Weekend Read Special Edition: COP28

In this special edition ahead of this year’s UN Climate Change Conference, we resurface research by IMF staff and external experts underscoring why the world must act now to safeguard economic and financial stability from the threat of climate change. See IMF Blog for climate posts next week and visit our website to learn more about our climate work:

• IMF at COP28
• IMF and climate change
• Staff climate notes
• Resilience and Sustainability Trust

Travelling to COP28 in Dubai? Visit us at the World Bank-IMF-Financial Times pavilion in the Blue Zone or follow our events online.

MANAGING DIRECTOR INTERVIEW

Climate action at the country level

Climate risks affect economic and financial stability, but climate action creates opportunities for growth and jobs. That’s why the IMF has adopted a climate strategy, Kristalina Georgieva told an audience at the recent annual meetings in Marrakech, also featuring Ajay Banga, the World Bank president, Mark Carney , the UN’s special envoy for climate action, and Leila Benali, PhD. , Morocco’s minister for the energy transition and sustainable development.

CLIMATE FINANCING

Emerging Economies Need Much More Private Financing

Achieving the transition to net-zero emissions by 2050 requires substantial climate investment in emerging market and developing economies, which currently emit around two-thirds of greenhouse gases.

These countries will need about $2 trillion annually by 2030 to reach that ambitious goal, according to the International Energy Agency, a fivefold increase from the current $400 billion of climate investments planned over the next seven years.

In a blog based on a chapter of our latest Global Financial Stability Report, IMF economists say the private sector must supply about 80 percent of the large climate investment needs for emerging market and developing economies.

“A broad mix of policies is needed to unlock the necessary private capital in emerging market and developing economies and ensure a positive climate impact.”

IMF PODCAST

Carbon pricing is steadily emerging as one of the most viable solutions to reducing global emissions, but shedding its contentious past to build a global consensus is still a work in progress. Ian Parry is the principal environmental fiscal policy expert in the IMF’s Fiscal Affairs Department. He championed the idea of carbon pricing long before it was fashionable—or even considered feasible by more than a handful of countries. Also from our podcast archive:?

• Resilience and Sustainability Trust: New Tool for a Changing World
• Raghuram Rajan on Climate Action and Continued Globalization
• Divya Kirti on the Economics of Climate Change
• Noah Kaufman on Green Trade Tensions
• Catherine Kling on Nature’s Real Worth

CLIMATE TRADE-OFFS

Countries Must Contain Global Warming While Keeping Debt in Check

Climate action presents policymakers with difficult tradeoffs, IMF economists write in a blog based on our latest Fiscal Monitor.

Relying mostly on spending will become increasingly costly, possibly raising debt by 45 percent to 50 percent of gross domestic product by midcentury. But prolonging “business as usual” leaves the world vulnerable to warming. Countries have the option to generate revenue through carbon pricing—but this may cross a political red line.

Governments thus face a policy trilemma between achieving climate goals, fiscal sustainability, and political feasibility. Pursuing any two of these objectives comes at the cost of partially sacrificing the third.

Our latest Fiscal Monitor offers new insights on how to manage this trilemma. Governments must take bold, swift, and coordinated action, and find the optimal mix of both revenue- and spending-based mitigation measures.

GREEN INNOVATION

How Green Innovation Can Stimulate Economies and Curb Emissions

Making low-carbon technologies cheaper and more widely available is crucial to reducing harmful emissions, but momentum in green innovation has slowed recently and promising technologies aren’t spreading fast enough to lower-income countries, IMF economists?write in a blog.

Green innovation peaked at 10 percent of total patent filings in 2010 and has experienced a mild decline since. This is concerning because, as the authors show in a?staff discussion note, green innovation is not only good for containing climate change, but for stimulating economic growth too.

“Our research shows that doubling green patent filings can boost gross domestic product by 1.7 percent after five years compared with a baseline scenario. And that’s under our most conservative estimate—other estimates show up to four times the effect.”

CRITICAL MINERALS

Fragmentation Threatens Clean Energy Transition

Russia’s invasion of Ukraine in 2022 fragmented major commodity markets. Countries have since restricted trade in commodities, with a more than twofold increase in new policy measures relative to 2021.

Commodities, particularly minerals critical for the green transition and some agricultural goods, are especially vulnerable in the event of more severe geoeconomic fragmentation, IMF economists write in a blog based on a chapter of our latest World Economic Outlook.

Further fragmentation could lead to turmoil in commodity markets, causing large price swings. Low-income and other vulnerable countries would bear the brunt.

Commodities fragmentation could also hinder the global energy transition, the authors write. To achieve net-zero-carbon emission targets, demand for minerals is set to rise severalfold in the coming years, requiring a rapid scaling up of supply.

“Since economically viable deposits are concentrated in a few countries, trade becomes essential to guarantee access to these resources. Fragmented markets could complicate matters.”

The IMF’s Martin Stuermer discussed the chapter’s findings on a panel hosted by the Atlantic Council’s Josh Lipsky .

PORTWATCH

Climate Change is Disrupting Global Trade

Around 1,000 ships pass through the Panama Canal each month carrying a total of over 40 million tons of goods—about 5 percent of global maritime trade volumes. But water levels in this vital link between the Atlantic and Pacific oceans have fallen to critical lows because of the worst drought in the canal’s 143-year history.

Drought restrictions imposed amid insufficient rainfall at the Gatún Lake, which feeds the canal, have caused shipping delays and reduced throughput by some 15 million tons so far this year.

As a recent blog shows, ports in Panama, Nicaragua, Ecuador, Peru, El Salvador and Jamaica are suffering most, with 10 percent to 25 percent of their total maritime trade flows affected. But the drought’s effects are felt as far away as Asia, Europe and North America.

Droughts, floods, tropical storms and other disasters are becoming more common because of climate change and pose a serious threat to maritime infrastructure. With PortWatch, an open platform launched this month by researchers from the IMF and the University of Oxford, policymakers can prepare for trade disruptions caused by shocks like climate extremes and decide how to respond to them.

CHART OF THE WEEK

Fossil-fuel subsidies surged to a record $7 trillion last year as governments supported consumers and businesses during the global spike in energy prices. As the world struggles to restrict global warming to 1.5 degrees Celsius, subsidies for oil, coal and natural gas are costing the equivalent of 7.1 percent of global gross domestic product. That’s more than governments spend annually on education (4.3 percent of global income) and about two thirds of what they spend on healthcare (10.9 percent). As the Chart of the Week shows, fossil-fuel subsidies rose by $2 trillion over the past two years.

FINANCE & DEVELOPMENT

The Scramble for Energy

High energy prices and supply disruptions after Russia’s invasion of Ukraine fueled a rush to energy security that could risk climate goals.

The December 2022 edition of?F&D Magazine?focused on the?scramble for energy, and what geopolitical tensions mean for the clean transition.?Look back at analysis from economists and other leading authorities on topics including energy efficiency, affordability, green technologies, alternatives such as hydrogen and nuclear, and political economy.

FEATURED ARTICLES:

• A Call to Clean Energy?|? Fatih Birol
• Bumps in the Energy Transition?|? Daniel Yergin
• Green Growth Opportunities?|? Ricardo Hausmann
• Nuclear Resurgence?|? Ted Nordhaus and Juzel Lloyd
• Hydrogen’s Decade?|? Thijs Van de Graaf
• From Abundance to Thirst?|?Andrea Pescatori and Martin Stuermer
• America’s Landmark Climate Law?|? Jason Bordoff
• Pipeline Diplomacy with Piotr Naimski?|? Chris Wellisz

Thank you again very much for your interest in the Weekend Read! Be sure to let us know in the comments what issues and trends we should have on our radar.

Nick Owen

Editor, IMF Weekend Read