Climate Change and COVID-19 – IMF F&D (Investing in a Green Recovery, Ulrich Volz, September 2020)

Source details

Canonical URL: Climate Change and COVID-19 – IMF F&D (Investing in a Green Recovery, Ulrich Volz, September 2020)

The COVID-19 pandemic is a “prelude to a looming climate crisis,” and “we have about a decade left” to achieve a low-carbon transition consistent with limiting global warming to 1.5°C above preindustrial levels (Intergovernmental Panel on Climate Change).
Recent climate signals cited: wildfires in Australia and California, thaw of permafrost in the Arctic, and increases in number and intensity of storms, floods, droughts, and other climate-related natural disasters.
The earth is approaching climate-tipping points, presenting risk of abrupt and irreversible climate changes.
Time horizon emphasized: “The next few years are our last chance to avoid catastrophic global warming.”

No inherent trade-off asserted between a sustainable recovery and economic progress; many green technologies have matured and low-carbon energy is, “in most cases, cheaper now than fossil-fuel-based energy.”
Evidence claim: well-designed green projects can generate more employment and deliver higher short-term returns per dollar spent compared with conventional fiscal stimulus.
Long-term returns: investment in climate mitigation and adaptation generates substantial long-term returns and cost savings; cost of inaction or late action is characterized as high.
Specific benefit of resilience investment: Global Commission on Adaptation estimate — “every dollar invested in building climate resilience could result in between $2 and $10 in net economic benefits.”

IMF projection cited: global public debt to increase to “more than 100 percent of GDP this year, up 19 percentage points year over year.”
Global fossil fuel subsidies in 2017 estimated at “$5.2 trillion, or 6.5 percent of world GDP.”
Policy instrument recommendation: meaningful carbon taxes — IMF suggestion of “$75 per ton of CO2.”
Political window note: current relatively low oil prices present an opportunity to levy or increase carbon taxes at reduced political cost.

Couple short-term crisis responses (protecting jobs, boosting recovery) with longer-term strategic goals: mitigating climate change and shoring up adaptation and resilience.
Align all public expenditures and the tax system with climate goals.
Phase out all fossil fuel subsidies.
Implement meaningful carbon taxes (IMF suggests “$75 per ton of CO2”) with revenues redistributed to support low-income households or communities disproportionately affected by the transition or climate impacts.

Financial flows must be aligned with a pathway toward low greenhouse gas emissions and climate-resilient development (Article 2.1c of the Paris Agreement).
Monetary and financial authorities should integrate climate risks into prudential and monetary frameworks.
Growth of NGFS: established “in December 2017 by eight central banks and supervisors” and grown to a membership of “66 central banks and supervisors.”
Recommended elements of a comprehensive framework:
- Mandatory disclosure of climate and other sustainability risks across the financial sector.
- Regular climate stress testing that considers multiple transition scenarios.
- Integration of climate-related financial risks into prudential supervision.
Crisis-response caution: central banks and supervisors should align crisis responses to avoid locking in a high-carbon recovery; liquidity-enhancing stimulus and easing prudential instruments that are not Paris-aligned can build climate-related risks in portfolios.
Prudential instruments accounting for climate risks should not be delayed and should be strengthened.

International financial institutions should support member countries to align financial systems with sustainability goals, including capacity building and leading by example in integrating climate risks across operations.
Multilateral development banks should align portfolios with the Paris Agreement and “completely phase out any high-carbon lending and investments.”
MDBs and national development banks can provide countercyclical lending that supports short-term economic activity and employment while contributing to the low-carbon transition.

Climate impacts are greatest in countries that contributed least to global warming.
Climate-vulnerable developing economies struggle to finance adaptation and resilience and face a climate risk premium on the cost of capital (references: Kling and others 2020; Beirne, Renzhi, and Volz 2020).
Risk of a vicious circle: greater climate vulnerability raises cost of debt and diminishes fiscal space for resilience investment.
Financial risk trends: already high and likely to increase as markets price climate risks and global warming accelerates (Buhr and others 2018).
Urgent needs:
- Rapid scaling up of investment in climate resilience.
- International support for increased funding and mechanisms to transfer financial risks.
- Development of new instruments by IMF and MDBs, including extended emergency facilities, to support climate-vulnerable developing economies after disasters.
Historical disaster impact examples:
- Over the past two decades, about “20 countries—most of them small island nations—suffered losses amounting to more than 10 percent of their GDP.”
- Dominica (Hurricane Maria, 2017): estimated damage equaling “260 percent of GDP.”
- Grenada (Hurricane Ivan, 2004): wiped out about “150 percent of Grenada’s GDP.”
Proposal: urgent discussion needed on “climate debt” — public debt incurred as a direct result of climate disasters or necessary adaptation measures.

If action is not taken, many countries risk entering “permanent crisis mode.”
Spillovers: countries spared initially will still be affected by global impacts, including increased migration in the context of disasters and climate change.
Collective action across local, national, and international levels and across public and private sectors is required within the decade to transform economies and avoid catastrophic global warming.

Content based on "Investing in a Green Recovery" by Ulrich Volz, F&D Magazine, September 2020.

Invertir en una recuperación verde ● Finanzas y Desarrollo ● Septiembre de 2020
- Invertir en una recuperación verde ● Finanzas y Desarrollo ● Septiembre de 2020 (Markdown version)
- Invertir en una recuperación verde ● Finanzas y Desarrollo ● Septiembre de 2020 (PDF)
Investir dans une reprise verte
- Investir dans une reprise verte (Markdown version)
- Investir dans une reprise verte (PDF)
Climate Change and COVID-19 – IMF F&D
- Climate Change and COVID-19 – IMF F&D (Markdown version)
- Climate Change and COVID-19 – IMF F&D (PDF)