The IMF assessed the increase in the burden of financing carbon neutrality with an increase in public debt

The rise in borrowing costs and the slowdown in economic growth will contribute to an increase in the level of public debt in both developed and developing countries, according to a review by the International Monetary Fund. Against this background, the fund’s experts talk about the dim prospects for financing the transition to carbon neutrality of economies. So far, countries have taken two key approaches: green economy subsidies and carbon pricing. The divergence in these strategies will affect future global trade conditions, experts warn.

The level of global public debt will rise to 93% of GDP by the end of 2023 and will continue to grow, mainly due to large economies such as the United States and China, said Vitor Gaspar, director of the IMF’s fiscal affairs department, at a visiting session of the governing bodies of the fund and the World Bank in Marrakesh. On average, the burden on countries will grow by 1% of GDP per year in the next five years (without the USA and China – by 0.5% of GDP). In the United States, public debt in relation to GDP may increase from 123.3% this year to 137.5% in 2028, in China – from 83% to 104.3%.

Against this backdrop, the IMF assesses the prospects for financing carbon neutrality goals (countries’ plans to reduce emissions mainly include achieving it by 2050), describing two key scenarios: through emissions trading and carbon pricing, as well as through increased investment in creating new carbon neutrality. infrastructure and increasing government subsidies for green industries and technologies. However, the fund warns, financing only through government investment will mean an increase in debt for a large greenhouse gas-emitting country by 45–50% of GDP. The introduction of emissions trading mechanisms, on the contrary, should limit the increase in the debt burden to 10–15% of GDP.

Let us clarify that carbon pricing is already used in 50 countries, and the mechanism is being implemented in 23. Current pricing schemes cover a quarter of all emissions, and their average cost is $20 per tonne – significantly less than what is required to achieve neutrality goals, the IMF notes. Applying pricing alone would require an extremely high carbon cost. For most economies it will be unaffordable. The International Energy Agency (IEA) previously estimated investment needs of $2–2.5 trillion over ten years.

The fork that the authors of the report describe is already visible in the examples of the EU and the USA. The EU has the largest emissions trading scheme, and the carbon price exceeds €85 per tonne (in the next three to four years they are expected to rise to above €100 per tonne). The largest example of government subsidies can be considered the Anti-Inflation Act adopted in the United States in August 2022 (it provides for the reduction of emissions). Of the total $391 billion over ten years, most of the funds are allocated for tax breaks for companies, as well as for energy consumer benefits, grants and loans. China also applies government subsidies (especially for solar energy) as part of the Made in China 2025 program.

The setting of emissions prices by countries also affects foreign suppliers: Kept calculated that among all suppliers to EU countries, Russian exporters, upon completion of the transition period for the implementation of transboundary carbon regulation (TUR), will face the greatest additional financial burden (full implementation of the mechanism, we recall, in the EU calculated for 2026). Tightening carbon regulation within the EU will also require greater control over carbon leakage, and the higher the price for carbon, the higher the import tariff, analysts at the Peterson Institute for International Economics point out. This, in turn, could lead to a new type of trade war, including with the United States, which has no plans to introduce pricing at the federal level.

Tatiana Edovina