Climate change poses extraordinary threats to macroeconomic stability and global prosperity, and since the IMF’s purpose is to foster both objectives, its help in addressing these threats is central to its mandate.
Central banks will face difficult policy choices on the extent to which monetary policy should become an instrument for accelerating the transition to a low-carbon future, and financial sector regulators will need to go beyond simply asking for disclosure of corporate and bank assets at risk of climate-induced impairment to dealing with the financial impact of subsequent dislocations.
The IMF has a role to play in speaking truth to power, especially to the largest economies that have committed to achieve net-zero carbon emissions by the middle of this century and have the means to achieve this but are held back by the up-front investment cost and political opposition to the transition.
The balance of payments problems come on top of other pressures, including those arising from the COVID-19 pandemic, an overhang of external debt in some cases, and longer-term strategies to reduce poverty and achieve rapid economic growth that will involve meeting huge increases in energy demand.
The world’s infrastructure investment is set to double in the next two decades and the bulk of this doubling will take place in emerging markets and developing countries.
Second, a dedicated Green Transition Facility is preferable to reliance on existing loan instruments because of the distinct natures of the balance of payments need, program policies, and the delineation of responsibilities between the IMF and other institutions.
Addressing the structural nature of balance of payments problems has become explicit in medium-term programs and, in the case of the programs supported by the Poverty Reduction and Growth Trust, the balance of payments need is generated by the policies to tackle poverty and low growth.
For example, the IMF would focus on the economic policies required to implement the Nationally Determined Contributions but rely on judgments from the UN Framework Convention on Climate Change on climate change itself, as well as on mitigation targets and the adequacy of national commitments and the progress in achieving them.
And when a global consensus emerged that macroeconomic stability for low-income countries would be illusory without a program to accelerate growth and reduce widespread poverty, the IMF created the Poverty Reduction and Growth Facility in the late 1990’s to support these members in pursuit of this broader agenda.
A Green Transition Facility could make the necessary urgent action more feasible and overcome some of the hesitation from potential borrowers who worry about the stigma associated with regular IMF programs. It would support countries embarking upon a desirable transformation that would also generate local benefits in the form of cleaner air and better health, an immediate concern of millions.
However, now is the time for the IMF and its shareholders to engage in this discussion with a view to reaching consensus on the way forward and enabling the IMF to play its full part in the global response to the challenges posed by climate change and the opportunities presented by a green transition.
CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise.