The IMF & Climate Justice
Credit: Madeleine Race/Recourse
Credit: Placard from global strike for climate change. Photo: Halfpoint/ Shutterstock
The IMF and Key Principles of Climate Justice
How does the IMF contradict the Paris Agreement?
From exacerbating inequality to eroding fiscal space for climate investment, there is already a strong case historically for the practical limitations, internal contradictions, and inconsistency with a just transition of the IMF’s approach. Here we highlight specifically how the IMF’s approach is at odds with some of the core principles of the Paris Agreement – and what would need to change.
The principle of Common but Differentiated Responsibilities and Respective Capabilities (CBDR–RC) stems from the 1992 treaty of the UN Framework Convention on Climate Change (UNFCCC) and was further enshrined in Art. 2.2 of the Paris Agreement. It indicates that all countries are responsible for tackling climate change, but some (Global North, ‘developed’ countries) must shoulder a greater burden of the transition and provide climate finance (to Global South countries), based on their responsibility in using up a greater share of the carbon budget and their relatively greater capacity to act. This group consists of developed countries (a list specified in Annex I to the treaty) which have in recent years started to push for an expansion of the ‘contributor base’, as middle-income countries have increased their ‘capability’ to act as well as their (current) emissions – but refuse to change category – and many fossil fuel producers are not in the Annex I list either. Research summarised by the IPCC has also highlighted the different starting points for countries to pursue climate-resilient development pathways, the importance of aligning climate action with sustainable development, and the need to address the uneven distribution of power to ensure poverty and inequality are not exacerbated.
The IMF is dominated by those same rich countries (‘advanced economies’, the largest global cumulative CO2 emitters) and their geopolitical interests, which has prevented a long-overdue reform of the IMF’s governance that would reshuffle some decision-making power away from the Global North. Rich countries are very unlikely to ever get an IMF loan, so they are not subject to programme conditionalities / policy obligations through the Fund, while the Board – which they dominate – signs off on loans and conditions to poorer countries.
On the other hand, Global South countries least responsible for climate change and most affected by its impacts have the least say in the IMF governance structure and are most likely to have to use IMF loans, thus becoming subject to policy obligations including on climate.
Credit: David Tong/Oil Change International
This means that within the dynamics of the Fund, those with the largest responsibility for causing and addressing climate change both call the shots and evade any obligations being put on their own policies, while those least responsible and most vulnerable are more or less forced to accept what is deemed ‘good policy’ by an institution whose decision-making is dominated by the largest emitters. The chances that the IMF’s climate policies are shaped in the interests of rich countries are therefore very high – these dynamics are the exact opposite of the CBDR principle.
The call for IMF governance reform is long-standing, and recent proposals from civil society have included a re-design of the IMF quota system that also takes into account countries’ contributions to the climate emergency, shifting power from the largest emitters towards more vulnerable lower emitters, especially Small Island Developing States (SIDS).
Sovereignty
The same dynamics also impact the concepts of sovereignty, democratic ownership and accountability. Given that only poorer countries are subject to IMF conditions through lending, their sovereignty and their governments’ democratic and human rights mandates towards their citizens (e.g. on education, health, and social protection) are clearly ‘less than’ those of advanced economies that do not face interference in their policy choices through IMF conditions.
In essence, the IMF has often become the enforcer of creditors’ interests (most of whom are based in the Global North), which then overrule other government priorities and existing mandates – a situation that has become acute in the fallout from the Covid-19 pandemic, with many low-income countries under critical debt burdens. More than one country has faced a long string of IMF programmes (e.g. Ghana is already in its 17th programme since 1966 and Mauritania has had IMF programmes for thirty years, all of which are meant to ameliorate ‘short-term’ balance of payments issues) which means a) that the IMF has been intervening in their policy sovereignty for decades, and b) that its short-term approach clearly isn’t working.
Despite the IMF’s insistence on ‘country ownership’, both its history of enforcing structural adjustment and decades of resistance to IMF-imposed austerity demonstrate that IMF policies are often in contradiction to the public interest of programme countries’ citizenry and pose serious challenges to democratic representation. IMF loan agreements are usually hammered out behind closed doors with little public dialogue and civil society participation, and the decision-making process remains opaque.
In climate matters this is relevant as countries already have obligations under the Paris Agreement and their own Nationally Determined Contributions (NDCs) under the UNFCCC, which may be undermined by pursuing short-term fiscal consolidation, fossil fuel extraction for the purpose of generating foreign reserves for debt repayment, or indeed other types of “climate policies” mandated by the IMF. The Fund’s carbon pricing and market centred approach to climate is at odds with climate policies in many developing countries; yet might take precedence over their existing national action plans, given high debt stress.
Alignment with 1.5°C and the Paris Agreement
The IMF has not formally aligned its climate work with the goals of the Paris Agreement and a 1.5°C (degree Celsius) pathway, nor is there a framework to quantifying how conditionalities (e.g. under the RST) contribute to either, measuring impact, and creating accountability. It also has not integrated loss and damage both in program design and in IMF resource adequacy projections.
As a result, the Fund is not systematically tracking its overall climate impacts, and the way its flagship climate project – the Resilience and Sustainability Trust, RST – has been set up leaves cause for concern: Countries with an RST loan need a concurrent additional ‘regular’ IMF loan that also has conditionalities, leading to contradictions e.g. between climate investment needs to fulfil NDC commitments and fiscal consolidation obligations. The same is true for the Fund’s wider lending, as without an institutional commitment to align with the Paris Agreement, there is no mainstreamed climate impact lens. Reviews of recent IMF loan programmes indicate continued endorsement of fossil fuel extraction, prioritisation of debt servicing over climate and development needs, and widespread austerity leaving little fiscal space for the necessary public investments. These dynamics also imply major transition risks, such as further entrenchment of fossil extraction, associated indebtedness, and eventually stranded assets.
There are currently no criteria for ‘strong’ IMF-backed climate reforms linking to the UNFCCC or Paris Agreement or systematically aligning them with countries existing strategies, or even any set of criteria for ‘high quality’ reforms at all (beyond their ‘depth’). Guidance around the RST just indicates a heterogeneous list of examples considered good policy, which means countries may be presented with a laundry list of policies without a framework to judge their merit and trade-offs, and which – given the Fund’s lack of dedicated climate expertise and overall orthodox macro approach – are likely to be biased towards fiscal austerity rather than maximizing climate and development impacts.
Article 2.1c of the Paris Agreement
Due to its outsized role in the global financial architecture and especially on monetary and central banking policy matters, the IMF’s stance impacts the wider climate finance discourse – in particular on Art 2.1c of the Paris Agreement, which calls for making “finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.” This article has been interpreted in widely differing and often problematic ways, e.g. putting the burden on developing countries to provide investor-friendly ‘enabling environments’ to entice private finance flows into climate (mitigation and increasingly adaptation) investments. On the other hand, 2.1c opens the door to a critical structural analysis of how the international financial system is (dis)enabling climate-resilient development – including illicit financial flow and the unequal tax, debt, and trade architecture, as well as developed countries’ refusal to fulfil their ODA and climate finance commitments.
The narrative of de-risking and ‘catalysing’ private finance is not only strongly pushed by advanced economies but also very prominent at the World Bank, which the IMF collaborates closely with and views as the ‘real expert’ on climate – potentially heralding in a new era of structural adjustment of public policy at the service of capital, this time under the mantle of climate action.
This hegemonic mantra suggests that the role for financial sector regulators and central banks is solely to ensure the risks of climate harmful investments are disclosed and for fiscal authorities to set the right price for carbon – a position the IMF is largely also taking. Once this is done, financial institutions will supposedly stop financing fossil fuels and money will flow into renewables. However, reality has shown that this is simply not the case. Private finance will only flow to those projects that can guarantee profits. In countries with high cost of capital, political and macroeconomic instability, and/or currency risks, only a handful of (very large-scale) projects will fulfil these conditions, likely excluding those energy projects for more vulnerable communities and more localised, community-driven climate solutions. Deciding to reorient public finance to ensure profits for the private sector also goes against CBDR, as it reinforces these same unequal structures of the international financial architecture (given companies and financial institutions that benefit are mostly based in the Global North).
Instead, leading scholars have proposed a planning ‘green state’ that subordinates private capital to the strategic priorities of a state-led green transition, including not only ‘carrots’ for green investment but also ‘sticks’ (penalties) for harmful finance. This requires a more active and interventionist approach from financial regulators and central bankers, abandoning the false assumption of market neutrality, which currently means upholding a fossil-based status quo. This is an area where the IMF is considered the eminent authority and could significantly advance policy space but is so far clinging to orthodox monetarist tenets.