May 11, 2022
More than 140 countries, representing 90% of global carbon emissions, have announced or are considering net-zero targets. With the transition to net-zero, the structure of the global economy is expected to change significantly—clean sectors, such as renewable energy, are likely to grow, and emissions-intensive activities, such as oil or coal production, to shrink.Scoping the fiscal impacts of this transition is a critical task for finance ministries, as it can help them promote sustainable economic policies, prepare and adjust for possible major changes, and maintain budget sustainability in a changing environment. Yet much of the decision-making environment exists in conditions of deep uncertainty—many potential changes are difficult to forecast with a high level of accuracy, and the transition will likely be nonlinear, at some points gradual and at other points sudden. How, then, should finance ministries prepare for this transformation? What does it mean for economic forecasting and budgetary planning? With that background, the Coalition of Finance Ministers for Climate Action has published a new report under the Helsinki Principle 1 workstream (aligning policies with the Paris Agreement), titled "How to Scope the Fiscal Impacts of Long-Term Climate Strategies? A Review of Current Methods and Processes". By reviewing the leading fiscal modeling methods, approaches, and processes, this report provides a comprehensive guide for policymakers on how to best identify and quantify the potential fiscal impacts of various policies designed to address climate change and reach net zero targets. The report, based on a literature review and interviews with 36 global experts in academia, research institutes, and government, marks an important step in helping Coalition Member countries design tools to assess the likely economic and fiscal impacts of climate change policies. Moreover, since modeling is relevant across multiple Helsinki Principles, this report makes an important contribution to the Coalition’s work more broadly. The Coalition is very grateful to Sitra, the Finnish Innovation Fund, for leading the development of this report.