IMF Blog post |  Ensuring a lower-carbon future is not only necessary but also good for the economy, according to the latest climate scenarios from the Network for Greening the Financial System, a group of 127 central banks and financial supervisors working to manage climate risks and boost green investment.
The NGFS data come as world leaders gather in Dubai for the 28th United Nations Climate Change Conference, or COP28, to forge agreement on how to keep the planet from overheating.
As the Chart of the Week shows, making an orderly transition to net zero by 2050 could result in global gross domestic product being 7 percent higher than under current policies.

This year will be the warmest on record, according to the World Meteorological Organization. While temperatures are rising unevenly across the world, on average they are up 1.2 degrees Celsius from pre-industrial levels.
Economic and financial risks are rising too. NGFS models show that droughts and heatwaves are the largest source of risk across regions. Specifically, countries in Europe and Asia are most exposed to heatwaves, while countries in Africa, North America, and the Middle East are most vulnerable to droughts.
Transitioning to a low-carbon economy will have negative impacts on demand from higher carbon prices and energy costs. But these can be partially offset by recycling carbon revenues into government investment and lower employment taxes. Most importantly, lowering emissions will reduce the physical impacts of climate change, which lowers macroeconomic costs.
Transitioning to a net-zero economy will require substantial investment in green electricity and energy storage. How economies approach making this investment poses policy tradeoffs, as detailed in the October Fiscal Monitor.
The NGFS, established in 2017, aims to strengthen the global response in meeting Paris Agreement goals and helping the financial system manage risks. The climate scenarios, which are aligned with international best practices, supplement those of other international organizations such as the Intergovernmental Panel on Climate Change and the International Energy Agency.
The IMF is one of 20 international organizations that are NGFS observers, and actively contributes to the scenario design and analysis. A selection and visualization of key indicators from the NGFS climate scenarios is curated by the IMF on the Climate Change Indicators Dashboard.
 
For more information, please contact the author:
> Jens Mehrhoff, Senior Economist – Statistics Department, IMF
 
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At the World Climate Action Summit in Dubai today, President Ursula von der Leyen launched the Global Pledge on Renewables and Energy Efficiency together with the COP28 Presidency and 118 countries.
This initiative, first proposed by the Commission President at the Major Economies Forum in April, sets global targets to triple the installed capacity of renewable energy to at least 11 terawatts (TW) and to double the rate of global energy efficiency improvements from roughly 2% to an annual figure of 4%, by 2030. Delivering these targets will support the transition to a decarbonised energy system, and help to phase out unabated fossil fuels.
European Commission President Ursula von der Leyen said: “With this Global Pledge, we have built a broad and strong coalition of countries committed to the clean energy transition – big and small, north and south, heavy emitters, developing nations, and small island states. We are united by our common belief that to respect the 1.5°C goal in the Paris Agreement, we need to phase out fossil fuels. We do that by fast-tracking the clean energy transition, by tripling renewables and doubling energy efficiency. In the next two years, we will invest 2.3 billion euros from the EU budget to support the energy transition in our neighbourhood and around the globe. This pledge and this financial support will create green jobs and sustainable growth by investing in technologies of the future. And, of course, it will reduce emissions which is the heart of our work at COP28.”
The Global Pledge has been developed in close cooperation by the European Commission and the COP28 Presidency, with the support of the International Energy Agency (IEA) and the International Renewable Energy Agency (IRENA). Adopted during the first days of COP28, this Pledge should help to build momentum towards reaching the most ambitious negotiated outcome possible at the end of this year’s conference. The EU is calling for concrete actions to phase out fossil fuels throughout energy systems globally, particularly coal, and will be pushing for language that reflects this in the final COP Decision.
EU financial contribution to the pledge
To support the delivery of the Global Pledge, President von der Leyen announced that in the next two years, we will invest 2.3 billion euro from the EU budget to support the energy transition in our neighbourhood and around the globe. The EU will also draw on its Global Gateway flagships programme to continue supporting the clean energy transition. The Commission invites other donor countries to follow this lead and fast-forward the implementation of the Global Pledge.
Next steps
The Global Pledge on Renewables and Energy Efficiency will be a key tool to for the international community to measure progress and stay the course in achieving the Paris temperature goals. With support from the IEA and IRENA, an annual review of world developments contributing to achieving the global goals of 11 TW and 4% of annual energy efficiency improvements will be released ahead of COP each year. The Commission will be working closely with European financial institutions such as the European Investment Bank and the European Bank for Reconstruction and Development to deliver on its financial commitments associated to the pledge.
Background
The initiative to set global goals for renewables and energy efficiency was first announced by Commission President Ursula von der Leyen at the Major Economies Forum on 20 April 2023. As part of the European Green Deal, the EU has recently raised its domestic targets for the deployment of renewable energy and the improvement of energy efficiency, leading the way globally on the clean energy transition. By 2030 the EU will reach a minimum of 42.5% of renewables in its energy mix, and aim for 45%. Also this decade, the EU has committed to improve energy efficiency by 11.7%. In June 2023, President von der Leyen and COP28 President Dr. Sultan Al-Jaber met in Brussels and decided to work together on several joint initiatives to drive a just energy transition globally, including the Global Pledge on Renewables and Energy Efficiency.
 
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Climate super-pollutants – including methane, nitrous oxide, hydrofluorocarbons, and tropospheric ozone – are responsible for over half of today’s warming.  Under the Global Methane Pledge, launched by the EU and the US, more than 150 countries are now  implementing a collective goal of reducing global anthropogenic methane emissions by at least 30% by 2030, from 2020 levels. This global initiative will help to keep the Paris Agreement objective of limiting warming to 1.5 degrees Celsius within reach.
President of the European Commission, Ursula von der Leyen said today: “Reducing methane emissions is crucial for meeting our 1.5-degree commitment under the Paris Agreement. Every fraction can immediately shave down global temperature rises. We have the tools to tackle wasteful venting and flaring of gas, and use the recovered resources for a fair energy transition. With the “You Collect, We Buy” scheme we are showing the way forward. And with €175 million for the Methane Finance Sprint, we are helping low- and middle-income countries to act too.” 
In a Statement, President von der Leyen presented the first-ever EU law to curb methane emissions in the energy sector, with world-leading standards for measuring, detecting, and stopping emissions in the EU and globally. The EU and its Member States announced €175 million in support of the Methane Finance Sprint to boost methane reduction at the Summit. These funds will help catalyse efforts from government, industry, and philanthropy to reduce methane emissions across the energy sector, including by enabling the methane data revolution with the use of new satellites.
President von der Leyen also announced that the Commission will develop a roadmap for the global rollout of the “You Collect, We Buy” scheme by COP29. This scheme incentivises companies to capture and commercialise gas that would otherwise go to waste through venting and flaring, thereby bolstering climate action and energy security. The EU and Algeria will pilot together this scheme.
Background
The Global Methane Pledge, launched by President von der Leyen and President Biden at COP26 in 2021, is the main coordination platform for global methane emissions reduction. More than 150 signatories are now committed to at least a 30% global reduction in anthropogenic methane emissions by 2030, focusing on the energy, agriculture, and waste sectors. The strong global support for the Pledge illustrates the growing momentum to swiftly reduce methane emissions.   It is co-chaired by the EU and the United States, and works with two UNEP bodies, namely the Climate and Clean Air Coalition (CCAC) and International Methane Emissions Observatory (IMEO). Through the CCAC, the Global Methane Pledge has supported more than 50 countries in developing national methane action plans, and through the IMEO it has conducted a number of scientific studies and developed a Methane Alert and Response System for super-emitting events. This year Canada, the Federated States of Micronesia, Germany, Japan, Nigeria, became Global Methane Pledge Champions alongside the EU and the US.
The EU provides technical, political, and financial support for methane emissions reduction efforts globally, including through the “You Collect, We Buy” scheme, while ensuring the implementation of the new methane emissions rules domestically.
On 1 December, the UNEP International Methane Emissions Observatory released the first public methane emissions data through its Methane Alert and Response System as another development for effective tracking. This is a further concrete step in support of the implementation of the Global Methane Pledge Energy Pathway launched in 2022.
 
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Commission President Ursula von der Leyen today hosted a high-level event at COP28 to promote the development of carbon pricing and carbon markets, as powerful instruments to reach the Paris Agreement objectives. It builds on the Call to Action for Paris-aligned Carbon Markets that the European Commission, Spain and France launched in June 2023.
President of the European Commission, Ursula von der Leyen said today: “Carbon pricing is thecentrepiece of the European Green Deal. In the European Union, if you pollute, you have to pay a price for that. If you want to avoid paying that price, you innovate and invest in clean technologies. And it works. Since 2005, the EU ETS has reduced emissions in the sectors covered by over 37%, and raised more than €175 billion. Many countries around the world now embrace carbon pricing, with 73 instruments in place, covering a quarter of total global emissions. This is a good start, but we must go further and faster. The EU is ready to share its experience and help others in this noble task.” 
The President of the World Bank Mr Ajay Banga, Director General of the World Trade Organisation Dr Ngozi Okonjo-Iweala, and the Managing Director of the International Monetary Fund, Ms Kristalina Georgieva all participated in today’s European Commission event, which marks a new phase in cooperation on carbon pricing. The four organisations all underlined the importance of carbon pricing for the climate and for a fair transition. Today’s event also included interventions from Prime Minister of Spain, Pedro Sanchez, and President of Zambia, Hakainde Hichilema, who shared their country’s perspective on the challenges and benefits of further developing carbon pricing and ensuring the high integrity of international carbon markets.
The Commission will continue to provide technical support to countries that wish to introduce carbon pricing regimes in their domestic legislation, and to help them to build robust approaches to international carbon markets that are consistent with their long-term climate and development strategies. Carbon credits must be based on common and robust standards that ensure an effective reduction of emissions through transparent and verified projects. Following today’s event, COP28 should play an important role in setting a benchmark for international and voluntary carbon markets that would ensure their added value and reliability while promoting an equitable sharing of the benefits between participants. We need a credible standard that drives transformational investment, respects environmental limits, and avoids lock-in to unsustainable levels of emissions or unjustified reliance on vulnerable removals.
Background
Carbon pricing is a central part of the EU’s successful and ambitious climate policies, implemented through the EU Emissions Trading System (EU ETS). Putting a price on greenhouse gas emissions is a fair and economically efficient way to reduce them, as it penalises polluters and incentivises investment in clean technologies. Carbon pricing also generates revenues for public sector invest in climate action. In sectors covered by the EU ETS, emissions have fallen by over 37% since its introduction in 2005 and revenues from the EU ETS have reached €175 billion. Since 1990 the EU’s total emissions have fallen by 32.5%, while our economy has grown by around 65%, underlining how we have decoupled economic growth from emissions. Emissions trading will soon apply to new sectors in Europe under recently agreed reforms, extending to maritime and aviation, and later to fuels for buildings and road transport.
The Call to Action on Paris-aligned Carbon Markets was launched at the Summit for a New Financial Pact hosted by France in June 2023. So far 31 countries (EU27 + Barbados, Canada, Cook Islands and Ethiopia) have expressed their support for the Call. The Call includes three elements: 1) commitment to expansion and deepening of domestic carbon pricing and carbon market instruments; 2) Support to host countries for full implementation of the agreed rulebook for international compliance markets, and; 3) ensuring high integrity in voluntary carbon markets. The Call builds on and compliments existing initiatives such as Canada’s Global Carbon Pricing Challenge, which the EU formally joined at the EU-Canada Summit on 24 November, the G7 High Integrity Principles, as well as the Paris Agreement’s Article 6 rules.
Related links
Speech of President von der Leyen at the High Level Event on Carbon markets
Call to Action on Paris-aligned Carbon Markets

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The EU has been a global pioneer in the transition to decarbonize its economy and its immediate neighbors (EUN), namely, Albania, Bosnia and Herzegovina, Kosovo,  Moldova, Montenegro, North Macedonia, Serbia, and Türkiye, which are heavily integrated with and reliant on the bloc through economic, financial and FDI and technology channels are likely to be significantly affected by such a transition. More immediately, the question whether the EU’s carbon border adjustment (CBAM)—an import tax on carbon intensive imports—will affect its neighbors has been attracting increasing attention.
The paper assesses the performance of the EUN countries to date on emissions mitigation, their policies on that front, the extent to which they have experienced inward  spillovers of tightening EU emission mitigation policies, and how further stringency in decarbonization policies in the EU in future is likely to affect them. We also study the consequences of the EUN countries trying to keep pace with the EU’s carbon transition through a unilateral and upfront adoption of economywide decarbonization policies.
EUN countries have lagged the EU significantly in emissions mitigation. Their emission problem arises, mainly, from carbon-heavy power generation and industrial sectors. The high natural endowment of coal, the highest carbon emitting fossil fuel, has been a major source of cheap locally available energy. While these countries benefited from being reliant on coal during the recent energy crisis, a more sustainable way to achieving energy security will be relying more on renewables, converging to EU standards, and eventually through EU accession, directly benefiting from EU-wide policies that also help with energy security.
EUN countries’ emissions mitigation policy efforts have been generally weak. They have significantly lagged EU members and have been moving only gradually towards market-based instruments since 2000. They still have substantial fossil fuel subsidies in place, and as a group, they compare unfavorably in terms of implicit subsidies, i.e., the cost of fossil fuel externalities not covered by consumer prices.
The EU’s heavy push to decarbonize its own economy over the past two decades appears to have spilled over and influenced emissions mitigation in EUN countries. Our  empirical findings suggest that as the EU has increased the stringency of its climate policies, the EUN countries have lowered their emissions, more so than other countries. Over the 2000-20 period, a near doubling of EU environmental policy stringency was associated with a potential reduction in emissions in EUN countries by as much as 10 to 20 percent, after controlling for other factors.
An important question we consider is how much impact CBAM will have on EUN countries in the coming years as it becomes fully operational, as well as in the more distant future when the policy is expected to be tightened further by expanding it to a wider set of the Union’s imports. We find that output effects of the CBAM, once its currently proposed form is fully operationalized in 2026, would be limited, however, exports of EUN countries’ emissions-intensive industries could be directly impacted, particularly metals and energy industries, and North Macedonia and Serbia are heavily exposed in this regard. Over the next decade, the EU ETS emissions cap for power and industry is set to converge to zero by 2040 and an ETS on emissions for buildings and transport is envisioned; these future developments could have spillover effects for EUN countries, though these countries have less of a catch up to do in the latter sectors. In addition, over the long run, further tightening of the CBA could also affect the competitiveness of EUN countries given their trade integration with the EU, necessitating the tightening of emission mitigation policies.
Putting a price on carbon is the most economically efficient and equitable policy response to the emerging challenge of decarbonization in EUN. We find that the fear that a tax on carbon will adversely affect output by hitting firms and reduce household welfare, particularly for the poorer ones, is overdone. At the same time, policymakers need to be mindful of the industries that could be hit hard by a decarbonization policy and provide social assistance and safety nets, where needed. Our analysis indicates significant fiscal impact particularly when an effective recycling mechanism is in place. Under a $75 carbon tax and relative to a business-as-usual scenario, fiscal revenues from the tax would amount to about 3 percentage points of GDP on average, and it would result in an about 25 percent reduction of CO2 emissions by 2030.
Given the strong economic integration of EUN and EU, it would be in the interest of the former to keep pace with the speed of emission mitigation in the latter in future. Most of the EUN countries are at different stages on the path to EU accession and hence adhering to EU standards in this area will likely be required under the accession process. Broadly, the EU accession process would bring a host of long-term benefits, including a reorientation of the economy to achieve higher growth and living standards. Realigning the economy with EU’s climate goals and its standards on emissions would also be a key part of the accession process. An up-front adoption of a comprehensive  decarbonization strategy, such as through the introduction of an economywide carbon tax, would be of greater benefit to these countries than postponing action for later.
 
You can read the full working paper here.
 
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> Euro area firms signalled a continued increase in turnover, while higher labour, production and interest costs weighed on their profitability. Firms expect their turnover to increase further over the next six months.
> The share of financially vulnerable firms increased almost to the level seen during the coronavirus (COVID-19) pandemic.
> Compared with the last survey, firms expect a noticeably smaller increase in their average selling prices (3.7%, down from 6.1%) and wages (4.3%, down from 5.4%) over the next year.
> Firms reported a modest increase in their need for external funds, while availability deteriorated further, reflecting the transmission of monetary policy. As a result, the financing gap continued to increase at a moderate pace.
> A large net share of firms reported stricter price terms and conditions for bank loans. Despite tighter financing conditions, few firms reported obstacles to obtaining a bank loan.
In the latest round of the twice-yearly Survey on the Access to Finance of Enterprises (SAFE) in the euro area, covering the period from April to September 2023, firms reported an increase in turnover, although the net percentage was lower than in the previous survey round (Chart 1).
More firms saw a deterioration in their profits than in the previous survey round (net -14%). The decline in profits once again reflects a sharp rise in labour costs and other costs related to materials and energy, although cost pressures seem to have eased. Increasing interest expenses are a further drag on profitability. Firms’ investment and employment growth has broadly held up, albeit with fewer firms reporting increases.
The financial vulnerability indicator, which provides a comprehensive picture of firms’ financial situation, suggests that 9% of euro area enterprises encountered major difficulties in running their business and servicing their debts over the past six months (Chart 2).
Firms reported on average that they expect their selling prices to increase by 3.7% over the next 12 months (down from 6.1% in the previous survey round) and their non-labour input costs to increase by 6.1% (Chart 3). They expect their employees’ wages to rise by 4.3% (down from 5.4%), with an increase in average employment of 1.7% over the year ahead.
The net share of firms reporting an increase in their need for bank loans was modest (5%, compared to 4% in the last survey round). At the same time, the availability of bank loans declined, with 10% of firms indicating a deterioration. The financing gap thus continued to widen at a moderate pace.
Firms continued to report a widespread increase in bank interest rates and other price and non-price costs of bank financing (net 86%), reflecting the transmission of past monetary policy tightening to firms’ financing costs.
Despite tighter financing conditions, the financing obstacles indicator for all firms remained at a similar level compared with the previous round (6%, down from 7%). Among firms applying for a bank loan (27% of firms), 10% reported obstacles to obtaining a loan, which was also similar to the previous round.
Looking ahead, firms expect a decline in the availability of all external financing sources, and especially bank loans. This suggests that part of the transmission of monetary policy to firms’ financing conditions is still in the pipeline.
The report published today presents the main results of the 29th round of the SAFE in the euro area, conducted between 4 September and 18 October 2023 and covering the period from April to September 2023. The sample comprised 11,523 enterprises, of which 10,499 (92%) are small and medium-sized enterprises (SMEs) (i.e. firms with fewer than 250 employees).
Notes:

The report on this SAFE survey round, together with the questionnaire and methodological information, is available on the ECB’s website.
Detailed data series for the individual euro area countries and aggregate euro area results are available on the ECB Data Portal.

Chart 1
Changes in the income situation of euro area enterprises

(net percentages of respondents)

Base: All enterprises. The figures refer to rounds 3 to 29 of the survey (March 2010-September 2010 to April 2023-September 2023) for all firms and to rounds 21 to 29 (April 2019-September 2019 to April 2023-September 2023) for SMEs and large firms.
Notes: Net percentages are the difference between the percentage of enterprises reporting an increase for a given factor and the percentage reporting a decrease. The data included in the chart refer to Question 2 of the survey.

Chart 2
Vulnerable and financially resilient enterprises in the euro area

(percentages of respondents)

Base: All enterprises. The figures refer to rounds 3 to 29 of the survey (March 2010-September 2010 to April 2023-September 2023) for all firms and to rounds 18 to 29 (October 2017-March 2018 to April 2023-September 2023) for SMEs and large firms.
Notes: Vulnerable firms are defined as firms that simultaneously report lower turnover, decreasing profits, higher interest expenses and a higher or unchanged debt-to-assets ratio, while financially resilient firms are those that simultaneously report higher turnover and profits, lower or no interest expenses and a lower or no debt-to-assets ratio. The data included in the chart refer to Question 2 of the survey.

Chart 3
Expectations of selling prices, wages, input costs and employment one year ahead

(weighted percentages)

Base: All enterprises. The figures refer to rounds 28 and 29 of the survey (October 2022-March 2023 and April 2023-September 2023).
Notes: Mean and median euro area firm expectations of changes in selling prices, wages of current employees, non-labour input costs and number of employees for the next 12 months, along with interquartile ranges, using survey weights. The statistics are computed after trimming the data at the country-specific 1st and 99th percentiles. The data included in the chart refer to Question 34 of the survey. Questions on non-labour input costs and employees were not available in round 28.

 
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November 28, the Commission is taking another step to make the EU’s energy system fit for the future by adopting the first list of Projects of Common Interest (PCIs) and Projects of Mutual Interest (PMIs) that is fully in line with the European Green Deal. These key cross-border infrastructure projects will help the EU reach its ambitious energy and climate goals. The projects will benefit from streamlined permitting and regulatory procedures, and become eligible for EU financial support from the Connecting Europe Facility (CEF).
This list is adopted under the revised Trans-European Networks for Energy Regulation (TEN-E) which ends support for fossil fuel infrastructure and focuses on cross-border energy infrastructure of the future. It includes PCIs, which are projects within the EU territory, and for the first time PMIs, which connect the EU with other countries. The Commission will ensure the projects are swiftly completed and can contribute to doubling the EU’s grid capacity by 2030 and meeting its 42.5% renewable energy target.
Out of the 166 selected PCIs and PMIs:

over half (85) are electricity, offshore and smart electricity grid projects, with many expected to be commissioned between 2027 and 2030.

for the first time, hydrogen and electrolyser projects (65) are included, which will play a major role in enabling energy system integration and the decarbonisation of EU industry.
the list also includes 14 CO2 network projects in line with our goals to create a market for carbon capture and storage.

Following the adoption of the PCI and PMI List by the Commission today, as a Delegated Act under the TEN-E Regulation, it will now be submitted to the European Parliament and the Council for their scrutiny. Both co-legislators have two months to either accept or reject the list in full, but may not amend it. This process can be extended by two months, if requested by the co-legislators. Once the list is adopted, the Commission will work with project promoters and Member States to support the rapid implementation of this list of projects, in line with the enhanced measures proposed today in the EU Action Plan for Grids.
Background
The list adopted today is the 6th Union List including PCIs, and the first Union list of PCIs and PMIs established under the revised TEN-E Regulation, which was adopted in 2022. The revised Regulation ensures that EU-supported cross-border energy infrastructure projects help the Union achieve its climate and energy goals as set out in the European Green Deal. As set out in the TEN-E Regulation, such lists are adopted every two years, following extensive stakeholder consultation in regional groups which are established by the TEN-E regulation.
 
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