Montreal (Platts)--3Apr2008

Climate change will create a "supply-side shock" that needs a harmonized
global carbon price to reduce abatement costs, according to the International
Monetary Fund.

In its latest World Economic Outlook, the agency publishes one twice a
year, the IMF said worldwide emissions reduction costs would fall with a
harmonized carbon price.

To reduce emissions, carbon pricing should be global and engage all major
greenhouse gas emitters to start pricing their emissions, the IMF said.

Any carbon price should be equalized across countries to maximize the
efficiency of abatement, resulting in emissions reductions occurring where it
is cheaper to do so, the report added.

But choosing a cap-and-trade system over a carbon tax was not a
"clear-cut" choice, the report cautioned.

A carbon tax would provide more transparent price stability and allow
revenues to be collected and recycled, for example, into adaptation issues.
But a tax may also be politically more difficult to implement, it said.

A cap-and-trade scheme would offer better forward prices for carbon, and
would be quicker in providing the relevant price signal, the IMF suggested,
pointing to speculation over a tighter emissions cap in the future due to
accelerated evidence of global warming.

Conversely, price volatility is also a downside risk of cap-and-trade,
the report said, particularly with emissions allowance over-allocations.

The IMF first looked at the effects of climate change on the global
economy in its outlook published last October. The latest report called
climate change "a supply-side shock" with probable "serious effects on trade,
capital flows, migration, investment and savings."