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

  • Alex Bowen
  • Emanuele Campiglio
  • Massimo Tavoni

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.

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Paper provided by Grantham Research Institute on Climate Change and the Environment in its series GRI Working Papers with number 122.

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Date of creation: Aug 2013
Date of revision:
Handle: RePEc:lsg:lsgwps:wp122
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  1. 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.
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