The low-carbon challenge facing Ministries of Finance

• Comparing future emissions by country and sector between current policies and a net zero 2050 scenario shows that for many high- and middle-income countries, decarbonizing the energy sector, including by eliminating coal fired power plants, is key. For many low-income countries the focus is on increasing carbon sinks or pursuing low-carbon electrification, or a mixture of both.
• No single policy can ensure an efficient and least-cost low-carbon transition. Rather, a policy package should include steps to internalize externalities, sectoral supply-side policies, and social and transition policies.
• While carbon prices are needed to align economic incentives with decarbonization, they are not a silver bullet. World Bank estimates indicate that carbon prices alone would reduce emissions by less than 50% for most countries evaluated.
• Complementary regulatory action and industrial policy can speed up and amplify the transition, and measures are also needed to clear nonmarket obstacles and ensure a just transition.
• The transition can also bring opportunities, e.g., by opening up markets and creating jobs.

Decarbonization options in transportation, heating and cooling, and light industry all include electrification, among other means. This is inefficient for heavy industry reliant on high temperatures, however. Here, low-carbon fuels (such as hydrogen), lower process-based emissions, and where necessary, carbon capture and storage (CCS) can aid the transition. To achieve effective decarbonization while meeting the growing energy demand from electrification and providing electricity to people currently without access, significant investment in renewable power systems is required. This is capital-intensive, and financing constraints make implementation difficult.