Addressing Cross-border Spillover Risks of Climate Transition Policies: The Role of the G20 and IMF

G20 members need to undertake a coordinated approach to foster an orderly low-carbon transition. In particular, the G20 countries should focus on the global impact of their domestic transitions. Climate policies adopted at the country or regional level can have unintended cross-border consequences, which are illustrated through two empirical examples: (i) the European Union’s Carbon Border Adjustment Mechanism (CBAM), and (ii) the impact of taxing air travel on tourism-dependent economies. Significant welfare impacts and macroeconomic consequences for developing economies emerge from both cases. Policy recommendations presented in this brief include: strengthening the assessment of cross- border impacts of domestic climate policies; addressing the distributive and welfare effects of climate policies in developing countries, for example, by investing revenue from the CBAM to support the low-carbon transition; integrating cross-border spillovers into surveillance activites; and purisng a globally coordinated approach to climate policy with economic diversification.