The IMF’s Climate Change Debate

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The IMF’s Climate Change Debate

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Bibliographic details

• Authors: Masood Ahmed
• Published: June 3, 2024

Context and framing

• Climate change poses a special challenge to the International Monetary Fund. The IMF’s World Economic Outlook offered its first substantive discussion of the matter in 2008; the executive board agreed a strategy for helping member countries address it in 2021.
• The executive board: “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,” and “Climate change is bound to affect macroeconomic and financial stability through numerous other transmission mechanisms, including fiscal positions, asset prices, trade flows, and real interest and exchange rates. . . . No country can expect to be spared entirely.”
• The Fund’s lodestar is “macroeconomic and financial stability.” The test of “macro-criticality” guides what the Fund should address, but debate remains over how far the IMF’s involvement should extend and in what form.

Two schools of thought

• Restraint / core mandate camp:
  • Argues for limiting IMF focus on climate change to implications strictly necessary to deliver on the core mandate (fiscal, monetary, financial, and external accounts; global economy).
  • Supports IMF research, assessment, and advice on policy tools in these domains and capacity building to design and implement such policies.
  • Opposes extending coverage to advising on mitigation mechanisms, mobilizing private financing for mitigation, or assessing progress on international green transition commitments as part of surveillance.
  • Concerns include:
  • Risk of diluting focus on core fiscal, monetary, and financial risks.
  • Lack of necessary in-house expertise and the high cost/difficulty of building it.
  • Potential “poaching” of staff from organizations with more direct climate mandates.
  • Resource trade-offs in tight budgets and erosion of the institution’s conservative culture.
• Engagement / evolution camp:
  • Starts from climate change as an existential threat requiring action from every organization.
  • Sees the IMF as an underused player; current Fund actions do not go far enough.
  • Argues for the IMF to develop frameworks and tools to integrate climate risks into surveillance, technical assistance, and lending, including:
  • Building state-of-the-art tools and research approaches for assessing climate risks.
  • Building macro fiscal and financial frameworks that incorporate substantial investments needed for low-carbon transition and operational policy tools.

Mobilizing climate financing

• Estimated needs and financing gaps:
  • Emerging market and developing economies other than China will have to spend about $2.4 trillion a year by 2030, according to the Independent High-Level Expert Group on Climate Finance.
  • About $1 trillion a year of that will have to come from external sources.
• IMF resources and instruments:
  • The IMF’s financing capacity is cited as $1 trillion.
  • The Resilience and Sustainability Trust (RST), set up in 2022, has total disbursements so far of just $1.4 billion.
  • The RST’s requirement for a regular IMF financing program to accompany such funding reduces its attractiveness because of associated conditionality and reputational stigma.
  • Like regular IMF financing, the RST adds more debt—albeit over a much longer maturity period—which limits usefulness for many countries.
  • The IMF issued SDRs equivalent to $650 billion during the pandemic; 67 percent went to rich countries that didn’t need this financing.
• Proposals and lines of argument from the engagement camp:
  • Reexamine policies for issuing and deploying special drawing rights (SDRs); consider large and regular distributions of SDRs or change SDR allocation rules to target countries that need them and/or link allocations to spending on climate change.
  • Use the IMF’s convening power—where finance ministers and governors meet regularly—to raise awareness and assist with coordinating macroeconomic and financial policy responses, since “climate change mitigation is a global public good and requires an unprecedented level of cross-country policy cooperation and coordination. As a multilateral institution with global reach, the IMF can assist with coordinating the macroeconomic and financial policy response.”

Points of tension and operational challenges

• Political and institutional constraints:
  • It is not realistic to expect the IMF’s membership to agree to a bold new consensus making the fight against climate change a core IMF priority in the near term.
  • For now, regular distributions of SDRs to finance climate-related spending or tasking the Fund to play a central role in mobilizing international policy and financing responses should be ruled out.
• Practical trade-offs:
  • Expanding IMF engagement risks overloading surveillance, program conditionality, and core staff capacity.
  • Deepening engagement requires resources, recruiting specialists, strengthened partnerships with institutions with complementary skills, and careful handling of member support and political sensitivities.

Recommendations, strategic approach, and near-term priorities

• Maintain and deepen current integration:
  • Do not retreat from advances in building climate change into IMF analytical, surveillance, and capacity-building work; focus on deepening these aspects as demand grows.
• Strengthen the RST and policy research:
  • The RST should become a more significant source of IMF financing.
  • The IMF should devote more resources and higher priority to research and analytical work on climate-related fiscal, macro, and financial frameworks and on mobilizing finance.
• Leverage intellectual leadership and convening power:
  • Use the power of ideas to shape public thinking and awareness of links between climate change and economic prospects of member countries.
  • Use convening forums to raise awareness of policy and financing actions that finance ministers and governors can take.
• Proceed incrementally:
  • Follow a “one step at a time” approach—“cross the river by feeling the stones”—building on progress already made, strengthening partnerships, and recruiting specialists to link climate agenda to traditional IMF focus and skills.

Masood Ahmed, The IMF’s Climate Change Debate, F&D Magazine, June 2024.

Content in this bundle

• The Imf’S Climate Change Debate
  • The Imf’S Climate Change Debate (Markdown version)
  • The Imf’S Climate Change Debate (PDF)