Waiting for Godot? The case for climate change adaptation and mitigation in small island states

ABSTRACT

Global warming is the most significant threat to ecosystems and people’s health and living standards in the coming decades, especially in small island states in the Caribbean and elsewhere. This paper contributes to the debate by analyzing different options to scale up climate change mitigation and adaptation. In particular, the empirical analysis indicates that increasing energy efficiency and reducing the use of fossil fuel in electricity generation could lead to a significant reduction in carbon emissions, while investing in physical and financial resilience would yield long-run benefits. From a risk-reward perspective, the advantages of reducing the risks associated with climate change and the health benefits from higher environmental quality clearly outweigh the potential cost of climate change mitigation and adaptation in the short run. The additional revenue generated by environmental taxes could be used to compensate the most vulnerable households, building a multilayered safety net, and strengthening structural resilience.

KEYWORDS:

• Climate change
• decarbanization
• energy efficiency
• mitigation
• adaptation
• carbon tax

JEL CLASSIFICATION:

• O40
• O44
• Q40
• Q48
• Q51
• Q54
• Q58
• H23

Acknowledgements

The author would like to thank editor, Ken Wills, and an anonyms referee for their insightful comments that led to marked improvements in the paper. An earlier version of this article benefited from comments and suggestions by Bas Bakker, Simon Black, Chen Chen, Diane Kostroch, Nate Vernon, Tessy Vasquez, and Anke Weber. The views expressed in this article are those of the author and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Data availability statement

The data that support the findings of this study are available from International Financial Statistics and World Economic Outlook databases, the World Bank’s World Development Indicators database, and the U.S. Energy Information Administration.

Notes

1 The World Bank’s Climate Change Knowledge Portal provides comprehensive cross-country information, including projections for climate outcomes.

2 The post-Paris pace of decarbonization in the Caribbean is limited to only about 1 percent excluding the large drop in Cuba.

3 For example, Tol (2007) finds that a carbon tax on international aviation would ‘induce a shift from long flights to medium distance one and a shift from medium distance flights to short distance holidays, [and thereby] disproportionally hit island nations [if] the tax is applied regionally rather than globally’.

4 For example, with approximately 80% of the land lying less than 1.5 metre above sea level, The Bahamas is one of the most vulnerable countries in the region to extreme weather hazards exacerbated by climate change.

5 Some Caribbean countries, including Barbados, Haiti, Jamaica, and St. Vincent and the Grenadines, have also made unconditional NDC commitments that could be met without any conditions and based on countries’ own resources and capabilities. Countries also adopt non-GHG and action-based targets as well as sector-specific emissions reduction targets, such as such as generating a given amount of all electricity from renewables, using renewable energy sources in street lighting, and cutting GHG emissions in the agriculture sector, respectively.

6 As of 2020, only 17% of emissions were covered by a carbon price, which was at a global average of US$3 per ton.

7 The CPAT provides country-specific projections of fuel use and CO₂ emissions by the energy, industrial, transportation (excluding international aviation and maritime), and residential sectors. The CPAT model is parameterized using data compiled from the International Energy Agency (IEA) on recent fuel use by country and sector. Real GDP projections are from the latest IMF forecasts. Data on energy taxes, subsidies, and prices by energy product and country is compiled from publicly available and IMF sources, with inputs from proprietary and third-party sources. International energy prices are projected forward using an average of IEA and IMF projections for coal, oil, and natural gas prices. Assumptions for fuel price responsiveness are chosen to be broadly consistent with empirical evidence and results from energy models.

8 This dispersion reflects cross-country differences commitments and in the energy mix, which leads to differences in the responsiveness of emissions to prices. Furthermore, since the CPAT uses price elasticity assumptions to determine changes to the energy mix, if a country initially has a very low level of renewable energy, changes in fossil-fuel prices will not elicit a large increase in renewables. Non-tax policies may be needed to introduce renewable energy and these policies are not covered in the CPAT framework.

9 Vogt-Schilb et al. (2019) find that 30% of revenues generated by a carbon tax of $30 per metric ton of CO₂ emissions could be enough to compensate poor and vulnerable households on average in Latin America and the Caribbean, leaving 70% of additional funds for other expenditure priorities.

10 The dataset of annual observations used in this analysis are drawn from the IMF’s International Financial Statistics and World Economic Outlook databases, the World Bank’s World Development Indicators database, and the U.S. Energy Information Administration. Summary statistics are presented in Appendix Table A1.

11 The estimated coefficients on control variables have the expected signs and some are also statistically significant.

12 Electric vehicles still only make up about 1% of the global fleet of passenger cars, but sales are increasing rapidly across the world including the Caribbean.

13 Air pollution caused by CO₂ emissions is associated with serious health problems, including respiratory and cardiovascular diseases (Halkos and Argyropoulou 2020). 

14 In the Caribbean, Dominica and Grenada have developed such DRS frameworks with IMF’s support.

15 The sample of small developing states in this study includes Antigua and Barbuda, The Bahamas, Belize, Bhutan, Cabo Verde, Comoros, Djibouti, Dominica, Fiji, Federated States of Micronesia, Grenada, Guyana, Kiribati, Maldives, Mauritius, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Samoa, Sao Tome and Principe, Seychelles, Solomon Islands, Timor-Leste, Tuvalu and Vanuatu. With a broader perspective, another recent report estimated annual adaptation costs in developing countries at US$70 billion, which is expected to reach US$140–300 billion in 2030 and US$280–500 billion in 2050 (UNEP 2021b).

16 The CCRIF, established in 2007 with 23 members, is the first multi-country risk pool in the world. The CCRIF develops parametric insurance policies – designed for tropical cyclones, earthquakes, excess rainfall and the fisheries sector – to limit the financial impact of natural hazard events in the Caribbean.

17 For example, Jamaica used a nature-based approach to protect and restore the marine ecosystem in the White River fish sanctuary and achieved an increase of 147% in coral coverage and 1700% in fish biomass within the protected area.

18 Carbon credits are basically a cap-and-trade system that allows emitters to trade carbon permits on an international financial platform. A carbon credit, also called a carbon offset, is a credit for carbon emissions reduced or removed from the atmosphere by an emission reduction project, which can be used by governments and/or companies to compensate for the emissions they generate elsewhere. REDD+ (Reducing Emissions from Deforestation and Forest Degradation), a United Nations-backed framework, is the most prominent international financial mechanism currently being practiced for conserving tropical forests and reducing CO₂ emissions from forestry and land use in the tropics.

19 On a cumulative basis, the outstanding amount of green bonds in Latin America and the Caribbean reached US$30.2 billion as of June 2021 out of over US$1 trillion globally (CBI 2021).