Good policies can contain climate change costs: IMF

WASHINGTON (Reuters) - Economic costs of damages caused by climate change can be contained by implementing well designed policies that are adopted by a large group of countries, the International Monetary Fund said on Thursday.

In new analysis, the IMF said those costs can be reduced through long-term, flexible policies that can avert further climate changes, including a carbon pricing system that is credible to both people and businesses.

For example, higher carbon prices would spur shifts in investments and consumption away from products and technologies that increase greenhouse gases that cause global warming.

The IMF's research, the first ever that looks at the effects of climate change on economies, cautioned that climate policies could also have wide-ranging economic consequences.

It pointed to the increase in global food prices and inflation caused by biofuels production, which is draining maize stocks and pushing up prices of staples.

The IMF's research comes as countries begin to flesh out a global agreement on addressing climate change to extend or replace the existing Kyoto Protocol, which expires in 2012.

U.N. climate experts want the new pact to cut greenhouse gases in all countries, although there is wide disagreement about how to share the burden between rich nations led by the United States and emerging countries such as China and India.

Nearly 200 countries agreed in talks in Bali, Indonesia, in December to try and clinch a new climate deal by the end of 2009.

The IMF said the risk from potential damages caused by climate change could be large and even catastrophic if global warming was left not properly addressed.

The IMF said mitigation policies should encourage all countries, from rich to poor, to start pricing their emissions. Any framework that does not include large and fast-growing economies would be costly and politically difficult, the IMF said.

That is because during the next 50 years, 70 percent of emissions are projected to come from emerging and developing economies, the fund added.

IMF researcher Natalia Tamirisa said incentives to cut emissions would depend on the design of policies to cut emissions.

"For example, on the cap and trade policies or hybrid policies, it is possible to design them in a way that would generate some financial transfers towards emerging and developing countries," she told reporters.

The IMF said carbon pricing policies should aim for a common world price for emissions that targets the cheapest emissions cuts, thereby reducing the cost of fighting climate change.

The IMF also said that carbon pricing should have enough flexibility to accommodate the ups and downs of the business cycle. In periods of high demand, it would be more costly for firms to reduce emissions, for example, it said.

It recommended a gradual increase in carbon prices, starting early and from a low level, which would minimize adjustment costs by spreading them over a longer period.

The IMF said it had not produced any regional estimates of damages from climate change, but added that generally the costs would likely burden future generations.

(Editing by Gary Hill)