Webinar Summary – The Role of the IMF in Mitigating Climate Risks: From Physical Impacts to Just Transitions

By Rishikesh Ram Bhandary

On Thursday, April 14, the Boston University Global Development Policy Center hosted a webinar discussion on how the International Monetary Fund (IMF) can help mitigate climate risks. The discussion featured members of the Task Force on Climate, Development and the IMF, a consortium of experts from around the world utilizing rigorous, empirical researcher to advance a development-centered approach to climate at the IMF. The panel discussed the role of the IMF in supporting climate resilient development as the only rules-based, multilateral institution charged with maintaining the stability of the international financial and monetary system.

Sara Jane Ahmed, Sustainable Finance Advisor to the Group of Vulnerable 20 (V20) moderated the session. She opened by highlighting the most recent Intergovernmental Panel on Climate Change (IPCC) report and how it is a ‘now or never’ moment for decisive action on climate change. She said the international community is already feeling the impacts of climate change and on the road to breaching 1.5 degree of warming. Ahmed highlighted the research the Task Force has released focusing on three areas related to climate: the fiscal impacts, physical impacts and the cross-country spillover risks of climate policies. This research seeks to inform the IMF’s increased engagement and efforts to include climate change into its work.

To kick off the discussion, Ahmed first shared a recorded video message from Mambury Njie, Minister of Finance and Economic Affairs for The Gambia. In his statement, Njie said the IMF has a central role to play in helping countries navigate climate shocks and identified the prevailing financial protection gap as a major concern for the V20. He emphasized the climate vulnerability of African nations and said international institutions need to help foster an orderly transition to a low-carbon, climate resilient economy.

Furthermore, he underscored how the IMF is uniquely situated to help countries understand cross-border spillovers and called on the IMF to work together with multilateral development banks (MDBs) to mobilize needed resources. He said the IMF’s modeling tools must help countries achieve climate prosperity and called for capacity development in developing countries to be an area of focus.

Welcoming the establishment of the IMF’s Resilience and Sustainability Trust (RST), the minister said the RST’s scope should be reviewed on a regular basis and should recognize the differentiated needs of climate vulnerable countries. He also highlighted the work of the V20 with the Group of Seven (G7) on the InsuResilience Global Partnership and called for greater representation of climate vulnerable countries in global decision-making.

Next, Ma Jun, Director of the Macro and Green Finance Lab at Peking University, introduced a technical paper on the macroeconomic impact of the European Union’s (EU) carbon border adjustment measures (CBAM) on emerging market and developing countries. The paper uses a dynamic computable general equilibrium model to quantify the impacts. The findings show the magnitude of spillover impact on developing countries and that the CBAM was likely to worsen income distribution across countries. Ma said one option to minimize and mitigate the impact of the CBAM would be to establish an Equitable Decarbonization Fund (ECF) that would be financed from the revenue raised by the CBAM and geared towards helping developing countries transition to clean energy.

Presenting the findings from the paper, coauthor He Xiaobei said the impact of the CBAM varies across countries depending on the extent to which they are exporters to the EU. She said the IMF should assess and monitor the impact of CBAMs on the macroeconomic health of vulnerable countries and called on the IMF to build capacity in vulnerable countries to analyze the impact of external shocks and provide advice to countries on minimizing and mitigating spillover risks. She said the ECF, financed by CBAM revenue, could serve as a de-risking facility to crowd in private capital and could support investment in green technologies in developing countries that have limited access to those technologies.

Next, Rakesh Mohan, President of the Centre for Social and Economic Progress (CSEP), presented CSEP’s latest technical paper for the Task Force, which assesses the challenges presented by India’s fiscal and energy transition, given that fossil fuel revenues alone are currently more than double India’s entire defense expenditure. Mohan emphasized the “triple challenge” faced by developing countries of economic growth, renewable energy and revenue shortfalls. The need to achieve sustained levels of economic growth means countries will need to keep up their pace of investment in energy. He noted the importance of exploring how private and public sectors can support this transition by working together to tackle investment needs.

Commenting on efforts to quantify the investment gap in developing countries to achieve green growth, Mohan stated the macroeconomic consequences of relying on external finance to support such growth was not receiving sufficient attention. He suggested countries find ways to enhance their capacity to both better absorb large scale transfers, while also increasing revenues raised domestically.

Following the research presentations, Laurence Tubiana, Chief Executive Officer of the European Climate Foundation, welcomed the findings and shared reactions. She said it was important to understand the impact of CBAMs on emerging markets and climate vulnerable nations, and that carbon pricing tailored to the level of development of each country could help to create a level playing field. She also emphasized the need to integrate the investment requirements for a net-zero world with macroeconomic analyses. She called on the IMF to undertake the required analyses.

On the RST, she said vulnerable countries are the ones that most need Special Drawing Rights and wondered if the RST would lead to an institutional shift in the IMF, making it more attune to the needs of the most vulnerable countries. She noted that elevating the voice and representation of vulnerable countries was needed to keep the international system as honest as possible. She said the RST must be attractive enough for countries so ensure it truly helps mobilize finance.

On debt sustainability assessments, she said it was important to pay attention to how the dialogue between the IMF and finance ministries would unfold. Fiscal space will have to take the need for investments into account.

She also highlighted the role of the IMF on debt resolution and stressed the need to integrate climate change into any global debt workout. She called for a fundamental re-thinking in how debt is understood when countries have to spend more and more every year to rebuild infrastructure due to climate impacts.

Finally, she identified resilience as a key theme that emergences from the Task Force’s work. Public finance will have to be resilient to support the transition to a low-carbon economy – a problem particularly acute for fossil fuel producers.

Responding to a question from the audience on the feasibility of accelerating climate action to meet the 1.5-degree goal, Tubiana said investment to support decarbonization in developing countries was critical. Ma called attention to countries that do not have robust financial sectors to help generate investment and highlighted the cost of capital as a crucial factor that will shape how quickly countries can increase renewable energy and that it is important to expand the work of MDBs on de-risking facilities. Mohan stated large developing countries need help mobilizing investment for mitigation, while smaller countries need help for adaptation.

In closing remarks, Marilou Uy, Director of the Intergovernmental Group of 24 Countries on Monetary Affairs and Development at the IMF, said policymakers need to be better equipped to deal with macroeconomic challenges. She said the IMF can play a critical role in assessing macroeconomic risks and called on the institution to collaborate with other international financial institutions. She said two of the papers highlighted how the low-carbon transition will impact revenue and reduce fiscal space at a time when countries need to increase spending on climate investments. On CBAMs, she said modeling efforts need to better reflect medium and long-term impacts on developing countries and that there is a need to explore how CBAM proceeds could help finance a just transition. Finally, she urged attention to the quality of climate finance and the need for more granular analyses to truly understand how countries can transition to a low-carbon economy.

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