Asia-Pacific Economic Cooperation (APEC) economies display large variation in terms of income per capita. The richest APEC economies have an income per capita about twenty times higher than the poorest ones. So far most work on fiscal policy and climate change has been written with developed economies in mind. This report corrects that bias with a particular focus on the developing economies of APEC. It draws on examples from three developing economies in particular, China, Indonesia and Vietnam. It also plays close attention to lessons that could be learnt from the advanced economies of APEC and elsewhere. On mitigation, the report notes that many developing as well as developed economies have now adopted emissions reduction targets. These targets are ambitious, and their achievement will not be easy. Instrument choice will be the difference between success and failure, and is a major theme of the report. The key message is that the characteristics of developing economies, particularly of their energy sectors, matter a lot when it comes to policy choice in this area. Simply mimicking what has been adopted in or recommended for developed countries is unlikely to work. Mitigation in developing countries requires a broad-based response with four key components. First, carbon pricing is critical, but on its own will not suffice, and in some economies and some sectors may have little or no impact due to pre-existing distortions. Second, energy sector reforms in many countries will be a prerequisite for effective mitigation, though they may on their own increase emissions. Of particular importance are policies to allow for cost pass-through in the energy sector, so that subsidies do not re-appear, and so that carbon prices can be passed on. Without this, carbon pricing will lack both signaling power and credibility. Enabling cost pass-through will require liberalization of energy markets and the establishment of independent regulators, both formidable tasks. Third, broader economic reforms may also be important. Broader policy settings in some economies may bias economic growth to be more capital and energy intensive than is optimal. Fourth, technology-based mitigation policies will also be needed, but, given the mixed track record in this area, must be chosen with care. Given the many uncertainties involved, and the multiple reforms needed, a verifiable quantity anchor for mitigation policy is recommended for developing economies, such as the energy-intensity target recently adopted by China.

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