Mitigating Fiscal Impacts of Net-Zero Transitions – Task Force on Climate, Development and the IMF Round-Up

Rising emissions must end before 2025 if the world is to stay below the 1.5°C threshold of global warming. Rapid, transformative green transitions will require an unprecedented mobilization of resources and investment, particularly for countries that rely on fossil fuels as a major source of revenue. Net-zero transitions, without global support and coordination, could threaten the financial stability of carbon-intensive economies around the world.

A suite of new research from the Task Force on Climate, Development and the International Monetary Fund examines the fiscal impacts of net-zero transitions and how the International Monetary Fund (IMF), as it is charged with maintaining the financial stability of the international monetary and fiscal system for long-run growth, is uniquely positioned to help mitigate the economic impacts of climate change and play a global coordinating role.

Explore three technical papers and a policy brief with policy recommendations for the IMF below:

Climate Change and the IMF Debt Sustainability Analysis

There is now a consensus that climate change and climate change policy pose ‘macro-critical risks’ to national economies and the global economy as well. Transition risks also emerge from a late and uncoordinated introduction of climate policies whose impacts cannot be fully anticipated by investors.

A new technical paper from Kevin P. Gallagher and Franco Maldonado focuses on the debt sustainability aspects of physical climate risk and the resource mobilization necessary for a transition to a more resilient and low-carbon economy. The authors experiment with the IMF’s current DSA methodology for Market Access Countries (MAC-DSA), applying their methodology to Colombia and Peru.

Gallagher and Maldonado find climate shocks could significantly affect the countries’ public debt trajectory. As a result, there is a need for more robust, country-specific data for the MAC-DSA framework. Improved data estimation is also needed for the magnitude of investment required for resilience and low-carbon transition pathways in IMF member countries. Read the technical paper.

India’s Energy and Fiscal Transition

At the 2021 United Nations Climate Change Conference in Glasgow, India’s Prime Minister Narendra Modi announced India will meet a target of net-zero emissions by 2070. As a result, India will face a significant energy and fiscal transition over the coming decades, as fossil fuels account for a significant share of Indian government revenues.

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Fiscal Impact Estimates of Net-Zero Emissions Transition for Major Hydrocarbon Producers in Latin America and the Caribbean

Hydrocarbon producing countries will face important fiscal challenges to reduce greenhouse gas emissions in line with the Paris Agreement on Climate Change before moving on to a net-zero emission (NZE) scenario. The complexity of the NZE transition will be determined by the degree of fiscal dependence on hydrocarbons.

A new technical paper from a team of researchers at the United Nations Economic Commission for Latin America and the Caribbean examines the fiscal impacts of an NZE transition on Bolivia, Brazil, Colombia, Ecuador, Mexico and Trinidad and Tobago and outlines next steps for preparing for green, just transitions, including mobilizing domestic resources, integrating climate change into IMF work, providing more flexibility in the use of IMF resources and embracing global coordination. Read the technical paper.

The Fiscal Implications of Climate Transitions: The Importance of IMF Surveillance

The fiscal implications of managing energy transitions are significant, especially considering the reality that fossil fuels are a major source of revenue for some of IMF member countries. Furthermore, the revenue raised from carbon pricing, which has proven to be politically difficult to enact, may be insufficient to finance or incentivize the low-carbon transition. This means the IMF has a key role to play in helping countries innovate to improve domestic resource mobilization and access to quality external financing.

This policy brief summarizes the three technical papers and outlines four key policy recommendations for the IMF to mitigate climate risks for smooth transitions to resilient, net-zero economies. Read the policy brief.

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