As monitor of the world’s economic and financial system, the International Monetary Fund (IMF) plays a major role in guiding national and global economic policies. The IMF’s regular assessment of countries’ macroeconomic health — a process called “Article IV consultations” — identifies economic risks and recommends policies for growth and financial stability. Article IV reports are a go-to starting point for anyone in the financial sector — public or private — who wants to assess the economic risks and opportunities in a specific country at any given point in time.
And yet until 2021, climate change — one of the greatest threats to countries’ economies — featured unevenly in this process. The IMF faces an awkward but unavoidable conundrum: Most climate change impacts harm countries’ economies and macroeconomic stability (so fall within the IMF’s mandate), but most climate solutions require policy and regulatory changes in sectors that fall outside the IMF’s traditional expertise, such as energy or transportation.
While the IMF finally announced in 2021 that climate change does, in fact, threaten macroeconomic health and should be part of its assessments, integrating the impacts of climate change into Article IV surveillance will require a step-change at the institution and in member countries. WRI’s new research paper evaluates how climate change has factored into the Article IV surveillance process thus far, how the risks climate change poses to countries’ economic wellbeing can be included, and how the IMF and countries can benefit from an enhanced “climate-informed” process.
How has the IMF historically handled climate change in Article IV surveillance?
Until 2021, the IMF largely focused on mitigation and advised countries to enact carbon pricing to reduce greenhouse gases, but otherwise maintained that climate change fell outside its core mandate to ensure macroeconomic stability. Article IV consultations included climate change impacts on the economy on an ad hoc basis.
Using a literature review, an analytical stock-taking of 27 Article IV reports published in 2020, and interviews with IMF staff and country teams in 2021, we assessed the IMF’s consideration of climate change in the Article IV process. Although 19 of the 27 reports published in 2020 mentioned climate change, only 11 discussed climate change as a macroeconomic risk, six discussed transition risks, and none discussed stranded assets. Even when a country was a major emitter, reports largely did not discuss transition risks, stranded assets or adaptation. As for vulnerable countries, reports did not necessarily discuss physical risks or adaptation needs.
For example, Madagascar, a member of the V20, did not receive any guidance on climate adaptation; oil exporters Brazil, Mexico and the United States did not receive any guidance on transition risks.
What changed in 2021?
In January 2021, IMF Managing Director Kristalina Georgieva declared that climate change did threaten macroeconomic stability and thus the IMF’s core mandate. In May 2021, the IMF published a Comprehensive Surveillance Review, which concluded that climate change — including climate mitigation, adaptation and transition risk management — should in many cases be incorporated into Article IVs. Following this review, in July 2021, IMF staff published its Climate Strategy. With respect to Article IVs, the strategy committed to focus on:
- Transition management for the top 20 emitters every three years;
- Adaptation needs for the 60 most vulnerable nations every three years; and
- Climate priorities for each country every five to six years.
This agenda may seem extensive, or not extensive enough, depending on where one sits.
In December 2021, the IMF Board approved a significant portion of the budget requested in the Climate Strategy. Success, however, will hinge on both how rapidly and systematically the IMF develops and operationalizes climate-related tools and partnerships, and to what extent member countries will make use of this added capacity.
What gaps remain to integrate climate change impacts into Article IV surveillance?
We identified several gaps and challenges to creating a systematic, climate-informed Article IV process. They include:
- IMF mission teams and in-country ministries lack climate data and expertise. This information gap hinders efforts to identify climate-related risks, incorporate climate into macro-fiscal frameworks, and provide detailed analyses and recommendations, particularly for adaptation.
- There’s no holistic method for identifying and discussing climate considerations, including physical and transition risks.
- The IMF’s prioritization process for selecting surveillance topics and/or domestic constraints in member countries does not systematically include climate change.
- Limited tools exist within the IMF or potential partner organizations to understand and quantify the range of climate impacts and related needs. This undermines the IMF’s ability to provide informed guidance about how countries can maintain debt sustainability while addressing climate change.
What do we recommend for the IMF’s Article IV surveillance process?
We propose an approach to systematically integrate climate change into the IMF Article IV surveillance process to better grasp the macroeconomic implications of physical and transition risks. A climate-informed Article IV process needs to include all available, relevant data and analytical approaches in the IMF’s analysis, frameworks, modelling and risk assessments. During an Article IV mission, for example, IMF staff should ask pointed questions about climate risks and impacts, and consult local climate experts. The final Article IV report needs to ensure that the IMF’s policy recommendations are consistent with climate objectives and any financing issues that arise from acting on climate change.
Adopting such an approach will require both the IMF and its 190 member countries to insert climate data, impacts and other considerations into their Article IV discussions. Member countries can help by doing the following:
- Demand more of the IMF’s analytical capabilities to conduct forward-looking analysis and monitor spillovers across countries to better anticipate climate-related challenges.
- Request guidance about how to sequence climate, economic and fiscal policy reforms to maximize policy coherence.
- Request help identifying climate-related risks to economic growth and financial stability; and
- Receive guidance about how to navigate the conflicting pressures of having limited fiscal space, maintaining debt sustainability, and making the necessary climate investments.
As it starts to implement its Climate Strategy to the Article IV process, the IMF can continue to deliver a stable economic and financial system by:
- Designing an approach to physical and transition risk, including a checklist of climate risks and, where possible, including relevant line ministries, local communities, sub-national governments, and local climate experts in the consultations.
- Encouraging national-level coordination between finance ministries and the line ministries responsible for climate, planning, energy and economic policy.
- Understanding the multiple dimensions of climate risk by expanding the IMF’s modelling and scenario analysis to include physical risk, transition risks (including stranded assets), and the associated policy and regulatory changes.
- Including climate-related scenarios to identify how climate change impacts the economy, including in the IMF’s existing cross-country spillover analysis.
- Refining its guidance to member countries on how they should navigate the tension between maintaining debt sustainability and making necessary investments in climate change mitigation and adaptation by convening and leveraging partnerships with other relevant institutions.
To learn more about integrating climate change considerations into Article IV surveillance, read our working paper, How the IMF and Member Countries Can Create Climate-informed Article IV Surveillance.
