The Right Course of Action: Climate Policies in a Shock-Prone World

IMF News, December 7, 2023

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Published: December 7, 2023

Macro criticality of climate risks and global context

Climate risks are "macro critical": they hit economies, communities, and households dramatically and can cause financial instability.
The transition to a new climate economy offers opportunities for green growth and jobs.
World has entered a more shock-prone environment since 2020, including: COVID; war in Ukraine; a cost-of-living crisis; and conflict in this region.
Global economic growth is slow: IMF projects growth of just 3 percent year-on-year for the next five years, which is almost a whole percentage point below the average from the previous decade, when annual growth averaged 3.8 percent.
Geopolitical tensions causing economic fragmentation compound the challenge of addressing the climate crisis.

Current emissions trajectory and ambition gap

Aggregate Nationally Determined Contributions (NDCs) for this decade add up to a cut in emissions of just 11 percent.
Keeping "1.5 degrees alive" would require cuts of between 25 percent and 50 percent.
There is significant inequality within and across countries: shocks can cause divergence between economies with stronger capacity and those less able to cope, many of them low-income and especially vulnerable to climate devastation.

Policy package advocated by the IMF (frontloaded action this decade)

Core elements of the advocated strong package:
- A carbon price.
- Elimination of harmful subsidies.
- Policy support to accelerate decarbonization (including targeted public spending).

Carbon pricing: coverage, levels, distributional use, and modalities

Coverage of carbon pricing in national and sub-national jurisdictions is now close to 25 percent of global emissions, up from around 10 percent a decade ago.
Average carbon price in areas covered by a carbon price: about $20 per ton.
Global average carbon price (including the 75 percent of emissions not covered): just $5 a ton.
Required average carbon price by 2030 to stay on track with the Paris Agreement goal: at least $85 a ton.
Revenue and distributional potential:
- Carbon pricing is revenue-raising and fair: higher emitters pay more.
- IMF assessment shows that 20 percent of revenues can provide support to the poorest 30 percent of the population.
Implementation modalities:
- Carbon tax (described as the most efficient and most impactful path).
- Emissions Trading Scheme (example: Europe’s ETS has generated Euro 175 billion in revenues).
- Regulatory compliance measures such as emissions standards.

Subsidies: scale and redirection

Direct fossil fuel subsidies reached a record $1.3 trillion last year due to support measures introduced to address the cost-of-living crisis.
Including indirect subsidies (from environmental and health damage), the total goes up to $7.1 trillion.
While the IMF does not traditionally support subsidies, it acknowledges that directing subsidies and public money can be justified to accelerate decarbonization in areas such as research and development or infrastructure that facilitates rapid decarbonization.

Financing the transition: scale, private sector role, and IMF support

Required mitigation investment scale: from around $900 million a year currently to $5 trillion a year.
Framing the $5 trillion need:
- Comparable to $7.1 trillion in direct and indirect subsidies.
- Comparable to a world economy of over $100 trillion.
Private sector participation:
- Private money is already 40 percent of total climate finance.
- Private participation needs to reach between 80 percent and to 90 percent of total climate finance.
- Blended finance is progressing but needs to accelerate, especially for developing countries where emissions are growing.
IMF actions and instruments:
- Rapidly integrating climate into IMF work: mitigation for high polluters, adaptation for vulnerable countries, and transition for large hydrocarbon sectors.
- Integration of climate into financial sector assessments and advice on managing financial-sector climate risks.
- Active on climate-related data to inform decisions.
- Financial support: creation of the $40 billion Resilience and Sustainability Trust, with approved programs for 11 countries.
- The UAE contributed $200 million to the Resilience and Sustainability Trust.

Call to cooperation and moral imperative

Success requires international cooperation and mobilizing public and private finance.
The imperative to act is framed as an obligation to future generations: policy decisions should be guided by the urgency to "change the direction of our societies" and do "what is necessary."

Keynote speech by IMF Managing Director, Kristalina Georgieva at the COP28 Business & Philanthropy Climate Forum, Dubai, UAE. December 2, 2023. As prepared for delivery.

IMF Communications Department, December 7, 2023.