Advancing Climate Policy at the IMF
While the macroeconomic significance of climate change has been understood in academic scholarship for a long time, policy engagement on this topic is rather new.
While initiatives such as the Network for Greening the Financial System and the Coalition of Finance Ministers for Climate Change have emerged, the International Monetary Fund (IMF) – the only rules-based, multilateral body charged with maintaining economic and financial stability of the international financial system – is at the institutional core of the global economic governance system and is uniquely capable of engaging in surveillance functions, especially on cross-border climate risks, providing emergency financing and engaging in capacity development.
In a new book chapter in the Oxford Handbook of the International Monetary Fund, Rishikesh Ram Bhandary and Kevin P. Gallagher trace the history of the IMF’s engagement on climate change, with special emphasis on the Fund’s Climate Change Strategy launched in 2021. They examine the integration of climate change into four major areas of the IMF’s current work: surveillance, technical assistance, lending and global policy coordination.
The authors find that while IMF has made efforts to mainstream climate change into its surveillance functions, integrating climate change into lending remains limited. Also, although the IMF is making major efforts on capacity development, how these efforts will be scaled up, institutionalized and used to inform the rest of the toolkit remains to be seen.
Policy recommendations:
- Surveillance activities should be expanded to include the full spectrum of climate risks, physical and transition, while also ensuring that its policy advice recognizes the diversity of national contexts and the efficacy of policy instruments beyond carbon pricing.
- The IMF’s methodological apparatus should be updated to reflect state of the art analytics, and its debt sustainability analyses should incorporate the full spectrum of climate risks and climate investment needs for a more accurate portrayal of a country’s debt sustainability situation.
- The IMF’s role in climate mitigation should be viewed in light of other international financial institutions and treaty processes. The IMF can play a complementary role given its special niche in monitoring and advising on spillovers, bring greater clarity and transparency on the role of major emitters and the consequences of inaction, facilitate the mobilization of resources through both global policy coordination efforts and fiscal frameworks, and bolster its lending capacity so that countries have access to the scale and types of resources they need.