Speech

Securing a Green Recovery: The Economic Benefits from Tackling Climate Change

April 15, 2021

As prepared for delivery

1. Introduction and Outlook

Good evening! [wăn shàng hăo]. I would like to thank Governor Yi Gang for inviting me here today, and to the People’s Bank of China for co-hosting this important event.

Given the challenges facing us at this pivotal moment, I would like to draw inspiration from three Chinese sayings.

The first is this: “Dispel the clouds and see the sun”.

Last year, the world was clouded by the worst pandemic in a century and the deepest recession since the Second World War.

Now the outlook is starting to become sunnier. With the recovery underway, the IMF recently lifted its global growth forecast to 6 percent for this year and 4.4 percent in 2022.

We are in a much better place because of extraordinary efforts. Think of the scientists from around the world who worked together to create vaccines in record time.

And think of the exceptional policy measures—including about $16 trillion in fiscal action and a massive liquidity injection by central banks, including the People’s Bank of China (PBC).

Without these coordinated measures, the global contraction last year would have been three times worse—this could have been another Great Depression.

We now see the recovery across the Asia-Pacific region, where growth is projected at 7.6 percent this year.

This year, China’s economy is expected to grow at 8.4 percent, largely because of stronger net exports. And we project that China will contribute on average more than one-quarter to global GDP growth through 2026.

And yet, while a few economies—led by the United States and China—are powering ahead, others are still struggling to emerge from the shadows of this crisis.

We see a multi-speed recovery in which weaker and poorer countries are falling behind—because they have more limited access to vaccines and very little room in their budgets to fight the crisis and secure the recovery.

We also see a multi-speed recovery within countries. Young people, women, the lower-skilled, and small businesses in contact-intensive sectors have been among the hardest hit—and they will need more support.

This is critical to heal the economic scars of the crisis. But it will only take us so far.

2. Securing a Green Recovery

If we are to achieve a more sustainable and inclusive recovery, we must turn this crisis into opportunity by building greener and more climate-resilient economies.

The existential threat of climate change is one of our most important problems. Left unchecked, it will bring untold disruption. To achieve the goal of reducing climate risks and averting future calamities, action during this decade will be critical.

Which brings me to a second Chinese proverb: “One generation plants the trees; another gets the shade.”

The Asia-Pacific region is already experiencing faster-rising temperatures and more weather-related natural disasters than anywhere else—with coastal areas and small island countries being especially affected.

In low-income countries, climate change is already a key driver of rising poverty, accelerating spread of disease, and worsening food insecurity.

The good news is that taking action on climate change now will do more than avoid disasters in the future: by accelerating the historic transformation to greener economies, we also can provide a major boost to the recovery.

In our research, [i] we analyzed how economic policy tools can pave a road toward net zero emissions by 2050, in a matter that supports economic growth, employment and income equality. For illustration, a policy mix of carbon taxes and green investment stimulus could increase the level of global GDP in the next 15 years by about 0.7 percent and create around 12 million new jobs through 2027.

Let us take a closer look at some of the key economic policy tools for climate mitigation.

(a) Carbon Pricing

While there is no one-size-fits-all for countries’ policies, there is a growing consensus that carbon pricing is the most efficient and cost-effective approach to curbing emissions. [ii]

By raising energy prices overall, carbon pricing creates incentives for households and firms to shift towards greener options, promoting energy efficiency. It also boosts green investments, and spurs innovation, by leveling the playing field between renewables and fossil fuels.

Asia is home to the majority of the world’s population and has been the main driver of global growth in recent decades. Not surprisingly, it also accounts for almost half of the world’s carbon emissions. Yet, new IMF research shows that a moderate and progressive carbon price—starting from a low base but rising steadily—could help countries in the region deliver on their commitments under the Paris Climate Agreement over the next 10 years. [iii]

In addition, carbon taxes can generate substantial revenues, which could be used to support households, affected by the low carbon transition, and to scale up public investment in health, education, and retraining and re-skilling of displaced workers.

Countries can achieve similar result using other instruments too. China’s existing coal tax is a good example, which could eventually be scaled up to curb CO2 emissions.

China is also taking a major step forward by introducing anational carbon emissions trading system for the power sector. It is designed slightly differently from what we see in other countries—instead of a cap on the total emissions a firm can generate, there are limits on emissions relative to a firm’s energy output.

Over time, the system can become more comprehensive by: (i) shifting the focus to a cap on total emissions, (ii) gradually adopting more ambitious targets, (iii) ensuring compliance, (iv) extending it beyond the power sector; and (v) generating revenue from these allocations, which today are free.

A range of other tools, such as “feebate” schemes, that reward efficient practices and discourage high-carbon activities, can contribute to lowering CO2 emissions in certain sectors as well. In some cases, tighter regulations of emissions and energy efficiency will be needed, along with better green technology policies.

China’s continuing reforms towards high-quality, sustainable, and balanced growth can also contribute to lowering carbon emissions. Shifting away from investment-heavy to consumption-led growth, and supporting the expansion of services and high-tech sectors—as envisaged in the just-approved 14th Five-Year-Plan—will reduce the energy demand and carbon intensity of growth, thus, making it easier to achieve your climate goals.

These efforts would result in a big cut to emissions—which would be amplified by synchronization across markets. That is why the IMF is advocating for carbon price floors in the world’s largest emitters to ensure more substantial climate change mitigation. [iv]

(b) Green Financing

The sheer size of the task ahead calls for trillions of dollars in green investment. This suggests, in China as elsewhere, there is room to foster more private-sector green financing by efficiently steering capital from “brown” to green investment, for example, through price signals and regulatory incentives.

Domestically, countries need to set up environmental information disclosures, green finance standard systems, and other support policies to mobilize more private sector investment.

Data has an important role. In a recent survey of 425 investors [v] with ~$25 trillion in assets under management, 53 percent cited the poor quality or availability of ESG data and analytics as the biggest barrier to deeper and broader implementation of sustainable investing.

Climate change is in itself a threat to financial stability. Countries and companies—and therefore their banks—face higher risks from extreme weather events and from the transition to a low-carbon economy. Risk management needs to be improved to assess climate-related risks and safeguard financial stability.

Boosting green finance also means ramping up international support for poorer countries—where climate resilience can be a question of life and death, and the price tag can be much higher.

Globally, the average increase in public investment to finance climate adaptation is about 3 percent of GDP per year. But Tonga, for example, will need 14 percent of GDP per year over the next decade.

Vulnerable countries will need more domestic revenue mobilization—but also more external concessional financing, and more help to deal with debt. These challenges have become even more pressing during the pandemic.

Here China is playing an important role—by participating in the recently extended G20 Debt Service Suspension Initiative and in the Common Framework for orderly debt restructuring, and by its support for the IMF’s Catastrophe Containment and Relief Trust.

3. Stronger International Cooperation

Which brings me to a third proverb: “One beam, no matter how big, cannot support an entire house on its own.”

The world shares the same goal—to limit global warming to well below two degrees Celsius—so, we must cooperate. Reaching agreement on possibly differentiated carbon price floors, as I mentioned above, is one major example of cooperation.

The international community also needs to step up to provide the climate finance and technology transfers that developing economies need to enhance their own climate efforts.

Another immediate priority is to improve the quality of climate disclosure and to harmonize global green finance standards—everywhere—and we need to share best practices across borders. This is essential for the planet, and for financial stability.

The PBC is spearheading these efforts in China, and it has important work ahead.

At the IMF, we are working on these and other issues with the Network of Central Banks and Supervisors for Greening the Financial System, the Financial Stability Board, and other standard-setting bodies. A new IMF dashboard helps in providing data for macroeconomic and financial policy analysis.

This is one of the ways in which we are stepping up our engagement on the macro-critical aspects of climate change—which is now at the heart of our mandate.

The upcoming COP26 summit in November will be an important opportunity for countries to come together and accelerate climate action. And before that, China will host the Biodiversity COP15 in May.

One thing is clear: only by working together, can we foster a green recovery and a resilient post-pandemic world. I look forward to our discussions on this topic.

Thank you. Xièxiè