Sustainable Transformation of Societies – A Green Consensus for Macro-Fiscal Policies?

IMF News, October 9, 2020

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Remarks by Mr. Tao Zhang, Deputy Managing Director, prepared for delivery on October 9, 2020.
Climate change is already having a large impact on countries’ macroeconomic stability and prospects for growth.
Central banks and finance ministries both have a critical role to play in addressing these challenges.
The IMF aims to cover three aspects of its work on climate change:
- First, capacity development assistance to help finance ministries and central banks take climate into account in their activities;
- Second, advice on getting the price of carbon right; and
- Third, the Climate Change Policy Assessments developed with the World Bank to help individual member countries integrate climate considerations in their macroeconomic policymaking.

The IMF’s capacity development workstream covers a wide range of critical economic issues, sharing knowledge through hands-on advice, training, and peer-to-peer learning.
Planned steps and focus areas:
- Step up capacity development on the integration of environmental concerns into budget processes, including in Public Investment Management Assessments—the Fund’s key tool for assessing infrastructure governance.
- Develop capacity with a focus on green budgeting tools, essential for countries highly vulnerable to climate risks.
- Support technical assistance on green investment, particularly regarding public investment and public policies to promote low-carbon technologies.
- Work on understanding and better disclosing climate risks.
Financial sector support:
- Support central banks and supervisors addressing financial stability risks related to climate change.
- Existing climate-related capacity development has focused on insurance regulation and supervision, stress testing, and debt management in some Caribbean countries.
- Study the impact of climate risks on central bank operations and on the use of monetary policy tools.
- Support efforts to develop asset classification standards to improve climate-risk analysis and promote more accurate pricing of green assets.

Carbon pricing is identified as the tool economists believe should be the centerpiece of policies to promote a clean energy transition.
Political and social constraints:
- Limits exist to the acceptability of higher energy prices; carbon pricing will need to be reinforced with sector-by-sector policies that are less efficient but avoid a large increase in energy prices.
Policy recommendation:
- Consider “feebates”—sliding scales of fees on products or activities with above-average emission rates and rebates for products and activities with below average emission rates—to reinforce mitigation incentives in sectors such as transportation, power generation, agriculture, and forestry.
Investment and inclusivity:
- Investments in clean-technology infrastructure will be essential.
- Incentives to promote development and deployment of critical technologies will be needed to kickstart these investments.
- The clean energy transition needs to be inclusive; upfront assistance for vulnerable households, workers, regions, and firms is needed.
International approach:
- Recommend a carbon price floor arrangement, aligned with global temperature goals, to complement the Paris process and scale up mitigation efforts.
- The arrangement could be designed flexibly to accommodate different national approaches so long as they achieve equivalent emissions outcomes, and equitably, for example, with stricter requirements for advanced countries.

The Climate Change Policy Assessments are collaborative diagnostic tools developed with the World Bank to build capacity in countries to create coherent macro-frameworks for responding to climate change.
Coverage and structure:
- Assessments cover climate adaptation and mitigation policies as well as financing and risk management strategies, replicating the recommended structure of the National Determined Contributions under the Paris Agreement.
Pilots and findings:
- Since 2017, six pilots have been conducted for small states vulnerable to climate change and natural disasters.
- Recipient countries found the assessments useful in identifying policy, institutional, and financing gaps and in linking climate change with the broader economy.
Next steps:
- The Fund, together with the Bank, is considering how to take the assessments forward and exploring the scope for broadening their scope beyond small developing states to low-income countries, emerging economies, and possibly also advanced economies.

The Fund is expanding its engagement on climate change across multiple areas in recognition that this is a critical macroeconomic challenge that affects all member countries.
Key institutional roles highlighted:
- Provide capacity development to finance ministries and central banks.
- Advise on carbon pricing mechanisms and complementary sectoral policies.
- Advance Climate Change Policy Assessments with the World Bank to integrate climate into macroeconomic policymaking.

Source: Remarks by Mr. Tao Zhang, Deputy Managing Director, October 9, 2020.