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IMF considers impact of climate change on economy
December 6, 2007 / 6:56 AM / 10 years ago

IMF considers impact of climate change on economy

WASHINGTON (Reuters) - The International Monetary Fund will spell out the economic implications of climate change in research and discussions set for early 2008, a senior IMF official said on Wednesday, as governments gather in Bali for post-Kyoto negotiations.

In the IMF’s first news conference to discuss the economic effects of climate change, Takatoshi Kato, the IMF’s deputy managing director, said these global changes posed “many and complex” challenges as shifting and unreliable weather patterns force governments to adapt and climate-proof their economies.

“This research will analyze in greater depth the macroeconomic implications of climate change and policy responses to it, both in terms of mitigation and adaptation,” Kato said.

“The IMF executive board will discuss possibly early next year the fiscal implication of climate change,” he added.

The IMF was considering new tax mechanisms and other fiscal measures for countries affected by climate change, he said.

According to the IMF, economic challenges from climate change will include direct negative impacts on output and productivity; weaker traditional tax bases and increased spending; balance of payments problems due to reduced exports of goods and services such as agricultural products, fish and tourism; and private economic costs from higher energy prices.

While fiscal positions could deteriorate, there were also opportunities to boost revenue from efficient carbon-pricing schemes, he added.

Kato will join world leaders in Bali next week for U.N. climate change negotiations to shape a global agreement for when the Kyoto Protocol expires in 2012.

Kyoto created a carbon market as a way to reduce carbon emissions by encouraging governments and the private sector to offset their climate footprint by purchasing carbon credits.

The carbon trade has attracted speculators including investment banks and specialized carbon project developers.

Developing countries stand to earn billions of dollars through carbon trading by reducing deforestation and preserving tropical forests, which store huge amount of carbon.

Charles Collyns, deputy director for research at the IMF, said potential flows from payments for carbon credits could have implications for balance of payments and exchange rates.

“One thing to be cautious about is that these revenues are well used, well directed in efficient local spending,” he said. “But it is quite possible that the best use of these funds is to save them to avoid a Dutch Disease-type of problem if you ramp up spending too quickly.”

“Dutch Disease” was a name given to the Netherlands’ economic problems following the discovery of North Sea oil in the 1970s, which resulted in currency disruptions, increased imports, decreased exports and a fall in productivity.

Collyns said governments were more aware of the need to prepare for climate change but the response so far was “relatively muted,” mainly due to the lack of an efficient carbon pricing system.

“Until investors are faced by a set of prices that prices in the true cost of carbon emissions, there won’t be a full response,” he said, “which is why it is important to move ahead with a successor to the Kyoto Protocol in order to establish carbon prices not just in the near term but also in the longer term.”

Editing by Braden Reddall

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