## THE IMF’S CLIMATE CHANGE DEBATE

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**Canonical URL:** [THE IMF’S CLIMATE CHANGE DEBATE](https://www.imf.org/-/media/files/publications/fandd/article/2024/06/ahmed.pdf)

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### Context and mandate
- The IMF’s executive board characterized climate change as “one the most critical macroeconomic and financial policy challenges” in its 2021 strategy paper.
- The board noted climate change affects macroeconomic and financial stability through “fiscal positions, asset prices, trade flows, and real interest and exchange rates.”
- The IMF’s guiding lode-star is “macroeconomic and financial stability”; “macro-criticality” is the test for issues the Fund should address.
- The IMF first offered a substantive discussion of climate change in the World Economic Outlook in 2008; the executive board agreed a strategy in 2021.

### Two schools of thought
- Restraint camp (focus on core mandate):
  - Argues IMF should limit climate engagement to effects that are “macro-critical” (fiscal, monetary, financial, and external accounts).
  - Supports research, assessment, advice, and capacity-building on policy tools within IMF core domains.
  - Opposes IMF involvement in advising on slowing climate change, mobilizing private finance for mitigation, or assessing progress on countries’ international green transition commitments as part of surveillance.
  - Concerns include diluting focus on core macroeconomic and financial risks, lack of in-house expertise, costly recruitment, risk of “poaching” staff from other organizations, and resource trade-offs amid tight budgets.
- Expansion camp (broader institutional role):
  - Views climate change as an existential threat requiring all institutions to act and adapt focus, business models, and skill sets if necessary.
  - Argues IMF is underused and current steps do not go far enough; IMF should develop state-of-the-art tools and macro fiscal and financial frameworks that incorporate substantial transition investments.
  - Emphasizes building analytical agendas and operational policy tools for integrating climate risks into surveillance, technical assistance, and lending.

### Mobilizing climate financing
- Scale of financing need:
  - Low- and middle-income countries will need to spend trillions of dollars a year for adaptation, mitigation, and resilience.
  - Emerging market and developing economies other than China will have to spend about $2.4 trillion a year by 2030, according to the Independent High-Level Expert Group on Climate Finance.
  - About $1 trillion a year of that $2.4 trillion will have to come from external sources.
- IMF financing and instruments:
  - The IMF has $1 trillion in financing capacity—seen by some as “low-hanging fruit” to support the green transition.
  - The Resilience and Sustainability Trust (RST), set up in 2022, has total disbursements so far of just $1.4 billion.
  - The RST’s requirement that a regular IMF financing program accompany RST funding reduces its attractiveness because of conditionality and reputational stigma.
  - Like regular IMF financing, RST resources add more debt (albeit with longer maturities), limiting usefulness for many countries.
- Special Drawing Rights (SDRs) discussion:
  - During the pandemic, the IMF issued SDRs equivalent to $650 billion.
  - 67 percent of those SDRs went to rich countries that didn’t need this financing.
  - Proposals include large and regular SDR distributions, changing SDR allocation rules to target countries that need them, and/or linking allocations to climate spending.

### IMF’s convening and analytical role
- The IMF’s 2021 strategy paper states “climate change mitigation is a global public good and requires an unprecedented level of cross-country policy cooperation and coordination.”
- As a global institution where finance ministers and governors meet regularly, the IMF can use convening power to raise awareness of policy and financing actions that only finance ministers and central bank governors can take.
- The Fund has increased partnerships with the World Bank and other institutions with complementary skills and mandates and recruited specialists to link climate and traditional IMF agendas.

### Practical path forward and recommendations
- The author rules out, for now:
  - Expecting IMF membership to agree to a bold new consensus declaring climate a core IMF priority.
  - Making regular distributions of SDRs to finance climate-related spending.
  - Tasking the IMF or its governing bodies to play a central role in mobilizing international policy and financing responses.
- Endorsed next steps:
  - Continue and deepen integrating climate change into analytical work, surveillance, and capacity-building.
  - Strengthen the RST so it becomes a more significant source of IMF financing.
  - Maintain intellectual leadership by shaping public thinking on links between climate change and economic prospects.
  - Proceed incrementally (“cross the river by feeling the stones”), building on progress and broadening support while aligning new capacities with the IMF’s membership needs.

- Direct quote preserved: “It is neither feasible nor sensible to retreat from the advances the IMF has already made in building climate change into its work.”

*masood ahmed is president of the Center for Global Development, a Washington-based think tank.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2024/06/ahmed.pdf_