Oct 3, 2023 - Economy

Paris targets need big private climate spending boost: IMF

Climate policies in major banks that do not align with net zero targets
Data: IMF; Note: Exclusion of project finance refers to coal mines, plants and infrastructure; Chart: Deena Zaidi/Axios Visuals

The International Monetary Fund warned Monday that countries cannot rely exclusively on public funds to cut greenhouse gas emissions, stating the effort needs a big boost from the private sector.

Why it matters: In two new reports kicking off high-level meetings in Washington and Morocco during the next two weeks, the IMF pointed to how far off track the Group of 20 largest industrialized countries are from their own 2030 emissions targets and emphasized the need for far more private sector money.

The big picture: The IMF laid out its conclusions as parts of larger analyses. Taken together, the fund warns that nations are likely to face significant limits on public sector spending for the climate fight.

  • In particular, the IMF cites growing debt burdens from weaker economic growth, rising interest rates and other economic headwinds during the 2023 to 2028 period.
  • This is expected to complicate tapping national coffers to pay for the transition to a low-carbon economy, the IMF wrote.
  • A major theme is the need to draw in far more private capital to pay for steep increases in cleaner energy spending in emerging markets and developing countries.

Of note: The IMF concludes that the private sector will need to supply about 80% of the needed investments for the developing world's energy transition through 2030, but this share rises to 90% when you exclude China.

  • The findings cited International Energy Agency figures indicating emerging market and developing economies will need about $2 trillion per year by 2030 to reach net-zero emissions by 2050; that is five times the current level.

Between the lines: One obstacle standing in the way of more private financing is the need to reform the ways that the World Bank and IMF make money available for climate and other priorities, and the need to align major private sector banks with their own net zero emissions targets.

  • The research noted that "most major banks," out of a total of 30 examined, are not yet on track with net-zero targets, despite many of them having commitments to do so.
  • The proliferation of sustainability-focused funds has not translated into more money going into developing countries to support their emissions reduction efforts, the analysis noted. Instead, there needs to be more explicit ties made between fund objectives and climate targets.

Zoom in: The IMF describes leaders as facing decisions that are only getting harder. Climate change is being addressed mainly through spending measures, which runs the risk of raising debt levels to unsustainable heights; The alternative involves pursuing more modest, less costly climate actions, which would not fulfill the Paris targets.

  • Or, the IMF notes, they can implement politically unpopular measures, such as carbon pricing. That can include fossil fuel subsidy reform, emissions trading or carbon taxes, though some of these options are political nonstarters in certain countries such as the U.S.
  • The authors come down on the side of carbon pricing accompanied by other policy tools, such as subsidies for renewable forms of energy, that could further reduce emissions and cushion the economic blow to citizens whose costs might increase.
  • It notes that nearly all of the emissions cuts that would need to happen before 2030 in order to meet the Paris Agreement's temperature targets could be made using existing technologies, yet the Group of 20 wealthiest industrialized countries are "significantly" short of this track.

The bottom line: While an exercise in fiscal analysis, the IMF's findings will be a major focus of the upcoming UN Climate Summit in Dubai, which begins late next month.

  • Multilateral development bank reform, the need for more financing for developing countries, and other topics have gained new momentum as the scale and speed of the climate challenge have become clear. The current year has featured devastating extreme weather events globally.
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