A Peek into IMF Training: The Macroeconomics of Climate Change

Climate change has emerged as one of the most critical macroeconomic and financial challenges facing the membership of the International Monetary Fund (IMF) in the coming decades. This is why these issues are at the heart of the work of the IMF.

Part of that work includes launching a new free and open online course on the Macroeconomics of Climate Change and other training resources on climate change economics, all aimed at expanding member countries’ capacity to translate their climate targets into practical policy actions.

This course was presented at a "peek into training" event during the 2022 Spring Meetings of the IMF.

"At the IMF, we have stepped up our work on climate mitigation, adaptation, and transition to a low-carbon economy. We are integrating the climate agenda in the full range of IMF activities, from research and analytical work, to policy advice, technical assistance, and training", Gita Gopinath, IMF First Deputy Managing Director

The IMF's role in addressing climate change

High greenhouse gas emissions are the main contributor to global warming. Rising temperatures cause changes to our climate that have real, and in some cases severe, socioeconomic impacts. Ultimately, this could undermine macroeconomic and financial stability.?

This underscores why the IMF sees three types of climate-related policy challenges as falling within its mandate.?Two are domestic policy challenges, which the IMF covers as part of the bilateral surveillance that informs its country economic reports, known as?Article IV Consultations.??

1. First, many countries need to adapt to climate change. For example, they need to invest in infrastructure that is resilient to disruptive weather patterns. And they need to manage the consequences of climate change such as migration and resettlement. Often these policy challenges have fiscal and other macroeconomic implications.???
2. Second, almost all countries need to transition to a low-carbon economy. Many countries must meet Nationally Determined Contributions under the Paris Agreement, which requires changes to fiscal, structural, and regulatory policies. Oil exporters will suffer from reduced demand for their exports and will need to manage that transition as well.???
3. A third policy challenge is global: mitigating climate change. This calls for global action to limit or offset the emissions of greenhouse gases in the atmosphere.??

No country can mitigate climate change on its own, but some countries have a greater impact on the global effort.??

During our multilateral surveillance, IMF staff assesses whether one country’s policies trigger potentially destabilizing spillovers in other countries. Then we discuss options to contain those spillovers. Climate change mitigation policies can trigger such spillovers, particularly for countries that are large emitters of greenhouse gases.?

Signatories of the 2015 Paris Agreement agreed to “hold the increase in the global average temperature to well below 2 degrees Celsius above pre-industrial levels and pursue efforts to limit the temperature increase to 1.5 degrees Celsius”. Meeting these targets requires cutting greenhouse gas emissions globally by 25 to 50 percent by 2030 and reaching global carbon neutrality by 2050.?Countries need to work collectively, but their policy solutions do?not need to be the same.

Different paths to tackling climate mitigation

Carbon pricing is typically the centerpiece of mitigation strategies because it is the most efficient policy tool for reaching mitigation goals.?A gradual increase in carbon pricing reduces the relative cost of renewables for energy supply and power generation – making them an even more attractive choice for consumers, and energy producers.

Energy prices – and consumption – can be insulated from the negative effects of carbon pricing by a range of policy responses that affect the energy mix.

These include: ?

• shifting from coal to gas and to renewables?
• coupling fossil fuel power plants with carbon capture and storage?
• and, importantly, efficiency improvements in power generation

Higher carbon prices directly impact households through higher costs of fossil fuel consumption. And,?indirectly, through the pass through of higher fossil fuel prices to prices of other products and services households consume.?In addition to being an efficient tool for mitigation, carbon taxes can also raise extra revenue that can be redistributed to poor and vulnerable households. Or this extra revenue can be used to reduce other distortionary taxes and improve overall?efficiency.?

Put simply, carbon pricing can be both pro poor and pro equity.?

Mitigation policies can also have important local benefits, especially since burning fossil fuels causes significant air pollution.

Adapting to climate change

Beyond mitigation, countries also face the challenge of adapting to climate change. Countries need to design policies that shield their people and economies from climate change risks, now and into the future.?Rising sea levels, more frequent or ferocious natural disasters, and encroaching desertification are just examples of climate change impacts that are already upon us. While mitigation aims to curb climate change, there is a very real risk that climate change impacts will continue to worsen. ?

Since there is uncertainty about the future impacts of climate change, there is also uncertainty about the best policy response. Using present climate risks as a starting point is the way to go.?However, some big questions remain.?How do you convince policymakers to spend for the future, when they have so many urgent spending priorities that require attention now??

Building resilience against natural disasters or climate change in the future can seem less urgent than helping families struggling with higher food prices. In practice, however, climate vulnerable countries need to do all these things.

Compared to mitigation, adaptation is mainly a private good, but some types of adaptation actions have large positive externalities. Examples might include investments in flood-resilient infrastructure, or research and development of drought-resistant crops. The private sector might underinvest, so government intervention might be warranted??

Market inefficiency also exists, including barriers to credit and to trade, or inefficient risk pricing. To promote market efficiency and bring in the private sector, government intervention – and often government spending – may be needed.???

Finally, equity issues must be considered. Climate change already disproportionally affects the most vulnerable. Adaptation policies should reduce inequality rather than worsen it. And governments should step in to ensure that this is the case.???

Building Capacity on Climate Change

To develop the right policies to address climate change, policymakers need to have the right information.?They need insight into the financial, physical, and transition risks posed by climate change. And they need to know what other governments are doing.?

To preserve financial stability and make sound decisions, businesses, investors, and financial institutions need to understand the risks associated with climate change that affect their balance sheet.?And they also want insight into the financial backing put towards the support of a low-carbon economy.?In short, decisive climate action requires climate data – and a robust information architecture for generating and sharing that climate data.

High-quality, reliable, and comparable data is the scaffolding needed to build the climate information architecture.?This is why the IMF and its partners launched the IMF-led Climate Change Indicators Dashboard in 2021. The Dashboard is an international statistical initiative to address the growing need for data in macroeconomic and financial policy analysis to support climate change mitigation and adaptation. In a single, easy-to-navigate online platform it brings together experimental climate change indicators that allow comparison across countries.?

The indicators have been developed in cooperation with international organizations and other agencies including the Organization for Economic Co-operation and Development (OECD), the World Bank Group (WBG), the United Nations (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).?

The IMF’s Institute for Capacity Development, with the generous support from the Government of Japan, is now pleased to launch its first in its series of six of its courses on edX on the Macroeconomics of Climate Change to help policymakers and the general public better understand how to effectively address climate change. This will be followed by a complementary set of regional training courses.

The dashboard and this course come in addition to a wide range of tools, as well as other technical assistance and training work – delivered by the IMF with funding support from its development partners – on climate change, such as the Climate Public Investment Management Assessment Tool (developed with funding support from Japan and the European Union) and IMF Climate Notes. Find out more on the IMF's climate webpages.

The IMF is also hiring more climate professionals to amplify its work on climate change.

Find out more watching the Peek into Training.

This article was written by Chen Chen and Irene Yackovlev, respectively Technical Assistance Advisor and Senior Economist at the IMF Fiscal Affairs and Communications Departments, and derives from the abovementioned Peek into Training.

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Find out more on the IMF's Online Learning Program (open to everyone) and dedicated courses for government officials at IMF.org/Training.

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