## IMF’s Engagement on Climate Issues

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**Canonical URL:** [IMF’s Engagement on Climate Issues](https://www.imf.org/-/media/files/about/partners/cso/imfs-engagement-on-climate-issues.pdf)

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### Climate threats to macroeconomic and financial stability
- Climate-related damages and adaptation investments can put pressure on fiscal and debt sustainability.
- Domestic stability could be threatened as some households and sectors are disproportionately affected.
- Revaluation of financial and physical assets to reflect climate risks could impact financial stability.
- Global redistribution induced by climate change has repercussions for trade and exchange rates.
- Transition to clean energy sources will affect growth prospects and competitiveness.

### IMF Climate Strategy (2021) and institutional objectives
- Surveillance to cover adaptation, transition management, mitigation.
- Managing transition risks, e.g., challenges arising when seeking to achieve NDC; need to diversify away from fossil fuels.
- Strengthening resilience to natural disasters, adaptation to weather changes, higher sea levels – 60 climate-vulnerable members identified.
- Mitigation efforts: Strongly encouraged for the 20 largest emitters, encouraged for others.

### Incorporation of climate considerations into IMF lending and facilities
- Existing facilities: cover natural disasters; Rapid Financing Instrument and Rapid Credit Facility; climate considerations included in existing IMF programs.
- Resilience and Sustainability Trust (RST): Support for up to 143 IMF members; long-term financing, for climate and pandemic preparedness.
- Climate and debt: Climate modules planned for the Debt Sustainability Analysis for market access countries.

### Capacity development offerings and tools
- Frameworks integrating macro-climate linkages; debt dynamics and adjustment.
- Modelling global and domestic macro impacts of climate change and policy responses including with just transition.
- Climate Change Indicators Dashboard.
- Technical assistance on development and compilation of indicators of economic impacts of climate, environmental accounts, and new data products on sustainable finance.
- Climate module in new Inclusive Growth online course.
- Adaptation staff “Climate 101” course for policy makers.
- Legal aspects of monetary, financial, and fiscal policies responses to climate change, including border carbon adjustments.
- TA on financial integrity and governance of climate change (anti-corruption & AML/CFT, environmental crimes).
- Training and tools: CMAPs; Climate PIMA; Green PFM; Carbon pricing; fossil-fuel subsidies; green budgeting & tax reform; Social spending for a just transition.

### Policy analysis, flagships, and Staff Climate Notes
- Flagships cited: WEO October 2020; GFSR April 2020; Fiscal Monitor October 2019; WEO April 2022.
- Regional and departmental papers: AFR REO April 2020; EUR Departmental Papers on sectoral policies and mitigation.
- IMF Staff Climate Notes include:
  - Proposal for an International Carbon Price Floor Among Large Emitters.
  - Climate-Sensitive Management of Public Finances—"Green PFM”.
  - Strengthening the Climate Information Architecture.
  - Carbon Pricing: What Role for Border Carbon Adjustments?
  - Not Yet on Track to Net Zero.
  - Climate Change Adaptation Series.

### Fiscal policies for climate change: priorities and gaps
- Climate mitigation requires international coordination.
- Transition to low-carbon economy requires the right policy mix to navigate the transition.
- Climate adaptation is a pressing issue especially for many small states and countries vulnerable to natural disasters.
- Fiscal and other macroeconomic policies are central to mitigation, transition and adaptation.
- Two gaps in mitigation policy persist for this decade: an ambition gap and an implementation gap in annual global emissions trajectories (1990-2030, bn tCO2/yr) relative to 2°C, 1.8°C, and 1.5°C pathways.
- Supporting policies needed: carbon pricing; pricing of broader emissions; sectoral feebates/regulations; public investment/technology; productive/equitable use of pricing revenues; just transition measures; industrial competitiveness.

### Fossil fuel subsidies and mitigation policy signals
- Figures for explicit and implicit subsidies use projections from 2019 and 2021 onwards for fuel use and fuel prices, respectively.
- Current global ambition achieves less than one half of what’s needed for 2°C and about one fifth for 1.5°C.
- Policies exceeding global carbon price of $75/ton in 2030 are needed.
- Strong case for carbon pricing: effective, revenue, domestic environmental, administrative.
- Coordination (e.g., Border Carbon Adjustment; International Carbon Price Floor proposal for large emitters) is preferred to isolated national efforts.
- Quantitative framework: Climate Policy Assessment Tool (CPAT) – 200+ countries.

### Adaptation: scale and policy guidance
- Adaptation needs are large.
- Staff Climate Notes on adaptation include:
  - Economic principles for integrating climate change adaptation into fiscal policy: maximizing the use of finite public resources for a just adaptation to climate change, facilitating private adaptation, dealing with uncertainty.
  - The macro-fiscal implications of adaptation: estimates of adaptation costs, benefits and gaps and their implications for macro-fiscal analysis; call for international support.
  - Planning and integrating adaptation in fiscal policies: adaptation plans, frameworks for a comprehensive design and mainstreaming of adaptation policies.

### Climate PIMA (Public Investment Management Assessment) framework
- Climate PIMA (C-PIMA) modules:
  - C1. Climate-aware planning
  - C2. Coordination across public sector
  - C3. Project appraisal & selection
  - C4. Budgeting & portfolio management
  - C5. Risk management
  - Cross-cutting institutions: Legal Framework, IT System, Staff Capacity.
- Module developed with the financial support of the EU.

### Coalition of Finance Ministers for Climate Action
- Membership: 80 country members covering approx. 39 percent of global emissions; 25 institutional partners.
- Secretariat provided by World Bank and IMF.
- Workstreams based on six “Helsinki Principles”, including carbon pricing, green budgeting/public financial management, and facilitating private investment in mitigation and adaptation.

### Financial sector policies and climate risk oversight
- Financial stability relevance: climate change intersects policy analysis; monetary & central banking operations; information architecture; risk assessment; regulation & supervision; debt management; climate finance.
- Climate Risk Analysis in Financial Sector Assessment Programs (FSAPs):
  - Physical risk pilots: Philippines (typhoons), Mexico (floods and tropical cyclones), Uruguay (coastal floods), Ireland (river flood), Chile (floods and droughts), South Africa (droughts).
  - Transition risk pilots: Chile, Colombia, Ireland, Norway, Mexico, South Africa, the UK.
  - Objectives: development of analytical tool for FSAPs (and TA) in collaboration with World Bank, authorities, Network for Greening the Financial System.
  - Physical risk: estimating damages due to physical risk hazards for all IMF member countries; DATA!
  - Transition risk: short term impact of transition risk; use of CGE models; DATA!
  - Two stated objectives: 1. Raise awareness of the risk and adaptation needs. 2. Illustrate potential pressure points for the financial system due to physical climate shocks and in the transition to a low-carbon economy.
- Climate risk supervision and regulation:
  - Assessed as part of financial sector oversight policies; pilot comprehensive in-depth analysis in Sweden and Iceland.
  - References: NGFS guide; Basel Core Principles; BCBS principles for climate risk.
  - Capacity development: dissemination of emerging best practices; series of specific workshops (8 events, +500 supervisors, +80 jurisdictions); dedicated course to be offered in FY24; topic included in most events.
  - Policy development: work with International Standard Setters: ISSB, FSB, NGFS, BCBS, IAIS, SIF; Climate Information Architecture; role of financial sector supervisors.

### External collaborations
- Collaboration with multiple institutions and standard setters across surveillance, capacity development, and policy development activities.

### The Resilience and Sustainability Trust (RST): purpose and coverage
- RST aims to help address qualifying longer-term structural challenges—climate change and pandemic preparedness—that entail significant macroeconomic risks.
- 143 countries are RST-eligible, including all low-income (PRGT), and vulnerable small states and middle-income countries; the list reviewed periodically.
- RSFs (Facilities) will complement standard Fund-supported programs to help build resilience to alleviate costs of future external shocks.

### RST access, lending terms, and affordability
- Interest/fee groups and terms:
  - Group A: SDR i+ 55 bps; no service charges. PRGT-eligible countries that are not presumed blenders.
  - Group B: SDR i+ 75 bps; 25 bps upfront one-time service charge on each disbursement. Presumed blenders and non-PRGT eligible small states with per capita GNI below ten times the IDA operational cutoff.
  - Group C: SDR i+ 95 bps; 50 bps upfront one-time service charge on each disbursement. All other RST-eligible countries.
- Normal access is 75 percent of quota – BoP needs, strong reforms and capacity to repay may justify higher access, up to 150 percent of quota or SDR 1 billion, whichever lower.
- A tiered interest rate structure provides higher degree of affordability for lower-income members.
- RST loans have longer grace period and maturity: 10½ years and 20 years respectively.

### RST conditionality examples and reform areas
- Conditionality based on diagnostics (CCDR, CMAP) and CD (C-PIMA, PFM).
- Policy reforms to support investment in sectoral and infrastructure resilience.
- Design social protection strategy that mitigates impacts of climate shocks on most vulnerable and supports a just energy transition.
- Issue regulations on carbon pricing policy (e.g., remove fuel subsidies or implement a tax).
- Green Public Finance Management / Climate PIMA: integrate climate in economic decision making and budget documents; mandatory reflection of climate risks in investment decisions.
- Financial sector risks and risk transfer: put in place regulatory and supervisory frameworks to better assess climate-related financial sector risks; adopt a disaster risk financing strategy that includes options for risk reduction, risk transfer (e.g., through climate contingent instruments or insurance), and risk retention (e.g., through budget).
- Examples for conditionality for pandemic preparedness are being developed.

### RST catalytic role, operational status, and coordination
- Climate finance needs are large relative to RST resources, so catalytic effect is key.
- Reforms that improve investment climate and macro framework (e.g., green budgeting, climate PIMA) => Enhance governance and transparency => Additional financing from donors, MDBs/RDBs, and climate funds.
- Use the RST as coordinating device (fund seed financial instruments, galvanize parallel financing through donor roundtables, etc.).
- Regulatory reforms to support private sector engagement.
- RST can play a catalytic role by creating a conducive environment for climate investment: credibility and commitment to reforms is key.
- Operational progress:
  - Need to build momentum for climate finance – official and private.
  - Building experience with first set of countries.
  - Good progress on SDR 33 million target has been made, but timely delivery of remaining pledges and additional pledges key.
  - Demand is strong.
  - Good cooperation with other institutions (e.g., World Bank) has been key.
  - Fundraising continues.
  - 4 RSFs have been approved (Costa Rica, Barbados, Rwanda, Bangladesh), one additional RSF expected in February, and several requests coming.

### RST qualification, design, and synergies
- Strong qualification to support catalytic role requires:
  - Package of high-quality reform measures (RMs) addressing the qualifying longer-term structural challenges.
  - Concurrent IMF-supported program (“UCT Program”) with at least 18 months remaining prior to its expiry: financing (SBA, EFF, FCL, PLL, SCF, ECF) or non-financing (PCI, PSI).
  - Safeguards: sustainable debt and adequate capacity to repay the Fund.
- RST design and synergies:
  - Reform strength relies on good diagnostics as a "starting point", and consider that Capacity Development takes time.
  - No project financing but can catalyze or leverage it through budget.
  - WB/IMF: reform package informed by country diagnostics developed in both institutions; policy priorities identified in coordination to promote complementarity and delineate areas of responsibility according to each institution’s mandate and role.
  - WB/WHO/IMF: a framework for pandemic preparedness is being discussed.
  - Engagement with other regional Multilateral Development Banks is also pursued.
  - Coordination with other institutions is critical.

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_Source: https://www.imf.org/-/media/files/about/partners/cso/imfs-engagement-on-climate-issues.pdf_