Those in the other camp start from a very different point. Climate change is already affecting the lives of billions of people and poses an existential threat to future generations. Thus, this group maintains, it is incumbent on every organization to do whatever it can to address the threat. If this entails a change in focus, business models, or skill sets, that needs to be dealt with but should not become a reason to stand on the sidelines.
From this perspective, the IMF is an underused player on the global stage, and the actions that the Fund has taken to date simply do not go far enough. The history of the IMF is rich with instances when the organization adapted to meet the changing needs and priorities of its members, this group argues. Climate change is simply the next big global challenge that requires the institution to evolve.
The IMF has already taken steps to develop frameworks and tools for integrating aspects of climate change into its surveillance, technical assistance, and lending work, but many technical questions remain unexplored. These range from building state-of-the-art tools and research approaches for assessing climate risks to building macro fiscal and financial frameworks that incorporate the substantial investments needed to transition to a low-carbon economy and the policy tools that will make those frameworks operational.
Mobilizing climate financing
Many countries face constraints on fiscal and debt sustainability even as they come under pressure to invest more in accelerating their low-carbon transition. The Fund needs to help countries find the right balance and to adapt its own debt sustainability frameworks to reflect these flows, according to people in this camp. The IMF should devote more resources to and put a higher priority on advancing this research and analytical agenda, they argue.
It is now widely accepted that low- and middle-income countries will need to spend trillions of dollars a year for climate-related adaptation, mitigation, and resilience. It is also clear that while governments will have to mobilize the better part of this financing domestically, a substantial share will need to come from external public and private sources. For example, emerging market and developing economies other than China will have to spend about $2.4 trillion a year by 2030, according to estimates by the Independent High-Level Expert Group on Climate Finance, commissioned by the United Nations Climate Change Conferences of 2021 and 2022. About $1 trillion a year of that will have to come from external sources.
Raising that much money has proved to be much more difficult than expected. In that context, accessing the IMF’s $1 trillion in financing capacity seems like low-hanging fruit to people in this group. The argument that these resources need to be safeguarded for a possible global financial crisis is not convincing if that means neglecting financing of the green transition, which could make such a crisis more likely, according to this line of reasoning.
The IMF set up the Resilience and Sustainability Trust (RST) in 2022 to help countries finance resilience and green transition projects. But those who want the IMF to do more argue that the RST is too small—with total disbursements so far of just $1.4 billion—and that the requirement for a regular IMF financing program to accompany such funding makes it less attractive for many countries because of the associated conditionality and reputational stigma.
Moreover, like regular IMF financing, the RST just adds more debt—even though over a much longer maturity period—limiting many countries. That concern prompted some people in this group to call for a reexamination of current policies for issuing and deploying special drawing rights (SDRs), which bolster the official reserves of member countries. During the pandemic, the IMF issued SDRs equivalent to $650 billion, which, notwithstanding the fact that 67 percent went to rich countries that didn’t need this financing, greatly relieved pressures on some low- and middle-income countries. Why not, ask those who want the IMF to expand its climate change footprint, have large and regular distributions of SDRs? At the same time, perhaps the institution should change the SDR allocation rules and target countries that need them and/or link allocations to spending on climate change, they argue.
The IMF could also use its convening power to mobilize global action and financing to address climate change. As a global organization where finance ministers and governors meet regularly, the Fund could raise awareness of the policy and financing actions that only they can take to address climate change, this group suggests. According to the IMF’s 2021 strategy paper, “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.”
One step at a time
It is easier to outline the points of dispute over the IMF’s climate change mission than to resolve them. This is another manifestation of the broader ambiguity in the international response to climate change. The communiqués of world leaders regularly recognize the seriousness of the threat and the need for urgent and coordinated action. And yet, concrete policies and financing commitments languish.
In this context, it is simply not realistic to expect the IMF’s membership to agree to a bold new consensus that would make the fight against climate change a core IMF priority. For now, we should also rule out making regular distributions of SDRs to finance climate-related spending or tasking the Fund or its governing bodies to play a central role in mobilizing international policy and financing responses.
At the same time, it is neither feasible nor sensible to retreat from the advances the IMF has already made in building climate change into its analytical, surveillance, and capacity-building work. Rather, the focus on these aspects will need to deepen as countries feel more pressure to address climate threats and seek the Fund’s help. The RST should become a more significant source of IMF financing. The Fund also has an important contribution in terms of intellectual leadership or through the power of ideas for shaping public thinking and awareness of the links between climate change and the economic prospects of its member countries.
Perhaps the IMF’s best way forward on climate change will be to “cross the river by feeling the stones,” as the Chinese say: one step at a time. The Fund has already made considerable progress in integrating climate change into its activities. It has, after a hesitant start, strengthened its partnerships and other institutions with complementary skills and mandates. And it has recruited a cadre of specialists who can help link the climate change agenda to the traditional focus and skills of the institution. The demands for going further are only likely to grow. The challenge for the institution will be to harness them in ways that both serve the membership and attract broad support.