Is the International Monetary Fund Engaging in "Mission Creep" as It Emphasizes Climate Change Mitigation for Developing Nations?
The IMF is an important global institution. Harvard Professor Gita Gopinath plays a key leadership role there. Here is her recent Keynote Address where she discusses the challenge that emerging market economies face. I will quote from her Keynote and then share some thoughts related to tradeoffs and the political economy of accepting tradeoffs.
Quote #1
II.3. Climate change is also inflicting growing costs.
The third change in external conditions is climate change. Extreme weather events like hurricanes, droughts, floods, and fires are becoming more frequent, and more costly (slide 13). To build resilience, EMs are investing in climate adaptation and mitigation. The cost of this will be enormous. The International Energy Agency estimates that mitigation-related investment needs in emerging markets and developing economies will reach about $2 trillion annually by 2030—or 40 percent of global needs. For South Africa, the World Bank estimates climate financing needs of 4.4 percent of GDP per year between 2022 and 2050 (slide 14). This scale of costs—when many emerging markets have limited fiscal space, global financial conditions are tougher, and the world is fragmenting—poses an exceptional challenge. [7] [8]
MY COMMENTS;
Note that she conflates mitigation and adaptation. No attempt is made to quantify how much $ will be spent to prepare for anticipated more severe weather conditions. Instead, she pivots to discussing carbon mitigation (i.e reducing a nation’s carbon emissions). If this mitigation effort is so costly, then these nations are unlikely to do so. This is the point of our 2022 NBER paper.
The end of her quote highlights she expects that the developed world will pay for these transfers to developing nations. Is this likely to occur? Which nations will make these payments? How will they balance their own budgets? Which domestic programs will be cut and whose taxes will rise to pay for these transfers of $ to the developing world? By not engaging on the real public finance here, I am not sure how to evaluate the logic here.
Quote #2
III.3. Implement a fiscally and socially sustainable climate strategy.
The third action is to address the challenge of climate change by implementing a strategy that is both fiscally and socially sustainable. To ensure fiscal sustainability it will be critical not to rely mostly on spending measures such as green public investment and subsidies to reach net-zero targets. Forthcoming research in the IMF’s Fiscal Monitor shows that such an approach would lead to a sharp rise in the debt-to-GDP ratio—over 50 percentage points by 2050 relative to current paths. Clearly, this is not feasible. [18]
Carbon pricing should therefore be an integral part of the policy package as it can raise revenues and catalyze much needed private investment. Given the frequency of climate shocks and their impact on public finances, countries could consider incorporating climate actions in debt sustainability analysis.
MY COMMENT
She endorses the policy proposal that nations adopt carbon pricing. Again, is this possible? What is the political economy of how major developing nations would introduce such a policy? One optimistic path that environmental economists discuss is that a nation’s air pollution (PM2.5) would decline if fossil fuel consumers faced a higher price for consuming such energy sources. Health gains and improvements in quality of life through PM2.5 reductions would be achieved if fossil fuel prices are higher. But, the poor’s purchasing power would decline. The elites would gain and the poor would face serious tradeoffs as they would face higher energy prices.
QUOTE #3
IV.3. Confronting climate change
Finally, we are helping our members confront climate change. The IMF’s Climate-Public Investment Management Assessment, or C-PIMA, helps governments identify improvements in public investment institutions and processes to build low-carbon and climate-resilient infrastructure. India, Senegal, and the UK are amongst the 40 countries that have already benefitted from a C-PIMA.
In addition, our new Resilience and Sustainability Trust provides financing for adaptation and mitigation reforms that will help boost private investment in climate projects. This is complemented by technical assistance to support countries as they enhance their framework for managing climate change and attracting private investment. So far, programs have been approved for ten countries, including Kenya, Rwanda, and Seychelles.
MY COMMENT
This sounds good to me in theory. Here is the C-PIMA webpage. If you click, on the weblinks —- you won’t see much actual content. It is difficult to judge what is the rate of return on this investment and what is the control group here for credibly estimating this rate of return. How does the IMF know if this effort is effective or not? What is the opportunity cost of these funds?
My question for Professor Gopinath is the following; If the IMF stuck to its old mandate of reducing economic crisis risk and encouraging economic growth, how much would each LDC nation’s emissions rise by and how much richer would these nations be? If these nations are richer, how much poverty alleviation would take place in each of these nations? How much better would these now middle class people be at adapting to the serious weather challenges they face?
Would the IMF play a more important role in the climate change space if it focused on promoting economic growth and helping individuals around the world to adapt to the physical risks of climate change and to decarbonize at their own pace?
I do think that the IMF’s policy advice is a non-starter. Developing nations are not going to introduce a rising carbon tax, the emerging middle class would reject this and punish leaders who propose this. The political economy of adaptation and mitigation require more thought here.
A Summary of My views
Richer people and richer nations have a much greater capacity to adapt to almost every challenge posed by climate change. If you want to protect poor people, help them to grow richer. This is the theme of my 2010 Climatopolis book and my 2021 Adapting to Climate Change book.