Speech

Sustainable Transformation of Societies – A Green Consensus for Macro-Fiscal Policies?

October 9, 2020

As prepared for delivery

Thank you for the opportunity to speak today.

Climate change is already having a large impact on countries’ macroeconomic stability and prospects for growth. Central banks and finance ministries both have a critical role to play in addressing these challenges.

Monetary and financial sector policies can support the management of climate risk and help cushion climate impacts on output and inflation.

And good fiscal policies can help achieve a transition to a climate-resilient and low-carbon economy. But these policies require strong fiscal institutions for effective implementation, as well as to ensure that spending is done wisely and efficiently.

Here, the IMF can play an important role.

To help you better understand the Fund’s growing engagement with climate change issues, I would like to cover three aspects of our work:

First, our capacity development assistance to help finance ministries and central banks take climate into account in their activities;

Second, our advice on getting the price of carbon right; and

Third, the Climate Change Policy Assessments we have been developing with the World Bank to help individual member countries integrate climate considerations in their macroeconomic policymaking.

Capacity development work

The IMF’s capacity development workstream covers a wide range of critical economic issues. Our experts share knowledge with finance ministries and central banks through hands-on advice, training, and peer-to-peer learning.

Looking ahead, the Fund will step up its capacity development work on the integration of environmental concerns into budget processes, including in Public Investment Management Assessments—which is the Fund’s key tool for assessing infrastructure governance. This would include developing capacity with a focus on green budgeting tools, which will be essential for countries highly vulnerable to climate risks.

The Fund will also support technical assistance on green investment, particularly with regard to public investment and public policies to promote low-carbon technologies. Equally important will be our work on understanding and better disclosing climate risks.

On the financial sector side, the IMF is supporting the efforts of central banks and supervisors to address the financial stability risks related to climate change.

Climate-related capacity development has already focused on insurance regulation and supervision, stress testing, and debt management in some Caribbean countries. In this region, and others, we are also studying the impact of climate risks on central bank operations and on the use of monetary policy tools. Moreover, we are supporting efforts to develop asset classification standards to improve climate-risk analysis and promote more accurate pricing of green assets.

Carbon pricing

Let me turn to carbon pricing. This is the tool economists believe should be the centerpiece of policies to promote a clean energy transition. Yet, as we have seen in many countries there are limits to the acceptability of higher energy prices. So carbon pricing will need to be reinforced with sector-by-sector polices that are less efficient, but which avoid a large increase in energy prices.

Here, we recommend that policymakers consider “feebates”—which essentially are sliding scales of fees on products or activities with above-average emission rates—and rebates for products and activities with below average emission rates. These schemes could be used to reinforce mitigation incentives in sectors such as transportation, power generation, agriculture, and forestry.

Investments in clean-technology infrastructure will be essential moving forward. And incentives to promote development and deployment of critical technologies will be needed to kickstart these investments. The clean energy transition also needs to be inclusive, so upfront assistance for vulnerable households, workers, regions, and firms is also needed.

At the international level, it is essential that the international community, and particularly the major stakeholders, agree on a mechanism to complement the Paris process and scale up mitigation efforts. Our recommended approach is a carbon price floor arrangement, aligned with global temperature goals. The arrangement could be designed flexibly to accommodate different approaches at the national level, so long as they achieve equivalent emissions outcomes, and equitably, for example, with stricter requirements for advanced countries.

Climate Change Policy Assessments

Finally, I want to mention the Climate Change Policy Assessments, which the Fund has developed with the World Bank.

These assessments are a collaborative diagnostic tool that develops capacity in countries to build coherent macro-frameworks for responding to climate change. They cover climate adaptation and mitigation policies as well as financing and risk management strategies, replicating the recommended structure of the National Determined Contributions under the Paris Agreement.

Since 2017, six pilots have been conducted for small states vulnerable to climate change and natural disasters. Recipient countries found the assessments useful in identifying policy, institutional, and financing gaps as well as linking climate change with the broader economy.

The Fund, together with the Bank, is now considering how to take the assessments forward. We are exploring the scope for broadening their scope beyond small developing states to low-income countries, emerging economies, and possibly also advanced economies.

WRAP-UP

So, to conclude, the Fund is expanding its engagement on climate change across multiple areas, in recognition that this is a critical macroeconomic challenge that affects all our member countries.