The IMF Should be an Analytical Partner on the UN Global Stocktake – Here’s Why
This is a critical policy moment just weeks ahead of the 28th United Nations Climate Change Conference (COP28) in Dubai where the first-ever assessment of how countries are meeting their climate pledges under the Paris Agreement – the Global Stocktake (GST) – will conclude. This review process will provide countries vital context and insight for course correcting Nationally Determined Contributions (NDCs) and globally coordinated efforts, though it comes at a fraught moment.
Countries are facing a polycrisis of shocks – high capital costs, increased debt service payments and high inflation rates – all in the face of intensifying climate impacts. Currently, based on International Monetary Fund (IMF) and UN Development Programme data, recent research identifies at least 61 countries that need immediate debt relief. What is more, the IMF found that only seven of the 29 low-income countries that have submitted quantified climate change adaptation needs have the necessary fiscal space to make those investments. Concomitantly, this eroding fiscal space is running up against escalating climate impacts. A coalition of 68 climate vulnerable countries that have organized to pursue climate prosperity – the Vulnerable 20 Group of Finance Ministers – lost more than $500 billion in climate-induced losses over the last two decades. These macroeconomic headwinds make it all the more challenging to mobilize the $2.4 trillion in finance by 2030 estimated by the Independent High-Level Expert Group on Climate Finance.
While country negotiators have primarily focused on the ambition of climate pledges, as well as policy measures for adaptation and climate finance and technology, unlocking the ambitious climate action required to stay below 1.5C of warming requires addressing macroeconomic challenges – an issue on which the IMF is uniquely positioned to provide invaluable insight.
Recent research from the Task Force on Climate, Development and the IMF – a consortium of experts primarily from the Global South utilizing rigorous, empirical research to advance a development-centered approach to climate at the IMF – illustrates areas where the IMF could better lead on climate. Drawing on this research, the IMF can inform policy actions following the forthcoming GST and better advance future GSTs in three key ways: assessing and managing cross-border spillovers, gauging the quality of climate pledges and identifying and unlocking macroeconomic constraints limiting climate action and ambition.
Assessing cross-border spillover impacts
Keeping warming to below 1.5C requires a decisive shift away from carbon-intensive sectors of economic activity. Climate policies designed to pursue these goals will have macroeconomic consequences that are not only domestic but also spill over into other countries. Research shows, for example, that China’s pursuit of a net-zero pathway will have major macroeconomic repercussions to some of its trading partners, like Indonesia. China is the biggest destination of Indonesia’s coal exports and a decline in coal demand due to net-zero policies could result in a 6 percent drop in Indonesia’s gross domestic product (GDP) by 2050. Likewise, the European Union (EU) Carbon Border Adjustment Mechanism (CBAM) can also have major distributional consequences on countries that are major carbon-intensive exporters to the EU; Mozambique could see its economy shrink by 2.5 percent due to the fall in demand.
The IMF is well positioned to engage in surveillance activities that identify and help manage these cross-border spillover risks, and those activities will be a valuable contribution to the GST where, to date, cross-border impacts remain an understudied consideration.
Designing better climate policies
The GST is not designed to assess individual country pledges for their ambition or effectiveness, nor does it compare efforts across countries. The IMF, however, could help countries design stronger and better climate policies. The IMF Climate Change Strategy, published in 2021, places a premium on tracking mitigation efforts by the largest 20 emitters, and the IMF’s goal of comparing domestic mitigation policies across peer countries, alongside other efforts to track the comparability of pledges by research organizations and civil society groups, would complement the GST.
The IMF is also well situated to provide policy advice. Robust and credible pledges are necessary for countries to mitigate risks to financial stability. A disorderly transition would undermine financial stability by eroding the ability of actors to move away from carbon-intensive economic activities and safeguarding themselves from climate risks. The IMF has an important role in the supervision and management of climate policies. Furthermore, the IMF’s Climate Macroeconomic Assessment Program would help to provide an essential complement to other efforts, such as the World Bank’s Country Climate Development Reports, which aim to help the prioritization of climate actions.
Financing a sustainable future
Many developing countries will be looking to the GST for clarity on climate finance as they face high capital costs and debt levels precisely at the moment they need to undertake a stepwise increase in climate investment. Moreover, countries that are reliant on fossil fuel-based taxes will witness their revenue bases shrink as they pursue low-carbon growth strategies. The IMF has identified carbon pricing as one major source of finance, yet analytical work suggests that carbon revenues alone are unlikely to fill the revenue shortfall. A recent technical paper on India’s fiscal and energy transition shows that a carbon tax would not compensate for the decline in revenues lost from fossil fuel taxes and measures. Similarly, in the case of Latin America and the Caribbean, researchers have found that only well diversified economies, like Brazil and Colombia, are able to better withstand the impact of declining fossil fuel-generated revenue. Through its surveillance work, the IMF could help countries estimate financing needs and identify sources of finance that best match their fiscal contexts. For example, for many countries at high risk of debt distress, a combination of debt relief, concessional finance and credit enhancement will be necessary.
Any assessment of the progress made under the Paris Agreement would not be complete without an understanding of the macroeconomic constraints to climate action. The IMF is the only international financial institution with the mandate to help countries identify and relieve those constraints. Through its flagship reports and surveillance work, the IMF can complement the GST, especially when it comes to the financing challenges and the cross-border ramifications of climate policy.
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