Dec 3, 2019 — The changing climate, largely wrought by humans, is bringing rising greenhouse gas emissions based on a review of recent.

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Subscribe at Read at Connect at ContentsWe should treat the natural world as we would the economic world and protect our natural capital.44 The Greatest Balancing Act Nature and the global economy David Attenborough and Christine Lagarde 6 Carbon Calculus For deep greenhouse gas emission reductions, a long-term perspective on costs is essential Kenneth Gillingham 12 Fifty Shades of Green ˜e world needs a new, sustainable ˚nancial system to stop runaway climate change Mark Carney 16 Putting a Price on Pollution Carbon-pricing strategies could hold the key to meeting the world™s climate stabilization goals Ian Parry 22 Investing in Resilience Disaster-prone countries are strengthening their ability to withstand climate events Bob Simison 26 Climate Change and Financial Risk Central banks and ˚nancial regulators are starting to factor in climate change Pierpaolo Grippa, Jochen Schmittmann, and Felix Suntheim 30 Reaping What We Sow Smart changes to how we farm and eat can have a huge impact on our planet Nicoletta Batini 34 Nature™s Solution to Climate Change A strategy to protect whales can limit greenhouse gases and global warming Ralph Chami, ˜omas Cosimano, Connel Fullenkamp, and Sena Oztosun THE ECONOMICS OF CLIMATE

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December 2019 | FINANCE & DEVELOPMENT 1FINANCE & DEVELOPMENTA Quarterly Publication of the International Monetary Fund December 2019 | Volume 56 | Number 4 DEPARTMENTS ALSO IN THIS ISSUE 505638 Tackling Inequality How can we address inequality in the 21st century? Start with climate change Lyndsay Walsh 44 Grass Roots From Brazil to New Zealand, local activists show that small-scale initiatives can make a di˛erence Daphne Ewing-Chow, Anna Jaquiery, Denise Marín, Ashlin Mathew, and David Smith 56 Hidden Giants It™s time for more transparency in the management and governance of national oil companies David Manley, David Mihalyi, and Patrick R. P. Heller 60 A Greener Future for Finance ˜e successes and challenges of green bonds o˛er lessons for sustainable ˚nance Afsaneh Beschloss and Mina Mashayekhi 62 The SDR™s Time Has Come Rethinking the Special Drawing Right could bolster the IMF™s role in the global ˚nancial safety net José Antonio Ocampo 3820 Straight Talk The Adaptive Age No institution or individual can stand on the sidelines in the ˚ght against climate change Kristalina Georgieva 50 People in Economics City Slicker Chris Wellisz pro˚les Harvard™s Edward Glaeser , who sees urbanization as a path to prosperity 54 In the Trenches Going against the Tide Brazil™s Ilan Goldfajn explains why central bankers ought to follow their convictions 64 Currency Notes Ahead of His Time Mathematician and computer science pioneer Alan Turing will appear on UK currency Melinda Weir

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2 FINANCE & DEVELOPMENT | December 2019FINANCE & DEVELOPMENTA Quarterly Publication of the International Monetary Fund ON THE COVER Time is running out to save our planet, and everyone has a responsibility to act. Illustrator Davide Bonazzi™s December™s 2019 cover likens the threat of climate change to the closing jaws of a crocodile, shown in silhouette against a steadily warming earth. Carbon calculus P.6 Fifty shades of green P.12 The adaptive age P.20 DECEMBER 2019The Economics of Climate A New Climate Economy fiEVERYBODY TALKS ABOUT the weather, but nobody does anything about it.fl ˜e quip, attributed to 19th-century American humorist Mark Twain, might describe the current state of play on climate change. In Twain™s day, it was absurd to suppose humans could do anything about the weather. Today, we understand that we can and we must. ˜e changing climate, largely wrought by humans, is bringing rising sea levels, temperature extremes, and more frequent and harsher storms. ˜ese threaten to displace lives, livelihoods, and communities, with clear economic consequences, often at a high price tag, around the world. Simply put, climate is the biggest risk the world faces. What can we do to move from talk to action? ˜is issue of Finance ˚ Development looks at the economic and ˚nancial impact of climate policy choices. It points to concrete solutions that o˛er growth opportunities, driven by technological innovation, sustainable investment, and a dynamic private sector. For IMF Managing Director Kristalina Georgieva, dealing with climate change requires not only mitigating damage, but also adapting for the future. ˜is means pricing risk and providing incentives for green investment. Kenneth Gillingham shows that in the long run, the costs of climate action may be lower than we think. Ian Parry estimates that aggressive carbon taxes would help individual nations meet their emission-reduction goals and scale up action globally. Mark Carney and others show how harnessing ˚nance can open enormous opportunitiesŠfrom transforming energy to reinventing protein. In this shared crisis, everyone has a responsibility to act. Ultimately, the world™s fortunes and those of future generations depend on the ambition and urgency with which leaders collaborate to address the global climate emergency today. But there is hope. Today™s young people, like Greta ˜unberg and others, serve as reminders of just how capable human beings can be of remaking the world. It is their future at stake. GITA BHATT , editor-in-chief EDITOR˜IN˜CHIEF: Gita Bhatt MANAGING EDITOR: Maureen Burke SENIOR EDITOR: Chris Wellisz EDITOR: Glenn Gottselig DIGITAL EDITOR: Rahim Kanani ONLINE EDITOR: Lijun LiPRODUCTION MANAGER: Melinda Weir COPY EDITORS: Michael Harrup Lucy Morales ADVISORS TO THE EDITOR: © 2019 by the International Monetary Fund. All rights reserved. For permission to reproduce any F&D content, submit a request via online form ( or by e-mail to Permission for commercial purposes also available from the Copyright Clearance Center ( for a nominal fee. Opinions expressed in articles and other materials are those of the authors; they do not necessarily reflect IMF policy. Subscriber services, changes of address, and advertising inquiries: IMF Publication Services Finance & Development PO Box 92780 Washington, DC 20090, USA Telephone: (202) 623-7430 Fax: (202) 623-7201 E-mail: Postmaster: send changes of address to Finance & Development , International Monetary Fund, PO Box 92780, Washington, DC 20090, USA.The English edition is printed at Dartmouth Printing Company, Hanover, NH. Finance & Development is published quarterly by the International Monetary Fund, 700 19th Street NW, Washington, DC 20431, in English, Arabic, Chinese, French, Russian, and Spanish. English edition ISSN 0145-1707 Bernardin Akitoby Celine Allard Bas Bakker Steven Barnett Nicoletta Batini Helge Berger Paul Cashin Luis Cubeddu Alfredo Cuevas Rupa Duttagupta Thomas Helbling Tommaso Mancini Griffoli Gian Maria Milesi-Ferretti Christian Mumssen ˜nci Ötker Catriona Purfield Uma Ramakrishnan Abdelhak Senhadji Alison Stuart

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Debt and Entanglements Between the Wars fiModern, industrialized warfare is extraordinarily expensiveŠso expensive that its prosecution requires a state to take on tremendous public debt. The question facing a state, whether it wins or loses the war, is how it can survive politically under the constraint of the debt. The carefully researched essays in this fascinating book not only show how the belligerents in World War I experimented with a combination of strategiesŠtax increases, ˜ nancial repression, in˚ ation, debt rescheduling, selective default, and inter-governmental guaranteesŠto address this political optimization problem, they also show the long-run economic costs of those strategies. The analyses not only teach us about history but have implications for the present day.fl ŠStephen Haber, Stanford University Forthcoming from the IMF INTERNATIONAL MONETARY FUND

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December 2019 | FINANCE & DEVELOPMENT 7The scienti˚c consensus is clear: climate change is associated with increasingly fre -quent and intense natural disasters ranging from droughts and wild˚res to hurricanes and coastal ˝ooding. While the extent of the economic damage cannot be known for cer -tain, strong evidence suggests it could be quite severe. ˜e challenge for policymakers will be to decide how much to spend on measures to reduce greenhouse gas emissions. To do that, they must be able to compare the costs of various options, including renewable-energy sources and electric cars. ˜e challenge is taking on increasing urgency in the policy world as climate scientists argue that emis -sion reductions must be rapid and deep, with a goal of reaching net zero by 2050, if not sooner (Millar and others 2017). ˜at goal, which many countries have already embraced, will require a vast trans -formation of the energy sources used to power the global economy, and it would mean going far beyond For deep greenhouse gas emission reductions, a long-term perspective on costs is essential Kenneth GillinghamCARBON CALCULUS

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8 FINANCE & DEVELOPMENT | December 2019Chart 1 Comparing costsRenewable-energy technologies are among the least costly relative to existing coal generation.(Dollars per ton of carbon dioxide, in 2017 dollars) Source: Kenneth Gillingham and James H. Stock, fiThe Cost of Reducing Greenhouse Gas Emissions,fl Journal of Economic Perspectives 32, no. 4 (Fall 2018): 53Œ72. Note: Estimates are derived from the US Energy Information Administration’s Annual Energy Outlook 2018. Costs are projected for facilities that come online in 2022. Costs do not include federal renewable-energy tax credits or other subsidies.Batini, 09/27/19 020406080100120140Onshore wind Natural gas combined cycle Utility-scale solar photovoltaic New natural gas with carbon capture and storage Advanced nuclear Coal retro˜t with carbon capture and storage New coal with carbon capture and storage O˚shore wind Solar thermal business-as-usual technological progress. Indeed, the US Energy Information Administration™s International Energy Outlook 2019 projects that fossil fuels will still generate 57 percent of elec -tricity in 2050. How much would it cost to move beyond busi -ness as usual and come within striking distance of net-zero emissions by 2050? To answer this question, it™s important to distinguish between short- and long-term costs. In the short term, there are some inexpensive ways to reduce emissions, but deeper cuts run up against quickly rising costs. However, some activitiesŠespecially those involv -ing ˝edgling low-carbon technologiesŠthat appear expensive in the short term may actually turn out to be low-cost approaches in the long term, because of induced innovation. ˜is insight suggests that the longer-term cost of mitigation may be lower than is widely assumed. Short-term costs of technologies To calculate the short-term costs of mitigating greenhouse gas emissions, economists estimate the up-front costs and divide by the number of tons of carbon dioxide (or equivalent) emissions reduced. For example, suppose a government spends $20 million to promote the development of wind farms to generate electricity, reducing carbon dioxide emissions by 1 million tons. ˜e short-term cost of the mitigation would be $20 per ton. ˜is method provides a useful way of comparing the costs of various ways of reducing emissions. Of course, one must be cautious in interpreting results focused on an individual technology or policy in isolation. For instance, there could be interactions among policies, and the costs associ -ated with technologies may vary by location and exactly how the technology is implemented. And estimates of such costs are changing every year. Indeed, the cost of solar and wind generation has declined rapidly over the past decade, and the decline appears likely to continue. My colleague James Stock and I estimated the unsubsidized costs of various technologies to reduce greenhouse gas emissions based on a review of recent economic literature and the Energy Information Administration™s Annual Energy Outlook 2018 (Chart 1). ˜e costs are expressed in relation to existing coal generation, which is a useful benchmark because coal is the most carbon-intensive fuel. In many countries, policymakers will have to decide whether to close existing coal plants on the path toward decarbonization. ˜ese estimates are averages from the United States, and one should be cautious in applying them elsewhere. ˜e most striking takeaway is that renewable- energy technologies are among the least costly. (˜is result can be applied outside the United Some activities that appear expensive in the short term may actually turn out to be low-cost approaches in the long term, because of induced innovation.

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December 2019 | FINANCE & DEVELOPMENT 9Table 1 Wide range Economic studies show that costs of short-term measures to reduce carbon dioxide emissions vary widely. POLICY MEASURE ESTIMATED COST OF REDUCING CARBON DIOXIDE EMISSIONS ˝2017 DOLLARS PER TON˙ Behavioral energy eˆciency Œ190Corn starch ethanol Œ18Œ+310Reforestation 1Œ10Renewable-portfolio standards 0Œ190Corporate Average Fuel Economy (CAFE) standards Œ110Œ+310Wind energy subsidies 2Œ260Clean power plants 11Gasoline taxes 18Œ47Methane-˛aring regulations 20Reducing federal coal leasing 33Œ68Agricultural emission policies 50Œ65National clean energy standards 51Œ110Soil management 57Livestock management policies 71Concentrating solar power expansion 100Renewable fuel subsidies 100Low-carbon fuel standards 100Œ2,900Solar photovoltaic system subsidies 140Œ2,100Biodiesel150Œ420Energy eˆciency programs 250Œ300Cash for clunkers 270Œ420Weatherization assistance programs 350Dedicated-battery electric- vehicle subsidies 350Œ640Source: Kenneth Gillingham and James H. Stock, fiThe Cost of Reducing Greenhouse Gas Emissions,fl Journal of Economic Perspectives 32, no. 4 (Fall 2018): 53Œ72. Note: The policies in the table are from around the world, but most are from the United States. Costs for greenhouse gases other than carbon dioxide are converted to carbon dioxide equivalents based on the gases™ global warming potential. Estimates are based either on individual studies or on a range of estimates from di˜erent studies. States, because markets for most renewable tech -nologies are global.) In fact, the cost of wind and solar may be even lower when implicit or explicit subsidies are included. However, these estimates do not account for the intermittency of renewable energy generationŠafter all, the sun does not shine and wind does not blow all the time (Joskow 2019). At high levels of use, renewables must be complemented with storage technologies such as pumped hydroelectric storage or batteries, or with a form of generation that can quickly ˚ll the gap when the supply of wind or solar power falters. In the United States, a low-cost, low-carbon alternative to coal is a power plant that incorporates both gas and steam turbines to increase e˙ciency. Known as natural gas combined-cycle generation, this solution takes advantage of the copious supply of inexpensive fracked shale gas. One caveat: the estimated cost of $27 per ton assumes that no methane leaks from wells, pipelines, or storage facilities. Methane is a potent greenhouse gas, and the gigantic leak at Aliso Canyon, California, in 2015 shows that natural-gas generation may pro -duce higher greenhouse gas emissionsŠand thus higher costs per ton of all greenhouse gases reduced. Social cost To understand how sensible it is to spend money on these emissions reductions, we can compare them to estimates of carbon™s social cost, which quanti˚es the incremental damage resulting from emitting a ton of carbon dioxide and other green -house gases into the atmosphere. ˜is incremental damage includes factors such as losses (or gains in northern climates) to agriculture caused by global warming, ˝ooding from sea level rise, and destruction from more-severe tropical cyclones and additional wild˚res. ˜e administration of US President Barack Obama developed a central-case estimate of $50 per ton of carbon dioxide in 2019. Several technologies for mitigation turn out to be less expensive than carbon when this estimate of carbon™s social cost is used (suggesting they are no-brainers), while others are more expen -sive, such as solar thermal and o˛shore wind. Benchmarks other than the $50 per ton estimate may also be useful. For instance, a recent IMF report estimates that a tax of $75 per ton of carbon dioxide applied around the world would make it possible to meet the Paris Agreement target of limiting global warming to 2ˆC over preindustrial THE ECONOMICS OF CLIMATE

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