Asia-Pacific Economic Cooperation (APEC)economies display large variation in terms of income percapita. The richest APEC economies have an income per capitaabout twenty times higher than the poorest ones. So far mostwork on fiscal policy and climate change has been writtenwith developed economies in mind. This report on the use offiscal policies for mitigating and adapting to climatechange effects corrects that bias with a particular focus onthe developing economies of APEC.It also plays closeattention to lessons that could be learnt from the advancedeconomies of APEC and elsewhere. On mitigation, the reportnotes that achieving the ambitious targets adopted by APECeconomies will depend crucially the choice of fiscal policyinstruments.These choices will depend, in turn, on thecharacteristics of developing economies, particularly oftheir energy sectors.Specifically, mitigation indeveloping countries requires a broad-based response withfour key components. First, carbon pricing will be critical,but will not be sufficient and in some economies and somesectors may have little or no impact due to pre-existingdistortions. Second, energy sector reforms that liberalizemarkets and establish effective regulators so that policiescan support appropriate carbon prices and cost pass-throughin the energy sector will be key. Third, broader economicreforms may also be important to off-set current biastowards capital and energy intensive economic growth.Fourth, technology-based mitigation policies will also beneeded, but, given the mixed track record in this area, mustbe chosen with care. Given the many uncertainties involved,and the multiple reforms needed, a verifiable quantityanchor for mitigation policy is recommended for developingeconomies, such as the energy-intensity target recentlyadopted by China. On the adaptation side, fiscal analysishas so far largely focused on cost projections, but forpolicy makers adaptation instruments and decision-makingtools are as or more important.Adaptation instrumentsinclude the provision of public and club goods (such asinfrastructure), public sector pricing reform (in particularof water) and financial instruments (microcredit andinsurance) which can be cost-effective alternatives tosubsidies.Key to the right choice of instruments (whichwill vary from location to location) will be the correct useof appropriate decision-making tools.In particular, thesocial costs and benefits of alternative strategies need tobe analyzed under conditions of uncertainty, in many waysthe hallmark of climate change. Popular tools such asmulti-criteria analysis, vulnerability indexes, and cost-effectiveness analysis are inadequate to the task.Acombination of Monte Carlo and 'real options'analysis within a cost-benefit framework is recommended foradaptation projects.Examples from a range of economies areprovided to demonstrate the utility of such an approach.
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