IMPROVING PUBLIC FINANCE
3.2
The role of the International Monetary Fund in supporting climate action
M oving to a global zero- carbon economy requires trillions of dollars of investment each year. Many developing econ- omies and emerging markets are investing public funds to support the transition. However, most of the needed financing will need to be provided by the private sector. With the cost of renew- ables falling sharply in recent years, private investments in the clean energy sector have surged. But in most devel- oping economies, significant barriers to investment remain, including high public debt, high cost of capital due to political risks, lack of reliable data, shal- low markets and weak legal systems. The most important prerequisite for a successful transition is the implemen- tation of strong macroeconomic and climate policies at home. Policy reforms should include reducing and repurpos- ing environmentally harmful subsidies and implementing carbon pricing. Such actions provide a clear financial incen- tive to invest in low-carbon alternatives and increase energy efficiency. The fis- cal space they provide could be used to compensate those most affected to ensure broad support for the transition and making it more just. Strengthen- ing institutional and legal frameworks will assist in reducing the cost of capi- tal and is critical to mobilising financial resources for the transition. In some cases, innovative financial mecha- nisms, including finding public-private synergies, could be leveraged to attract investments. The IMF’s role International financial and devel- opment institutions, including the International Monetary Fund, play a key role in supporting and financing
THE MOST IMPORTANT PREREQUISITE FOR A SUCCESSFUL TRANSITION IS THE IMPLEMENTATION OF STRONG MACROECONOMIC AND CLIMATE POLICIES AT HOME. POLICY REFORMS SHOULD INCLUDE REDUCING AND REPURPOSING ENVIRONMENTALLY HARMFUL SUBSIDIES AND IMPLEMENTING CARBON PRICING. To adapt to climate change, coun- tries need access to finance – but that’s not the only component involved in driving a successful transition. Ceyla Pazarbasioglu, director, Strategy, Policy and Review Department, International Monetary Fund
this transition in developing countries. In the IMF’s surveillance activities, country teams provide comprehen- sive analysis of climate challenges and policies to address them. Capacity development to help countries address climate issues has been scaled up. In the last two years, the IMF has also been providing direct long-term, low-cost financing through a new Resilience and Sustainability Facility, in close collabo- ration with the World Bank and other multilateral development banks. The goal of the RSF is to help develop- ing countries strengthen resilience to long-term structural challenges includ- ing climate change and pandemic preparedness. Its lending operations are financed through the Resilience and Sustainability Trust, which channels resources – through voluntary contri- butions – from economically stronger members to those with the greatest needs. As of October 2024, 23 countries have pledged over $48 billion. On the receiving side, about two-thirds of IMF members – including all low-income countries – are eligible. RSF lending has longer maturities than traditional IMF financing and has a tiered inter- est rate structure, with lower interest rates for low-income countries. A total of 20 arrangements have already been approved by the IMF Executive Board since June 2024. These arrangements are specifically focused on climate change initiatives and have benefited from a close collaboration between the IMF and development partners. The IMF and the World Bank recently announced an Enhanced Cooperation Framework to scale up climate action, with Madagascar the first country to benefit from the RSF. As well as providing climate finance directly, the RSF helps countries
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Financing a Just Transition
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