Making Growth Sustainable

Economic costs of rising temperatures could be substantial

A blooming sunflower followed by two other sunflowers in progressive states of wilting

Behind the scenes

The effects of weather shocks on economic activity: how can low-income countries cope?

The October 2017 World Economic Outlook on climate change states that temperature increases have uneven macroeconomic effects, with adverse consequences concentrated in countries with relatively hot climates, such as most low-income developing countries. Sound domestic policies and development, in general, and investment in specific adaptation strategies, could help reduce the adverse consequences of weather shocks. But given low-income countries’ constraints, the international community must support these countries as they cope with climate change—a global threat to which they have contributed little.

If unaddressed, climate change is likely to become one of the greatest economic shocks of the 21st century, owing to adverse effects including hotter temperatures, larger and more frequent natural disasters, rising sea levels, and the loss of biodiversity in depleted ecosystems.

Figure 1.2: Effects of Temperature Increase on Real per Capita Output across the Globe

‍ A chart showing that the global financial safety net tripled between 2008 and 2016, but has stagnated since

Sources: Natural Earth; ScapeToad; United Nations World Population Prospects Database: the 2015 Revision; World Bank; and IMF staff calculations.

IMF research in the October 2017 World Economic Outlook shows that the economic costs from rising temperatures could be substantial, especially for low-income developing countries, which generate very little greenhouse gas emissions. For the median low-income developing country, with a temperature of 25 degrees Celsius, an increase of 1 degree Celsius would reduce GDP per capita by an estimated 1.5 percent—and the loss would persist for at least seven years.

If emissions are not curbed, a median low-income developing country could lose up to one tenth of its income per capita by the end of the century. Rising temperatures affect economic outcomes in many ways—such as lower agricultural output, lower productivity of workers exposed to heat, worse health, and lower investment. About 60 percent of people in the world live in countries where these effects could occur.

To mitigate the effects of climate change by reducing emissions, the Paris Accord was agreed by nearly 200 countries. The IMF is developing spreadsheet tools for each IMF member country to quantify the levels of carbon pricing needed and the trade-offs with other instruments such as emissions trading, energy efficiency incentives, taxes on electricity, and individual fuels.

The findings emphasize the substantial climate, fiscal, and economic advantages of carbon taxes and the wide cross-country dispersion in needed prices, underscoring the case for international coordination. This year, the IMF’s Executive Board agreed to further assist developing countries facing urgent balance of payments needs by increasing the access limits of the Rapid Credit Facility and the Rapid Financing Instrument. In small developing countries, the annual cost of disasters is nearly 2 percent of GDP—more than four times higher than that of larger countries. Capacity development helps member countries build resilient public financial management frameworks, adopt environmental tax reforms, and price energy appropriately to reflect the harmful environmental side effects of climate change.

The IMF also introduced, in collaboration with the World Bank, Climate Change Policy Assessments, which provide an overarching assessment of climate mitigation, resilience building, and financing strategies for small states, within a sustainable macrofiscal framework.

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The IMF’s rapid credit facility

The IMF’s Rapid Credit Facility (RCF) is designed to provide rapid zero-interest loans with limited conditions to low-income developing countries facing an urgent balance of payments need. It places emphasis on countries’ poverty reduction and growth objectives. The facility was created under the Poverty Reduction and Growth Trust (PRGT) as part of a broader reform to make the IMF’s support more flexible and better tailored to the diverse needs of low-income developing countries, including in times of crisis.

The facility is available to PRGT-eligible member countries, and assistance is a one-time loan disbursement. A country may request assistance under the RCF again within any three-year period if its balance of payments need is caused primarily by an exogenous shock or the country has established a track record of adequate macroeconomic policies. In June 2017, the IMF approved a disbursement under the RCF to The Gambia.