Climate Policy and the Recovery

Abstract

Negotiations towards a successor to the Kyoto Protocol on climate change have come to a critical point, and domestic climate policies are being developed, as the world seeks to recover from the deepest economic crisis for decades and looks for new sources of sustainable growth. This position note considers the challenge posed by these two policy imperatives: how to exit from the crisis while developing an effective response to climate change. It argues that: The economic crisis does not change the basic climate challenge, or the proper response to it. Even a serious recession, with prolonged output losses, has limited implications for appropriate mitigation objectives. The crisis should not distract from efforts to address the externality that is at the heart of the climate challenge, which requires that firms and households pay for the social damage that their emissions cause (through carbon pricing). A cautious shift towards more aggressive carbon pricing (though taxation or tradable emission permits) need not impede recovery. Stronger emissions pricing could make a substantial and efficient contribution to restoring fiscal positions damaged by the crisis.