The International Monetary Fund, Climate Change and Development: A Preliminary Assessment

Santiago, Chile. Photo by Christopher Quezada via Unsplash.

As the international institution charged with maintaining global financial and monetary stability, the International Monetary Fund (IMF) has a vital role to play in ushering in a green transition that is as swift as it is just.

What actions has the IMF taken since the release of its Climate Change Strategy in August 2021 to align the institution’s efforts with a development-centered approach to combatting climate change? And is the IMF on track to help vulnerable countries achieve shared climate and development goals?

A new report from the Task Force on Climate, Development and the International Monetary Fund provides an independent, preliminary assessment of the IMF’s efforts to mainstream climate change. The assessment is evaluated through the development-centered lens articulated in the Task Force’s initial strategy report and advances actionable policy recommendations for the IMF and its stakeholders. 

The Task Force welcomes the early steps taken by the IMF to date, beginning to integrate climate into surveillance activity and most importantly, the establishment of the Resilience and Sustainability Facility (RSF) with re-channeled Special Drawing Rights following the IMF’s historic allocation in 2021. However, the report finds that, while modest progress has been made, the IMF must show greater leadership on climate change and development in three key areas:

  1. Multilateral surveillance activities have adopted a “one-size-fits-all” approach with carbon pricing as a panacea for climate action. Previous Task Force research demonstrates that a carbon tax would not be sufficient to offset budgetary pressure from a decline in fossil fuel revenue in a net-zero pathway nor meet a substantial portion of the investment needs required for a green transition.
  2. Bilateral surveillance activities are underestimating the macroeconomic implications of financing climate transitions in a financially stable manner. The IMF has prioritized carbon pricing when a more holistic approach is required to help countries orient their macro-fiscal frameworks towards resource mobilization, investment, structural change and climate resilience. The IMF’s work should reflect the full range of climate risks confronting countries and foster greater understanding of the economic and financial implications of climate change.
  3. The IMF lending toolkit lacks appropriate scale and overemphasizes short-term fiscal consolidation over long-run resource mobilization. While the Fund’s new RSF has the potential to fill a major gap in the global climate finance architecture, it lacks the scale and design features necessary to trigger and sustain development-centered climate transformations. More generally, the toolkit is not yet designed to help mitigate the balance of payments impacts of short-term climate shocks, loss and damage and resilience in a manner that accelerates intermediate and longer-term development pathways.

IMF surveillance and lending must help member states make the proper investments toward low-carbon, carbon resilience and socially inclusive growth paths. To that end, the Task Force advances a series of concrete policy improvements across the IMF toolkit:

  • Broaden multilateral surveillance activities to strengthen focus on an investment-led approach to a resilient and just transition, cross-border spillovers, loss and damage and the necessary global cooperation on resource mobilization.
  • Strengthen bilateral surveillance by deploying better analytical tools to analyze climate risks and their macro-critical impacts, as well as the resource mobilization needs of member states and support capacity building in developing countries to strengthen climate policy analysis and the development of domestic markets for sustainable finance.
  • Scale and reform the IMF lending toolkit in line with the Paris Agreement on climate change, including the RSF, to align short-term and longer-run financing horizons without jeopardizing debt sustainability and growth prospects.

While the IMF has made strides in mainstreaming climate change into its operations, the progress to date does not match the urgency of the moment, nor a full alignment with the varied development needs of member states, particularly emerging market and developing economies.

Read the Report Read the Executive Summary Read the Blog