## ppea2021057 ## Source details **Canonical URL:** [ppea2021057](https://www.imf.org/-/media/files/publications/pp/2021/english/ppea2021057.pdf) ## Other formats - [Markdown version](/-/media/files/publications/pp/2021/english/ppea2021057.pdf.md) - [Structured JSON version](/-/media/files/publications/pp/2021/english/ppea2021057.pdf.json) --- ### EXECUTIVE SUMMARY — Introduction and overview - Climate change identified as one of the most critical macroeconomic and financial policy challenges for the IMF’s membership in coming years and decades. - Transmission channels to macroeconomic and financial stability include fiscal positions, asset prices, trade flows, and real interest and exchange rates. - No country is entirely spared; relative importance of transmission mechanisms differs across countries. - Mitigation is a global public good requiring unprecedented cross-country policy cooperation; the IMF can assist with coordinating macroeconomic and financial policy responses. - IMF engagement to date: stepped up flagship reports, policy papers, and pilot Climate Change Policy Assessments (CCPAs) with the World Bank. - Proposed comprehensive strategy for systematic integration of climate change into IMF activities: stock-taking of current activities, concept of adequate engagement (specific outputs and collaboration), and budgetary and human resource implications. - Date on document: June 30, 2021. ### Nature and scale of the climate problem (analysis and projections) - IPCC projection cited: absent decisive mitigation action, global average temperature will exceed the pre-industrial level by 3–5 degrees centigrade by end-century. - “Tipping points” risk (examples): thawing of the permafrost, melting of Himalayan glaciers, changes in monsoon patterns, weakening or reversal of ocean currents, melting of Antarctic and Greenland ice sheets. - Climate change characterized as a negative externality with global reach, reinforcing the need for global policy coordination. ### Economic impact: observed and potential damages - Early indicators: higher frequency and magnitude of extreme weather events (droughts, wildfires, heatwaves, torrential rains, floods, hurricanes, extreme cold). - Longer-term trends: rising sea levels, destruction of habitable lands, ocean acidification, more frequent vector-borne disease outbreaks (Zika, dengue and malaria). - Non-linear temperature–GDP relationship: increase in average temperature raises GDP where annual average temperatures are low, but reduces GDP where they are high, with threshold estimated at an annual average temperature of about 13–15C. - Growth transmission estimate cited: absent mitigation, long-term GDP losses could be to the order of 25 percent of GDP by 2100 for the world economy, relative to holding temperatures fixed at current levels. - Example of disaster impact: Hurricane Maria in Dominica (2017) losses estimated to exceed 200 percent of GDP. - Cross-border spillovers examples: 2011 Thailand floods (hard drive production shortage); 2019 Mozambique storms (affected electricity exports). ### Macroeconomic and policy challenges - Adaptation and resilience-building require substantial investments, complicating fiscal management and potentially impairing debt sustainability. - Mitigation requires changes to tax regimes and regulatory frameworks, plus structural and spending policies to support a just transition. - Transition to low-carbon global economy poses significant challenges for fossil-fuel-dependent exporters. - Many of these challenges fall within the IMF’s mandate to assist members. ### IMF capacity and institutional response — summary - Historical engagement since at least 2008 has been ad-hoc and unstructured. - Membership demand for climate work has increased significantly, especially for surveillance and capacity development (CD). - Current approach of reallocating resources has reached limits; scaling up requires: - Reinforcing workforce with additional staff at the macro–climate nexus. - Training existing economists in climate-macro analysis. - Establishing specialized climate hubs to assist country teams. - Providing guidance for surveillance and building review capacity. - Expanding partnerships with external stakeholders. - Increasing CD capacity to meet member demand. --- ### A. Impacts on Low-Income Countries (LICs) and aggregate risks - LICs often located in relatively hot regions and depend more on climate-vulnerable sectors such as agriculture. - IMF estimate: a temperature increase of 1C in LICs lowers GDP in the same year by 1.2 percentage points (IMF, 2017). - Structural weaknesses in many LICs: weaker infrastructure, informal housing, lack of public services, weaker social safety nets, political fragility, and weak institutions. - Some estimates place output losses with unmitigated climate change at 60–80 percent by 2100 for countries located in hot regions. - Global interconnectedness implies spillovers; no country likely to remain unscathed. ### B. Macroeconomic and financial policy channels and examples - Fiscal management and public debt sustainability: revenue losses and spending pressures, especially where fiscal space is constrained. - Financial stability: large revaluations of assets and liabilities from physical and transition risks; exposure through underwriting, lending, and portfolios; liquidity risk via asset fire sales. - Monetary policy: greater volatility in output and prices; persistent shifts in relative prices (e.g., fossil fuels) affecting real interest rates. - Trade and exchange rates: climate-driven relative price and income distribution changes affect trade flows and exchange rates; higher volatility complicates managed exchange rate regimes amid vulnerabilities like high dollarization or debt. ### C. Policy-response challenges - Adaptation/resilience costs: example—IMF (2021b) estimates for Asia and Pacific that annual average investment needs can exceed 3 percent of GDP, with upfront costs and medium- to long-term benefits. - Mitigation and transition require significant tax, spending, and regulatory changes and just transition policies (repurposing human and physical capital; incentives for low-carbon R&D; targeted support for households and workers). - International coordination essential to prevent destabilizing spillovers, carbon leakage, and competitiveness concerns; coordination needed to ensure LICs have financial and technological means for adaptation and mitigation. - Fossil-fuel-dependent countries require financial and real diversification, with implications for fiscal, structural, and exchange rate policies. --- ### IMF engagement to date — scope and capacity (quantified elements) - Article IV consultations (2015–17): 27 climate and energy pilots discussed energy subsidy reform, mitigation, and resilience building. - For climate-vulnerable states: six Article IV consultations (about 2 per year) drew on pilot CCPAs with the World Bank. - Current capacity suffices to cover adaptation issues in about 4–6 Article IV consultations per year. - Current capacity suffices to cover mitigation and transition management in-depth in 4–6 Article IV consultations per year. - FSAPs: physical and/or transition risks assessed on average in two FSAPs per year; current capacity does not allow climate risk analysis in all FSAPs. - CMAP delivery target: appropriate coverage would require at least 10 CMAPs per year (up from current delivery of 2). - Table 3 CD targets (presented): - Climate Macroeconomic Assessment Program Reports — 10 per year - Single-Country CD — 87 per year - Fiscal issues — 10 - Financial sector issues — 30 - Climate data — 20 - Macro modeling — 15 - Legal and financial integrity issues — 12 - External Training: Online course — 5–6 times per year; Micro-learning interactive videos — 10 - Flagship and policy output targets (presented): - Flagship Reports (WEO, GFSR, Fiscal Monitor) — 1–2 chapters per year - Regional Economic Outlook Reports — 1–2 chapters per year - Policy Papers — 1–3 per year - Staff Climate Notes — 3–7 per year --- ### Box 1 — In-Depth Analysis of Mitigation and Associated Transition Risks (scope and outputs) - Analytical starting points for mitigation analysis: - historical and anticipated emissions trends and sources; - emissions and clean technology commitments under the Paris Agreement and national plans; - existing and envisioned mitigation policies at national and sectoral levels. - Analysis should discuss NDCs and net zero commitments, interim targets, and peer comparisons; include incidence analyses where feasible. - Quantitative assessments to cover emissions, fiscal, economic efficiency, and macroeconomic (GDP, employment, trade) impacts. - Specific policy instruments and trade-offs to be assessed: carbon pricing, taxes on electricity and fossil fuels, energy efficiency policies, sectoral emissions pricing, feebates. - Incidence assessments across household income groups and vulnerable industries where data permit. - Empirical and Article IV examples: Canada, Denmark, Finland, Germany, Indonesia, Korea, the Netherlands, the U.K., and the U.S. - Typical recommendation: comprehensive strategy with carbon pricing as centerpiece, reinforced with feebates, public investment in clean networks, productive use of carbon revenues, and just transition measures. ### FSAP integration and targeted FSAP outputs (three-stage template and coverage objectives) - FSAP three-stage assessment template: 1. climate financial risk diagnostic; 2. designing climate scenarios; 3. focus on risks materializing over the three- to five-year FSAP horizon and apply scrutiny to physical risks. - FSAP coverage objectives stated: - Adaptation and Resilience Building: cover 60 climate vulnerable countries every 3 years (based on CMAP: 10 per year; without CMAP: 10 per year). - Climate Change Mitigation: cover the 20 largest emitters of GHGs every 3 years (in-depth coverage: 6–7 per year). - Transition Management to a Low-Carbon Economy: cover all countries every 5–6 years (in-depth coverage: 8–9 per year; more standardized coverage: 25 per year). - Deliverable: assess climate issues as part of FSAP risk analysis and assessment of financial oversight frameworks; coverage: all FSAPs based on materiality assessment. ### FSAP lessons and examples - Historical textual analysis: 192 FSAP reports analyzed up to 2019; 33 FSAPs (17 percent) contained meaningful references to droughts, floods, storms. - Norway 2019 FSAP: explored three transmission channels of transition risk; sharp carbon price increases have significant but manageable impact on banks. - Philippines 2021 FSAP: climate stress test combining typhoon frequency/intensity projections, CAT model damage estimates, and DSGE model shocks; found moderate bank capital impact for extreme typhoon alone, but compound risks (e.g., extreme typhoon during a pandemic) could amplify damage. - Examples of oversight considerations: 2020 U.S. FSAP on insurance sector catastrophe incidence; 2019 Korea FSAP on supervisory coordination. --- ### Capacity development (CD), CMAPs, modelling, toolkits, and data priorities - CMAP: diagnostic tool under development to analyze climate policies and preparedness for climate-vulnerable countries; build on CCPA with stronger macroeconomic and financial focus. - CMAP objectives: analyze links between resilience building and long-term growth, climate financing needs, distributional effects, and long-term decarbonization plans. - Appropriate coverage requires at least 10 CMAPs per year (up from current 2). - CD demand to increase significantly; examples of CD recipients include Costa Rica, Colombia, Guatemala, Jamaica, Moldova, Seychelles. - CD focus areas: fiscal (green budgeting, climate PIMA), financial sector (climate stress testing, regulation, supervision), data (Climate Change Indicators Dashboard training), macro frameworks (climate scenarios in macro models), legal and financial integrity. - Modelling in-house under development: - (i) full structural global macroeconomic model with detailed energy production and use; - (ii) dynamic real CGE model for short-, medium- and long-run sectoral and trade effects; - (iii) Integrated Assessment Model for long-run interactions and negative feedback of climate on the real economy. - Debt sustainability analyses: - LIC DSF includes stress scenario for countries frequently exposed to natural disasters. - MAC SRDSF rollout in early 2022 will include a similar stress scenario and a long-term module for fiscal cost of adaptation and mitigation. - Future work to model benefits from resilience and adaptation policies in growth performance. - Toolkits and data: - Example IMF spreadsheet tool quantifying carbon pricing and policies for Paris pledges and energy subsidies for 150 countries. - Planned toolkits: macroeconomic effects of natural disasters and adaptation; macro, external, and distributional implications of climate policies. - Climate Change Indicator Dashboard maintenance, methodological refinement, broader country coverage, and third-party granular physical and transition risk data purchases anticipated. --- ### External training, knowledge sharing, and outreach - Need to substantially increase external training as many members establish climate units. - Training modalities: dedicated courses, interactive microlearning videos, webinars. - Training objectives: bolster capacity to analyze macroeconomic and financial effects of climate change, integrate climate modules into existing macro, fiscal, and financial sector training. - Table 3 CD outputs (reiterated): - Climate Macroeconomic Assessment Program Reports — 10 per year - Single-Country CD — 87 per year - External Training—Online course — 5–6 times per year; Micro-learning interactive videos — 10 - Flagship and policy dissemination targets reiterated (WEO, GFSR, Fiscal Monitor, REOs, Policy Papers, Staff Climate Notes). - Internal training plans: - Mandatory “climate 101” course for all IMF economists; near-term priority. - “Climate Bootcamp” for staff on country-specific issues. - Peer-to-peer learning events and a collaboration venue for staff lessons sharing. - Course delivery modalities: blended formats; external climate experts to be hired for seminars. - Peer and external collaboration highlights: co-hosting Coalition of Finance Ministers for Climate Action Secretariat with World Bank; engagement with G7, G20, G24; COP26 referenced; cooperation with IEA, OECD, UN agencies, regional development banks. --- ### Organizational design: climate hubs, departmental roles, and greening operations - Climate hubs envisaged in four functional departments: FAD, MCM, RES, and SPR; area departments to scale up and appoint regional climate coordinators. - Climate coordinator role (based in SPR) and Climate Advisory Group to continue cross-IMF coordination. - Departmental roles (summary): - FAD: lead CMAPs, climate PFM work, reinforce Article IV teams. - MCM: lead on financial stability and sustainable finance, climate stress testing, supervision assessments. - RES: spearhead analytical work, tailor macro models, organize annual IMF research conference on climate economics. - SPR: spearhead policy development, guidance, climate-specific review, coordination hub externally. - Other departments targeted for reinforcements: ICD (training/models), LEG (legal advice), STA (data quality), with FIN, ITD, COM, CSF activities noted as excluded from FTE estimate. - Greening IMF operations: reduce carbon footprint, maintain environmental sustainability strategy, transition to renewable energy and greener operations; Fund GHG emissions by scope (2019): Scope 1 5%, Scope 2 25%, Scope 3 70%. - Between 2010 and 2019, Fund’s total annual GHG emissions decreased by 10 percent; business travel accounted for 70 percent of Fund’s total carbon footprint in 2019 pre-pandemic. ### Budgetary and human resources implications (quantified) - FY20 spending: $16.5 million (of which $½ million externally funded). - FY21 spending: $28 million (of which $1½ million externally funded). - Current staffing: broadly 60 FTEs (about $2 million equals about 7 FTE transitional resources); remaining 53 FTEs include those covering climate as part of rotations. - Steady-state additional staff need: about FTE 95 (to complement existing ~60 FTEs). - Additional CD activities expected to be donor-funded. - Transition to steady state expected in 3 years. - Allocation of additional resources: - About 60 percent to direct country engagement (to be augmented to two thirds by CD financed from donor support). - Some 37 percent to enhanced regional surveillance, policy development, and tools. - Small share to support activities. - Direct country support targets: - Article IV climate coverage in roughly 60 Article IV consultation reports each year (split: about two thirds mitigation/transition; remainder adaptation). - FSAPs: all FSAPs (about 12 per year from currently 2) would cover climate-related physical and transition risks; additional unit costs about 0.5 FTE per FSAP. - CD: scale-up with donor support; 10 CMAPs per year (from 2) at cost up to 2 FTE; about 90 additional single-country CD per year costed at unit 0.2–0.3 FTE; one full-fledged external course delivered 5–6 times a year. - Costing and unit estimates: - Climate coverage in Article IVs averaged at 0.4 FTE (0.25 FTE for an Article IV accompanied by a CMAP); assumes 65 additional country teams spend 0.1 FTE/year for follow-up. - Unit cost for external course delivery estimated at 0.1 FTE. - How-to-notes are an existing publications series started in 2016. - Table 5 summary (additional staff FTEs and allocation): - Total additional staff: FTEs 95 (IMF01 20, IMF02 115 total), Percent 100. - Direct Country Engagement: FTEs 56 (IMF01 20, IMF02 76 total). - Article IV Consultations: FTEs 30 (IMF01 0, IMF02 30). - FSAPs: FTEs 6 (IMF01 0, IMF02 6). - CD: FTEs 15 (IMF01 20, IMF02 35). - CMAPs: FTEs 5 (IMF01 10, IMF02 15). - Other CD: FTEs 10 (IMF01 10, IMF02 20). - Area Department Coordination: FTEs 5 (IMF01 0, IMF02 5). - Multilateral Surveillance, Analytics and Policy: FTEs 35 (IMF01 1, IMF02 35). - Multilateral Surveillance: FTEs 10 (IMF01 0, IMF02 10). - Other research and analytics: FTEs 11 (IMF01 0, IMF02 11). - Policy development & tools: FTEs 14 (IMF01 1, IMF02 15). - Support activity: FTEs 4 (IMF01 0, IMF02 4). - Coverage note in table: 6–7 per year (contextual labeling). ### Staffing, hiring strategy, timelines, and training - Most additional FTEs to be macroeconomists with climate knowledge desirable; many recruits will require training due to limited supply of climate macroeconomists. - Complement recruits with climate/operational experts, legal experts, and political economy expertise. - Hiring phased over 3 years; dual strategy favoring quality over speed while accelerating scarce-skill hires. - Internal training essentials: - Mandatory “climate 101” for all IMF economists (near-term priority). - “Climate Bootcamp” and topic-specific training offered 3–4 times per year. - Peer-to-peer learning events: 4–6 per year. - Course materials to be deliverable in blended formats. - Costing: average unit cost of Board papers 2 FTE; climate notes 1.5 FTE; “climate 101”, bootcamps, peer events costed at 0.25 FTE per activity. ### Risk assessment and limits of mandate - Risks of increased climate engagement: perceived mission creep into environmental issues and overstepping IMF mandate. - Principal risk if under-resourced: crowding out other critical IMF work, uneven quality of engagement, reduced credibility and traction. - Risk management: limit engagement to macroeconomic and financial stability links; clearly communicate scope and limitations; properly resource mandate and allow transition/training time. - Residual risk acknowledged; main risk is engaging too little rather than too much. --- ### Conclusions, strategic priorities, and resource request - Climate change is a rapidly emerging source of macroeconomic and financial policy challenges for all IMF members. - IMF needs urgent reinforcement to provide high-quality climate work; reallocations under a flat budget have reached limits. - Coverage priorities: - Discuss macro-critical climate challenges for countries at least every 5–6 years in Article IVs, more frequently for adaptation and mitigation. - FSAPs should routinely analyze climate impacts and transition risks. - CMAPs to become a key tool for climate-vulnerable country analysis. - Scale up CD in line with member demand. - Flagships and policy papers to disseminate analysis and positions. - Anchor work in models, toolkits, data guidance, and review. - Staff estimate: about 95 FTEs needed to meet outlined challenge while preventing crowding out other work; complement with externally-funded CD of another 20 FTEs. - Additional resources would primarily strengthen bilateral country engagement, with indirect benefits for global policy coordination and climate financing for LICs and vulnerable countries. ### Issues for discussion (as posed) - Do Directors agree the Fund’s role needs to evolve given climate change as a critical macroeconomic policy challenge for members? - Do Directors agree the proposed strategy will ensure the Fund can continue to fulfill its mandate? - Are there further areas to consider to better serve the membership? - Do Directors agree with the request for additional resources necessary for effectiveness in this area? *Source: IMF — EXECUTIVE SUMMARY (ppea2021057) — June 30, 2021* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Introduction and overview - Climate change has emerged as one the most critical macroeconomic and financial policy challenges that the IMF’s membership will face in the coming years and decades. - By contributing to a higher frequency and intensity of natural disasters, climate change is already imposing large economic and social cost on many economies. - Climate change will affect macroeconomic and financial stability through numerous transmission mechanisms, including fiscal positions, asset prices, trade flows, and real interest and exchange rates. - No country can expect to be spared entirely; the relative importance of transmission mechanisms will differ across countries. - Climate change mitigation is a global public good requiring an unprecedented level of cross-country policy cooperation and coordination; as a multilateral institution with global reach, the IMF can assist with coordinating macroeconomic and financial policy responses. - Driven by membership demand, the IMF has stepped up engagement on climate-related issues, emphasizing flagship reports and policy papers and experimenting with new formats such as Climate Change Policy Assessments (CCPAs) conducted on a pilot basis with the World Bank. - The existing ad-hoc approach has reached its limits; the paper proposes a comprehensive strategy for systematic and strategic integration of climate change into the IMF’s activities. - The strategy includes a stock-taking of current activities, a detailed concept of adequate engagement (specific outputs and collaboration), and an outline of budgetary and human resource management implications. - Date on document: June 30, 2021. ### Macroeconomic and policy challenges posed by climate change - Climate change can destroy wealth, redistribute income between regions and countries, redirect trade, and impact asset valuations, with major repercussions for fiscal, financial, and monetary policy management. - Adaptation and resilience-building often require substantial investments, complicating fiscal management and potentially impairing debt sustainability. - Mitigation typically requires significant changes to tax regimes and regulatory frameworks, complemented by structural and spending policies to support a just transition. - A transition to a low-carbon global economy will have repercussions for economies dependent on exporting fossil fuels. - Many of these challenges fall firmly within the IMF’s mandate to assist members. ### The nature and scale of the climate problem (analysis and projections) - According to the International Panel for Climate Change (IPCC), absent decisive mitigation action, the global average temperature will exceed the pre-industrial level by 3–5 degrees centigrade by end-century. - Warming at this scale would trigger seismic ecological, economic, and social shifts; the gradual build-up of climate change makes it difficult to fully appreciate in real time. - Climate change is a negative externality with global reach; individual actors do not sufficiently internalize the impact of their actions on the world’s climate, reinforcing the need for global policy coordination across countries with different structures, development levels, vulnerabilities, and exposures. - “Tipping points” create major uncertainty; crossing critical environmental thresholds (e.g., thawing of the permafrost, melting of Himalayan glaciers, changes in monsoon patterns, weakening or reversal of ocean currents, melting of Antarctic and Greenland ice sheets) could lock in new climatic states and trigger catastrophic outcomes, reinforcing the rationale for mitigation. ### Economic impact: observed and potential damages - Early indicators of economic damage include losses associated with higher frequency and magnitude of extreme weather events; natural disasters can cause enormous human, social, and economic costs and are likely to become more pronounced as global warming intensifies. - Examples of extreme events: prolonged droughts, large wildfires, intense heatwaves, torrential rains, floods, hurricanes, extreme cold periods. - Longer-term, less visible trends include rising sea levels, destruction of habitable lands, acidification of oceans, and more frequent outbreaks of vector-borne diseases such as Zika, dengue and malaria. - Other transmission mechanisms: lower productivity in agriculture and fishing, increased climate-related pressures for forced migration, and risk of conflict. - Empirical evidence indicates non-linear effects of rising temperatures on the level of GDP: an increase in average temperature raises GDP in countries where annual average temperatures are low, but reduces GDP where they are high, with the threshold estimated at an annual average temperature of about 13–15C. - Some estimates suggest an additional impact of warming on growth (e.g., Burke et al., 2015), though this is debated. - A growth transmission mechanism implies much larger long-term GDP losses: in the absence of mitigation policies, these could be to the order of 25 percent of GDP by 2100 for the world economy, relative to holding temperatures fixed at current levels. - Output losses from natural disasters can be very large; example provided: when Hurricane Maria struck Dominica in 2017, losses were estimated to exceed 200 percent of GDP. - Natural disasters can produce cross-border spillovers (e.g., 2011 Thailand flooding halted hard drive production causing worldwide shortage; 2019 storms in Mozambique affected electricity exports to neighboring countries). ### IMF capacity and institutional response - The IMF has been involved in the climate change debate since at least 2008 but engagement to date has been mostly ad-hoc and unstructured, with a heavy focus on flagship contributions and policy papers and some discussion in bilateral country reports. - Demand from members for climate-related work has increased significantly, particularly for surveillance and capacity development (CD). - The IMF has re-dedicated resources—often on a provisional, temporary basis—and increased demands on existing staff; this approach has reached its limits and cannot deliver the comprehensive engagement needed. - To scale up effectively, the IMF needs to: - Reinforce its workforce with additional staff to work at the nexus between macroeconomics and climate issues. - Train existing economists to increase capacity for conducting climate-macro analysis. - Establish specialized hubs with climate expertise to assist country teams. - Provide guidance on dealing with climate-related challenges in surveillance and other activities, and build review capacity to ensure guidance is applied consistently and even-handedly. - Expand partnerships with external stakeholders to complement and strengthen the IMF’s own analysis and expertise. - Increase capacity to deliver CD in line with growing member demand. ### Paper structure and next steps (conceptual) - The paper proposes a strategy to scale up the IMF’s capacity to deal with climate-related macroeconomic and financial policy challenges to enable effective assistance to its membership. - Contents summarized: Section II sketches macroeconomic policy challenges; Section III summarizes IMF engagement to date; Section IV elaborates adequate coverage of climate change; Section V sketches organizational, budgetary, and human resource implications and provides a risk assessment; Section VI concludes. *Source: IMF — EXECUTIVE SUMMARY (ppea2021057) — June 30, 2021* ### 11. Low-income countries (LICs) tend to be disproportionately affected by climate change, ### 11. Low-income countries (LICs) tend to be disproportionately affected by climate change, ### A. Impacts on LICs and aggregate risks - LICs are often located in regions that are already relatively hot. - IMF estimates suggest that a temperature increase of 1C in LICs lowers GDP in the same year by 1.2 percentage points (IMF, 2017). - LICs tend to have less resources to invest in adaptation and resilience building and depend more on climate-vulnerable sectors such as agriculture. - Structural weaknesses in many LICs include weaker infrastructure, a higher prevalence of informal housing, lack of public services, weaker social safety nets, and political fragility, often exacerbated by weak institutions. - Some estimates place output losses with unmitigated climate change at 60–80 percent by 2100 for countries located in hot regions. - Given global interconnectedness, no country is likely to remain unscathed even if worst impacts are initially concentrated in hotter regions. ### B. Macroeconomic and financial policy challenges (channels and examples) - Fiscal management and public debt sustainability - Economic losses from climate change are likely to translate into revenue losses and spending pressures, triggering difficult fiscal policy challenges, especially in countries with already constrained fiscal space. - Financial stability - Assets and liabilities of financial firms could face large revaluations from physical risks (damages to property, infrastructure, land) and transition risks (adjusting to a lower-carbon economy). - Financial firms are exposed through underwriting activity, lending, and portfolio holdings. - Liquidity risk can materialize in the form of asset fire sales. - Monetary policy - Intensifying physical risk can produce greater volatility in output and prices. - Climate change and policy responses could cause persistent shifts in relative prices (for example, raising the price for fossil fuels) and affect real interest rates. - Trade, exchange rates and exchange rate regimes - Climate-driven changes in relative prices and income distribution will affect trade flows and exchange rates. - Higher volatility can complicate managed exchange rate regimes, especially amid vulnerabilities like high dollarization or debt levels. ### C. Policy-response challenges (fiscal, structural, coordination) - Adaptation and resilience building can be fiscally costly - Example: IMF (2021b) estimates for the Asia and Pacific region that annual average investment needs can exceed 3 percent of GDP—with costs typically falling due upfront, while benefits only accrue in the medium to long term. - Needs for resilience building are often most pressing in countries with elevated public debt and limited revenue capacity (IMF 2019a); international support may be required to close financing gaps. - Mitigation and transition to a low-carbon economy require significant changes to tax, spending, and regulatory systems - Accompanying social and structural policies are needed for a just transition, repurposing human and physical capital, and building low-carbon infrastructure, including incentives for low-carbon R&D and targeted support for households and workers (IMF 2019b, 2020c). - Mitigation typically involves higher energy prices and may require adjustments to development and industrial policy strategies. - International policy coordination is essential - Mitigation is a public good; coordination can prevent destabilizing spillovers and reduce carbon leakage and competitiveness concerns from unilateral mitigation. - Coordination is needed to ensure LICs and other climate-vulnerable countries have sufficient financial and technological means to pursue adaptation and mitigation. - Challenges for fossil-fuel-dependent countries - A global transition to a low-carbon economy creates existential challenges for many fossil fuel exporters. - Management typically requires financial diversification (investing export surpluses in low-carbon assets) and real diversification (developing non-fossil fuel sectors), with implications for fiscal, structural, and possibly exchange rate policies. ### IMF engagement to date — scope and capacity - Historical engagement - Early emphasis on policy papers and flagships, followed by gradual shift to bilateral country engagement (Article IVs, FSAPs, CD). - Recent years: climate-related demands on IMF staff increased greatly, especially in surveillance; IMF met demands by reallocating existing resources—an approach that has reached its limits. - Direct country engagement: Article IV consultations and FSAPs - Article IV consultations - During 2015–17, 27 climate and energy Article IV pilots discussed energy subsidy reform, mitigation policies and resilience building. - For climate-vulnerable states, six Article IV consultations (about 2 per year) drew on pilot Climate Change Policy Assessments (CCPAs) conducted jointly with the World Bank. - Capacity currently suffices to cover adaptation issues in about 4–6 Article IV consultations per year. - Capacity currently suffices to cover mitigation and transition management in-depth in 4–6 Article IV consultations per year. - Financial Sector Assessment Programs (FSAPs) - Physical and/or transition risks assessment have been covered on average in two FSAPs per year. - Current capacity does not allow climate risk analysis in all FSAPs, including stress testing and assessments on financial oversight. - Capacity development (CD) - Climate-related CD is rapidly increasing, focused mostly on fiscal issues, often delivered in collaboration with World Bank, OECD, IEA and bilateral donors. - Fiscal CD has covered mitigation and adaptation policies, resilience building, carbon pricing schemes, and green budgeting; initial work on climate-related module in public investment management assessments (PIMA). - Financial sector CD is limited, covering climate-related stress testing for insurance, regulation and supervision of climate-related risks, climate-related debt management, and green bonds. - Modelling support has addressed domestic macroeconomic, external, and distributional implications of climate policies. - Training: climate module in Inclusive Growth online course; work on model-based framework on mitigation and adaptation; plans for interactive microlearning videos. ### Multilateral surveillance, analytics, and data - Flagships and policy papers - Climate topics featured in flagships and policy papers since 2008 (WEO climate chapter) and include work on carbon pricing frameworks, stress testing and disclosures, economic impact on LICs and sub-Saharan Africa, and strategies to deliver global emissions reductions while minimizing transition costs. - Data and indicators - IMF launched an experimental climate change indicators dashboard in April to aggregate statistical indicators on climate change, greenhouse gas emissions from economic activity, trade in environmental goods, green finance, government policies, and physical and transition risks. - Considerable methodological work underway to improve climate data for macroeconomic analysis; staff analyzing commercial data and analytics solutions. ### Organization of IMF climate work and proposed scaling up - Current organizational arrangements - Climate work mainly within pre-existing structures with limited formal changes: - Creation of a Climate Advisory Group (2019) meeting at least bi-monthly. - Designation of a Deputy Director in SPR as Fund-wide climate change coordinator (2020). - Creation of a climate policy group in FAD (2020). - Several departments have set up networks and many divisions have taken on climate work in addition to their mandates. - Need to step up engagement - Serving member needs requires expanding coverage in Article IVs and FSAPs and increasing climate-related CD. - Country teams need expertise at the conjunction of macroeconomics and climate science, analytical tools, data, and guidance. - Strategy envisaged to reach a steady state within 3 years. - Proposed Article IV coverage (staff proposal) - Coverage of climate-related issues in about 60 Article IV consultations per year. - Cover adaptation and resilience building every 3 years for countries most vulnerable to climate change; about half accompanied by a Climate Macroeconomic Assessment Program (CMAP). - Mitigation policies of the 20 largest emitters to be covered every 3 years or so, requiring 6–7 Article IV consultations with in-depth mitigation coverage per year. - Transition risk management: 33–34 assessments per year with 8–9 going in depth—in particular for carbon exporters—plus another 25 assessments with a more standardized methodology, allowing coverage of transition risks for most of the membership over a time horizon of 5–6 years. *Source: ppea2021057 - 11. Low-income countries (LICs) tend to be disproportionately affected by climate change,* ### Box 1. In-Depth Analysis of Mitigation and Associated Transition Risks ### Box 1. In-Depth Analysis of Mitigation and Associated Transition Risks ### Scope and analytical starting points - A thorough mitigation analysis should begin with: - historical and anticipated future emissions trends and emissions sources; - emissions and clean technology commitments in the context of the Paris Agreement and in national plans; - existing and envisioned mitigation policies at the national and sectoral level. - The analysis should discuss implications of the country’s NDCs and, where existent, net zero commitments, including: - analysis of interim targets and a comparison with peers. - Where feasible, include incidence analyses for household income groups and vulnerable industries. ### Quantitative assessments and policy instruments - The analysis would present mitigation policy options with quantitative assessments of: - emissions, fiscal, economic efficiency, and macroeconomic (GDP, employment, trade) impacts. - Assessments would include quantitative analyses of: - the emissions, fiscal, and economic welfare impacts of carbon pricing, including the prices implicit in countries’ mitigation pledges; - domestic economic co-benefits (for example, reduction of deaths from air pollution). - Trade-offs illustrated between pricing instruments and other policies: - taxes on electricity; - taxes on individual fossil fuels; - energy efficiency policies and other regulations; - sectoral emissions pricing. - Practical guidance should be provided on how feebates or similar fiscal instruments can: - strengthen mitigation incentives in sectors (power, industry, transport, building, extractive, forestry, agriculture); - avoid creating new tax burdens on the average household or firm. - Where data permit, provide assessments of the incidence of carbon pricing across household income groups and vulnerable industries. ### Empirical evidence and recent Article IV work - Several recent Article IV consultations included assessments of climate mitigation and transition risk policies in selected issues or working papers, including: - Canada, Denmark, Finland, Germany, Indonesia, Korea, the Netherlands, the U.K., and the U.S. - Typical recommendation from these assessments: - a comprehensive strategy with carbon pricing as the centerpiece; - reinforced with feebates and public investment in clean technology networks; - productive use of carbon pricing revenues; and - just transition measures to protect vulnerable groups. ### Figure notes (emissions reductions and pricing) - The figure (CO2 Reductions for 2030 Pledges/ From Pricing) illustrates: - Percent emissions reductions vs. 2030 baseline. - Emissions reductions from $25 carbon price, extra reductions from $50 carbon price, extra reductions from $75 carbon price, and NDC target. - Notes associated with the figure: - NDCs targets are from first-round or (if applicable) second-round Paris pledge. - Estimates assume that CO2 must fall in proportion to other GHGs to achieve the target (i.e. non-CO2 GHGs must also fall in order for the target to be achieved). - Where a country has a conditional NDC the target is defined as the average between the conditional and unconditional target. - NDCs as of 2 June 2021. - Source: IMF staff calculations. ### Integration into FSAPs and targeted outputs - Exposure to climate risk and policy options should become an integral part of all FSAP analyses to better understand pressure points for the financial system from physical climate shocks and from transition to a low-carbon economy. - Typical climate component of an FSAP would include: - stress testing to both physical and transition risks (test design depending on countries’ vulnerabilities and characteristics); - assessments of climate-relevant financial regulation and supervision. - Staff plans: - develop and implement a standardized approach to assessing financial stability risks from climate change and the concomitant need for adaptation in the financial sector; - develop sector-specific guides (bank and insurance) for inclusion of climate risk in assessment of supervision and regulation. - Three-stage FSAP assessment template envisaged: 1. climate financial risk diagnostic to decide scope and relevant climate physical and transition risks; 2. designing climate scenarios; 3. focusing on risks that could materialize over the three- to five-year FSAP horizon and applying scrutiny to physical risks. - Tabled FSAP targeted outputs and coverage objectives (as stated): - Adaptation and Resilience Building. Objective: cover 60 climate vulnerable countries every 3 years. - Based on a CMAP: 10 per year. - Without a CMAP: 10 per year. - Climate Change Mitigation. Objective: cover the 20 largest emitters of GHGs every 3 years. - In-depth coverage: 6–7 per year. - Transition Management to a Low-Carbon Economy. Objective: cover all countries every 5–6 years. - In-depth coverage: 8–9 per year. - More standardized coverage: 25 per year. - Deliverable for FSAPs: - Assess climate issues as part of FSAP risk analysis and assessment of financial oversight frameworks. - Coverage: All FSAPs, based on an assessment of the materiality of climate risk. ### Box 2: Climate risk analysis examples and lessons from FSAPs - Historical textual analysis: - 192 FSAP reports (up to 2019) were analyzed; 33 FSAPs (17 percent) contained meaningful references to risk factors such as droughts, floods, and storms. - Many of these FSAPs were for small island states (for example, the Bahamas, Jamaica, and Samoa). - Recent FSAP approaches and examples: - Norway 2019 FSAP: - explored three transmission channels for transition risk to the financial system: (i) substantial increase in domestic carbon pricing affecting banks via corporates’ operating costs and profitability, (ii) large increase in global carbon prices affecting domestic economy and banks’ loan losses via fall in revenues of domestic oil producers, (iii) forced reduction in production of domestic oil firms affecting share prices and net wealth of domestic shareholders. - Results show a sharp increase in carbon prices would have a significant but manageable impact on banks. - Philippines 2021 FSAP: - constructed climate stress test scenarios with three components: projected frequency and intensity of typhoons under a global climate scenario; deployment of a catastrophe (CAT) risk model to estimate infrastructure damages; application of resulting damage as depreciation shock to capital stock and simultaneous productivity shock in a DSGE model calibrated for the country. - Exercise focused on typhoon risks and found relatively moderate impact on bank capital even for an extreme typhoon alone; compound risks (for example, an extreme typhoon during a pandemic) could substantially amplify damage. - Oversight examples: - 2020 U.S. FSAP considered regulatory responses to increasing incidence and severity of natural catastrophes in insurance sector supervision and regulation assessment. - 2019 Korea FSAP discussed coordination of climate action across authorities and supervisory strategy in the Technical Note on Financial Conglomerates Supervision. ### IMF-supported programs and climate considerations (Box 3) - Within the IMF’s lending mandate, financing may be provided under IMF-supported programs when climate-related measures are deemed critical to solve a member’s balance-of-payments problems. - Climate considerations already incorporated in program design include: - Fuel and energy subsidy reforms with dual BoP-stabilization and climate mitigation effects (examples cited: Egypt (2016 EFF); Tunisia (2016 EFF); Ukraine (2015 EFF)). - Introduction of new taxes and tax system improvements to widen revenue mobilization options such as carbon taxation (example cited: Jamaica). - Development of coherent resilience-building strategies to support green recovery and contain longer-term BoP needs (example cited: Costa Rica). - Inclusion of natural disaster clauses in new borrowing contracts to increase financial resilience to climate shocks in sovereign debt restructurings (examples cited: Barbados, Grenada). - Other program design elements that could internalize climate considerations: - Under program-supported PFM reforms, green budgeting to include and track climate-related spending across the budget cycle. - Offsetting distributional implications of climate-related measures through targeted cash or near-cash transfers and expanding existing ones to protect the poor and build broad support for adjustment and green recovery. ### Capacity development (CD), CMAPs, and data needs - Climate-related CD components: - (i) the CMAP—a diagnostic tool under development to analyze climate change policies and preparedness for climate-vulnerable countries; - (ii) climate-related single-country CD; - (iii) external training. - CMAP objectives and plans: - CMAP would build on the CCPA with a stronger macroeconomic and financial focus, analyzing links between resilience building and long-term growth, climate financing needs, distributional effects of climate policy, and long-term decarbonization plans. - Appropriate coverage of climate-vulnerable countries would require at least 10 CMAPs per year (up from the current delivery of 2), to inform corresponding Article IV consultations. - Demand for single-country CD expected to increase significantly, with substantial share to LICs and small states. - Examples of member countries receiving fiscal and economic assessments or advice on carbon taxes and green tax reforms: Costa Rica, Colombia, Guatemala, Jamaica, Moldova, Seychelles. - CD focus areas: - fiscal issues: green budgeting and climate PIMA (about a dozen countries have shown interest); - financial sector: climate risk stress testing, financial sector regulation and supervision, monetary policy and central bank operations, climate-related debt management; - data: Climate Change Indicators Dashboard to be accompanied by CD to train data compilers and bolster capacity for reliable, timely data; development of a toolkit for data collection, risk analysis and assessment for LICs and small states; - macro frameworks: help climate-vulnerable countries build macro scenarios reflecting climate change shocks and mitigation/adaptation policies with focus on growth, macro stability, and debt sustainability; - legal and financial integrity: CD on legal aspects in central banking, financial sector, Public Financial Management, tax law, governance, anti-corruption and financial integrity. *Source: IMF staff content in "Box 1. In-Depth Analysis of Mitigation and Associated Transition Risks."* ### 27. There also is a need to substantially increase external training. Many members are ### ppea2021057 - 27. There also is a need to substantially increase external training. Many members are ### External training and capacity development - Many members are scaling up climate work, including by establishing climate units in ministries of climate and central banks. - Given a dearth of expertise linking macro and climate science, the IMF can support efforts by training more authorities through: - dedicated courses, - interactive microlearning videos, and - webinars (as staff is already doing on a small scale for the Coalition of Ministers of Finance for Climate Action). - Training objectives: - bolster authorities’ capacity to analyze the macroeconomic and financial effects of climate change, natural disaster shocks, and policies; - incorporate climate modules into existing training courses on general macroeconomics, fiscal issues, and financial sector policies. - Table 3. Capacity Development: Main Targeted Outputs (as presented) - Coverage: Climate Macroeconomic Assessment Program Reports — 10 per year - Coverage: Single-Country CD — 87 per year - Fiscal issues — 10 - Financial sector issues — 30 - Climate data — 20 - Macro modeling — 15 - Legal and financial integrity issues — 12 - External Training: - Online course on the macroeconomics of climate change — 5–6 times per year - Micro-learning interactive videos — 10 ### Multilateral surveillance, analytics, and policy outputs - Flagship reports, regional surveillance reports, and policy papers remain key outlets to disseminate IMF analytical and policy work on climate. - Targeted outputs (Table 4: Flagship Reports and Policy Papers) - Flagship Reports (WEO, GFSR, Fiscal Monitor) — 1–2 chapters per year - Regional Economic Outlook Reports — 1–2 chapters per year - Policy Papers — 1–3 per year - Staff Climate Notes — 3–7 per year - Policy themes and priorities for papers and chapters: - adaptation; - integration of climate risk into debt sustainability analyses; - transition risks for fuel exporters; - climate adaptation in disaster-prone countries; - international coordination of mitigation policies; - political economy of climate mitigation; - methodology for assessing financial regulation and supervision of climate risks; - broadening and deepening assessments of physical and transition risks; - assessing financial stability implications of climate risks. - Other potential topics that may emerge: nexus between climate and development policies (UN Sustainable Development Goals), macro-critical aspects of biodiversity, financial integrity and climate change, measurement of natural capital, and the link between climate and digitalization. - An immediate priority is updating the IMF Surveillance Guidance Note to reflect climate-related conclusions of the CSR; guidance can also be disseminated through how-to notes. ### Modelling, toolkits, and data - Developing models and standardized toolkits will support analytical work in multilateral and bilateral surveillance; functional department staff would support country team requests for modeling climate impacts and provide granular policy analysis. - In-house models under development: - (i) a full structural global macroeconomic model (similar in design to the Global Integrated Monetary and Fiscal Model—GIMF) with detailed energy production and use; - (ii) a dynamic real CGE model to examine short-, medium- and long-run impacts at a more granular level, including sectoral and international trade effects; - (iii) an Integrated Assessment Model to look at the long-run interaction between climate and the economy, including negative feedback of climate change on the real economy. - Uses of models: analysis of mitigation and transition issues in bilateral surveillance, scenario analysis for FSAPs, CD, and multilateral policy issues (e.g., international coordination of mitigation policies). - Debt sustainability analyses (DSAs): - LIC DSF already includes—for countries frequently exposed to natural disasters—a stress scenario incorporating a large temporary impact on growth and guidance on incorporating average impact of disasters in long-term baseline projections. - The new debt sustainability framework for market access countries (MAC SRDSF), to be rolled out in early 2022, will include a similar stress scenario and a long-term module to account for the fiscal cost of climate change adaptation and mitigation policies. - Future work will seek to model benefits from resilience and adaptation policies in terms of growth performance to complement climate-related modules in both DSA frameworks. - Toolkits and templates: - Example: IMF spreadsheet tool that quantifies carbon pricing and other policies for Paris pledges and energy subsidies for 150 countries (used in several Article IV consultation reports). - Planned toolkits include: (i) supporting analysis of macroeconomic effects of natural disasters and adaptation policies; (ii) analysis of macroeconomic, external sector, and distributional implications of climate-related policies, including interactions with inequality. - Further work needed on longer-term implications of mitigation policies and interaction between climate change and debt sustainability, debt management tools, and instruments. - Climate data priorities: - Climate Change Indicator Dashboard requires maintenance, updates, and improvements: refining data sources, methodologies, more granularity, and wider country coverage. - Climate data will feature in IMF work on data gaps (G20 context and IMF Statistical Fora such as the 9th forum dedicated to Measuring Climate Change). - Staff provides leadership through the NGFS workstream on Bridging the Data Gaps. - Granular data on physical risk and transition risk will need to be purchased from third-party data providers. ### Support activities and internal capacity building - Internal training will upgrade IMF economists’ skills for macro-climate analysis. - Near-term priority: launch and teach a “climate 101” course mandatory for all IMF economists covering fundamental analytical tools at the intersection of climate and macroeconomics/finance. - Additional offerings: topic-specific “climate bootcamps” for in-depth training; training by external academics and institutions; internal knowledge sharing via platforms like the Green Shoots series. - Other support components: - Legal and financial integrity issues: increased demand for legal advice on institutional arrangements for incorporating climate in IMF operations; governance and financial integrity measures to safeguard climate policies; initiatives for Fund environmental sustainability (carbon credit purchases, green building programs, employee transit benefits); development and implementation of ESG investment policies. - External communication and outreach to official and non-official stakeholders and language services for climate-related work. ### Partnering and external collaboration - IMF staff collaborates widely with multilaterals, standard setting bodies, and NGOs to: - contribute to policy debate (engagement with G7, G20, G24; partnerships such as with Italian G20 Presidency for the Venice Conference on Climate in July; COP26 November 2021 conference); - co-host the Secretariat of the Coalition of Finance Ministers for Climate Action with the World Bank, supporting workstreams on carbon pricing and green budgeting; - work closely with the World Bank (including on the Bank’s new Climate Change Development Report) and maintain dialogues with the European Commission, OECD, various UN agencies, the IEA, the WTO, and regional development banks. - Improving climate data: - The Climate Change Indicators Dashboard is IMF-led and developed in cooperation with OECD, World Bank, UN, European Commission, Eurostat, FAO, IEA, and NOAA. - Strengthening information architecture and disclosures: - IMF co-chairs the NGFS workstream on bridging data gaps (data, disclosures, taxonomies) and participates in the NGFS Legal Task Force on climate-related litigation risk. - IMF is an observer in the International Platform on Sustainable Finance. - Staff cooperates with IFRS Foundation and FSB on climate disclosures and taxonomies and contributes to FATF work on climate and environmental crimes. - Strengthening financial stability: - Staff collaborates with FSB on financial stability risks from climate physical and transition risks and on prudential standards for climate risk. - Participation in NGFS workstreams on microprudential supervision, scaling up green finance (central bank operations), and designing scenarios for climate physical and transition risks. - Collaboration with BCBS, Sustainable Insurance Forum, BIS/FSI (to incorporate climate risk in supervisory and regulatory online course), and with the World Bank for FSAP scenario design for climate physical risk stress testing. - Collaborating on capacity development: - Fund collaboration with UNDP on peer-to-peer sharing events and roundtables on green budgeting in Asia and the Caribbean. - Cross-organizational coordination with OECD, World Bank, UNDP, and European Commission on standards and tools for climate-related public financial management (green budget tagging, medium-term expenditure frameworks, public investment management). - Convening and outreach: - Use of Spring/Annual Meetings to raise awareness on macroeconomic and financial challenges of climate change. - Co-organization of events (e.g., BIS green swan conference with Banque de France and NGFS in June; high-level climate event with the People’s Bank of China in April). - Exchanges with NGOs, academics, private sector, and think tanks (World Resources Institute, NDC Partnership, High-Level Advisory Group with Professor Nicolas Stern, Center for Global Development) and periodic exchanges with sustainability executives at major financial institutions. ### Strategic observations - Climate change interacts with many policy areas—including macroeconomic and financial stability, development, and peace and security—prompting increased engagement from institutions with different mandates. - There is scope for experimentation and peer learning in the macro/climate nexus, but urgency requires moving fast to get traction for policy action in this decade. *Source: IMF — IMF STRATEGY TO HELP MEMBERS ADDRESS CLIMATE CHANGE RELATED POLICY CHALLENGES (excerpts).* ### 37. In such an evolving environment, collaboration is paramount. As the Fund has emerged ### IMF STRATEGY TO HELP MEMBERS ADDRESS CLIMATE CHANGE RELATED POLICY CHALLENGES ### Collaboration with IFIs and Development Partners - Collaboration is paramount as the Fund has emerged as a more prominent voice on climate change issues; requests for participation and partnerships have multiplied. - Staff will identify areas of collaboration with IFIs and development partners and explore new partnerships, focusing on member needs and providing the best macroeconomic and financial policy advice possible—while being mindful of the Fund’s comparative advantage and the costs of collaboration. - Guiding considerations for collaboration: - Broad exchanges: seek to avoid collaborating on a project-by-project basis; ensure frequent exchanges to remain on top of each other's agendas, minimize overlaps, recognize, cross-reference, and disseminate the work of other stakeholders; delineate an effective division of work and leverage synergies. - Complementarity: leverage complementary expertise (example: multilateral development banks and some NGOs better placed to assess needs for physical resilience building; IMF comparative advantage is integrating resilience building needs into coherent macroeconomic and debt sustainability frameworks). Example of existing collaboration: IEA maps sectoral transition paths (energy and transportation) and has been collaborating with the IMF to assess macroeconomic effects. - Cost-benefit analysis: collaboration is resource intensive and often requires aligning institutions with different objectives, internal organizations, work cycles, governance structures, and communication strategies; cooperation should not be undertaken for its own sake and should align closely with institutional objectives to maximize value added and remain cost effective. - Flexibility: collaboration needs to be nimble to allow experimentation and openness on policy options; in the majority of cases, informal cooperation is preferable to formal cooperation arrangements. ### Organizational and Resource Implications and Risk Assessment — Overview - Implementing the strategy requires internal reorganization—especially establishment of ‘climate hubs’ in a few functional departments—and additional staff with climate expertise. - Needs for additional staff are estimated at about FTE 95 in the steady state (once scaling up is completed). - These would complement existing resources estimated at about 60 FTE including some transitional resources. - Additional CD activities needed to fully implement the strategy are expected to be funded by donor support. - Transition dynamics: - First years: above-average investments in developing policies and training while steadily ramping up country work through surveillance and CD. - As policies mature and training materials are adjusted, resources would be moved to further increasing country support. ### A. Organizational Implications — Climate hubs and departmental roles - Climate hubs envisaged in four functional departments—FAD, MCM, RES, and SPR—to host significant climate expertise to support country teams in Article IV consultations and FSAPs, lead policy development, and provide CD. Area Departments also need to scale up. - The IMF’s climate coordinator (based in SPR) and the climate advisory group would continue to coordinate work across the IMF. - Organization of climate hubs: may be extra divisions/units in some departments or a network of economists and experts in others. - Fiscal Affairs Department (FAD) roles: - Produce and/or coordinate climate outputs on adaptation, mitigation and transition issues, including leading the production of CMAPs. - Reinforce country teams for Article IV consultations with climate economists and experts. - Coordinate with international bodies, notably the Finance Ministers’ Coalition for Climate Action. - Continue to lead climate PFM work, including provision of CD. - Monetary and Capital Markets Department (MCM) roles: - Lead or co-lead outputs on financial stability aspects of climate change and the role of sustainable finance, including in multilateral surveillance. - Conduct climate-related risk analyses and stress testing including climate model calibration. - Assess regulation and supervision to recommend adaptations to central bank balance sheets and operations. - Support country teams by developing climate-related analytical tools and provide climate-related CD; MCM economists may reinforce country teams for Article IV consultations. - Research Department (RES) roles: - Produce and coordinate outputs on adaptation, mitigation, and transition, focusing on macroeconomic, global and political economy angles. - Spearhead analytical work, including on multilateral dimensions of climate mitigation and analysis of energy transition and implications for commodity markets in the context of the WEO, the WEMD and the G20. - Tailor macroeconomic models to individual country circumstances to support mitigation and adaptation policy analysis for Article IV consultations, regional divisions, and scenario analysis for FSAPs and CMAPs. - Organize an annual IMF research conference on the economics of climate change and support internal training. - Strategy, Policy and Review Department (SPR) roles: - Spearhead IMF policy development on climate issues in cooperation with other departments (e.g., integrating climate aspects into lending operations or debt sustainability frameworks). - Develop guidance for country teams, conduct climate-specific review, support the IMF climate coordinator on adapting the Fund’s overall strategy, and act as the IMF’s climate collaboration hub with external bodies. - Area Departments: - Require reinforcements as they provide bilateral policy advice, regional surveillance, and coordinate in-country with development partners. - Strengthen expertise on region-specific topics (examples: resilience building to natural disasters in APD, AFR and WHD; transition risks for oil exporters in AFR and MCD; regional climate mitigation initiatives and policies in EUR). - Assist with production of CMAPs—particularly debt and financing implications—and follow up on CMAP recommendations and other CD advice in Article IV reports. - Would have a climate coordinator function to operationalize climate work regionally, liaise with functional department climate hubs, feedback country experiences and common policy questions, and help on cross-country projects. - Other departments (targeted reinforcements): - ICD: reinforce capacity to deliver training and develop models for country applications. - LEG: strengthen advice on legal issues related to climate change policies. - STA: improve data quality and support data-related capacity development. - Footnote: climate-related work on Fund-supported programs (FIN), provision of digital and cyber risk expertise (ITD), high-impact communication and outreach (COM), and support services (CSF) are not included in this estimate and would be part of the mark-up for overhead costs. - Greening IMF operations: - Greening IMF operations is key for institutional credibility; the Fund will redefine post-pandemic engagement with an eye to sustainability and make some pandemic-related reductions in carbon footprint permanent. - Develop a Fund-wide governance structure and define goals and strategies to create a more robust environmental sustainability strategy while maintaining focus on serving the membership. - Box 4 highlights: - Between 2010 and 2019, the Fund’s total annual greenhouse gas (GHG) emissions decreased by 10 percent, mainly by reducing energy use by half. - Achievements include: U.S. Environmental Protection Agency’s Energy Star building certification and Platinum recertification of the HQ2 building under LEED. - The Fund considers environmental sustainability in planning of building and facilities-related projects to reduce environmental impact while meeting business needs and focusing on health and safety. - Pre-pandemic measures show business travel represented 70 percent of the Fund’s total carbon footprint in 2019; telework and virtual meeting capabilities present opportunities to reduce travel-related emissions and HQ space needs. - Transitioning to renewable energy operations and environmentally friendly vehicles may reduce energy consumption and emissions over time but require short-term investments. - Note: Emissions include all HQ operations and travel booked through the Fund’s travel agent; field office operations are not currently included. - Fund GHG Emissions by Scope (2019): Scope 1 - Purchased fuels and emissions 5%, Scope 2 - Purchased Electricity 25%, Scope 3 - Business travel, commuting, shipping 70%. ### B. Budgetary and Human Resources Implications - Current resources and spending: - Departments estimate they spent $28 million on climate in FY21 (of which $1½ million is externally funded), compared with $16.5 million (of which $½ million is externally funded) in FY20. - This spending corresponds to broadly 60 FTEs, with some $2 million (about 7 FTE) being transitional resources. - The remaining 53 FTEs include resources that have covered climate issues as part of usual rotation and prioritization of macro-critical topics. - Note: The 60 FTEs reflect staff working full time on climate, but also staff reporting only some of their time to climate. - Any costs or efficiency gains will be discussed and reflected in annual budgets. - Additional steady-state needs: - Staff estimates an addition of about 95 FTEs would be needed to ensure the Fund can cover most macro-critical aspects in its climate work in the steady state, while relying on other institutions where these have a comparative advantage. - A detailed bottom-up resource exercise was used to determine additional staff needs. - Allocation of additional resources: - About 60 percent of the additional resources would go to direct country engagement (to be augmented to two thirds by CD financed from donor support). - Some 37 percent would go to enhanced regional surveillance, policy development, and tools to support direct country engagement. - A small share would go to support activities. - Transition period: - A transition period of 3 years will be required before the new steady state is reached, including full delivery of the outputs sketched in the previous section. ### Direct Country Support — Planned Coverage and Delivery - Article IV consultations: - Strategy envisages climate coverage in roughly 60 Article IV consultation reports each year. - Coverage split: about two thirds on mitigation/transition and the remainder on adaptation issues. - Overall, this would suffice to engage with each member on macro-critical climate issues every 5–6 years. - Functional departments would support area department teams through mission participation and contributions to analytical papers, models and toolkits tailored to country circumstances, aided by area department climate coordinators to encourage knowledge transfer and mobility. - FSAPs: - All FSAPs (about 12 per year from currently 2) would cover climate-related physical and transition risks, including climate stress testing, assessment of regulation and supervision, data disclosures, and the climate-adequacy of regulatory frameworks. - The additional unit costs would be about 0.5 FTE. - FSAP mission teams would be supported by reference notes, modeling support from RES, and assistance on legal issues. - Findings of FSAPs would be integrated into corresponding Article IV consultation reports. - Capacity Development (CD): - CD delivery would be scaled up significantly from a low base to meet requests by country authorities to assist with implementing Fund advice from in-depth Article IV consultations. - Staff will seek additional donor support to augment internally-funded CD, including for CMAP and external training as well as for fiscal, statistical and financial issues. - The Committee on Capacity Building has designated climate change as a topical growth area for CD. - IMF01-funded CD would be targeted to the most urgent needs, especially for low-income countries and those unlikely to be covered by IMF02 resources. - Specific CD outputs and targets: - There would be 10 CMAPs per year (from currently 2) at a cost of up to 2 FTE. Main findings and policy recommendations would be integrated in corresponding Article IV consultation reports. - About 90 additional single-country CD per year (compared to the status quo) have been costed at a unit cost of 0.2–0.3 FTE. Climate-related single-country CD would be complemented by how-to climate notes offering practical advice to policymakers on selected economic issues. - External training: adapt existing course materials to include flexible climate change modules; one full-fledged climate-related macroeconomic course would be delivered 5–6 times a year. - Costing notes: - Climate coverage in Article IV consultations is costed on average at 0.4 FTE (0.25 FTE for an Article IV accompanied by a CMAP), accounting for integration of climate change issues in addition to country teams’ current work and assuming that 65 additional country teams would spend 0.1 FTE per year to follow up on previous Article IV consultations and stay current on climate issues. - Any climate issues related to a Fund-supported program are covered under this estimate (potentially leading to an underestimation if there was a substantial increase of climate-coverage in the context of programs). - Unit cost for delivery of an external course is estimated at 0.1 FTE. - How-to-notes are a publications series started in 2016 that offers practical advice to policymakers. ### Table 5 — Additional Resource Needs for New Deliverables (summary of FTEs and coverage) - Total additional staff: FTEs 95 (IMF01 20, IMF02 115 total), Percent 100. - Direct Country Engagement: FTEs 56 (IMF01 20, IMF02 76 total), Percent 59 (IMF01), 98 (IMF02), 66 (Total). - Article IV Consultations: FTEs 30 (IMF01 0, IMF02 30), Percent 32 (IMF01), 0 (IMF02), 26 (Total). - FSAPs: FTEs 6 (IMF01 0, IMF02 6), Percent 6 (IMF01), 0 (IMF02), 5 (Total). - CD: FTEs 15 (IMF01 20, IMF02 35), Percent 16 (IMF01), 98 (IMF02), 30 (Total). - CMAPs: FTEs 5 (IMF01 10, IMF02 15), Percent 5 (IMF01), 50 (IMF02), 13 (Total). - Other CD: FTEs 10 (IMF01 10, IMF02 20), Percent 11 (IMF01), 47 (IMF02), 17 (Total). - Area Department Coordination: FTEs 5 (IMF01 0, IMF02 5), Percent 5 (IMF01), 0 (IMF02), 4 (Total). - Multilateral Surveillance, Analytics and Policy: FTEs 35 (IMF01 1, IMF02 35), Percent 37 (IMF01), 2 (IMF02), 31 (Total). - Multilateral Surveillance: FTEs 10 (IMF01 0, IMF02 10), Percent 11 (IMF01), 0 (IMF02), 9 (Total). - Other research and analytics: FTEs 11 (IMF01 0, IMF02 11), Percent 11 (IMF01), 0 (IMF02), 9 (Total). - Policy development & tools: FTEs 14 (IMF01 1, IMF02 15), Percent 15 (IMF01), 2 (IMF02), 13 (Total). - Support activity: FTEs 4 (IMF01 0, IMF02 4), Percent 5 (IMF01), 0 (IMF02), 4 (Total). - Coverage note: 6–7 per year (contextual labeling in table). *Source: Authors.* ### 48. As in previous years, flagships would, as relevant, include high-impact climate-related ### ppea2021057 - 48. As in previous years, flagships would, as relevant, include high-impact climate-related ### Climate work expansion and outputs - Flagships would, as relevant, include high-impact climate-related chapters. - Staff would significantly expand climate work in regional surveillance reports to highlight cross-country work, particularly at the beginning of implementing the strategy, to cover a broader swath of countries and quickly raise awareness of climate issues with country teams and authorities. - Functional departments expect to present 1–3 additional Board papers per year. - Staff expects a larger number of policy papers in the first years of implementing the strategy because the IMF’s policies with regard to macro-climate issues are still being developed; some papers will be conceptual (for instance, the measurement of natural capital) and some topics may require a series of Board papers over a couple of years. - A new series labeled staff climate notes would showcase the latest policy-related analysis and research by individual IMF staff, published to elicit comments and further debate; staff plans to issue about 3–7 climate notes per year. ### Support activities, tools, and guidance - Functional departments would support country teams by following up on policy papers with guidance notes and other guidance (how-to notes and templates). - Emphasis of guidance: coverage requirements, analytical tools (in-house models and toolkits), data sources, even-handed application of IMF policy positions while taking into account country-specific circumstances, and best practice examples. - Support includes maintaining and upgrading the climate data dashboard and making small refinements to avoid obsolescence. - Climate-specific legal support related to surveillance and Fund-supported programs is included. - Increased resources for coordination and networking with internal and external stakeholders are expected to result in better products for members. - FTE resources would need to be complemented through forward-looking, highly granular, sectorized and geo-spatial data on physical and transition risks to support policy analysis and mainstream climate issues into multilateral and bilateral surveillance including FSAPs, analytical work, capacity development and potentially lending programs. ### Training, learning, and knowledge sharing - Given the dearth of climate-literate economists, internal training will be essential. - A short “climate 101” course will be mandatory to ensure that all Fund economists become conversant in basic climate issues; this course will be offered 3–4 times per year focusing on broad macroeconomic effects of climate change and policies to address them. - A “Climate Bootcamp” would be offered 3–4 times per year for staff working on countries facing specific issues; the Bootcamp would aim at using analytical tools to carry out macro policy scenario analysis and—through modules—develop more in-depth policy expertise geared to specific issues (such as carbon pricing) or specific country types (e.g., countries vulnerable to natural disasters). - To promote continuous learning, staff would organize 4–6 peer-to-peer learning events per year and establish a venue for collaboration where staff can share lessons from climate change work in surveillance, lending, and CD activities. - Course materials would allow for a variety of delivery modalities, including blended formats. - External climate experts would be hired to provide training seminars (e.g., academics developing graduate programs in climate economics). - Support activities also include legal support related to institutional aspects such as facilities and HR policies. - Costing notes: At an average unit cost of 2 FTE; large variation would be expected across papers. Climate notes are costed at 1.5 FTE on average. The “climate 101” course, climate bootcamps, and peer learning events have been costed with 0.25 FTE per activity. ### Staffing, hiring strategy, and timelines - Most of the additional FTEs would consist of macroeconomists; prior knowledge of climate issues would be ideal, but most new staff would need training because of a limited supply of climate macroeconomists. - A higher share of recruits with strong background in climate and environmental economics would enable more rapid scaling up. - Macroeconomists would be complemented by climate/operational experts (particularly for CD activities), legal experts, and possibly political economy expertise. - Current macroeconomists would be trained to enable them to spend part of their time on climate. - Managerial and administrative staff increases may be needed; resource organization in departments might need review if additional resources strain spans of control. - Hiring approach: dual strategy of quality over speed to allow time for training, while engaging in partially accelerated hiring for those with scarce skill premia. - Recruitment of diverse staff may take longer, arguing for starting early to enhance diversity. - Hiring would likely need to be phased in over 3 years. ### Risk assessment - Stepping up engagement on climate change will help mitigate reputational and strategic risks by assisting members with critical macroeconomic and financial policy challenges. - New risks include the IMF being perceived as venturing into environmental issues and overstepping its mandate. - Under-resourcing the new climate mandate could strain other critical IMF issues and reduce the quality and traction of Fund advice, affecting reputation. - Risk management measures: (i) limit engagement to issues with a clear link to macroeconomic and financial stability; (ii) clearly communicate the scope and limitations of the IMF’s engagement; and (iii) properly resource the new mandate and acquisition of skills, including time for transition and training. - A residual risk remains and will have to be accepted. - The main risk is engaging too little rather than too much; an under-resourced effort would produce uneven quality and frequency of engagement, undermine credibility and traction, and force the IMF to choose between engagement on climate and other macro-critical issues. - The IMF would stick closely to its mandate—macroeconomic and financial stability—and coordinate closely with other stakeholders to maximize effectiveness and complement its analysis. ### Conclusions and resource needs - Climate change has emerged rapidly as a cause of critical macroeconomic and financial policy challenges affecting all IMF members in coming years and decades; the IMF needs to assist members in building resilience, mitigation, and managing the transition to a low-carbon economy, and can help coordinate the global macroeconomic policy response. - IMF capacity to conduct high-quality climate work needs urgent reinforcement; to date engagement has mostly been arranged by reallocating resources within a flat budget and by increasing demands on existing staff, an approach that has reached its limits. - Climate-related policy challenges need broader and deeper coverage across activities: - Discuss macro-critical challenges most relevant for countries at least every 5–6 years in Article IV consultations, and more frequently for adaptation and mitigation. - Financial Sector Stability Assessments should routinely analyze impacts of climate change and transition risks. - CMAPs should be turned into a key tool for IMF analysis in climate-vulnerable countries. - Other CD needs should increase in line with membership demands. - Flagships and policy papers are needed to disseminate analysis and policy positions. - Work must be anchored in development of models and toolkits, data guidance, and review. - Staff estimates that about 95 FTEs are needed to meet the outlined challenge while preventing crowding out other IMF work; this should be complemented by externally-funded CD of another 20 FTEs. - Much of the additional resources would strengthen bilateral country engagement (analyze policy options for adaptation, strengthen financial sector resilience, assist with design of economically and socially balanced transition strategies, improve climate-related fiscal planning). - Indirect benefits would include facilitating policy coordination on climate change mitigation and helping boost climate financing for low-income and climate-vulnerable countries. ### Issues for discussion - Do Directors agree that the Fund’s role would need to evolve in light of climate change emerging as one of the most critical macro-economic policy challenges that the IMF’s membership will face in the coming years and decades? - Do Directors agree that the proposed strategy will ensure that the Fund can continue to fulfill its mandate? - Do Directors see any further areas that could be considered to better serve the membership? - Do Directors agree with the request for additional resources that would be necessary to ensure the Fund’s effectiveness in this area? *Source: IMF Strategy to Help Members Address Climate Change Related Policy Challenges (excerpts).* --- _Source: https://www.imf.org/-/media/files/publications/pp/2021/english/ppea2021057.pdf_