Fiscal Monitor

Climate Crossroads: Fiscal Policies in a Warming World

The report takes stock of mitigation policies across countries and presents the trilemma facing policymakers of balancing between achieving climate goals, debt sustainability, and political feasibility. New insights from the report shows that the only way to achieve these joint goals is through a carefully calibrated mix of revenue and spending-based policies. Carbon pricing is a necessary instrument and should be part of the policy mix. However, it is not sufficient and should be complemented by policies to address market failures and catalyze private financing and investment in low-carbon technologies. Robust fiscal transfers are needed to protect vulnerable households, workers, and communities during the green transition.

The fiscal cost of policy mix varies and could become challenging particularly for emerging market and developing economies already experiencing high debt and rising interest costs, alongside large adaptation and development needs. To navigate these challenges, countries with limited fiscal space should build tax capacity to mobilize revenues and improve spending efficiency. Policies should encourage the private sector to play an increasing role in financing and investing in climate actions. Global coordination to push forward pragmatic global carbon pricing, enhance external financial support, and facilitate knowledge transfers of established low-carbon technologies are essential to support climate efforts for developing economies.