Speech

The Right Course of Action: Climate Policies in a Shock-Prone World

December 7, 2023

Keynote speech by IMF Managing Director, Kristalina Georgieva at the COP28 Business & Philanthropy Climate Forum

Dubai, UAE. December 2, 2023.

As prepared for delivery

I want to start with congratulations to the UAE, our host country, on their National Day – and for welcoming us all to COP28.

So why am I here? Why is the International Monetary Fund part of this discussion?

We are here because climate risks are macro critical. They hit economies, communities, and households dramatically. They can cause financial instability. But we are also here because the transition to the new climate economy offers unique opportunities for green growth and jobs.

We are here in a rather difficult time for the world, in a more shock-prone environment. Since 2020, we have experienced unthinkable events: COVID, then war in Ukraine, a cost-of-living crisis, and now conflict in this region.

While we have seen resilience in the world economy, we recognize that global economic growth is slow. At the IMF we project growth of just 3 percent year-on-year for the next five years. This is almost a whole percentage point below the average from the previous decade, when annual growth averaged 3.8 percent.

On top of this come geopolitical tensions that cause economic fragmentation, and it is in this context that we also face a climate crisis. So, the question to all of us – here at COP and beyond – is whether we can address this crisis effectively?

I can confirm that IMF research shows we have a lot more work to do. When we look at the total of all Nationally Determined Contributions for this decade, they add up to a cut in emissions of just 11 percent, whereas keeping “1.5 degrees alive” would require cuts of between 25 percent and 50 percent.

We are also very concerned that there is inequality within and across countries. Those that are hit harder by shocks that can lead to a dangerous divergence between those economies that have a stronger capacity, and those that are less able to cope – many of them low-income countries that are especially vulnerable to climate devastation.

So, what should we do?

At the IMF, we advocate for an approach to accelerate decarbonization based on frontloaded action this decade. We believe that with a strong package of measures – including a carbon price, elimination of harmful subsidies, and policy support to accelerate decarbonization -- we can still have the impact we need by 2030.

So let me talk about these three things.

First, carbon pricing. We have seen some progress. Coverage in both national and sub-national jurisdictions is now close to 25 percent of global emissions, up from around 10 percent a decade ago. We are moving in the right direction.

We are also seeing an increase in the average carbon price. In the areas covered by a carbon price, it is about $20 per ton. But if you add in the 75 percent of emissions that are not covered, then the global average carbon price is just $5 a ton. Compare that to the average price of at least $85 a ton by 2030 that is needed to stay on track with the goal of the Paris Agreement. So we have a long way to go.

Carbon pricing is a particularly powerful instrument because it is revenue-raising and it is fair. The more emissions you create – through consumption or industry – the more you pay.

It also allows policymakers to address inequality. Revenues from a carbon price can be redirected to compensate the most vulnerable parts of the population – in fact, our assessment shows that 20 percent of revenues can provide support to the poorest 30 percent of the population.

And a carbon price also provides a very strong incentive to shift to low-carbon investments and consumption choices.

We often hear that that carbon pricing is not feasible in many places – but I would beg to disagree because it can be executed in different ways. It can be a tax – and this is the most efficient and most impactful path – just look at countries where emissions went down dramatically with a gradually increasing carbon tax.

It can also be implemented as trade – as is the case in Europe with the Emissions Trading Scheme that has generated Euro 175 billion in revenues. And it can also be implemented through regulatory compliance measures such as emissions standards.

Second is the elimination of subsidies. The IMF has calculated that direct fossil fuel subsidies reached a record $1.3 trillion last year due to support measures introduced to address the cost-of-living crisis. If you add the indirect subsidies – those from environmental and health damage – the total goes up to $7.1 trillion. Granted, these are not precise numbers, but they're an accurate order of magnitude.

Third, we need to direct subsidies and public money where it can make a real difference: areas such as research and development, or infrastructure that facilitates rapid decarbonization. At the IMF, we don’t traditionally support subsidies, but we recognize that the urgency of decarbonization can provide justification.

That takes me to the question of financing.

To reach the necessary level of decarbonization, we need to go from around $900 million a year in mitigation investments to $5 trillion a year. Is this a figure we can reach?

If we consider the sum of $5 trillion in the context of $7.1 trillion in direct and indirect subsidies, or in the context of the world economy of over $100 trillion, then we should be brave and say: yes, it can be done.

To succeed, we must bring in the private sector – to go faster and further, especially in the developing world where emissions are growing.

We have already seen movement on blended finance – but we need to go faster. Private Money is already 40 percent of total climate finance, but it needs to reach between 80 percent and to 90 percent. At the Fund, we are very happy to support these efforts.

This brings me to the importance of cooperation.

We cannot succeed in the fight against climate change unless we work together.

At the IMF, we are rapidly integrating climate into our work, starting with our policy engagement with our members. We consider mitigation for countries that are high polluters, adaptation for those that are vulnerable, and transition for those that have large hydrocarbon sectors.

We have integrated climate into our financial sector assessments – so we consider financial sector risks related to climate change and advise our members how to manage these. And we are also very active on data – because good data helps make good decisions.

Finally, the IMF is a financial institution. We have created the $40 billion Resilience and Sustainability Trust, which has already approved programs for 11 countries. I want to thank the UAE for becoming the latest contributor with $200 million in support. Thank you.

Let me finish with this.

When I am weighing a decision or the right course of action, I look at a picture of my grandchildren. Faced by the climate crisis, we must choose to act with all the force we can muster to change the direction of our societies. We must do what is necessary.

Thank you.