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Background paper prepared for the October 2020 IMF World Economic Outlook. This paper provides a detailed presentation of the simulation results from the October 2020 IMF World Economic Outlook chapter 3 and an additional scenario with carbon pricing only for comparison with the comprehensive policy package where green investments were also included. This paper has greatly benefitted from continuous discussions with Oya Celasun and Benjamin Carton on the design of simulations; contributions from Philip Barrett for part of the simulations; and research support from Jaden Kim. We also received helpful comments from other IMF staff. All remaining errors are ours. McKibbin and Liu acknowledge financial support from the Australian Research Council Centre of Excellence in Population Ageing Research (CE170100005).

Macroeconomics --- Economics: General --- Taxation --- Environmental Economics --- Environmental Conservation and Protection --- Natural Resources --- Model Construction and Estimation --- Forecasting and Other Model Applications --- Quantitative Policy Modeling --- Large Data Sets: Modeling and Analysis --- Open Economy Macroeconomics --- Environmental Economics: General --- Valuation of Environmental Effects --- Climate --- Natural Disasters and Their Management --- Global Warming --- Taxation and Subsidies: Externalities --- Redistributive Effects --- Environmental Taxes and Subsidies --- Nonrenewable Resources and Conservation: General --- Economic & financial crises & disasters --- Economics of specific sectors --- Public finance & taxation --- Environmental economics --- Climate change --- Environmental management --- Carbon tax --- Taxes --- Greenhouse gas emissions --- Environment --- Non-renewable resources --- Climate finance --- Currency crises --- Informal sector --- Economics --- Environmental impact charges --- Greenhouse gases --- Emissions trading --- Natural resources --- Climatic changes --- China, People's Republic of

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This paper assesses the economic effects of climate policies on different regions and countries with a focus on external adjustment. The paper finds that various climate policies could have substantially different impacts on external balances over the next decade. A credible and globally coordinated carbon tax would decrease current account balances in greener advanced economies and increase current accounts in more fossil-fuel-dependent regions, reflecting a disproportionate decline in investment for the latter group. Green supply-side policies—green subsidy and infrastructure investment—would increase investment and saving but would have a more muted external sector impact because of the constrained pace of expansion for renewables or the symmetry of the infrastructure boost. Country characteristics, such as initial carbon intensity and net fossil fuel exports, ultimately determine the current account responses. For the global economy, a coordinated climate change mitigation policy package would shift capital towards advanced economies. Following an initial rise, the global interest rates would fall over time with increases in the carbon tax. These external sector effects, however, depend crucially on the degree of international policy coordination and credibility.

Climate --- Environmental Taxes and Subsidies --- Global Warming --- International Policy Coordination and Transmission --- Natural Disasters and Their Management --- Open Economy Macroeconomics --- Redistributive Effects --- Taxation and Subsidies: Externalities