The energy transition as it is currently being pursued threatens to boost public debt significantly, the International Monetary Fund has warned in a new report.
Dubbed Climate Crossroads: Fiscal Policies in a Warming World, the report says that the choice of governments to push the transition forward by using a combination of public investment and subsidies risks sending public debt into the stratosphere, to account for 45-50% of GDP, which the IMF notes is unsustainable.
At the same time, the institution says that limited climate action would leave the world exposed to adverse consequences from global warming. Macroeconomic risks would concomitantly rise.”
The solution that the IMF offers to settle this tradeoff between spending and climate action is to put a price on carbon emissions—an idea that has been gaining popularity among decision-makers.
According to the IMF, turning CO2 into a commodity to be bought and sold would relieve the pressure on public finances as it would generate revenue for transition-focused governments while at the same time reducing emissions.
At the same time, the IMF report’s authors admit that carbon pricing is not exactly popular among the general population, “thus transforming the trade-off into a trilemma between achieving climate goals, fiscal sustainability, and political feasibility.”
To solve the “trilemma”, the IMF proposes a combination of carbon pricing, green subsidies, and regulation to push the transition forward “to promote innovation and deployment of low-carbon technologies and address market failures and network externalities.”
The report comes days after BlackRock’s chief executive Larry Fink said that the energy transition currently makes no sense because of the absence of technology that makes the alternative sources of energy meant to replace hydrocarbons profitable.
“We are not going to have a transition unless we can find technologies to bring down the competitive cost of renewables. We cannot do that.” Fink said, adding that BlackRock conducted a survey that showed 57% of their global investors are planning to put more money into decarbonization technologies.