IMF Strategy to Help Members Address Climate Change Related Policy Challenges: Priorities, Modes of Delivery, and Budget Implications ; IMF policy paper, July 2021

IMF POLICY PAPER

IMF STRATEGY TO HELP MEMBERS ADDRESS CLIMATE

CHANGE RELATED POLICY CHALLENGES: PRIORITIES,

MODES OF DELIVERY, AND BUDGET IMPLICATIONS

IMF staff regularly produces papers proposing new IMF policies, exploring options for

reform, or reviewing existing IMF policies and operations. The following documents have

been released and are included in this package:

• A Press Release summarizing the views of the Executive Board as expressed during its

July 16, 2021 consideration of the staff report.

• The Staff Report, prepared by IMF staff and completed on June 30, 2021 for the

Executive Board’s consideration on July 16, 2021.

The IMF’s transparency policy allows for the deletion of market-sensitive information and

premature disclosure of the authorities’ policy intentions in published staff reports and

other documents.

Electronic copies of IMF Policy Papers

are available to the public from

http://www.imf.org/external/pp/ppindex.aspx

International Monetary Fund

Washington, D.C.

July 2021

PR21/238

IMF Executive Board Discusses a Strategy to Help Members

Address Climate Change-Related Policy Challenges

FOR IMMEDIATE RELEASE

Washington, DC – July 30, 2021: On July 16, 2021, the Executive Board of the International

Monetary Fund (IMF) discussed a paper proposing a strategy to help members address

climate change-related policy challenges.

The paper highlights macro-critical climate-related policy challenges that will confront all IMF

members in the coming years and decades. For example, global warming is bound to

undermine productivity and growth, affecting fiscal positions and debt trajectories. It will also

impact asset valuations, with repercussions for financial stability. Further, climate change will

redistribute income across the globe, which will influence trade patterns and exchange rate

valuations. To live up to its mandate, the paper argues, the IMF needs to assist its members

with addressing these challenges. Moreover, as a multilateral institution, the IMF can play a

helpful role in facilitating policy coordination between countries to mitigate climate change.

The paper takes stock of climate-related activities in the IMF to date. It finds that the Fund has

stepped up engagement on climate significantly in recent years—reflecting in part demands by

the membership—with a focus on policy papers and flagship reports, accompanied by some

discussion of climate change-related policy challenges in bilateral country reports.

The paper argues that the time has come for a systematic and strategic integration of macro-

critical aspects of climate change into the IMF’s core activities. It proposes covering climate

change-related policy challenges comprehensively in Article IV consultations, aiming at

discussing such challenges with all members every 5-6 years, and more frequently with the

largest emitters of greenhouse gases and countries particularly vulnerable to climate change.

It also suggests expanding coverage of climate risk to all financial stability assessments

(FSAPs), and a substantial scaling up of climate-related capacity development (CD) activity in

line with member demand. In strengthening its engagement on climate, the IMF will continue

to cooperate and partner closely with other institutions to leverage complementarities and

provide the best service to its members. The paper also estimates the cost of implementing

the strategy.

Executive Board Assessment

Executive Directors welcomed the opportunity to discuss a strategy to help Fund members

address climate change related policy challenges. They concurred that climate change is a

global existential threat that poses critical macroeconomic and financial policy challenges for

the whole Fund membership in the coming years and decades. Against this backdrop,

Directors broadly agreed that the Fund has an important role to play, within its mandate, in

At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors,

and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:

http://www.IMF.org/external/np/sec/misc/qualifiers.htm.

supporting members’ efforts to address climate change related challenges through its

surveillance, when macro-critical, and through its capacity development (CD) activities.

Directors supported a more comprehensive coverage of climate change related policy

challenges in Article IV consultations, where macro-critical. In line with the conclusions from

the Comprehensive Surveillance Review, they generally agreed that coverage of climate

change mitigation in Article IV consultations would be strongly encouraged for the largest

emitters of greenhouse gases. Some Directors stressed that this means that coverage of

these policies would be voluntary. Directors supported the proposal to regularly cover

adaptation and resilience building policies for the most vulnerable countries to climate change,

including options to attract climate financing. In addition, they generally saw a need to cover

the management of transition risks, including for fossil fuel exporters, of adjusting to a low

carbon economy, while taking into consideration each country’s own circumstances.

Directors agreed that Financial Sector Assessment Programs should have a climate

component where climate change may pose financial stability risks. This would help assess

any potential pressure points for the financial system from physical climate shocks and from

the transition to a low-carbon economy. A few Directors emphasized that this climate

component should be aligned with the standards being developed by relevant international

standard-setting bodies to ensure a consistent policy advice.

Directors supported expanding climate-related CD efforts, given rising demand by the

membership. They also generally supported complementing Fund CD resources with donor

funded activities. A number of Directors also noted that the Fund could consider using

program conditionality to support borrowing countries to increase their resilience to climate

change shocks and ensure macroeconomic sustainability, provided the conditionality is in line

with the Fund’s lending mandate and policies. A few Directors cautioned, however, against

using climate-related conditionality.

Directors agreed that policy papers and multilateral surveillance reports should remain critical

outlets for disseminating the Fund’s analytical and policy work on climate change, especially

for topics with a multilateral component that require policy coordination, such as mitigation

policies or climate financing. Directors underscored that reliable climate data are a critical

foundation for macro-climate analysis and encouraged further work in this area. They

generally stressed the importance of developing models and standardized toolkits to support

the Fund’s work in both multilateral and bilateral surveillance, while being mindful of potential

limitations in models and toolkits, including due to specific country circumstances.

Directors stressed the importance of partnering with other institutions, including the World

Bank Group, on climate-related work. They called for a more systematic approach to

collaboration to leverage the expertise of other institutions, while minimizing overlap and

maximizing value for the membership.

Directors took note of the proposal for gradually adding 95 Full-Time Equivalents to

implementing the proposed climate strategy. They looked forward to assessing this, together

with other funding requests, during the discussion of the Fund’s overall budget.

Directors generally agreed that some internal re-organization that facilitates an efficient

delivery of the climate strategy would be needed, in particular by establishing climate hubs in

functional departments and reinforcing area departments as necessary. A few Directors

stressed that greening the Fund’s own operations and reducing its carbon footprint will be key

for the institution’s credibility.

IMF STRATEGY TO HELP MEMBERS ADDRESS CLIMATE

CHANGE RELATED POLICY CHALLENGES: PRIORITIES,

MODES OF DELIVERY, AND BUDGET IMPLICATIONS

EXECUTIVE SUMMARY

Climate change has emerged as one the most critical macroeconomic and financial

policy challenges that the IMF’s membership will face in the coming years and decades.

By contributing to a higher frequency and intensity of natural disasters, climate change

is already imposing large economic and social cost on many economies. In the period

ahead, climate change is bound to affect macroeconomic and financial stability through

numerous other transmission mechanisms, including fiscal positions, asset prices, trade

flows, and real interest and exchange rates. While the mechanisms’ relative importance

will differ between individual countries, no country can expect to be spared entirely.

Many of the ensuing policy challenges fall firmly within the realm of the IMF’s expertise,

and for the Fund to live up to its mandate, it needs to assist its members in addressing

these challenges. Moreover, climate change mitigation is a global public good and

requires an unprecedented level of cross-country policy cooperation and coordination.

As a multilateral institution with global reach, the IMF can assist with coordinating the

macroeconomic and financial policy response.

Driven by demands of the membership, the IMF has stepped up its engagement on

climate-related issues in recent years, and it has started building up expertise. The

approach to date has placed heavy emphasis on flagship reports and policy papers,

accompanied by some discussion of climate change-related policy challenges in

bilateral country reports. The IMF has also experimented with new formats, such as the

Climate Change Policy Assessments conducted on a pilot basis with the World Bank.

The ad-hoc approach has reached its limits, however, and the time has come for a more

systematic and strategic integration of climate change into the IMF’s activities.

This paper proposes a comprehensive strategy for the IMF’s engagement on macro-

critical, climate-related policy issues. It starts from a stock-taking exercise that reviews

the Fund’s activities in this area thus far. The paper then presents a detailed concept of

adequate engagement to serve the needs of the membership, including the delivery of

specific outputs and collaboration with other institutions. The final section sketches

budgetary and human resource management implications.

June 30, 2021

IMF STRATEGY TO HELP MEMBERS ADDRESS CLIMATE CHANGE RELATED POLICY CHALLENGES

2 INTERNATIONAL MONETARY FUND

Approved By

Ceyla Pazarbasioglu

Prepared by the Strategy, Policy, and Review Department in close

collaboration with almost all departments, in particular the Fiscal

Affairs, Monetary and Capital Markets, and Research Departments as

well as the Office of Budget and Planning. The staff team consisted of

Saad Quayyum, Tito da Silva, Vimal Thakoor, and Irene Yackovlev, was

led by Johannes Wiegand, and worked under the general guidance of

Kristina Kostial (all SPR). Significant contributions were provided by

Valerie Guillamo, Fouad Manal, Emanuele Massetti, Ian Parry, James

Roaf (all FAD), Florence Jaumotte (RES), Prasad Ananthakrishnan, Ivo

Krznar, Dulani Seneviratne (all MCM), Liam O’Sullivan (SPR), Keith Clark

(CSF), and Iryna Ivaschenko (ORM). Comments are gratefully

acknowledged from departments and from Axel Schimmelpfennig

(OBP). Marisol Murillo and Elisavet Zachou (SPR) assisted with the

production of the paper.

CONTENTS

Abbreviations and Acronyms _____________________________________________________________________________ 4

INTRODUCTION AND OVERVIEW _____________________________________________________________________ 6

CLIMATE CHANGE: A CRITICAL MACRO-ECONOMIC POLICY CHALLENGE _____________________ 7

A. Economic Impact _______________________________________________________________________________________ 8

B. Macroeconomic and Financial Policy Challenges ____________________________________________________ 9

IMF ENGAGEMENT ON CLIMATE CHANGE ISSUES TO DATE____________________________________ 10

A. Direct Country Engagement __________________________________________________________________________ 11

B. Multilateral Surveillance, Analytics, and Policy ______________________________________________________ 12

C. Organization of Climate Work ________________________________________________________________________ 13

STEPPING UP ENGAGEMENT ON CLIMATE IN LINE WITH THE IMF’S MANDATE ___________ 14

A. Direct Country Engagement __________________________________________________________________________ 14

B. Multilateral Surveillance, Analytics, and Policy ______________________________________________________ 22

C. Support Activities ______________________________________________________________________________________ 25

D. Partnering ______________________________________________________________________________________________ 25

ORGANIZATIONAL AND RESOURCE IMPLICATIONS AND RISK ASSESSMENT _______________ 28

A. Organizational Implications___________________________________________________________________________ 28

B. Budgetary and Human Resources Implications _____________________________________________________ 30

C. Risk Assessment _______________________________________________________________________________________ 35

IMF STRATEGY TO HELP MEMBERS ADDRESS CLIMATE CHANGE RELATED POLICY CHALLENGES

INTERNATIONAL MONETARY FUND 3

CONCLUSIONS __________________________________________________________________________________________ 36

ISSUES FOR DISCUSSION______________________________________________________________________________ 37

References_________________________________________________________________________________________________ 38

BOXES

1. In-Depth Analysis of Mitigation and Associated Transition Risks__________________________________ 16

2. Climate Risk Analysis in FSAPs ________________________________________________________________________ 18

3. Climate Considerations in IMF-Supported Programs _______________________________________________ 20

4. Greening the IMF ______________________________________________________________________________________ 31

TABLES

1. Article IV Consultations: Targeted Outputs __________________________________________________________ 17

2. FSAPs: Targeted Outputs ______________________________________________________________________________ 17

3. Capacity Development: Main Targeted Outputs ____________________________________________________ 22

4. Flagship Reports and Policy Papers: Targeted Outputs ____________________________________________ 23

5. Additional Resource Needs for New Deliverables __________________________________________________ 33

IMF STRATEGY TO HELP MEMBERS ADDRESS CLIMATE CHANGE RELATED POLICY CHALLENGES

4 INTERNATIONAL MONETARY FUND

Abbreviations and Acronyms

ADs

Area Departments

AFR

African Department

APD

Asia & Pacific Department

BCBS

Basel Committee on Banking Supervision

BIS/FSI

Bank for International Settlements/Financial Stability Institute

CARTAC

Caribbean Regional Technical Assistance Center

CAT

Catastrophe

CCPAs

Climate Change Policy Assessments

CCRT

Catastrophe Containment and Relief Trust

Capacity Development

CGE

Computable General Equilibrium

CMAP

Climate Macroeconomic Assessment Program

COM

Communications Department

CSF

Corporate Services and Facilities Department

CSR

Comprehensive Surveillance Review

DRSs

Disaster Resilience Strategies

DSA

Debt Sustainability Analysis

DSGE

Dynamic Stochastic General Equilibrium

ESG

Environmental, Social, and Governance

EUR

European Department

Eurostat

European Statistical Office

FAD

Fiscal Affairs Department

FAO

Food and Agriculture Organization

FATF

Financial Action Task Force

FIN

Finance Department

FSAP

Financial Sector Assessment Program

FSB

Financial Stability Board

FTE

Full-Time Equivalent

GFSR

Global Financial Stability Report

GHGs

Greenhouse Gases

GIMF

Global Integrated Monetary and Fiscal Model

Headquarters

ICD

Institute for Capacity Development

ICPF

International Carbon Price Floor

IEA

International Energy Agency

IFIs

International Financial Institutions

IFRS

International Financial Reporting Standards

IMF

International Monetary Fund

ITD

Information Technology Department

LEG

Legal Department

LIC DSF

The Debt Sustainability Framework for Low-Income Countries

LICs

Low-Income Countries

IMF STRATEGY TO HELP MEMBERS ADDRESS CLIMATE CHANGE RELATED POLICY CHALLENGES

INTERNATIONAL MONETARY FUND 5

MAC SRDSF

Sovereign Risk and Debt Sustainability Framework for Market Access

Countries

MCD

Middle East and Central Asia Department

MCM

Monetary and Capital Markets Department

NDC

Nationally Determined Contribution

NGOs

Nongovernmental Organizations

NGFS

Network for Greening the Financial System

NOAA

National Oceanic and Atmospheric Administration

OECD

Organisation for Economic Co-operation and Development

PFM

Public Financial Management

PFTAC

Pacific Financial Technical Assistance Centre

PIMA

Public Investment Management Assessment

RES

Research Department

SDRs

Special Drawing Rights

SPR

Strategy, Policy, & Review Department

STA

Statistics Department

United Nations

WEMD

World Economic and Market Developments

WEO

World Economic Outlook

WHD

Western Hemisphere Department

WTO

World Trade Organization

IMF STRATEGY TO HELP MEMBERS ADDRESS CLIMATE CHANGE RELATED POLICY CHALLENGES

6 INTERNATIONAL MONETARY FUND

INTRODUCTION AND OVERVIEW

1. Climate change has emerged as one the most critical macroeconomic policy challenges

that the IMF’s membership will face in the coming years and decades. By contributing to a

higher frequency and intensity of natural disasters, climate change is already causing momentous

challenges for climate-vulnerable countries. In the period ahead, climate change will impact

macroeconomic and financial stability through a variety of other transmission mechanisms. For

example, global warming is likely to affect productivity and GDP, with repercussions for fiscal

positions and public debt trajectories. It is also bound to impact asset valuations and therefore

affect the balance sheets of financial and non-financial firms, which could undermine financial

stability. Climate change will re-distribute income and wealth across the globe, and hence affect

trade flows, exchange rates, and possibly even exchange rate regimes.

2. The policy impact of addressing climate change creates another set of challenges.

Adaptation and resilience building to climate change, for example, often require substantial

investments, which can complicate fiscal management and impair debt sustainability. Preventing

climate change—i.e., climate change mitigation—typically requires significant changes to tax

regimes and regulatory frameworks, complemented by structural and spending policies to support a

just transition. Further, climate change mitigation is a global public good, hence an effective

mitigation strategy needs a global design and requires an unprecedented level of cross-country

policy cooperation and coordination. A transition of the world economy to a low-carbon mode of

production will, in turn, have repercussions for economies that depend on exporting fossil fuels.

3. For the IMF to live up to its mandate, it needs to assist its members in managing these

challenges. However, at this juncture the Fund is inadequately equipped to do so. While the IMF

has been involved in the climate change debate since at least 2008—when a chapter in the World

Economic Outlook identified climate change as “a potentially catastrophic global externality and one

of the world’s greatest collective action problems” (IMF, 2008)—engagement to date has been

mostly ad-hoc and unstructured, with a heavy focus on flagship contributions and policy papers. In

the past few years, demands from the membership for climate-related work have increased

significantly, particularly as regards the IMF’s surveillance and capacity development (CD) activities.

The institution has responded by re-dedicating resources—often on a provisional, temporary

basis—and increasing demands on existing staff. This approach has reached its limits however—it

cannot deliver the comprehensive engagement on climate needed to meet the needs of the

membership.

4. Equipping the IMF to deliver on climate has organizational, budgetary, and human

resource management implications. The IMF needs to reinforce its workforce with additional staff

For surveillance, a path forward was recently charted in the Comprehensive Surveillance (CSR) review (IMF 2021a).

For Article IV consultations, the CSR established an expectation to regularly cover the mitigation policies of the

20 largest greenhouse gas emitters, and to cover adaptation policies and transition management to a low-carbon

economy whenever the corresponding policy challenges are macro -critical.

IMF STRATEGY TO HELP MEMBERS ADDRESS CLIMATE CHANGE RELATED POLICY CHALLENGES

INTERNATIONAL MONETARY FUND 7

to work on the nexus between macroeconomics and climate issues, and it needs to train its existing

economists to increase their capacity for conducting climate-macro analysis. Specialized hubs with

climate expertise are needed to assist country teams with the coverage of climate-related issues.

Guidance needs to outline how to deal with climate-related challenges in surveillance and in other

activities, while review capacity needs to be built up to ensure that the guidance is applied

consistently and even-handedly to the membership. Partnerships with external stakeholders hold

potential to deliver better services to members by complementing and strengthening the IMF’s own

analysis and expertise. The capacity to deliver CD should increase in line with the growing demand

from the IMF’s members.

5. This paper proposes a strategy how to scale up the IMF’s capacity to deal with climate-

related macroeconomic and financial policy challenges, in order to enable the Fund to assist

its membership effectively. Section II sketches some macroeconomic policy challenges triggered

by climate change. Section III summarizes the IMF’s engagement on climate change to date. Section

IV elaborates on what adequate coverage of climate change would entail. Section V sketches

organizational, budgetary and human resource management implications and provides a risk

assessment. Section VI concludes.

CLIMATE CHANGE: A CRITICAL MACRO-ECONOMIC

POLICY CHALLENGE

Climate change causes momentous macroeconomic and financial policy challenges: it can destroy

wealth, redistribute income between regions and countries, redirect trade, and impact asset

valuations—all phenomena with major repercussions for fiscal, financial, and monetary policy

management. Mitigating and adapting to climate change triggers policy challenges on its own. Most of

these challenges and policy issues are firmly within the IMF’s mandate.

6. Climate change presents a unique and unprecedented global policy challenge.

According to the International Panel for Climate Change (IPCC), absent decisive mitigation action,

the global average temperature will exceed the pre-industrial level by 3–5 degrees centigrade by

end-century—thus surpassing temperatures at any time since the emergence of mankind. Warming

at this scale would be bound to trigger seismic ecological, economic, and social shifts. At the same

time, climate change is building up gradually, which renders it difficult to fully appreciate its

significance and implications in real time.

7. In economic terms, climate change is a negative externality with global reach.

Individual households, firms and governments do not sufficiently internalize the impact of their

actions on the world’s climate. Addressing climate change therefore requires not only policy

intervention, but also an unprecedented level of global policy coordination between countries with

IMF STRATEGY TO HELP MEMBERS ADDRESS CLIMATE CHANGE RELATED POLICY CHALLENGES

8 INTERNATIONAL MONETARY FUND

different economic structures, different levels of development, and different vulnerabilities and

exposures to climate change.

8. “Tipping points” are a major source of uncertainty in assessing the damages from

climate change. If critical environmental thresholds are crossed, this could lock in a new climatic

state. An example is the thawing of the permafrost, which would release into the atmosphere large

quantities of CO2 and methane currently locked away under the ice, triggering a runaway

greenhouse effect. Other tipping points include the melting of the Himalayan glacier, changes in

monsoon patterns, the weakening or reversal of ocean currents, and the melting of the Antarctic

and Greenland ice sheets. By harboring the potential for catastrophic outcomes in case of inaction,

tipping points reinforce the rationale for mitigating climate change.

A. Economic Impact

9. Early indicators of the economic damage from climate change are losses associated

with the higher frequency and magnitude of extreme weather events. Natural disasters can

cause enormous human, social and economic cost and are likely to become even more pronounced

as global warming intensifies.

Such events include prolonged droughts, large wildfires, intense

heatwaves, torrential rains, floods, hurricanes, or extreme cold periods.

Global warming is also

driving trends that are less visible and disruptive in the short term, but carry potentially large

economic cost in the long term, such as rising sea levels, the destruction of habitable lands, the

acidification of oceans, and more frequent outbreaks of vector-borne diseases such as Zika, dengue

and malaria. Other economic transmission mechanisms include lower productivity in agriculture and

fishing, increased climate-related pressures for forced migration, and risk of conflict.

10. There is broad agreement in the economic literature that the effects of rising

temperatures on the level of GDP are non-linear. An increase in the average temperature raises

GDP in countries where annual average temperatures are low, but reduces GDP where they are high,

with the threshold estimated at an annual average temperature of about 13–15C.

Some estimates

also suggest an additional impact of warming on growth (e.g., Burke et al., 2015), though this is open

to debate. A transmission mechanism through growth would result in much larger long-term GDP

losses: in the absence of mitigation policies, these could be to the order of 25 percent of GDP by

2100 for the world economy, relative to holding temperatures fixed at current levels.

Stern (2007) identifies climate change as “the greatest market failure the world has ever seen.” In April 2021, in an

open letter to world leaders, 101 Nobel laureates called for governments to sign up for a fossil fuel non -proliferation

treaty; see https://fossilfueltreaty.org/nobel-letter.

Output losses from natural disasters can be very large. For example, when Hurricane Maria struck Dominica in 2017,

losses were estimated to exceed 200 percent of GDP.

Natural disasters can also cause spillovers to other countries. A 2011 flooding in Thailand, for example, halted the

production of hard drives from one of the world’s largest producers, causing a worldwide shortage. Storms that hit

Mozambique in 2019 affected electricity exports to neighboring countries.

See Burke, Hsiang and Miguel (2015); Dell, Jones, and Olken (2014); Carleton and Hsiang (2016); and Heal and Park

(2016) for literature reviews. A recent study is Kalkuhl and Wenz (2020).

IMF STRATEGY TO HELP MEMBERS ADDRESS CLIMATE CHANGE RELATED POLICY CHALLENGES

INTERNATIONAL MONETARY FUND 9

11. Low-income countries (LICs) tend to be disproportionately affected by climate change,

as many LICs are in regions that are already relatively hot. IMF estimates suggest that a

temperature increase of 1C in LICs lowers GDP in the same year by 1.2 percentage points (IMF,

2017). LICs’ vulnerability is reinforced by the fact that they often have less resources to invest in

adaptation and resilience building. They also tend to depend more on climate-vulnerable sectors

such as agriculture, and often suffer from structural weaknesses such as weaker infrastructure, a

higher prevalence of informal housing, lack of public services, weaker social safety nets, and political

fragility, often exacerbated by weak institutions.

Some estimates place output losses with

unmitigated climate change at 60–80 percent by 2100 for countries located in hot regions.

Given

the strong interconnectedness of the global economy, no country is likely to remain unscathed even

if the worst impacts are initially concentrated in hotter regions.

B. Macroeconomic and Financial Policy Challenges

12. Climate change is bound to trigger major challenges for macroeconomic and financial

policy management. These challenges are likely to materialize through a variety of channels whose

relative importance will differ between countries, reflecting factors such as vulnerability to warming

and extreme weather events, economic structures, or the degree of economic and institutional

development. Examples include:

• Fiscal management and public debt sustainability. Economic losses from climate change are

likely to translate into revenue losses and spending pressures. This will trigger difficult fiscal

policy challenges especially in countries that struggle with constrained fiscal space already.

• Financial stability. Assets and liabilities of financial firms could face large revaluations in

response to physical risks arising from damages to property, infrastructure, and land, and

transition risks that arise in the process of adjusting to a lower-carbon economy (Carney, 2015,

IMF, 2020b). Financial firms are also exposed to physical risks through their underwriting activity,

lending, and portfolio holdings. Liquidity risk can materialize in the form of asset fire sales.

• Monetary policy. As physical risk intensifies, monetary policy can face challenges from greater

volatility in output and prices. Climate change and the policy response to climate change could

also lead to persistent shifts in relative prices (for example, raising the price for fossil fuels), while

the long-term effects of climate change-related policies may affect real interest rates. Monetary

policy needs to internalize and manage these factors (McKibbin and others., 2017).

• Trade, exchange rates and exchange rate regimes. By changing relative prices and

redistributing incomes across the globe, climate change is bound to affect trade flows, with

repercussions for exchange rates. Higher volatility can also complicate adherence to managed

exchange rate regimes, especially when combined with other vulnerabilities (such as high

dollarization or debt levels).

IMF (2017) and IMF (2020a).

Burke et al. (2015).

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10 INTERNATIONAL MONETARY FUND

13. The policy response to climate change can give rise to another set of macroeconomic

and financial policy challenges. Examples include:

• Adaptation and resilience building can be fiscally costly. IMF (2021b), for example, estimates

that for the Asia and Pacific region, annual average investment needs can exceed 3 percent of

GDP—with costs typically falling due upfront, while benefits only accrue in the medium to long

term. Further, needs for resilience building are often the most pressing in countries that already

have elevated public debt levels and limited revenue generating capacity (IMF 2019a). In this

case, domestic fiscal efforts may need to be complemented by support from the international

community to close financing gaps.

• Climate change mitigation and the transition to a low-carbon economy typically require

significant changes to tax, spending, and regulatory systems. Accompanying social and

structural policies are needed to ensure a just transition, repurpose human and physical capital,

and build the infrastructure for a low-carbon economy (IMF 2019b, 2020c), including incentives

for low-carbon R&D and targeted support for households and workers. The nature of transition

management needed will often differ greatly between countries, given differences in economic

structures and institutional arrangements. In particular, as mitigation typically involves higher

energy prices, it can require adjustments to development and industrial policy strategies.

• Given the public good character of climate change mitigation, enhancing the effectiveness of

mitigation efforts hinges on international policy coordination. Coordination could prevent

potentially destabilizing spillovers from inadequate mitigation policies to other countries. It

would also help reduce concerns about carbon leakage and competitiveness losses that could

materialize if countries pursue mitigation unliterally. Policy coordination is also needed to ensure

that LICs and other climate-vulnerable countries have sufficient financial and technological

means to purse adaptation and mitigation policies.

• A global transition to a low-carbon economy creates existential challenges for many countries

that depend on fossil fuel exports. A combination of financial diversification (investing export

surpluses in low-carbon assets) and real diversification (developing non-fossil fuel sectors of the

economy) will typically be needed to manage these challenges, with implications for fiscal,

structural and, potentially, exchange rate policies.

IMF ENGAGEMENT ON CLIMATE CHANGE ISSUES TO

DATE

The IMF has been involved in the climate policy debate for many years, with an emphasis on policy

papers and flagship reports in the beginning that was followed by a gradual shift to bilateral country

engagement (Article IVs, FSAPs, CD). In recent years, climate-related demands on IMF staff have

increased greatly, especially in surveillance. To support these demands, the IMF has begun developing

policies at the intersection of macroeconomics and climate, cooperating with a wide range of

See, for example the 2018 ECCU Article IV.

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INTERNATIONAL MONETARY FUND 11

institutions in the process. Until now the IMF has met the additional demands by reallocating resources

within a mostly unchanged budgetary envelope and organizational structure, with an extraordinary

effort made in the past nine months in anticipation of COP26—an approach that has reached its

limits.

A. Direct Country Engagement

14. Climate change has been discussed in the context of Article IV consultation and

Financial Sector Assessment Program (FSAP) reports.

• Article IV Consultations. During 2015–17, 27 climate and energy Article IV pilots discussed

topics such as energy subsidy reform, mitigation policies and resilience building, covering a wide

spectrum of countries. Since then, Article IV consultation reports have covered climate change

on an ad-hoc basis, reflecting requests from country authorities and staff capacity.

For climate-vulnerable states, six Article IV consultations (about 2 per year) have been able to

draw on pilot Climate Change Policy Assessments (CCPAs) conducted jointly with the World

Bank.

The CCPAs contained in-depth assessments of financing and investment needs and

provided a road map for formulating disaster resilience strategies (DRSs) for climate change

adaptation. For Dominica and Grenada, the country authorities—in collaboration with the

country teams as well as other IFIs—prepared a DRS on their own that was discussed in the

Article IV report.

A recent example of adaptation coverage without a CCPA or DRS is the

Maldives’ consultation, which included model-based analysis for prioritizing resilience-

building needs. At present, capacity suffices to cover adaptation issues in about 4–6 Article

IV consultations per year.

In cases where mitigation policies and transition management have been covered in-depth,

the discussion in the Article IV report has often been complemented by selected issues or

working papers (see Box 1 for examples). At present, staff capacity suffices to cover

mitigation and transition management in-depth in 4–6 Article IV consultations per year.

• Financial Sector Assessment Programs (FSAPs). Physical and/or transition risks assessment

have been covered on average in two FSAPs per year. Current capacity does not allow climate

risk analysis in all FSAPs, including stress testing and assessments on financial oversight.

15. Climate-related topics are a rapidly increasing area of demand for CD. To date, most CD

has focused on fiscal issues. Where possible and called for on substance, CD is being delivered in

collaboration with institutions like the World Bank, OECD, and the IEA to leverage these institutions’

expertise. The IMF has also started engaging in partnerships with bilateral donors.

For Belize, Grenada, Micronesia, Seychelles, St. Lucia, and Tonga.

The Board was briefed on these in May. The DRS followed IMF (2019a), a paper that concluded that there was a

need for a coherent medium-term approach to help countries prioritize and prepare for natural disasters.

For instance, Germany is providing funds for greening the recovery and CD that helps countries design and

implement their climate mitigation and adaptation strategies, while the United Kingdom has provided funds to

(continued)

IMF STRATEGY TO HELP MEMBERS ADDRESS CLIMATE CHANGE RELATED POLICY CHALLENGES

12 INTERNATIONAL MONETARY FUND

• On fiscal issues—other than the CCPAs mentioned above—CD has covered mitigation and

adaptation policies as well as building resilience. CD has assisted with developing carbon pricing

schemes and related tax policies. There is also initial work to develop CD for public financial

management on issues such as green budgeting and the development of a climate-related

module in public investment management assessments (PIMA).

• In the area of financial sector policies, CD is very limited at this point, covering climate-related

stress testing for the insurance sector, regulation and supervision of climate-related risks,

climate-related debt management, and green bonds.

• Some modelling support has covered the domestic macroeconomic, external, and distributional

implications of climate-related policies.

• To support training in member countries, a climate module is part of the newly launched

Inclusive Growth online course, and work is ongoing to develop a model-based framework on

mitigation and adaptation. Moreover, there are plans for interactive microlearning videos.

B. Multilateral Surveillance, Analytics, and Policy

16. Climate change related issues have featured in numerous flagships and policy papers

since 2008, when the first World Economic Outlook’s (WEO) climate chapter was published.

The

work on flagships and policy papers has often involved modeling support and instigated the

development of toolkits.

• Flagships. Staff has published many impactful analyses on climate-related topics in flagships

(WEO, GFSR, Fiscal Monitor) and Regional Economic Outlook papers. These contributions have

focused on a wide variety of issues, including (i) developing a conceptual and quantitative

framework for carbon pricing;

(ii) making a case for stress testing to climate risks and

promoting climate-related disclosures;

(iii) highlighting the economic impact of climate change

CARTAC to help member countries with CD to build climate change and disaster resilience, and Switzerland is

financing the IMF Climate Innovation Challenge, launched in June 2021.

Climate PIMAs focus on (i) climate-aware planning—whether public investment is planned considering climate

change policies, (ii) coordination between entities—how decision making on climate-related investment is

coordinated across the public sector, (iii) project appraisal and selection—in particular the reflection of climate-

related analysis and criteria, (iv) budgeting and portfolio management—how the government’s portfolio of climate-

related public investment projects is managed, and (v) risk management—how the government identifies and

manages its fiscal risk exposure associated with public investment that could be impacted by climate change and

natural disasters.

The April 2008 WEO (IMF, 2008) analyzed a variety of mitigation policies, with a recommendation for global and

equitable carbon pricing.

The October 2019 Fiscal Monitor (IMF, 2019b) provided a quantitative framework for understanding the impacts

and trade-offs of carbon taxes and similar pricing schemes to implement climate mitigation strategies, particularly in

the largest advanced and emerging economies.

The October 2019 GFSR (IMF, 2019c) covered developments in ESG markets (issuance, pricing, policy issues like

disclosures); the April 2020 GFSR (IMF, 2020b) looked at whether climate physical risks were properly priced in global

equity markets; the October 2020 GFSR offered an initial assessment of the impact of the COVID crisis on firms’

(continued)

IMF STRATEGY TO HELP MEMBERS ADDRESS CLIMATE CHANGE RELATED POLICY CHALLENGES

INTERNATIONAL MONETARY FUND 13

and its policy implications on LICs, and on sub-Saharan Africa in particular;

and (iv) devising a

strategy of how to deliver global emissions reductions while minimizing economic and social

cost during the transition.

• Policy papers have also discussed a wide variety of climate-related topics and policies, such as

energy subsidy reform, mitigation policies, resilience building to natural disasters, state-

contingent debt instruments for climate vulnerable countries, or macroeconomic and

distributional trade-offs of different mitigation policies in the European Union and in Asian

economies.

17. Various strands of work aim to improve climate data for macroeconomic and financial

analysis. The IMF launched in April an experimental climate change indicators dashboard.

With

climate data for macroeconomic analysis being a relatively new statistical area, much work has gone

into establishing and improving methodologies.

Staff is also analyzing the main commercial data

and analytics solutions currently available in the market.

C. Organization of Climate Work

18. To date, climate work is conducted mostly within pre-existing structures. Formal

organizational changes have been very limited and have included (i) the creation of a Climate

Advisory Group (2019) that consists of managerial staff from all departments and meets at least bi-

monthly to disseminate information and coordinate climate work, (ii) the designation of a Deputy

Director in SPR as the Fund-wide climate change coordinator (2020), and (iii) the creation of a

climate policy group in FAD (also 2020). Further, several departments have set up networks to

collaborate on climate issues, and there is also a Fund-wide, informal network of economists who

are interested in climate issues. Other than this, many existing divisions and units have taken on

climate work in addition to their other mandates and portfolios, such as the Multilateral Surveillance

Division in RES, the Strategy and Planning Unit in MCM, the Development Issues Strategy Unit in

SPR, the Fiscal Operations 2 and Public Financial Management 2 Divisions in FAD, the Public Affairs

Division in COM, and the Digital Advisory Unit in ITD. All departments partner extensively with

external organizations on climate work (see the next section).

environmental performance (IMF, 2020f). The April 2020 GFSR made the case for stress testing and better disclosures

to improve assessments of physical risks associated with climate change.

IMF (2020g).

The October 2020 WEO mapped out how a green investment push coupled with steadily rising carbon prices would

allow countries to achieve necessary emissions reductions while containing transition costs.

Examples include IMF (2019a, 2020e).

The dashboard aims to become a comprehensive aggregator for statistical indicators on climate change,

greenhouse gas emissions from economic activity, trade in environmental goods, green finance, government policies,

and physical and transition risks. See https://climatedata.imf.org/.

For instance, staff organized an iLab event on climate data & disclosures during the April 2021 Spring meetings.

IMF STRATEGY TO HELP MEMBERS ADDRESS CLIMATE CHANGE RELATED POLICY CHALLENGES

14 INTERNATIONAL MONETARY FUND

STEPPING UP ENGAGEMENT ON CLIMATE IN LINE

WITH THE IMF’S MANDATE

Serving the needs of the membership requires stepping up climate work in many areas, including an

expansion of coverage in Article IV Consultations and Financial Sector Assessment reports, and a

significant increase in climate-related CD. To be able to deliver these outputs, country teams would

need to be supported with expertise at the conjunction of macroeconomics and climate science,

analytical tools, data, and guidance. The strategy below describes a steady state that is envisaged to be

reached within 3 years.

19. The overarching objective of the IMF’s engagement on climate is to provide high-

quality, granular, and tailored advice to the membership on macroeconomic and financial

policy challenges related to climate change. This would include domestic policy challenges, which

would be addressed mostly in the context of the IMF’s bilateral country engagements (surveillance,

CD and lending), but also global policy challenges—reflecting the global public good character of

climate change mitigation and the ensuing need to coordinate policies. As climate change affects

countries, regions and sectors differently, and as countries’ policy implementation capacity also

differs, IMF analysis needs to be sufficiently granular and differentiated to factor in this

heterogeneity and reflect it adequately in the IMF’s policy advice. Substantial training within the IMF

will be needed to live up to this challenge.

A. Direct Country Engagement

20. Article IV consultation reports should cover climate related policies wherever climate

change triggers macro-critical policy challenges.

As detailed below and summarized in Table 1,

staff proposes coverage of climate-related issues in about 60 Article IV consultations per year.

Overall, this would allow covering adaptation and resilience building every 3 years for those

countries that are most vulnerable to climate change. The climate change mitigation policies of

those countries most critical for the global mitigation effort could also be covered every 3 years,

while transition risk management could be covered every 5–6 years for all members.

• Climate Change Adaptation/Resilience Building. Adaptation and resilience building are

potentially relevant for a large portion of the IMF’s membership. IMF (2019a) identified

60 countries—many of them LICs—as particularly vulnerable to climate change, ranging from

exposure to hurricanes and floods to slower-moving phenomena such as draughts. Over time,

the list of climate-vulnerable countries is likely to increase. Adaptation to climate change

requires strategies to build both physical resilience—i.e., climate resilient infrastructure—and

financial resilience—safeguarding the financial capacity to deal with disasters and to build

resilience—with the latter firmly in the realm of the IMF’s mandate. It can also include challenges

See IMF (2021a) for a discussion about the relationship of the IMF’s surveillance mandate—as codified in the

Articles of Agreement and the 2012 Integrated Surveillance Decision—and the treatment of climate-change related

policy challenges in Article IV consultations.

IMF STRATEGY TO HELP MEMBERS ADDRESS CLIMATE CHANGE RELATED POLICY CHALLENGES

INTERNATIONAL MONETARY FUND 15

to financial and monetary policies, for example dealing with a higher frequency and amplitude

of supply-side shocks and with changes in relative prices triggered by climate change.

In-depth coverage in Article IVs requires inter alia an assessment of country-specific climate

vulnerabilities, adaptation policies, and financing needs to build resilience. A full, granular

assessment of these issues will often require analysis conducted outside of the Article IV

consultation cycle. The planned Climate Macroeconomic Assessment Program (CMAP) is meant

to provide such analysis and input (see below). For Article IVs that cannot be preceded by a

CMAP, standardized assessments will be needed that would also draw on work by partners.

Overall, a reasonable objective is to cover adaptation and resilience building in all climate-

vulnerable countries every 3 years, with about half accompanied by a CMAP.

• Climate Change Mitigation. The Comprehensive Surveillance Review (CSR) published in May

set forth the expectation that mitigation policies of the 20 largest emitters of greenhouse gases

(GHGs) would be covered every 3 years or so.

The approach inscribed in the CSR reflects the

global public goods character of mitigation: while unconstrained global warming poses large

risks to global macroeconomic and financial stability, no country can mitigate climate change on

its own. Rather, success requires a collective effort to which countries can make an adequate

contribution—with the largest impact triggered by mitigation policies of large GHG emitters.

As discussed in IMF (2021a), an Article IV consultation report would be open to different policy

approaches to reach mitigation objectives. Further, they would refrain from assessing mitigation

objectives per se, but would provide relevant context, including a comparison of domestic

mitigation objectives with those of peers.

Living up to the commitment of the CSR will require 6–7 Article IV consultations with in-depth

mitigation coverage per year (Box 1).

• Transition Management to a low-carbon economy. Transition management is a macro-critical

policy challenge for almost every IMF member. It includes domestic policy efforts to achieve a

country’s Nationally Determined Contribution (NDC) under the Paris agreement, as meeting the

NDC often requires changes to tax regimes, regulatory frameworks, and accompanying social

and investment policies.

It also includes challenges arising from the global transition to a

low-carbon economy, such as managing the transition for fossil fuel exporting countries.

33–34 assessments per year with 8–9 going in depth—in particular for carbon exporters—plus

another 25 assessments with a more standardized methodology would allow covering transition

risks for most of the IMF’s membership over a time horizon of 5–6 years.

Together, these countries account for more than 80 percent of all GHG emissions.

All IMF members but one have committed to an NDC under the Paris agreement, and for most countries significant

policy efforts are needed to achieve their NDCs.

Transition risk management to achieve an NDC is closely related to and overlaps with mitigation. The difference is

that transition risk management is a domestic policy challenge that falls under the bilateral surveillance mandate of

the IMF. Mitigation adds another dimension: with mitigation being a global public good, mitig ation policy needs to

be discussed within the global context and falls under the IMF’s multilateral (rather than bilateral) surveillance

mandate. See IMF (2021a) for a detailed discussion of this distinction and the implications.

IMF STRATEGY TO HELP MEMBERS ADDRESS CLIMATE CHANGE RELATED POLICY CHALLENGES

16 INTERNATIONAL MONETARY FUND

Box 1. In-Depth Analysis of Mitigation and Associated Transition Risks

A thorough analysis of mitigation policy would start with a discussion of historical and anticipated future

emissions trends, emissions sources, emissions and clean technology commitments in the context of the

Paris Agreement and in national plans, and existing and envisioned mitigation policies at the national and

sectoral level. It would also discuss the implications of the country’s NDCs and, where existent, net zero

commitments for mitigation, including an analysis of interim targets and a comparison with peers.

The analysis would present options for mitigation policies, along with quantitative assessments of the

emissions, fiscal, economic efficiency and macroeconomic (GDP, employment, trade) impact. It would also

discuss strategies for enhancing the acceptability of mitigation, particularly in countries where political

economy considerations render carbon pricing difficult. Where feasible, incidence analyses for household

income groups and vulnerable industries would be included.

The assessments would include quantitative

analyses of the emissions, fiscal, and economic

welfare impacts of carbon pricing, including the

prices implicit in countries’ mitigation pledges

(see Figure) and domestic economic co-

benefits (like the reduction of deaths from air

pollution). They would illustrate the trade-offs

(in terms of emissions, costs, and revenue)

between pricing instruments and other policies

like taxes on electricity, taxes on individual

fossil fuels, energy efficiency policies and other

regulations, and sectoral emissions pricing. The

assessments would also provide practical

guidance on how feebates or similar fiscal

instruments can be used to strengthen

mitigation incentives in various sectors (such as

power, industry, transport, building, extractive,

forestry, agriculture) while avoiding new tax

burdens on the average household or firm.

Where data permit, assessments of the

incidence of carbon pricing across household

income groups and vulnerable industries would

also be provided.

Several recent Article IV consultations have included assessments of climate mitigation and transition risk

policies in selected issues or working papers, including Canada, Denmark, Finland, Germany, Indonesia,

Korea, the Netherlands, the U.K., and the U.S. These assessments typically recommended a comprehensive

strategy with carbon pricing as the centerpiece, reinforced with feebates and public investment in clean

technology networks along with productive use of carbon pricing revenues and just transition measures to

protect vulnerable groups.

0% 10% 20% 30% 40% 50% 60%

Argentina

Australia

Brazil

Canada

China

France

Germany

India

Indonesia

Italy

Japan

Mexico

Russia

Saudi Arabia

South Africa

Korea

Turkey

United Kingdom

United States

Percent emissions reductions vs. 2030 baseline

Emissions reductions from $25 carbon price Extra reductions from $50 carbon price

Extra reductions from $75 carbon price NDC target

Reductions for 2030 Pledges/ From Pricing

Source: IMF staff calculations.

Note: NDCs targets are from first-round or (if applicable) second-round Paris pledge. Estimates

assume that CO2 must fall in proportion to other GHGs to achieve the target (i.e. non-CO2 GHGs

must also fall in order for the target to be achieved). Where a country has a conditional NDC the

target is defined as the average between the conditional and unconditional target. NDCs as of 2

June 2021.

IMF STRATEGY TO HELP MEMBERS ADDRESS CLIMATE CHANGE RELATED POLICY CHALLENGES

INTERNATIONAL MONETARY FUND 17

Table 1. Article IV Consultations: Targeted Outputs

Type of Climate-Related Policy Challenge and Objectives

Coverage

Adaptation and Resilience Building.

Objective: cover 60 climate vulnerable countries every 3 years

Based on a CMAP

Without a CMAP

10 per year

Climate Change Mitigation

Objective: cover the 20 largest emitters of GHGs every 3 years

In-depth coverage

6–7 per year

Transition Management to a Low-Carbon Economy

Objective: cover all countries every 5–6 years

In-depth coverage

8–9 per year

More standardized coverage

25 per year

Source: Authors.

21. Exposure to climate risk and policy options to manage such risk should become an

integral part of all analyses under the FSAP (Table 2). This would help understand better potential

pressure points for the financial system from physical climate shocks and from the transition to a

low-carbon economy. It would also help inform policies needed to enhance risk management and

the resilience of the financial system.

• Topics. A typical climate component of an FSAP would include stress testing to both physical

and transition risks—with the test design depending on countries’ specific vulnerabilities and

characteristics—as well as assessments of climate-relevant financial regulation and supervision.

To this end, staff plans to develop and implement a standardized approach to assessing financial

stability risks from climate change and the concomitant need for adaptation in the financial

sector, in addition to sector-specific guides (bank and insurance) for inclusion of climate risk in

the assessment of supervision and regulation (see Box 2).

• Assessment process. Staff envisages a three-stage template. First is a climate financial risk

diagnostic to decide on the scope of the assessment and relevant climate physical and transition

risks. The second is designing climate scenarios.

The third step would focus on risks that could

Table 2. FSAPs: Targeted Outputs

Deliverables

Coverage

Assess climate issues as part of FSAP risk analysis and assessment of financial

oversight frameworks.

All FSAPs, based on

an assessment of

the materiality of

climate risk

Source: Authors.

1/As agreed with county authorities and depending on the systemic importance of climate risk in the jurisdiction.

While staff will leverage on NGFS scenarios for transition risks where countries are covered by the NGFS, many

emerging market economies and LICs are not covered. Moreover, the physical risk coverage in NGFS scenarios is

limited to one climate hazard and thus lacks the comprehensiveness needed for FSAP climate stress testing.

IMF STRATEGY TO HELP MEMBERS ADDRESS CLIMATE CHANGE RELATED POLICY CHALLENGES

18 INTERNATIONAL MONETARY FUND

materialize over the three- to five-year FSAP horizon––in contrast with the longer-term focus

adopted by most central banks and regulators––and apply scrutiny to physical risks.

22. Climate-specific review is needed to safeguard quality and evenhanded treatment

across topics and countries. The case for review is especially strong for the coverage of mitigation

policies for the 20 largest emitters of greenhouse gases in Article IV consultations, given that (as per

CSR) regular coverage is strongly encouraged. Review would also be conducted for other in-depth

discussions of climate policies in Article IV reports, selected FSAPs, CMAPs, selected issues papers,

working papers, and for policy papers (see below).

Box 2. Climate Risk Analysis in FSAPs

FSAPs have been assessing the impact of climate-related natural disaster events on financial stability for

some time. A textual analysis of 192 FSAP reports (up to 2019) found that 33 FSAPs (17 percent) contained

meaningful references to risk factors such as droughts, floods, and storms. Many of these FSAPs were for

small island states (such as the Bahamas, Jamaica, and Samoa). Some assessments for advanced economies

(such as Belgium, Denmark, France, Sweden, and the U.S.) have also covered natural catastrophe risks as part

of insurance stress testing.

More recent FSAPs have developed new approaches to assessing climate change risk.

• Norway 2019 FSAP. Three possible transmission channels for transition risk to the financial system were

explored: (i) the impact of a substantial increase in domestic carbon pricing on banks’ health via its effect

on corporates’ operating costs and profitability, (ii) the impact of a large increase in global carbon prices

on the domestic economy and banks’ loan losses via the fall in the revenues of domestic oil producers,

(iii) the impact of a forced reduction in the production of domestic oil firms on their share prices and, in

turn, on the net wealth of domestic shareholders. Results show that a sharp increase in carbon prices

would have a significant but manageable impact on banks (IMF, 2020b and Grippa and Mann, 2020).

• Philippines 2021 FSAP. Climate stress test scenarios were constructed with three distinctive components.

The frequency and intensity of typhoons were projected under a global climate scenario drawing on

climate science inputs. A catastrophe (CAT) risk model used in the property insurance industry was

deployed to estimate damages to infrastructures from typhoons. The resulting damage was applied as

depreciation shock to the capital stock and simultaneous productivity shock based on existing literature

of infrastructure economics in a dynamic stochastic general equilibrium (DSGE) model calibrated for the

country. The exercise focused on typhoon risks. The results indicated a relatively moderate impact on

bank capital even for an extreme typhoon on its own. Nonetheless, if multiple types of extreme shocks

materialize at the same time—so-called compound risk such as an extreme typhoon during a pandemic—

the damage could be substantially more amplified.

The oversight section of FSAPs also started to cover climate issues. In the 2020 U.S. FSAP, the regulatory

response to the increasing incidence and severity of natural catastrophes was considered as part of the

assessment of supervision and regulation of the insurance sector. In the 2019 Korea FSAP, the

coordination of climate action across authorities as well as supervisory strategy and major initiatives

among the financial industry were discussed in the Technical Note on Financial Conglomerates

Supervision.

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Box 2. Climate Risk Analysis in FSAPs (concluded)

The Philippines: Climate Change Stress Test

Notes: Bank capital ratio of UKB banks.

See Appendix I for methodological details.

1/Bank capital rises in scenarios without pandemic over the short-period due to the valuation gains with securities

(mostly sovereign) as the central bank cut policy rate.

IMF-Supported Programs

23. Within the Fund’s lending mandate, financing may be provided under IMF-supported

programs when climate-related measures are deemed critical to solve a member’s balance-of-

payments (BoP) problems. The IMF is already providing rapid assistance to country hit natural

disasters through its Rapid Financing Instrument and Rapid Credit Facility.

Further, to preserve

fiscal sustainability, the IMF has already incorporated climate-related elements—such as energy

Moreover, under the Catastrophe Containment and Relief Trust (CCRT), the Fund can also provide grants for debt

relief for the poorest and most vulnerable countries hit by catastrophic natural disasters or pub lic health disasters.

Macroeconomic assumptions: a severe typhoon is assumed to hit the country in Q3 2020

Macroeconomic Impact of Typhoons-Normal Time

(2019 real GDP = 100)

125

120

115

110

105

100

January WEO

Macroeconomic Impact of Typhoons and Pandemic

(2019 real GDP = 100)

125

120

October WEO

114

Typhoon, once

in 25 years

110

106

115

110

105

100

Typhoon, once

in 25 years

100

Typhoon, once

in 500 years

Typhoon, once

in 500 years

2019 2020 2021 2022 t

Current scenario

t+1 t+2 t+3

Future scenario

2019

2020

2021 2022

Current scenario

t t+1 t+2 t+3

Future scenario

Impact on bank solvency

Climate change (the difference between current and future

scenarios) has only a moderate impact on the effect of a

severe typhoon to bank capital during normal time…

Impact of Typhoons on Bank Capital-Normal Time

(Total capital adequacy ratio in percent)

18.0

16.0

14.0

Typhoon, once

in 25 years

…but climate change increases the effects of a severe

typhoon in an extreme tail event—a joint shock of a once

in 500 years typhoon and pandemic.

Impact of Typhoons and Pandemic on Bank Capital

(Total capital adequacy ratio in percent)

18.0

16.0

14.0

15.3

Typhoon, once

in 25 years

15.3

October WEO

12.0

10.0

8.0

6.0

4.0

2.0

0.0

January WEO

Typhoon, once

in 500 years

12.0

10.0

8.0

6.0

4.0

2.0

0.0

10.3

9.7

10.2

9.1

8.9

9.6

7.7

6.8

5.4

5.2

Typhoon, once

in 500 years

3.2

2019 2020 2021 2022

Current scenario

t t+1 t+2 t+3

Future scenario

2019 2020 2021 2022

1.0

t t+1 t+2 t+3

Current scenario

Future scenario

Notes: Bank capital ratio of UKB banks.

See Appendix I for methodological details.

1/ Bank capital rise in scenarios without pandemic over the short-period due to the valuation gains with securities

(mostly sovereign) as the central bank cut policy rate.

IMF STRATEGY TO HELP MEMBERS ADDRESS CLIMATE CHANGE RELATED POLICY CHALLENGES

20 INTERNATIONAL MONETARY FUND

subsidy reform, carbon pricing, and financial resilience building—into some programs (Box 3). Such

measures could be informed by the IMF’s analytical and policy work in the context of its surveillance

activities. Consistent with and constrained by the IMF’s lending mandate, climate-related measures

could be further internalized in program design when such measures are deemed critical for

resolving BoP problems. The ongoing discussion on rechanneling allocated SDRs is also considering

measures to finance climate-supportive measures as part of a range of options.

Capacity Development—Single-Country CD and Training

24. Climate-related CD has several components: (i) the CMAP—a diagnostic tool under

development to analyze climate change policies and preparedness for climate-vulnerable countries,

(ii) climate-related single-country CD, and (iii) external training. Table 3 summarizes the main

outputs envisaged in these areas.

25. The CMAP would build on the CCPA, but with a stronger macroeconomic and financial

focus. Among other things, CMAPs would analyze links between resilience building and long-term

As per the IMF’s Article of Agreements, CD needs to be consistent with the purposes of the IMF (Art. V.2(b)).

Box 3. Climate Considerations in IMF-Supported Programs

IMF-supported programs (“programs” thereafter) can have an important role in helping build climate-

resilient economies, within the Fund’s lending mandate whereby the IMF provides financing to members in

resolving BoP problems. Climate considerations have already been incorporated in program design in many

countries. In the context of needed fiscal adjustments, a range of “green” measures have been deployed in

several programs:

•

Fuel and energy subsidy reforms have dual BoP-stabilization and climate mitigation effects.

Reducing energy subsidies has been the focus, for instance, in programs for Egypt (2016 EFF);

Tunisia (2016 EFF); Ukraine (2015 EFF).

•

Where revenue mobilization is a priority, programs have helped the authorities introduce new taxes

and otherwise improve their tax systems. This has included widening the range of revenue

mobilization options such as carbon taxation (Jamaica).

•

To support green recovery over the course of fiscal consolidation and to contain possible longer-

term BoP needs, programs have also highlighted the development of coherent resilience-building

strategies (Costa Rica).

•

Members have included natural disaster clauses in new borrowing contracts, which can increase

financial resilience to climate shocks (Barbados, Grenada) in the context of a sovereign debt

restructuring.

Other aspects of program design could also internalize climate considerations, to the extent that they are

consistent with the IMF’s lending mandate. Under program-supported PFM reforms, green budgeting could

help include and track climate-related spending across budget cycle phases. Offsetting distributional

implications of climate-related measures would be critical to building broad support for adjustment in

general and a green recovery. In particular, programs would need to continue prioritizing measures to

protect the poor by establishing targeted cash or near-cash transfers and expanding existing ones.

IMF STRATEGY TO HELP MEMBERS ADDRESS CLIMATE CHANGE RELATED POLICY CHALLENGES

INTERNATIONAL MONETARY FUND 21

growth, climate financing needs, distributional effects of climate policy, and long-term

decarbonization plans. As discussed above, appropriate coverage of climate-vulnerable countries

would require at least 10 CMAPs per year (up from the current delivery of 2), with a view to

informing the corresponding Article IV consultations.

Many countries have already signaled

interest in a CMAP.

26. Demand for climate-related single-country CD is expected to increase significantly.

substantial share of this CD is expected to go to LICs and small states, reflecting both the need to

bolster capacity and the fact that these countries tend to be disproportionately affected by climate

change.

• On fiscal issues there is already considerable CD (see the previous section). Various in-house

mitigation analysis tools are under development for use in CD. Fund staff is providing member

countries—such as Costa Rica, Colombia, Guatemala, Jamaica, Moldova, Seychelles—with fiscal

and economic assessments of the impact of carbon taxes and/or is advising them on green tax

reforms. The increase in CD would focus on green budgeting and climate PIMA; on the latter,

about a dozen countries have already shown interest.

• On financial sector issues, CD would be substantially increased to assist with climate risk stress

testing, financial sector regulation and supervision, monetary policy and central bank operations,

and climate-related debt management issues. Financial Sector Stability Reviews would be a

useful vehicle for delivering climate risk assessments to LICs and small states. Additional delivery

modalities to complement bilateral CD work such as webinars would also be considered.

• In the area of data, the Climate Change Indicators Dashboard would need to be accompanied

by CD to help bolster member countries’ capacity to collect and report the new indicators. While

no CD has been provided in this area as of now, it will be critical to train data compilers so that

they can provide reliable and timely data for policy making. To deliver CD to LICs and small

states, staff considers developing a toolkit for data collection, risk analysis and assessment.

• On macro frameworks, the objective is helping climate-vulnerable countries build macro

scenarios that reflect climate change shocks as well as mitigation and adaptation policies, with a

focus on growth, macroeconomic stability, and debt sustainability.

• On legal and financial integrity issues, single-country CD would cover legal aspects related to

climate change policies in the areas of central banking, financial sector, Public Financial

Management, tax law, governance, anti-corruption and financial integrity.

27. There also is a need to substantially increase external training. Many members are

scaling up climate work, including by establishing climate units in ministries of climate and central

banks. Given a dearth of expertise linking macro and climate science, the IMF can support these

Board engagement on a fully fleshed out concept for the CMAP is envisaged for early 2022.

Single-country CD would be mindful that digitizing government and financial services be done in a manner that

does not excessively increase the carbon footprint (e.g., adopting green cloud data centers) and that improves

transparency and efficiency in the domains of energy distribution or information sharing.

IMF STRATEGY TO HELP MEMBERS ADDRESS CLIMATE CHANGE RELATED POLICY CHALLENGES

22 INTERNATIONAL MONETARY FUND

efforts by training more authorities in these areas through dedicated courses, interactive

microlearning videos and webinars—as staff is already doing on a small scale for the Coalition of

Ministers of Finance for Climate Action. All these training methods would bolster the authorities’

capacity to analyze the macroeconomic and financial effects of climate change, natural disaster

shocks, and policies. Climate modules would also be incorporated into existing training cour ses,

including on general macroeconomics, fiscal issues, and financial sector policies.

Table 3. Capacity Development: Main Targeted Outputs

Coverage

Climate Macroeconomic Assessment Program Reports

10 per year

Single-Country CD

87 per year

Fiscal issues

Financial sector issues

Climate data

Macro modeling

Legal and financial integrity issues

External Training

Online course on the macroeconomics of climate change

5–6 times per year

Micro-learning interactive videos

Source: Authors.

B. Multilateral Surveillance, Analytics, and Policy

28. Chapters in flagship reports and regional surveillance reports as well as policy papers

will remain key outlets for disseminating the IMF’s analytical and policy work on climate.

While coverage has increased markedly in recent years, impactful vehicles to communicate the

Fund’s policy messages will become even more important as the urgency of climate-related

macroeconomic policy challenges increases. Table 4 summarizes staff’s proposed outputs in this

area. Flagships and policy papers are especially important for topics with a multilateral component

that require policy coordination, as for these topics, country-level documents allow only partial

coverage. Examples include cross-country cooperation of mitigation efforts or climate financing,

i.e., financial measures to support the mitigation and adaptation efforts of developing and (other)

climate-vulnerable countries—a principle enshrined into the Paris agreement.

• Flagship chapters help shape institutional positions and often inform the engagement with

members in the context of Article IV consultations and FSAPs.

Regional surveillance reports

In this context, an IMF staff proposal for an international carbon price floor was published in June.

For instance, the October 2021 GFSR will look at climate transition risks and opportunities in the asset management

industry. The October 2021 WEO will lay out a multipronged strategy comprising of a green investment push; carbon

pricing; support for green R&D; and measures to ensure social fairness of the transition. It will also reflect on labor

market aspects of the green transformation, attempting to assess the share of jobs most directly affected and the

demographic characteristics of workers in those jobs.

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and papers can provide policy responses to climate change across peers, reflect region-specific

circumstances and characteristics at greater depth than flagship reports can typically do, and

draw in country authorities and teams.

• Policy papers in the next years could cover topics such as adaptation, integration of climate risk

into debt sustainability analyses, transition risks for fuel exporters, climate adaptation in disaster-

prone countries, international coordination of mitigation policies, the political economy of

climate mitigation, developing a methodology for assessing the financial regulation and

supervision of climate risks, broadening and deepening assessments of physical and transition

risks, or assessing the financial stability implications of climate risks. At the same time, other

policy areas are bound to emerge that may require a systematic discussion—while these are

difficult to predict, they could encompass the nexus between climate and development policies

and objectives (as manifested in the UN Sustainable Development Goals), macro-critical aspects

of biodiversity, financial integrity and climate change, measurement of natural capital, or the link

between climate and digitalization.

• Policy papers are being complemented by staff climate notes, a new outlet designed especially

for the IMF’s climate work.

Table 4. Flagship Reports and Policy Papers: Targeted Outputs

Type of Document

Coverage

Flagship Reports (WEO, GFSR, Fiscal Monitor)

1–2 chapters per

year

Regional Economic Outlook Reports

1–2 chapters per

year

Policy Papers

1–3 per year

Staff Climate Notes

3–7 per year

Source: Authors.

29. With climate economics a rapidly evolving field, there will be a constant need to

develop and upgrade guidance on how to reflect climate-related themes in bilateral country

documents. In some policy areas, IMF analysis is fairly well developed—for example climate change

mitigation—while in others, components of the Fund’s approach are still under development—an

example is adaptation and resilience building. In yet other areas, significantly more groundwork is

needed before guidance could be issued; an example are transition risks for fossil fuel exporters.

Guidance will also be needed to facilitate and ensure consistent treatment across financial sector

oversight assessments in FSAPs.

An immediate priority is the update to IMF Surveillance Guidance

Note, including to reflect the climate-related conclusions of the CSR. Guidance can also be

disseminated through other channels, such as topic-specific how-to notes.

For instance, staff is developing sector-specific guide for assessments of the Basel Core Principles and Insurance

Core principles.

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24 INTERNATIONAL MONETARY FUND

30. Developing models and standardized toolkits would support the IMF’s analytical work

in both multilateral and bilateral surveillance. To employ such toolkits efficiently, functional

department staff would support country team requests for modeling climate impacts and provide

granular policy analysis.

• Global macroeconomic models with detailed energy production and use are key to analyze the

macroeconomic, sectoral, and trade implications of climate-related policies. Several in-house

models are under development, including (i) a full structural global macroeconomic model

(similar in design to the Global Integrated Monetary and Fiscal Model—GIMF) with detailed

energy production and use;

(ii) a dynamic real CGE model to examine the short-, medium- and

long-run impacts of policies at a more granular level, including sectoral and international trade

effects; (iii) an Integrated Assessment Model to look at the long-run interaction between climate

and the economy, including the negative feedback of climate change on the real economy.

These models will support analysis of mitigation and transition issues in bilateral surveillance,

scenario analysis for FSAPs, CD, and analysis of multilateral policy issues such as the

international coordination of mitigation policies.

• Debt sustainability analyses (DSAs) would integrate countries’ exposure to climate risk and

policy options to manage such risks. The debt sustainability framework LICs (LIC DSF) already

includes—for countries that are frequently exposed to natural disasters—a stress scenario that

incorporates a large temporary impact on growth. In addition, guidance is provided on how to

incorporate the average impact of such disasters in long-term baseline projections. The new

debt sustainability framework for market access countries (MAC SRDSF), to be rolled out in early

2022, will include a similar stress scenario. In addition, a long-term module in the MAC SRDSF

will account for the fiscal cost of climate change adaptation and mitigation policies. Future work

will seek to model the benefits from resilience and adaptation policies in terms of growth

performance to complement the climate change-related modules in both DSA frameworks.

• Toolkits and templates give country desks straightforward-to-use instruments for policy

analysis. An example is the IMF spreadsheet tool that quantifies carbon pricing and other

policies for Paris pledges and energy subsidies for 150 countries; it has been used in several

Article IV consultation reports. Planned toolkits include: (i) supporting the analysis of the

macroeconomic effects of natural disasters and adaptation policies; and (ii) the analysis of the

macroeconomic, external sector, and distributional implications of climate-related policies,

including the interaction of climate change and climate related policies with inequality. More

work is also needed on the longer-term implications of mitigation policies, and the interaction

between climate change and debt sustainability, debt management tools, and instruments.

31. Reliable climate data are a critical foundation for macro-climate analysis. The Climate

Change Indicator Dashboard will need maintenance, updates, and improvements. This includes

further work on refining data sources, methodologies to make the indicators more suitable for

surveillance and policy making, more granularity, and wider country coverage. Climate data will also

This model will share features with the external model G-cubed (which has been used for previous analysis) in that

it allows to do short-term macroeconomic analysis (e.g., it features short-term nominal and real rigidities, and fiscal

and monetary policies), has international financial flows, and forward -looking agents.

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INTERNATIONAL MONETARY FUND 25

feature in the IMF’s work on data gaps in the context of the G20 and the regular IMF Statistical Fora

such as the 9

forum in November this year dedicated to Measuring Climate Change. Moreover,

staff is providing leadership on data issues through the NGFS workstream on Bridging the Data

Gaps. Granular data covering various dimensions of climate-change-related issues (for example

physical risk and transition risk) will also need to be purchased from third-party data providers.

C. Support Activities

32. Internal training would contribute to upgrading the skills of IMF economists to

conduct macro-climate analysis. A near-term priority is to launch and teach a “climate 101” course

that would be mandatory for all IMF economists and would cover the most fundamental analytical

tools on the intersection of climate and macroeconomics/finance. More granular courses and

training will be needed to keep up with the rapidly expanding field of climate economics. While

modalities need to be worked out, options include topic-specific “climate bootcamps” that would

provide in-depth training on specific tools and approaches. Training would also be offered by

external academics and possibly other institutions, with a view to introducing Fund staff to new

models, analytical frameworks, and alternative approaches to climate change policies. Beyond

formal training, internal knowledge sharing and peer-learning would continue via platforms like the

Green Shoots series.

33. Several other components would be part of a robust support structure, including:

• Legal and financial integrity issues. The scaling up of the IMF’s climate work is expected to

increase demand for legal advice related to institutional issues on incorporating climate change

issues in IMF operations; institutional arrangements for cooperation with stakeholders;

integrating governance and financial integrity measures to safeguard climate change policies

and programs; initiatives to increase the Fund’s environmental sustainability such as carbon

credit purchases, green building programs and employee transit benefits; and the development

and implementation of ESG investment policies.

• External communication and outreach to official and non-official stakeholders and creative

solutions and language services for climate-related work.

D. Partnering

34. IMF staff already successfully collaborates on climate work with a wide range of other

multilaterals institutions, standard setting bodies, and NGOs. This collaboration, which has been

expanded substantially over the past year, serves a multitude of purposes including:

• Contributing to policy debate on climate change issues. The Fund engages regularly with the

G7, G20, and G24. Among other things, the partnership between the Fund and the Italian G20

Presidency served as a catalyst for convening the Venice Conference on Climate in July. Another

example is the COP26 November 2021 conference. Staff also co-hosts with the World Bank the

Secretariat of the Coalition of Finance Ministers for Climate Action that brings together fiscal

and economic policymakers from more than 60 countries who have endorsed the Helsinki

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26 INTERNATIONAL MONETARY FUND

principles for climate action, and also supports the Coalition's various workstreams, in particular

on carbon pricing and green budgeting.

By contributing to such fora, the IMF is disseminating information, assists with policy

formulation, and supports policy coordination—the latter an especially important task for

climate change mitigation.

Staff works particularly closely with the World Bank, including on the Bank’s new Climate Change

Development Report, and maintains dialogues with the European Commission and the OECD. It

also exchanges views regularly with various UN agencies, the IEA, the WTO, and regional

development banks.

• Improving climate data. The Climate Change Indicators Dashboard is an IMF-led international

statistical initiative. The indicators have been developed in cooperation with international

organizations and other agencies including the OECD, the World Bank, the UN, the European

Commission, the European Statistical Office (Eurostat), the Food and Agriculture Organization

(FAO), the International Energy Agency (IEA) and the National Oceanic and Atmospheric

Administration (NOAA).

• Contributing to efforts to strengthen the information architecture around climate risks.

Better data and disclosures are needed to assess climate risks, allow accurate market pricing,

enable informed investment decisions, and facilitate the growth of climate finance. The IMF co -

chairs the NGFS workstream on bridging data gaps that covers data, disclosures, and

taxonomies.

Staff also participates in the NGFS Legal Task Force that aims to take stock, assess

and raise awareness of climate-related litigation risk. Further, the IMF is an observer in the

International Platform on Sustainable Finance. On climate disclosures and taxonomies, staff

cooperates with standard setting bodies and fora such as the International Financial Reporting

Standards (IFRS) Foundation and the Financial Stability Board (FSB). Staff is also contributing to

the work of FATF on climate and environmental crimes.

• Strengthening Financial Stability. Staff contributes to the global effort to further incorporate

climate risk in the prudential framework and financial stability analysis. Staff, for instance,

collaborates with the FSB on financial stability risks arising from climate physical and transition

risks as well as on prudential standards for climate risk. Moreover, staff participates in the NGFS

workstreams on microprudential supervision, scaling up green finance that covers central bank

operations, and in the NGFS workstream on designing scenarios for climate physical and

transition risks. Additional collaboration includes standard setting bodies and other fora such as

the Basel Committee on Banking Supervision (BCBS) and the Sustainable Insurance Forum.

Additionally, staff is collaborating with the BIS/FSI to incorporate climate risk in the supervisory

and regulatory online course. Collaborations with the World Bank also facilitate the IMF FSAP

scenario design for climate physical risk stress testing.

• Collaborating with international organizations on CD. The Fund has collaborated with the

UNDP on several peer-to-peer sharing events by organizing roundtables on green budgeting in

See the recent NGFS Progress_Report_on_Bridging_Data_Gaps (ngfs.net).

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Asia and in the Caribbean. There is close cross-organizational coordination and dialogue with

the OECD, the World Bank, UNDP, and the European Commission in the development of new

standards and tools on climate-related public financial management issue such as green budget

tagging, medium-term expenditure frameworks, and public investment management.

35. The Fund is also using its convening power and has exchanges with broader groups of

stakeholders:

• Using the Fund’s convening power. The Fund is already using the opportunity of the

Spring/Annual Meetings to raise awareness on the macroeconomic and financial challenges of

climate change. It has also partnered with others on seminal events. For instance, the Fund co-

organized the BIS green swan conference with the Banque de France and the NGFS in June and

co-hosted a high-level climate event with the People’s Bank of China in April—both events

focused on facilitating important dialogues between major representatives on green finance.

• Exchanging views with NGOs, academics and the private sector. Recent deepening of

collaboration with the World Resources Institute, the NDC Partnership, and other climate-related

NGOs has led to fruitful exchanges on analytical approaches and data, seminars for Fund staff,

and exploration of areas for future collaboration. Staff has also started to engage in a dialogue

with broader group of NGOs. In parallel, there is a continuous exchange of views with academics

and policy makers, for example in the context of the High-Level Advisory Group led by senior

IMF and World Bank staff and Professor Nicolas Stern from the London School of Economics.

Staff is also engaged with think tanks, including the Center for Global Development. Further, IMF

management and senior staff periodically exchange views with executives with oversight for

sustainability at major financial institutions on issues such as climate financing and ESG.

36. The landscape for collaboration on climate continues to evolve. In recent years, it has

become increasingly clear that climate change interacts with many policy areas—including macro-

economic and financial stability, development, and even peace and security. As a result, many

institutions with different mandates have stepped up their engagement on climate. There is scope

for experimentation and peer learning as the macro/climate nexus is a relatively new field. But there

is also a need to move fast to get traction for policy action in this decade.

37. In such an evolving environment, collaboration is paramount. As the Fund has emerged

as a more prominent voice on climate change issues, requests for participation and partnerships

have multiplied. Our collaboration needs to ensure that staff is aware of the activities and policy

advice given by other institutions, especially in the context of bilateral engagement with country

authorities. Where feasible, coordination of policy messages can also be helpful. Staff will therefore

continue to identify areas of collaboration with IFIs and development partners and explore new

partnerships, focusing on member needs and on providing the best macroeconomic and financial

policy advice possible—while being mindful of our comparative advantage and the costs of

collaboration. Specifically, staff would be guided by the following considerations:

• Broad exchanges. Where possible, staff will seek to avoid collaborating on a project-by-project

basis. The aim is to ensure frequent exchanges to remain on top of each other's agendas and

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28 INTERNATIONAL MONETARY FUND

minimize overlaps, while recognizing, cross-referencing, and disseminating the work of other

stakeholders. This will also help delineate an effective division of work in the climate space and

leverage synergies.

• Complementarity. In some areas, the expertise of Fund staff and that of other institutions are

complementary: for example, on adaptation, multilateral development banks and some NGOs

are better placed to assess the needs for physical resilience building, while the compara tive

advantage of IMF staff is with integrating resilience building needs into coherent

macroeconomic and debt sustainability frameworks. Another example is the IEA which maps out

paths for sectors at the center of the transition—energy and transportation—and has been

collaborating with the IMF to assess the macroeconomic effects of these.

• Cost-benefit analysis. Collaboration by itself is resource intensive: it often requires aligning

institutions with different objectives, different internal organizations, different work cycles,

difference governance structures, and different communication strategies. Hence cooperation

should not be undertaken for its own sake. Staff will seek to align collaboration closely with

institutional objectives to maximize the value added of collaboration for its members, while

remaining cost effective.

• Flexibility. Collaboration needs to be nimble to allow experimentation and openness on policy

options in an evolving environment. The latter implies that in the majority of cases, informal

cooperation is preferable to formal cooperation arrangements.

ORGANIZATIONAL AND RESOURCE IMPLICATIONS

AND RISK ASSESSMENT

Implementing the strategy requires some internal reorganization—especially the establishment of

‘climate hubs’ in a few functional departments to support the work on country teams—and additional

staff with climate expertise. Needs for the latter are estimated at about FTE 95 in the steady state, i.e.,

once the scaling up is completed. They would complement existing resources, which are estimated at

about 60 FTE including some transitional resources. Additional CD activities needed to fully implement

this strategy are expected to be funded by donor support. In the first years of implementation there

would be above-average investments in developing policies and training, while steadily ramping up

country work through surveillance and CD. As policies mature and training materials are adjusted,

resources would be moved to further increasing country support.

A. Organizational Implications

38. Efficient delivery of climate work requires some reorganization. “Climate hubs” in four

functional departments—FAD, MCM, RES, and SPR—would host a significant portion of the IMF’s

climate expertise to support country teams in the conduct of Article IV consultations and FSAPs, lead

IMF STRATEGY TO HELP MEMBERS ADDRESS CLIMATE CHANGE RELATED POLICY CHALLENGES

INTERNATIONAL MONETARY FUND 29

policy development, and provide CD.

Also Area Departments would need to scale up, given that

they are at the interface of the IMF’s engagement with the authorities. The IMF’s climate coordinator

(based in SPR) and the climate advisory group would continue to coordinate work across the IMF.

39. The “climate hubs” would be organized in different ways—extra divisions/units in

some departments, a network of economists and experts working on climate issues in others.

• The Fiscal Affairs Department (FAD) would produce and/or coordinate climate outputs on

adaptation, mitigation and transition issues, including leading the production of CMAPs. It

would reinforce country teams for Article IV consultations with climate economists and experts.

Further, FAD would coordinate with international bodies, notably the Finance Ministers’ Coalition

for Climate Action. It would also continue to lead climate PFM work, including through provision

of CD.

• The Monetary and Capital Markets Department (MCM) would focus on (i) leading or co-

leading outputs on the financial stability aspects of climate change and the role of sustainable

finance, including in the context of multilateral surveillance; (ii) climate-related risk analyses and

stress testing including climate model calibration; and (iii) regulation and supervision to assess

the effectiveness and adequacy of various regulatory responses and recommend adaptations to

central bank’s balance sheets and operations. It would support country teams, including by

developing climate-related analytical tools and provide climate-related CD. MCM economists

may also reinforce country teams for Article IV consultations.

• The Research Department (RES) would produce and coordinate outputs on adaptation,

mitigation, and transition issues, with a focus on the macroeconomic, global and political

economy angles. It would spearhead analytical work, including on the multilateral dimensions of

climate mitigation and analysis of energy transition and implications for commodity markets, in

the context of the WEO, the WEMD and the G20. Through the tailoring of its macroeconomic

models to individual country circumstances, RES staff would support analysis of mitigation and

adaptation policies by country teams for Article IV consultations and by regional divisions in

area departments, as well as scenario analysis for FSAPs and CMAPs. The department would

organize an annual IMF research conference on the economics of climate change and support

internal training

• The Strategy, Policy and Review Department (SPR) would spearhead the IMF’s policy

development on climate issues in cooperation with other departments—for example, integrating

climate aspects into lending operations or debt sustainability frameworks. It would develop

guidance for country teams, conduct climate-specific review, support the IMF climate

coordinator on adapting the Fund’s overall strategy, and act as the IMF’s climate collaboration

hub with external bodies.

40. Area departments would also require reinforcements, as they are on the forefront of

providing bilateral policy advice, performing regional surveillance, and coordinating in-country with

CD delivery would leverage to the extent possible existing structures including Regional Capacity Development

Centers (e.g., CARTAC and PFTAC have already been active on climate issues ).

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30 INTERNATIONAL MONETARY FUND

development partners. There is a case for strengthening expertise on region-specific topics, such as

resilience building to natural disasters in APD, AFR and WHD, transition risks for oil exporters in AFR

and MCD, or regional climate change mitigation initiatives and policies in EUR. Area departments

also would assist with the production of CMAPs—notably as regards the debt and financing

implications of climate change and climate related policies—and follow up on the CMAP

recommendations and other CD advice in Article IV reports. In addition to other resources, area

departments would have a climate coordinator function to guide and operationalize climate work at

the regional and country level, liaise with functional department climate hubs to bring the latest

tools to bear on their department’s work, feedback country experiences and common policy

questions to functional departments, and help on cross-country projects.

41. Other departments would require targeted reinforcements to step up climate work.

These reinforcements would typically be accommodated within the existing organizational structure

and include reinforcing the capacity to deliver training and develop models for country applications

(ICD), strengthening advice on legal issues related to climate change policies (LEG), and improving

data quality and support data related capacity development (STA).

42. Greening the IMF’s own operations will require a concerted effort and is key for the

institution’s credibility. As the Fund redefines how to work and engage with members post-

pandemic, it will do so with an eye to sustainability and by making some pandemic-related

reductions in the IMF’s carbon footprint permanent.

This will involve developing a Fund-wide

governance structure and defining goals and strategies. The intent is to develop a more robust

environmental sustainability strategy, allowing the Fund to lead in environmental stewardship while

maintaining its focus on serving the membership (Box 4).

B. Budgetary and Human Resources Implications

43. Despite a substantial reallocation, current resources are insufficient. Departments

estimate that they spent $28 million on climate in FY21 (of which $1½ million is externally funded),

compared with $16.5 million (of which $½ million is externally funded) in FY20. This spending

corresponds to broadly 60 FTEs, with some $2 million (about 7 FTE) being transitional resources.

The remaining 53 FTEs also include resources that have covered climate issues as part of the usual

rotation and prioritization of macro-critical topics. While prioritization and rotation will continue for

individual products, climate issues have become more salient and will have to be covered more

regularly and for more countries, thus requiring additional resources.

Not included in this estimate are climate-related work on Fund-supported programs (FIN), provision of digital and

cyber risk expertise to help countries align their digitalization strategies with their climate objectives (ITD), high-

impact communication and outreach (COM), and support services (CSF). These costs would be included in the mark-

up for overhead costs.

Any costs or efficiency gains will be discussed and reflected in annual budgets.

The 60 FTEs reflect staff working full time on climate, but also staff reporting only some of their time to climate.

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44. Staff estimates that an addition of about 95 FTEs would be needed to ensure that the

Fund can cover most macro-critical aspects in its climate work in the steady state, while relying

on other institutions where these have a comparative advantage. To determine how many additional

Box 4. Greening the IMF

The IMF has sought to improve its environmental sustainability since 2009. This is through reductions

in its energy and water consumption, material and food waste, and digitalization of Fund media and content.

Between 2010 and 2019, the Fund’s total annual greenhouse gas (GHG) emissions decreased by 10 percent,

mainly by reducing energy use by half. Other achievements include: (i) U.S. Environmental Protection

Agency’s Energy Star building certification and (ii) Platinum recertification of the HQ2 building under the

Leadership in Energy & Environmental Design (LEED) program. The Fund considers environmental

sustainability in the planning of all building and facilities-related projects with the intent to reduce the

impact on the environment,

while meeting the Fund’s

business needs and focusing

on the health and safety of

staff, other building

occupants, and the

surrounding communities.

Efforts to green the Fund’s

operations go hand-in-

hand with the

modernization agenda.

Investments in modernization

and the ‘future of work’ will not only

serve to make the Fund more effective

and resilient but can also have a

substantial positive impact on its carbon

footprint. The pandemic has shown that

the Fund can serve its members

effectively and at a much lower cost to

the environment than in the past. Pre-

pandemic measures of the Fund’s

carbon footprint underscore the

importance of business travel, representing 70 percent of the Fund’s total carbon footprint in 2019. As such,

investments in virtual meeting capabilities provide an opportunity to strengthen member engagement,

reduce travel and curtail GHG emissions. Greater use of telework, as envisaged under the ‘hybrid work

model,’ will provide an opportunity to reduce the environmental impact of staff commuting. With time and

upfront investment, this could result in reduced Fund HQ space needs, and thus have positive environmental

and budgetary impacts. Transitioning to renewable energy operations at HQ and in field offices may reduce

energy consumption in the longer term but will require investments in the short term. A transition to

environmentally friendly vehicles in the field and at HQ has recently started (under the lifecycle replacement

program) and will reduce purchased fuels and emissions.

_______________________________

Emissions include all HQ operations and travel booked through the Fund’s travel agent; field office operations are not

currently included.

25%

70%

Fund GHG Emissions by Scope (2019)

Scope 1 -

Purchased fuels

and emissions

Scope 2 -

Purchased

Electricity

Scope 3 - Business

travel, commuting,

shipping

20000

40000

60000

80000

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

GHG Emissions (CO2e in metric tons)

Cross-Year Comparison of Emissions (CO2e) by

Scope

Scope 1 Scope 2

Scope 3

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32 INTERNATIONAL MONETARY FUND

staff would be needed to enable the Fund to implement the proposed strategy in the steady state,

i.e., after the upscaling has been completed (see below), staff engaged in a detailed bottom-up

resource exercise. About 60 percent of the additional resources would go to direct country

engagement (to be augmented to two thirds by CD financed from donor support; see below). Some

37 percent would go to enhanced regional surveillance, policy development, and tools to support

direct country engagement in providing customized advice. A small share would go to support

activities. As it will take some time to hire and train the new staff and to build the structures for

implementing this strategy, a transition period of 3 years will be required before the new steady

state will be reached, including full delivery of the outputs sketched in the previous section.

Direct Country Support

45. As outlined in the previous section, the strategy envisages climate coverage in roughly

60 Article IV consultation reports each year, with about two thirds on mitigation/transition and

the remainder on adaptation issues. Overall, this would suffice to engage with each member on

macro-critical climate issues every 5–6 years.

Functional departments would support area

department teams through mission participation and contributions to analytical papers, as well as

models and toolkits tailored to country specific circumstances. This interaction between department,

assisted by area department climate coordinators, would also help knowledge transfer and

encourage mobility between the climate hubs and area departments.

46. All FSAPs (about 12 per year from currently 2) would cover climate-related physical

and transition risks, including climate stress testing, assessment of regulation and supervision, data

disclosures, and the climate-adequacy of regulatory frameworks. The additional unit costs would be

about 0.5 FTE. FSAP mission teams would be supported by reference notes, modeling support from

RES, and assistance on legal issues. The findings of these FSAPs would be integrated in the

corresponding Article IV consultation reports.

47. CD delivery would be scaled up significantly from a low base, reflecting inter alia the

need to meet requests by country authorities to assist with implementing Fund advice from the in-

depth Article IV consultations. Staff would seek additional donor support to augment internally-

funded CD, including for CMAP and external training as well as for fiscal, statistical and financial

Any climate issues related to a Fund-supported program is covered under this estimate (potentially leading to an

underestimation if there was a substantial increase of climate-coverage in the context of programs).

Climate coverage in Article IV consultations is costed on average at 0.4 FTE (0.25 FTE for an Article IV accompanied

by a CMAP), accounting for the fact that climate change issues are additional to country teams’ current work to

ensure that other priority topics are not crowded out. This estimate reflects that integrating climate issues will require

the country teams to look into all aspects of macroeconomic policies—in the fiscal, monetary, and financial sectors.

The estimate also assumes that 65 additional country teams would spend 0.1 FTE per year to follow up on previous

Art. IV consultations and stay current on climate issues.

This category also includes review.

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issues. To this end, the Committee on Capacity Building has already designated climate change as a

topical growth area for CD. IMF01-funded CD would be targeted to the most urgent needs,

especially for low-income countries, as well as those that are unlikely to be covered by IMF02

resources. The outputs below include donor-funded activities.

• There would be 10 CMAPs per year (from currently 2) at a cost of up to 2 FTE. The main findings

and policy recommendations would be integrated in the corresponding Article IV consultation

reports.

• About 90 additional (compared to the status quo) single-country CD per year have been costed

at a unit cost of 0.2–0.3 FTE. Climate-related single-country CD would be complemented by

how-to climate notes that offer practical advice from staff to policymakers on selected economic

issues.

• External training would be bolstered through adapting existing course materials to include

flexible climate change modules, including one full-fledged climate-related macroeconomic

course would be delivered 5–6 times a year.

How-to-notes are a new publications series started in 2016 that offers practical advice to policymakers on

important issues.

The unit costs for the delivery of an external course is estimated at 0.1 FTE.

Table 5. Additional Resource Needs for New Deliverables

IMF01

IMF02

Total

IMF01

IMF02

Total

Coverage

FTEs

Percent

Total

115

100

Direct Country Engagement

Article IV Consultations

FSAPs

CMAPs

Other

Area Department Coordination

Multilateral Surveillance, Analytics and

Policy

Multilateral Surveillance

Other research and analytics

Policy development & tools

6-7 per year

Support activity

Source: Authors.

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34 INTERNATIONAL MONETARY FUND

Multilateral Surveillance, Analytics, and Policy

48. As in previous years, flagships would, as relevant, include high-impact climate-related

chapters. Staff would significantly expand climate work in regional surveillance reports, however,

highlighting cross-country work. Particularly at the beginning of implementing the strategy, this

would help cover a broader swath of countries and also help to quickly raise awareness of climate

issues both with country teams and with authorities.

49. Functional departments expect to present 1–3 additional Board papers per year.

Staff

expects that in the first years of implementing the strategy, there would likely be a larger number of

policy papers, given that the IMF’s policies with regard to macro-climate issues are still being

developed. Some of these papers are expected to be conceptual in nature as they would be

breaking new ground (for instance, the measurement of natural capital). In some cases, a series of

Board papers might be needed over a couple of years to fully cover and develop a topic. The policy

papers would be complemented by a new series labeled staff climate notes that would showcase the

latest policy-related analysis and research being developed by individual IMF staff and are published

to elicit comments and further debate, aimed at a broad audience interested in climate issues. Staff

plans to issue about 3–7 climate notes per year.

50. Functional department would support country teams by following up on policy papers

with guidance notes and other types of guidance, such as how-to notes and templates. The

emphasis would be on coverage requirements, analytical tools—such as in-house models and

toolkits—data sources, even-handed application of IMF policy positions while taking into account

country-specific circumstances, and best practice examples. This item also includes support for

maintaining and upgrading the climate data dashboard as well as small refinements as otherwise

the dashboard risks becoming obsolete; and climate-specific legal support related to surveillance

and Fund-supported programs. Lastly, there would be a need to increase resources for coordination

and networking with internal and external stakeholders, which is expected to result in better

products for members. FTE resources would need to be complemented through forward-looking,

highly granular, sectorized and geo-spatial data on physical and transition risks. Such data are

critical to support policy analysis and would be used to support and mainstream climate is sues into

broader multilateral and bilateral surveillance including FSAPs, analytical work, capacity

development and potentially lending programs.

Support Activities

51. Given the dearth of climate-literate economists, internal training will be essential. The

short “climate 101” course will be mandatory to ensure that all Fund economist become conversant

in basic climate issues; this course will be offered 3–4 times per year focusing on the broad

macroeconomic effects of climate change and policies to address them. For staff working on

countries facing the specific issues, a “Climate Bootcamp” would be offered 3–4 times per year. The

At an average unit cost of 2 FTE; large variation would be expected across papers.

Climate notes are costed at 1.5 FTE on average.

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INTERNATIONAL MONETARY FUND 35

Bootcamp would aim at using analytical tools to carry out macro policy scenario analysis and —

through modules—develop more in-depth policy expertise geared either to specific issues—such as

carbon pricing—or specific country types (e.g., countries vulnerable to natural disasters). To promote

continuous learning as staff experience accumulates, staff would organize 4–6 peer-to-peer learning

events per year and establish a venue for collaboration where staff can share lessons from their

climate change work in surveillance, lending, and CD activities.

Course materials would be

designed in a way to allow for a variety of delivery modalities, including blended formats. Finally, to

ensure internal training remains varied and relevant, external climate experts would be hired to

provide training seminars (e.g., academics in those universities that are developing graduate

programs in climate economics). Support activities also include legal support related to institutional

aspects such as facilities and HR policies.

Other Issues

52. Most of the additional FTEs would consist of macroeconomists. Prior knowledge of

climate issues would be ideal, but the expectation is that most of these new staff would need to be

trained on climate issues because there is a limited supply of climate macroeconomists on the

market. The higher the share of recruits with a strong background in climate and environmental

economics, the more rapidly could the climate strategy be scaled up. These macroeconomists would

be complemented by some climate/operational experts (the latter particularly for CD activities) and

legal experts; political economy expertise might be needed as well. At the same time, current

macroeconomists would be trained to enable them to also spend part of their time on climate.

Given the scale of the increase, there also is a need for some managerial and administrative staff. In

particular, and there might be a need to look at how resources are organized in departments if the

additional resources strain spans of control in existing divisions or units.

53. The pace of upscaling would need to be cognizant of market conditions and the

Fund’s own absorption capacity. The IMF would adopt a dual strategy whereby it would hire

quality over speed to allow time for training, while engaging in partially accelerated hiring for those

with scarce skill premia. It should also be noted that for new hires, recruitment of diverse staff may

take longer, arguing for starting early to enhance diversity. While a comprehensive HR strategy

remains to be worked out, hiring would likely need to be phased in over 3 years.

C. Risk Assessment

54. Stepping up the IMF’s engagement on climate change as proposed in this strategy will

help mitigate reputational and strategic risks to the Fund. Engaging on the macro-critical

aspects of climate change would enable the IMF to assist its members with one of the most critical

macroeconomic and financial policy challenges of the coming years and decades, and would reduce

the risk of the IMF being perceived as unresponsive to new challenges. At the same time, the

proposal is creating new risks, such as the IMF being perceived as venturing into environmental

The “climate 101” course, climate bootcamps, and peer leaning events have been costed with 0.25 FTE per activity.

IMF STRATEGY TO HELP MEMBERS ADDRESS CLIMATE CHANGE RELATED POLICY CHALLENGES

36 INTERNATIONAL MONETARY FUND

issues and therefore as overstepping its mandate. Further, not properly resourcing the new climate

mandate could increase business risks by straining other critical issues central to the IMF mandate

and could result in reduced quality and traction of the Fund’s advice across the spectrum, in turn

affecting its reputation. These risks need to be managed carefully, including by (i) limiting the

engagement to issues with a clear link to macroeconomic and financial stability; (ii) clearly

communicating the scope and limitations of the IMF’s engagement; and (iii) properly resourcing the

new mandate and the acquisition of skills, including time for transition and training. Still, a residual

risk remains and will have to be accepted.

CONCLUSIONS

55. Climate change has emerged rapidly as a cause of critical macroeconomic and financial

policy challenges that will, in some shape or form, affect all members of the IMF in the

coming years and decades. For the IMF to live up to its mandate, it needs to assist its membership

with addressing these challenges, from building resilience against climate change over climate

change mitigation to managing the transition to a low-carbon economy. The IMF can also play a

useful role in assisting with coordinating the global macroeconomic policy response to climate

change, given the global public good character of climate change mitigation.

56. To be able to live up to its responsibility, the capacity of the IMF to conduct high-

quality climate work needs urgent reinforcement. To date, the IMF’s engagement on climate to

date has mostly been arranged by reallocating resources within a flat budget and by increasing

demands on existing staff, an approach that has reached its limits.

57. Broadening and deepening the IMF’s engagement on climate is needed across a large

number of activities. Climate change-related policy challenges need to be covered at much greater

frequency and depth in Article IV consultations, with the objective to discuss macro-critical

challenges most relevant for countries at least every 5–6 years, and more frequently in the areas of

climate change adaptation and mitigation. Financial Sector Stability Assessments should routinely

analyze the impact of climate change and transition risks on the financial sector. CMAPs should be

turned into a key tool for IMF analysis in climate-vulnerable countries. Other CD needs to increase in

line with the demands from the membership. Flagships and policy papers are needed to disseminate

analysis and policy positions on climate-related policy challenges. Finally, all this work needs to be

anchored in the development of models and toolkits, data guidance, and review.

58. Staff estimates that about 95 FTEs are needed to live up to the challenge sketched

above, while preventing that other key portions of the IMF’s work would be crowded out; this

would need to be complemented by externally-funded CD of another 20 FTEs to ensure that

members can implement Fund policy advice. While this is no negligible number, it appears

modest compared to the benefits that increased engagement on climate issues could bring. Much

of the additional resources would be invested to strengthen bilateral country engagement and

would therefore be to the direct benefit of the membership, be it through analyzing policy options

for climate change adaptation, strengthening financial sector resilience to climate change, assisting

IMF STRATEGY TO HELP MEMBERS ADDRESS CLIMATE CHANGE RELATED POLICY CHALLENGES

INTERNATIONAL MONETARY FUND 37

with the design of economically and socially balanced strategies to transition to a low-carbon

economy, or improving climate-related fiscal planning. Indirect benefits for the membership would

materialize if the IMF can facilitate policy coordination on climate change mitigation—employing its

role as a trusted advisor who interacts with almost all governments across the world—or help boost

climate financing to support the efforts of low-income and other climate vulnerable countries.

59. The main risk is for the IMF to engage too little, rather than too much, on the

macroeconomic and financial policy challenges related to climate change. An under-resourced

effort would risk that the quality and frequency of engagement with the membership is uneven,

which would undermine credibility and traction. It would also force the IMF to choose between

engagement on climate and other macro-critical issues. In engaging, the IMF would stick closely to

its mandate and area of expertise—macroeconomic and financial stability—and coordinate its

efforts as closely as possible with other stakeholders, both to maximize effectiveness and to

complement its own analysis with insights where other institutions have a comparative advantage.

ISSUES FOR DISCUSSION

• Do Directors agree that the Fund’s role would need to evolve in light of climate change

emerging as one the most critical macro-economic policy challenges that the IMF’s membership

will face in the coming years and decades?

• Do Directors agree that the proposed strategy will ensure that the Fund can continued to fulfill

its mandate?

• Do Directors see any further areas that could be considered to better serve the membership?

• Do Directors agree with the request for additional resources that would be necessary to ensure

Fund’s effectiveness in this area?

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38 INTERNATIONAL MONETARY FUND

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