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

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**Canonical URL:** [Climate Change and COVID-19 – IMF F&D (Investing in a Green Recovery, Ulrich Volz, September 2020)](https://www.imf.org/en/publications/fandd/issues/2020/09/investing-in-a-green-recovery-volz)

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## Bibliographic details
- Authors: ULRICH VOLZ
- Published: September 1, 2020

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### Crisis framing and urgency
- 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.”

### Economic rationale for a green recovery
- 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.”

### Fiscal constraints and key numerical indicators
- 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.

### Policy recommendations — fiscal and tax measures
- 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.

### Aligning finance, central banks, and supervisors
- 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.

### Role of multilateral institutions and development banks
- 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.

### Support for climate-vulnerable developing economies
- 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.

### Systemic risks and broader implications
- 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.*

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## Content in this bundle

- **Invertir en una recuperación verde ● Finanzas y Desarrollo ● Septiembre de 2020**
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  - [Invertir en una recuperación verde ● Finanzas y Desarrollo ● Septiembre de 2020 (PDF)](/-/media/files/publications/fandd/article/2020/september/es/invertir-en-recuperacion-verde-volz.pdf){rel="external" type="application/pdf"}
- **Investir dans une reprise verte**
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  - [Investir dans une reprise verte (PDF)](/-/media/files/publications/fandd/article/2020/september/fr/investir-dans-une-reprise-verte-volz.pdf){rel="external" type="application/pdf"}
- **Climate Change and COVID-19 – IMF F&D**
  - [Climate Change and COVID-19 – IMF F&D (Markdown version)](/-/media/files/publications/fandd/article/2020/september/investing-in-a-green-recovery-volz.pdf.md){rel="alternate" type="text/markdown"}
  - [Climate Change and COVID-19 – IMF F&D (PDF)](/-/media/files/publications/fandd/article/2020/september/investing-in-a-green-recovery-volz.pdf){rel="external" type="application/pdf"}

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_Source: https://www.imf.org/en/publications/fandd/issues/2020/09/investing-in-a-green-recovery-volz_