The Petersberg Climate Dialogue comes as we are fighting the COVID-19 pandemic. In the minds of some, the health crisis and the “great lockdown” needed to address it mean that we can push the pause button in the fight against the other existential crisis we face—our changing climate. Nothing is further from the truth. We are about to deploy a massive fiscal stimulus which can help us address both crises at the same time.
Governments around the world have deployed extraordinary policy measures to save lives and protect livelihoods in the worst economic downturn since the Great Depression. And given the gravity of this crisis, significant further efforts will be needed—especially during the recovery phase.
If this recovery is to be sustainable—if our world is to become more resilient—we must do everything in our power to promote a “green recovery.”
In other words, taking measures now to fight the climate crisis is not just a “nice-to-have.” It is a “must-have” if we are to leave a better world for our children.
So what can governments do?
Last week IMF Fiscal Affairs Department staff published broad guidance[i] on “greening the recovery.” Let me highlight three priorities:
First—use public support wisely. When governments provide financial lifelines to carbon-intensive companies, they should mandate commitments to reduce carbon emissions. We saw similar agreements during the global financial crisis, when some automakers committed to higher fuel efficiency standards. With oil prices at record-low levels, now is the time to phase out harmful subsidies. And governments need to prioritize investment in green technologies, clean transport, sustainable agriculture, and climate resilience. In the energy sector alone, the IMF estimates that a low-carbon transition would require $2.3 trillion in investment every year for a decade.[ii] These types of investments would boost growth and jobs during the recovery phase, and help steer the world in the right climate direction.
Second—promote green finance. We need to continue the emphasis on using green bonds and other forms of sustainable finance. In light of the extended use of government guarantees, part of them can be deployed to mobilize private finance for green investment. And financial firms have to be mandated to better disclose climate risks in their lending and investment portfolios. More broadly, we need to find better ways of pricing in climate risk. New IMF analysis[iii] shows that, over the past 50 years, climate-related disasters have had only a modest effect on equity markets. Clearly, many investors have yet to face up to the new climate reality.
Third—put the right price on carbon. Funding the massive fiscal measures governments adopt to prevent economic collapse during the pandemic requires seeking ways to increase public revenues in the future. This brings into focus a carbon price as a source of income, which has the additional benefit of minimizing the risk of misallocating vital investment—think of badly designed infrastructure projects that lock in high carbon emissions for decades to come. A substantially higher carbon price is needed to encourage climate-smart investment and to accelerate the shift to cleaner fuels and more energy efficiency. The current global carbon price is only $2 per ton, way below the levels needed to keep global warming under 2 degrees Celsius, which we estimate to be $75 per ton. This transition must be fair and growth-friendly. For example, carbon tax revenues can be used to provide upfront assistance to poorer households, lower burdensome taxes, and support investments in health, education, and infrastructure.
Of course, measures taken by individual countries can only succeed if everyone acts. Just as vulnerable countries need support to fight the pandemic, the developing world will need support in reducing carbon emissions and, most importantly, in adapting to the consequences of climate change.
In all these efforts, we at the IMF are supporting our member countries—with policy advice, financial resources, and capacity development support, and also by providing a global platform for joint action.
What we do now will not only reshape our economies and societies; it will also reshape humanity’s future on this planet. Coming out of one crisis need not be a prelude to getting into another—a ‘green recovery” is our bridge to a more resilient future.