it’s all about action—not for the sake of distant generations, but for people here now. The economic and social benefits of low-carbon development, worth $26 trillion between now and 2030, are there for the taking. That includes 65 million new jobs in 2030, as well as 700,000 fewer deaths from air pollution.
The IMF found that the world is wasting a whopping 6.5% of global GDP—$5.2 trillion per year—subsidizing dirty energy. Under-pricing of local air pollution, which the World Health Organization estimates kills 4.2 million people each year, is the largest part of these costs. Coal remains the largest recipient of subsidies, despite being the most polluting.
The world is up against a climate countdown, with not a moment to lose. As Lagarde said, “Action is required by everyone, every institution, every country.” There are no excuses for, nor any reason to delay the transition to a new climate economy.
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It’s a sign of the times that even the International Monetary Fund (IMF) is exploring ways in which it can help address the climate crisis. Building on two new IMF papers released last week and Managing Director Christine Lagarde’s eight years of leadership, this mainstay of traditional economic thought is lending its voice and unique mandate to the cause of tackling climate change. More specifically, the IMF is working to better reflect climate resilience in macro-fiscal and financial frameworks, assess the fiscal and financial impacts of climate policy choices, and mainstream climate risk into its country assessments. As Lagarde noted, “Climate change is the great existential challenge of our times.” It is high time this reality is appropriately reflected in the IMF’s work.
The IMF found that the world wastes $5.2 trillion per year subsidizing dirty energy. Photo by Max Pixel
What’s New from the IMF?
One of the new papers is a comprehensive update of global fossil fuel subsidies and negative externalities like air pollution. The paper found that the world is wasting a whopping 6.5% of global GDP—$5.2 trillion per year—subsidizing dirty energy. Under-pricing of local air pollution, which the World Health Organization estimates kills 4.2 million people each year, is the largest part of these costs. Coal remains the largest recipient of subsidies, despite being the most polluting.
For the first time, the IMF’s subsidies assessment is paired with a new paper exploring how countries can apply a range of fiscal policies to deliver their goals under the international Paris Agreement on climate change, and what the IMF can do to support them. The paper emphasized the central importance of carbon pricing and measures to reduce fossil fuel subsidies, as well as the importance of accompanying measures like investments in R&D, infrastructure investment, financial market policies, and strategies to support vulnerable groups.
These two papers from the IMF Fiscal Affairs Department are excellent. The challenge now is to integrate the wealth of guidance they contain into relevant work across the rest of the IMF, as well as into national policies.
What Are the IMF and Others Doing Now?
Indeed, the IMF has already begun to integrate some of the macro-fiscal and financial implications of climate change into other areas of its work. Through its annual Article IV Consultations, where analysts assess countries’ current and future economic health, the IMF has helped identify ways in which some countries can align macro-economic and fiscal policies with climate resilience. This seemingly unexciting development was in no small part driven by the wake-up call of recent extreme weather events, including Hurricane Maria in 2017, which decimated islands in the Caribbean.
With the realities of climate change starting to hit economies around the world, the ever-pragmatic financial sector has also been waking up to climate risks. Signs of this shift were captured in the New Climate Economy’s September 2018 report. Just months since its release, we’ve seen this momentum snowball.
For example, the Task Force on Climate-related Financial Disclosures (TCFD) set forth a series of recommendations in July 2017 to increase transparency around the material financial risks of climate change in order to improve investment decisions. The uptake of these recommendations in a relatively short period is remarkable: The TCFD now boasts more than 500 supportive companies with a combined market capitalization of more than $7.9 trillion, including 287 financial firms responsible for assets of nearly $100 trillion.
And what could be a clearer symbol of this shift than Norway’s trillion-dollar Sovereign Wealth Fund—itself built on oil and gas revenues—excluding fossil fuel exploration and production companies in its investment profile in order to reduce risks to the Norwegian economy?
How Can the IMF and Others Step Up on Climate Action?
This notable shift in the financial sector, added to the infectious passion coming from Fridays for Future school strikes, the Green New Deal, the Extinction Rebellion protests and others, now puts the onus squarely on our political and institutional leaders to step up climate action.
For the IMF, this is an excellent opportunity to build on the great work it has started and to more systematically promote the use of economic and fiscal policy to drive national climate action, including through the recently launched Coalition of Finance Ministers for Climate Action. And it means moving beyond a focus on climate impacts to also grapple with the macro-critical implications of transitioning to net-zero carbon economies. The IMF should integrate climate risk assessment into all Article IV Consultations, for every country and for every year, as well as take other important steps to support this agenda.
For country leaders, it’s all about action—not for the sake of distant generations, but for people here now. The economic and social benefits of low-carbon development, worth $26 trillion between now and 2030, are there for the taking. That includes 65 million new jobs in 2030, as well as 700,000 fewer deaths from air pollution.
Indonesia is a good example of how countries can seize this opportunity. Under its new Low Carbon Development Initiative, it is now making ambitious climate action part of its next five-year development plan, putting the country on a path to meet or exceed its emissions-reduction goals while achieving 6% GDP growth per year between 2019 and 2045, outpacing business-as-usual growth. That a resource-rich, fossil fuel-dependent, populous and growing economy like Indonesia is making this shift should make every finance minister stop and think, as should the fact that the IMF is actively looking at how to integrate climate risks across its work.
The world is up against a climate countdown, with not a moment to lose. As Lagarde said, “Action is required by everyone, every institution, every country.” There are no excuses for, nor any reason to delay the transition to a new climate economy.
** April 2019
At the Spring Meetings of the World Bank Group and International Monetary Fund, Finance Ministers from more than twenty countries launched a new coalition aimed at driving stronger collective action on climate change and its impacts. The newly formed Coalition of Finance Ministers for Climate Action endorsed a set of six common principles, known as the “Helsinki Principles,” that promote national climate action, especially through fiscal policy and the use of public finance.
The Helsinki Principles – so-called as they were conceived by a group of Governments represented at a meeting led by Finland and Chile in Helsinki in February – are designed to support Finance Ministers to share best practices and experiences on macro, fiscal, and public financial management policies for low-carbon and climate-resilient growth.
The Coalition will help countries mobilize and align the finance needed to implement their national climate action plans; establish best practices such as climate budgeting and strategies for, green investment and procurement; and factor climate risks and vulnerabilities into members’ economic planning.
“Finance ministries have a crucial role to play in accelerating the global shift to a low-carbon, climate-resilient growth model,” said World Bank CEO, Kristalina Georgieva. “This Coalition demonstrates new levels of ambition from decision makers in the fiscal policy arena and provides an important platform for Finance Ministers to share best practice on the jobs and growth benefits of the new climate economy.”
“Climate change is a real threat nowadays but we can turn it into an opportunity,”said Felipe Larraín Bascuñán, Minister of Finance, Chile. “Beyond traditional tools like carbon pricing or the phasing out of fossil fuels we can stimulate and signal the private sector to invest in innovative solutions, incorporate this risk and externalities into the investment decision making process. Economic growth is essential but reducing emissions is also essential. We need more ambition and concrete commitments that translate into action.”
“The Coalition will be successful, if it helps us plan concrete, effective policy measures to address the climate crisis nationally, regionally and globally,” said Petteri Orpo, Minister of Finance, Finland. “The Coalition must rely on analytical work and sharing of experiences to achieve solutions that work in practice.”
“I fully support the new Coalition of finance ministers for climate action. The role that finance can and must play in the transition to a low carbon economy is often underestimated,” said Bruno Le Maire, Minister of Finance, France. “Many countries have already developed interesting initiatives at a national or regional level such as green bonds in France or the Emissions Trading System in the EU. Sharing experiences can only be useful. U.N. Secretary-General António Guterres gave President Macron a mandate to accelerate climate finance in the run-up to the Climate Summit in September. In this perspective, we are calling for collectively and urgently step up our actions to meet the Paris Agreement commitment.”
The World Bank will serve as secretariat for the Coalition and will partner with various institutions to provide strategic and technical support to governments, including the International Monetary Fund (IMF), the Organization for Economic Cooperation and Development (OECD), UNFCCC Secretariat, UN Development Programme (UNDP), other UN agencies and the NDC Partnership.
Notes for Editors:
The countries that have endorsed the principles are: Austria, Chile, Costa Rica, Cote d’Ivoire, Denmark, Ecuador, Finland, France, Germany, Iceland, Ireland, Kenya, Luxembourg, Marshall Islands, Mexico, Netherlands, Nigeria, Philippines, Spain, Sweden, Uganda, and the United Kingdom. Since the formal announcement the following countries have also signed on: Colombia, Fiji, Guatemala and Norway.
The International Monetary Fund (IMF) and climate change do not often appear in the same headline together. Indeed, environmental issues have been, at most, peripheral to the Fund’s core functions. But now economists inside and outside the IMF are beginning to understand that climate change has significant implications for national and regional economies, and so it’s worth reconsidering the Fund’s role in addressing the climate challenge.
To her credit, Managing Director Christine Lagarde has boldly injected the IMF’s voice into the global debate on policy responses to climate change and has identified a number of roles the Fund can play.
The Fund has conducted valuable work on how carbon emissions can be reduced through market prices that reflect the negative externalities of those emissions. In particular, the Fund has become a leading voice for quantifying and streamlining or eliminating fossil fuel subsidies, as well as for introducing carbon-pricing mechanisms.
What is still missing, however, is a bigger role for the IMF in enabling countries to prepare and manage the potential impacts of climate change. There are three things the Fund could do, building on its current efforts, that would make a big difference:
1. Deepen Research on Macroeconomic and Financial Impacts of Climate Change
In a climate change debate that has become heavily politicized, the Fund’s technical and nonpartisan voice is uniquely valuable. Few questions are as important as understanding the possible effects of a changing climate on the world’s economies, especially the most vulnerable ones.
The Fund has recently started to make important contributions in this area. In a paper published last year, the IMF started to look into the implications of climate change on so-called “small states”. And last week, the Fund devoted for the first time a whole chapter of its flagship World Economic Outlook to the impacts of weather shocks on economic activity.
Building on these foundations, the Fund should focus its research capabilities on a key question, namely whether climate change is having have a “level effect” or a “growth effect” on per capita income. If the former, then climate change will only destroy a given amount of income over time (think of damaged bridges and buildings) but not affect the capacity of the economy itself to grow. If the latter, then climate change is also harming the drivers of growth themselves, such as the productivity and availability of workers, the productivity of agriculture, and the flow of investment. The economy’s growth rate will slow as a result, and losses will compound year after year, leaving an economy significantly worse off than if only level effects applied.
Getting better answers to this question is essential for policymakers making decisions about how much to spend today to avoid damage tomorrow.
2. Formally Incorporate Climate Change Into Policy Dialogue
One of the Fund’s core functions is macroeconomic surveillance. This function brings Fund staff into regular policy dialogues (called Article IV consultations) with financial authorities in virtually every country in the world.
Financial authorities have a key role to play in preparing for climate change, as they are charged with budget planning and managing fiscal and financial risks. The Fund should bring climate risk into the dialogue as a formal part of its consultations, not just with small states, but with a much larger set of vulnerable countries as well, including systemically-significant ones.
The Seychelles. Flickr/Federico Robertazzi
This year, in collaboration with the World Bank, the Fund launched the first Climate Change Policy Assessment (CCPA) during the Article IV consultations for the Seychelles. The assessment focused on policy options to reduce vulnerability to climate change; the Seychelle authorities found it to be very useful. More CCPAs are planned – a small handful per year – but this is simply not fast enough given the urgency and gravity of the challenge.
The Fund should formalize CCPAs as a routine part of Article IV consultations for a broad swath of vulnerable, low-income countries. This will require investing in staff capacity and training, including in the Fund’s Monetary and Capital Markets Department, which can help countries identify how climate risks and opportunities could affect their financial systems. Maximizing synergies with the World Bank on the CCPAs will also be necessary.
3. Treat Expenditures on Climate Resilience as Investments
Countries facing a balance-of-payments crisis often draw on IMF resources and enter into a program relationship with the IMF. One of the trickiest elements when negotiating such a program is how to treat different categories of spending and where to cut to restore fiscal balance. How should the Fund treat expenditures designed to provide financial protection against extreme weather events? These include, for example, deposits into a national reserve fund, premium payments on sovereign insurance against natural disasters, or the costs of issuing catastrophe (“cat”) bonds.
Protecting some of these expenditures from program-mandated cuts is fully appropriate, as they are designed to provide a measure of fiscal protection to the government in the aftermath of an extreme weather event. For instance, the Fund might treat cat bond issuance costs and insurance premiums as investments with potential upside, rather than as expenditures, thereby exempting them from cuts.
Managing Director Lagarde has positioned the IMF as an important and credible voice in the debate about climate change. Now it’s time for the Fund to expand and institutionalize this new role, helping poor and vulnerable countries understand and confront the macroeconomic and financial risks of climate change.
