Tax Carbon or Cost of Climate Fixes Will Be ‘Unsustainable,’ IMF Warns

Relying on spending measures alone to address climate change could expose countries to massive debt crises, according to a new report from the International Monetary Fund. These measures include policies like the Inflation Reduction Act, which offers billions in federal funds to boost climate resilient infrastructure.

Scaling up spending to help countries meet their emissions targets could up a "representative large-emitting" country's gross domestic product added to debt by 45 to 50% — a path the IMF describes as "unsustainable" in its 2023 Fiscal Monitor report.

Scaling back the spending, by contrast, would mean countries run the risk of extreme damage caused by climate change. Carbon pricing, or a tax on emissions, offers a different way forward — but one that the IMF acknowledges is politically difficult to achieve, calling it a "policy trilemma."

"Governments thus face a policy trilemma between achieving climate goals, fiscal sustainability, and political feasibility," wrote several IMF experts in a blog post on the report.

"Pursuing any two of these objectives comes at the cost of partially sacrificing the third."

They point out that some 50 countries have carbon tax schemes, and a mix of these policies and spending may be the best way to achieve net-zero by 2050. Delaying carbon pricing, the IMF said, is extremely costly: Each year of delay means another 0.8 to 2.0% of a country's GDP gets tacked on to its debt. As other warming targets quickly slip out of reach, the whole world needs to get on board.

"Climate change is a shared responsibility," the report authors wrote. "No single country is able to solve it alone."