Carbon Pricing: Good for You, Good for the Planet


By Ian Parry

The time has come to end hand wringing on climate strategy, particularly controlling carbon dioxide (CO2) emissions.  We need an approach that builds on national self-interest and spurs a race to the top in low-carbon energy solutions. Our findings here at the IMF—that carbon pricing is practical, raises revenue that permits tax reductions in other areas, and is often in countries’ own interests—should strike a chord at the United Nations Climate Summit in New York next week. Let me explain how.

Ever since the 1992 Earth Summit, policymakers have struggled to agree on an international regime for controlling emissions, but with limited success. Presently, only around 12 percent of global emissions are covered by pricing programs, such as taxes on the carbon content of fossil fuels or permit trading programs that put a price on emissions. Reducing CO2 emissions is widely seen as a classic “free-rider” problem. Why should an individual country suffer the cost of cutting its emissions when the benefits largely accrue to other countries and, given the long life of emissions and the gradual adjustment of the climate system, future generations?

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Too Much At Stake: Moving Ahead with Energy Price Reforms


By Ian Parry

(Versions in Español中文, 日本語Français, and Русский)

Energy plays a critical role in the functioning of modern economies. At the same time, it’s at the heart of many of today’s pressing environmental concerns—from global warming (predicted to reach around 3–4 degrees Celsius by the end of the century) and outdoor air pollution (causing over three million premature deaths a year) to traffic gridlock in urban centers. In a new IMF book, we look at precisely how policymakers can strike the right balance between the substantial economic benefits of energy use and its harmful environmental side effects.

These environmental impacts have macroeconomic implications, and with its expertise in tax design and administration, the IMF can offer sound advice on how energy tax systems can be designed to ensure energy prices fully reflect adverse environmental impacts.

We do this by developing a sensible and reasonably simple way to quantify environmental damages and applying it, in over 150 countries, to show what these environmental damages are likely to imply for efficient taxes on coal, natural gas, gasoline, and road diesel. For example, the human health damages from air pollution are calculated by estimating how many people are exposed to power plant and vehicle emissions in different countries and how this exposure increases the risk of various (e.g., heart and lung) diseases. Although there are some inescapable controversies in this approach (e.g., concerning the valuation of global warming damages or how people in different countries value health risks), the methodology is flexible enough to easily accommodate alternative viewpoints—it is a starting point for debate, not a final point of arrival.

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Central, Eastern, and South-Eastern Europe: Safeguarding the Recovery as the Global Liquidity Tide Recedes


By Reza Moghadam, Aasim M. Husain, and Anna Ilyina

(Version in Türk)

Growth is gathering momentum in most of Central, Eastern, and South-Eastern Europe (CESEE) in the wake of the recovery in the euro area. Excluding the largest economies—Russia and Turkey—the IMF’s latest Regional Economic Issues report  projects the region to grow 2.3 percent in 2014, almost twice last year’s pace. This is certainly good news.

Figure 1

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The Trillion Dollar Question: Who Owns Emerging Market Government Debt


By Serkan Arslanalp and Takahiro Tsuda

(Version in EspañolFrançaisPortuguêsРусский中文 and 日本語)

There are a trillion reasons to care about who owns emerging market debt.  That’s how much money global investors have poured into in these government bonds in recent years —$1 trillion.  Who owns it, for how long and why it changes over time can shed light on the risks; a sudden reversal of money flowing out of a country can hurt.  Shifts in the investor base also can have implications for a government’s borrowing costs.

What investors do next is a big question for emerging markets, and our new analysis takes some of the guesswork out of who owns your debt.   The more you know your investors, the better you understand the potential risks and how to deal with them.

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Taking Away the Punch Bowl: Lessons from the Booms and Busts in Emerging Europe


By Bas B. Bakker and Christoph Klingen

With all eyes on the euro area, it is easy to forget that only a few years ago the emerging economies of Europe, from the Baltic to the Black Sea, went through a deep economic and financial crisis. This crisis is the topic of a new book that we will introduce to the public this week in Bucharest, London, and Vienna.

One lesson is that your best chance to prevent deep crises is forcefully addressing booms before they get out of hand. Another is that even crises that look abysmal can be contained and overcome— policies to adjust the economy and international financial support do work.

In the half decade leading up to the crisis, easy global financial conditions, confidence in a rapid catch-up with western living standards, and initially underdeveloped financial sectors spawned a tremendous domestic demand boom in the region. Western banking groups bankrolled the bonanza, providing their eastern subsidiaries with the funds to extend the loans that fueled the domestic boom. Continue reading

Convergence, Crisis, and Capacity Building in Emerging Europe


by Nemat Shafik

Central, Eastern and Southeastern Europe has been through a lot. In two short decades, the region moved from a communist planned system to a market economy, and living standards have converged towards those in the West.

It has also weathered major crises: first the break-up of the old Soviet system in the early 1990s, then the Russian financial crisis in 1998, and finally the recent global economic crisis. How did these countries do it?

From the Baltic to the Balkans, the region’s resilience and flexibility are the result of hard work and adaptability. But more than anything, it is the strong institutions built over the last two decades that have enhanced the region’s ability to deal with the momentous challenges of the past, the present—and those to come.

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Going Broke? Why Pension Reforms Are Needed in Emerging Economies


By Mauricio Soto

We’re all getting older, and there’s no doubt that pension reform is a hot topic in the advanced economies. But it’s also critical in emerging economies.

Our analysis here at the IMF shows that across emerging economies pension spending is projected to rise as the population ages. On average, these spending increases are not that large. But reforms are needed to increase coverage of the system without making pension systems financially unsustainable over the long term.

Rising spending

In emerging Europe, we’ve seen how pension spending has increased from 7½ to 9 percent of GDP over the past two decades. Spending also increased rapidly in other emerging economies—albeit from much lower levels—going from 2 to 3 percent of GDP over the same period. It seems the relatively low spending in emerging economies outside Europe reflects relatively low coverage (generally only those in the formal sector are eligible) and younger populations.

Populations are aging rapidly in the emerging economies. As illustrated in Chart 1, a rather grim picture is developing where we see that the ratio of elderly to working population will more than double in the next four decades. In the future, there will be many more retirees consuming what fewer workers will produce.

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