha, Unnada & Ren, Xiaolin & Wills, William & Octaviano, Claudia & McFarland, James & Beach, Robert & Cai, Yongxia & Calderon, Silvia & Fishe, 2016. "Macroeconomic impacts of climate change mitigation in Latin America: A cross-model comparison," Energy Economics, Elsevier, vol. 56(C), pages 625-636.
    3. Alex Bowen & Emanuele Campiglio & Sara Herreras Martinez, 2015. "The ‘optimal and equitable’ climate finance gap," GRI Working Papers 184, Grantham Research Institute on Climate Change and the Environment.
    4. Armon Rezai & Sigrid Stagl, 2016. "Ecological Macreconomics: Introduction and Review," Ecological Economics Papers ieep9, Institute of Ecological Economics.
    5. repec:spr:ieaple:v:17:y:2017:i:6:d:10.1007_s10784-017-9352-2 is not listed on IDEAS
    6. Rezai, Armon & Stagl, Sigrid, 2016. "Ecological Macreconomics: Introduction and Review," Ecological Economic Papers 4803, WU Vienna University of Economics and Business.

    More about this item

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • O44 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Environment and Growth

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