Addressing Cross-Border Spillover Risks of Climate Transition Policies: the Role of the G20 and the IMF

As Group of 20 (G20) members have committed to transition to low-carbon economies, they need to adopt a carefully coordinated approach to ensure an orderly transition that considers the potential cross-border spillover risks of domestic transitions.

A new Think20 (T20) policy brief by Rishikesh Ram Bhandary, Régis Gourdel, Xiaobei He, Lara Merling and Irene Monasterolo demonstrates how G20 climate policies adopted at the local or regional level can have unintended cross-border consequences, many of which leading to net welfare and macroeconomic losses in developing countries. The policy brief illustrates the potential ramifications through two case studies: the European Union Carbon Border Adjustment Mechanism (EU CBAM) and the impact of taxing air travel on tourism dependent economies, such as Barbados.

In the first case study, the authors find that, depending on the scope of the EU CBAM and the carbon intensity of products exported, implementation could lead to a net welfare loss for developing countries, while creating a welfare gain for developed economies. 

In the second case study, the authors consider how a tax on air travel to reduce greenhouse gas emissions would significantly impact tourism-dependent economies. For a country like Barbados, such a tax could drop its gross domestic product (GDP) by 37 percent in 2050 against a business-as-usual scenario.

Both case studies suggest the need for a closely coordinated approach to climate policy, with greater analysis needed to understand the breadth of cross-border climate policy ramifications. What is more, remedies must be devised where policies negatively impact welfare, such as re-channeling revenue raised through a CBAM to invest in low-carbon growth in developing countries.

As the only multilateral institution charged with maintaining global financial and fiscal stability, the authors argue the International Monetary Fund (IMF) is uniquely positioned to provide the surveillance needed to both identify and address cross-border spillover risks, as well as lead on international coordination of climate policies and economic diversification. As the largest voting members in the IMF, the G20 must advocate for integrating these concerns into IMF activities.