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Asia-Pacific, the gigantic domino of climate change

What Asia does to fight global warming will be literally felt across the whole planet
Director, Fiscal Affairs Department at the International Monetary Fund
Director, Asia and Pacific Department at the International Monetary Fund
Shanghai city skyline covered with a heavy smoke caused due to air pollution

Forget the poetic flap of a butterfly’s wings in Beijing causing rain in Central Park. Climate issues in Asia-Pacific are measured in superlatives. The world’s biggest population. Two of the three largest carbon dioxide-emitting countries and the largest share of emissions globally. The most exposed to extreme weather events. Some of the smallest and most vulnerable countries. Also, the fastest-growing part of the global economy and many of the leaders in green technology.

It’s not hard to see that what Asia does to fight global warming will be literally felt across the whole planet.

Pursuing a green recovery in the aftermath of COVID-19 might sound daunting, but it’s actually a great opportunity to direct recovery spending into stimulating sustainable jobs and growth.

Green investment is generally more labour-intensive than the regular kind. The near-term extra spending and jobs would strengthen economies. In the longer-term, Asian economies would become more sustainable and resilient, and could build on their lead in many of the emerging green technologies.

What policies are needed? A newly released IMF staff paper makes recommendations in three areas.

More carbon taxes, more compensation

With the world’s most populous and fastest-growing economies, Asia-Pacific emits the largest volume of greenhouse gas, producing about half the world’s carbon dioxide. China, India (the first and third-largest emitters respectively, with the US second) and other large emitters will need to make greater efforts to reduce emissions if global warming is to be kept to the Paris Agreement’s goal of 1.5–2 degrees centigrade above pre-industrial levels.

Taxes on the carbon dioxide released when burning fossil fuels can be a highly effective way of reducing emissions, but they are little used in the region. Even a gradually introduced and relatively modest carbon tax of $25 per tonne would achieve the region’s aggregate Paris Agreement target. But Asia’s Paris targets, like other region’s, are well below what is needed and models suggest that $50-100 per tonne is required globally to keep warming below 2 degrees.

Exhibit 1: Reduction in 2030 CO2 emissions with different carbon taxes, compared to Paris Agreement pledges

Rather than taxing all emissions, much can be done by targeting the most polluting fuels. That would be very effective in countries like China, India and Mongolia, heavily reliant on coal, by far the dirtiest fossil fuel. And it comes with the added benefit of reducing air pollution, which could save some 3 million lives in China alone by 2030.

Of course, some households, workers, and firms would be particularly affected by the higher energy prices resulting from carbon taxes. They need to be identified and compensated, ideally with targeted benefits, though universal transfers can also work. For example, China could use carbon tax revenues to increase its minimum guaranteed income scheme, finance green investment or reduce other taxes.

Exhibit 2: Impact of carbon tax compensation measures in China

Other policies can help. For example, more sectors can be included in emissions trading systems, in which the government sets overall limits on emissions and lets the market determine their price. Financial incentives to use less-polluting alternatives, such as electric vehicles, reduce the need to raise energy prices. Stricter regulations on air quality can support decarbonisation efforts.

Increase adaptability to climate change

Even in the best of scenarios, historic emissions mean a certain amount of warming and climate change will be inevitable. Extreme weather events are only expected to intensify, so adaptation is urgent. Rising sea levels alone could directly affect a billion people by mid-century, potentially submerging many cities and wiping out entire nations.

Low-income and Pacific island countries are particularly vulnerable and need to invest in protecting infrastructure, making water resources more resilient, adapting dryland agriculture, restoring mangroves, and improving early warning systems for natural disasters.

Exhibit 3: Smaller Asian economies less capable to adapt

But some of the most vulnerable have the least resources to prepare. Adaptation requires stepping up public investment, on average by about 3% of GDP annually. For the smallest, also the least-polluting countries, the price tag is higher. A recent IMF/World Bank assessment concluded that Tonga would have to spend $67 million a year in climate adaptation for 10 years. Doesn’t sound much, until one realises this is 14% of its GDP, which underscores the need for greater international support for such countries.

Greener recovery from COVID-19

The COVID-19 crisis does not change the climate crisis, but provides an opportunity to tackle it. How? By ensuring that as much as possible of the very large recovery spending is allocated towards greener activities. Some countries are already doing that, like Korea in its Green New Deal. But much more can be done as the pandemic response shifts from crisis containment to recovery.

Countries seeking to accelerate the transition to carbon neutrality can invest in renewable energy, retrofitting buildings, upgrading the electricity grid, facilitating electric cars, and incentivising research. When the main challenge is adaptation, they could upgrade infrastructure projects, retrofit existing assets, and develop coastal protection. For many, it will be a combination of both.

Global efforts to promote and finance the transfer of green technologies to developing countries and expanding multilateral climate funds need to be stepped up. The IMF is helping by integrating climate in our annual country economic assessments and scaling up capacity development to ensure government officials have the needed skills to handle these complex issues.

Butterflies still matter…

In a 1952 short story, American science fiction writer Ray Bradbury imagined a man from 2055 who travels to the past and, by accidentally stepping on a butterfly, changes the outcome of his day’s presidential election. It was “a small thing,” Bradbury writes, “that could upset balances and knock down a line of small dominoes and then big dominoes and then gigantic dominoes.” In our global fight against climate change, Asia-Pacific is a gigantic domino that cannot fall. As the world recovers from COVID-19, now is the time and opportunity to ensure ourselves a better 2055.

This article was first published in the IMFBlog and can be read here.

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Vitor Gaspar
Director, Fiscal Affairs Department at the International Monetary Fund

Vitor Gaspar, a Portuguese national, is Director of the IMF’s Fiscal Affairs Department. Prior to joining the IMF, he held a variety of senior policy positions in Banco de Portugal, including most recently as Special Adviser. He served as Minister of State and Finance of Portugal during 2011–2013. He was head of the European Commission’s Bureau of European Policy Advisers during 2007–2010, and director-general of research at the European Central Bank from 1998 to 2004.

Chang Yong Rhee
Director, Asia and Pacific Department at the International Monetary Fund

Chang Yong Rhee is the Director of the IMF’s Asia and Pacific Department. Prior to joining the IMF, Dr. Rhee was chief economist at the Asian Development Bank (ADB). He was the chief spokesperson for ADB on economic and development trends, and oversaw the Economics and Research Department. Dr. Rhee was the secretary-general of the G20 summit’s Presidential Committee in the Republic of Korea. Prior to his appointment at the FSC, Dr. Rhee was a Professor of Economics at Seoul National University and Assistant Professor at University of Rochester. He was also a frequent and active policy advisor to the Government of Korea, including in the Office of the President, the Ministry of Finance and Economy, the Bank of Korea, the Korea Securities Depository, and the Korea Development Institute. His key research interests include macroeconomics, financial economics, and the Korean economy. He has published many papers in these fields.

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