Climate change will be the single most important global policy challenge of the 2020s. Economist Nicholas Stern labelled climate change “the greatest market failure the world has ever seen”, referring to the widespread failure of governments to price GHG emissions in line with the damage they cause. Green fiscal policies such as carbon taxes, emissions trading and fossil fuel subsidy reform are amongst the most efficient and effective instruments to policymakers to tackle climate change.

The first round of Nationally Determined Contributions (NDCs), in which countries communicated their greenhouse gas (GHG) mitigation efforts to the UNFCCC imply global warming of about 3^oC by 2100, far higher than the targets in the Paris Climate Agreement. Achieving a target of 2^oC requires countries to triple their mitigation efforts; limiting warming to 1.5^oC requires countries to increase mitigation efforts by a factor of 5 (UNEP 2019). Achieving the latter target would reduce the number of people exposed to climate-related risks and susceptible to poverty by up to several hundred million by 2050 (IPCC 2018).

Green fiscal policies can make an important contribution to mitigation efforts. A carbon price of USD 50-100/tCO₂ in 2030 has the potential to incentivise the changes in investment, consumption and production patterns necessary to meet the 2°C target of the Paris Agreement (CPLC 2017). Reforming fossil fuel subsidies – indicator 12.c.1 in the Agenda 2030 and a commitment in several international fora including the G7, the G20 and APEC – could reduce global greenhouse gas (GHG) emissions by up to 10% by 2030 (IMF 2019).

Carbon pricing also has the potential to mobilise substantial volumes of revenue, which can be used to fund low-carbon investment and adaptation measures. A carbon price of USD 70/tCO₂ has the potential to drive substantial cuts in GHG emissions and mobilise revenue equivalent to 1-3% of GDP in most countries and 2-4% in large developing economies, such as India, China and South Africa (World Bank 2019).