The Role of the IMF in Facilitating Green Energy Transitions

The latest Intergovernmental Panel on Climate Change (IPCC) report underscored the need to reach net-zero emissions globally by mid-century to preserve a credible pathway to limit warming to 1.5C, with 135 countries have pledged carbon neutrality thus far.

However, net-zero growth trajectories will entail a fundamental shift in the composition of the global economy, especially in the energy sector. Carbon-intensive economies in particular face the dual challenge of winding down fossil fuel-intensive sectors while scaling up clean energy. As the only multilateral organization charged with promoting the stability of the international financial and monetary system for long-run growth, the International Monetary Fund (IMF) is uniquely positioned to support facilitation of green energy transitions.

A new policy brief for the Think20 (T20) authored by Rishikesh Ram Bhandary, Daniel Titelman, Laveesh Bhandari, Marilou Uy, Sara Jane Ahmed, Amar Bhattacharya, Aasheerwad Dwivedi and Noel Perez addresses the role of the IMF in supporting economies that are carbon intensive and reliant on fossil fuels for domestic revenue. The authors are members of the Task Force on Climate, Development and the International Monetary Fund.

In the brief, they identify three ways in which the IMF can identify transition risks, incorporate those risks into bilateral and multilateral surveillance activities and facilitate resource mobilization towards clean energy and climate resilient development. First, examining the implication of net-zero strategies on the fiscal and financial health of member states must be a core part of the IMF’s surveillance functions. Second, the IMF will need to actively help countries mobilize the resources necessary for a just transition to a low-carbon economy in the context of declining revenue from fossil-intensive sources. Third, the IMF’s analytic work will be crucial to understanding how net-zero strategies will shape the external position of an economy, including foreign exchange flows, resources available for decarbonization and fiscal space more generally.

Policy recommendations:

• Given that many of the Group of 20 (G20) are major oil and gas exporters and consumers, the fiscal consequences of pursuing net-zero strategies are of interest to the G20 membership. As a result, there is a need to firmly connect net-zero strategies with policy attention to fiscal balances.
• As the largest shareholders of the IMF, G20 members have a special opportunity to help define and craft how the IMF address green transitions in its work. For example, the IMF will be incorporating its climate change strategy and the outcomes of its Comprehensive Surveillance Review into staff guidance notes, and the G20’s input will be vital.
• As major shareholders of multilateral development banks, the G20 has a crucial opportunity to increase the capital base of these institutions in order to increase the scale of financing available for developing countries. The mobilization of domestic resources must be accompanied with a step-wise increase in financing from international institutions.