The IMF’s Work On Climate
Credit: IMF Photo/Raphael Alves, license CC BY-NC-ND 2.0, retrieved from Flickr in April 2025
The IMF’s dedicated climate work is very recent, but its structure, policies, conditions and economic analyses have had climate impacts since its founding. This page gives you an overview of both.
How did the IMF come to be involved in climate?
For most of its existence, the IMF has ignored climate change, as it was not deemed to be macro-critical (economically relevant) and therefore outside its mandate. During this time, including in the years after the Paris Agreement had been signed – and while a small group of Fund staff began researching climate out of personal interest – the IMF continued promoting fossil fuel investment in many countries as a means to generate foreign reserves and grow commodity exports. In terms of macro-criticality, things changed in 2021 when a background paper for the Comprehensive Surveillance Review laid out the legal basis for how climate action is aligned with the Fund’s core mandate.
Since the appointment of MD Georgieva and more ambitious proposals for climate finance and fundamental financial architecture reform emerged from the Covid-19 pandemic, such as Barbados’ Bridgetown Initiative, the UN Secretary General’s financial architecture reform paper, UNCTAD’s new multilateralism principles, and the tremendous wealth of feminist post-Covid-19 recovery plans, the Fund has significantly stepped up its resources and analysis dedicated to climate issues – finally recognising that climate change poses significant balance-of-payment and global financial stability issues in the medium to long term, and is therefore relevant to its mandate after all.
Official rhetoric and an increasing body of IMF research, toolkits, pilots, Article IV country reports and the 2023 flagship publications are now stressing the urgency for accelerated climate actions as well as the mobilisation of climate finance. In 2021, the IMF published a climate strategy paper, and in the following year inaugurated a new lending facility for climate, the Resilience and Sustainability Trust (RST). The operationalisation of the RST has become a way for the Fund to ‘learn by doing’ and design its lending approach to climate ‘on the go’ – without first reflecting more thoroughly the role it could and should be playing. Many newly appointed climate ‘specialists’ working on the RST were pulled from surveillance, reinforcing the resource constraints and ad-hoc approach on climate outside the RST.
A report from the Fund’s Internal Evaluation Office (IEO) in 2024 shed light on the decision-making and budget allocation processes that accompanied this strategic re-orientation, which was in great part steered by the current and previous Managing Directors, Kristalina Georgieva and Christine Lagarde. While Georgieva has been a champion of moving the IMF into climate work, this has led to considerable internal resistance (over the top-down process) as well as external criticism (over the substantial flaws in the approach highlighted on this website).
How are climate and macroeconomics connected?
With devastating floods, hurricanes, and droughts wiping out countries’ development gains and productive capacity, the macroeconomic and financial stability impacts of climate change have become undeniable. Beyond the disastrous fallout from catastrophic climate events, shifts in prices from structural changes and supply shocks also impact economic and monetary stability – for example, more frequent drought brought on by climate change (a structural change) can lead to widespread reduction of agricultural output (a food supply shock) which can then trigger food price inflation, which spells economic and monetary instability. Moreover, global decarbonisation efforts carry considerable spillover risks for countries whose exports and access to foreign reserves are still dependent on fossil fuels to a large degree, leading to a deteriorating balance of payments, potential divestment from key industries, and stranded assets, which may in turn make governments vulnerable to investor lawsuits for damages or foregone profits. Achieving the necessary global emissions reduction will require considerable economic transformation especially from (rich, high-emitting) G20 countries, with a radical shift towards green energy and reduction in their over-consumption, as well as green technology transfer and an active industrial and labour market policy to steer the required green industrial transformation. This transformation needs to be embedded in principles of (compensatory, distributive and procedural) justice, which means Global North countries with the largest cumulative emissions and capacity to act need to move first, climate finance needs to be channelled to the Global South, and the energy transition (in the South) has to happen in a way that centres community needs, gives affected countries and communities a say in decision-making, and does not jeopardise development or exacerbate inequality. Conversely, maintaining the status quo of the current fossil-based economic and financial system has major climate impacts, as time runs out before irreversible tipping points are reached.
Should the IMF even work on climate?
In theory, the IMF could play an important role in using its macro expertise to help countries adjust their macro-financial frameworks in a way that enables the necessary structural changes, resource mobilisation, and climate resilience through systematically integrating climate and economic policy. This would mean that a just transition ought to be the end, and macro policy – including investment-led growth and publicly-steered green industrial transformation – the means to achieve it. In reality, this prioritisation has been far from clear – and in fact, institutions like the World Bank, IMF, and Global North countries are promoting a framing of this ‘enabling environment’ that makes poorer countries responsible for creating an attractive investment context for capital, thus prioritising the interests and profits of finance, including at the cost of more ambitious climate action. Rather than IMF leadership taking this opportunity to fundamentally rethink the Fund’s role in the financial architecture and its policy framework in creating a true enabling environment for concerted, public, redistributive climate action (under the conditions of radical uncertainty, path dependency, and spillover effects), what has emerged since then is rather a re-framing of climate policy within the IMF’s existing modus operandi that fails to address the structural issues those reform initiatives had raised.
The IMF’s climate impacts
Since its post-WWII inception led by imperial powers, the IMF has been a contentious institution defined by geopolitics, economic orthodoxy, and maintaining a global power dynamic disadvantaging the Global South. Several core criticisms have emerged with time, which are discussed here specifically for their relevance in relation to climate change: Governance, austerity, the primacy of markets, prices, and private finance; and debt.
Governance
Why does IMF governance matter for climate?
It is questionable whether an institution whose governance remains dominated by the historically largest polluters from the Global North (US, Europe), with major current emitters (China, India, and other large Southern G20 members) vying for power while the countries most affected by climate change have little say, will be able to promote the kind of transformative action required to tackle climate change. For example, the biggest point of contention at the Board over climate seems to have been the definition of ‘largest’ emitters (e.g. current vs. cumulative emissions) and whether their coverage in surveillance should be mandatory or voluntary – as the Climate Strategy envisioned regularly assessing the adequacy of their mitigation efforts, given that spillover impacts from insufficient mitigation in the 20 countries that make up 80% of emissions have global ramifications and are thus automatically macro-critical. Meanwhile, climate-vulnerable V20 countries (representing 30% of the Fund’s membership and 18% of global population) only command 5.6% of the formal votes of the IMF.
It is even less likely that a Board of this composition will meaningfully support the principle of common but differentiated responsibilities established in the Paris Agreement and UNFCCC, which obliges the most developed countries to take the widest-ranging measures. The fact that the largest BRICS countries and others with large voting shares at the Board (e.g. Saudi Arabia) are high emitters or downright petro-states, and partially in hostile or competitive relationships with the US, means geopolitical gridlock is likely to further keep the Fund from making major strides on climate.
Researchers have pointed out how these power dynamics are reflected in the IMF Climate Strategy and the design of the RST, thus representing ‘business as usual’ and running the risk of resulting in ‘organized hypocrisy.’
Austerity Vs. Climate
Have IMF loan conditionalities changed with climate on the agenda?
As the IMF’s most direct policy influence is through the conditionalities attached to its lending, looking at recent loan programmes provides important insight into how its research and rhetoric on climate are implemented in practice – in particular through the Resilience and Sustainability Trust (RST), which was established to support climate action specifically. Doing so makes it evident that the Fund still has not grappled with the fundamental trade-off between investing in long-term climate action and pursuing austere macro policies, leading to contradictory outcomes as well as a kind of ‘green fiscal consolidation’: Every RST loan has to be accompanied by a second, ‘traditional’ upper-credit-tranche (UCT) IMF programme in parallel, which also carries conditionalities, so in practice the RST might require mitigation investments or try to expand fiscal space for climate action, while the UCT endorses expanding fossil fuels or requires fiscal consolidation. These contradictions are symptomatic of the fundamental tensions between a just transition and the IMF’s neoliberal orthodoxy.
Analyses of the Fund’s slate of loan programmes over the Covid-19 period have documented a global wave of austerity measures, which stunt green industrial policy measures such as publicly-funded R&D, leave little fiscal space for wider climate action, and have been shown to undermine economic performance (as well as social, poverty and inequality outcomes) in the longer term – thus further forestalling climate action, as households can’t afford to change their consumption patterns, firms don’t make investments in greening their activities, and depressed economic activity begets public revenue losses. A review of all 51 active IMF programmes in 2024 showed that 40 included budget cuts, including 14 countries ‘in debt distress’ or ‘at high risk of debt distress’, with average cuts of 3.3% GDP and more (4.1%) for low-income countries. While the most obvious impact of this “fiscal consolidation” is the reduction of public funds available to invest in climate resilience and long-term sustainability goals, the slashing of public sector wages also diminishes state capacity for effective climate regulation and enforcement.
Country examples: Juggling climate investment and austerity
Kenya and Senegal
Kenya and Senegal, under fiscal consolidation pathways of 5.7% of GDP between 2021-2025 and 3.7% of GDP 2022-2025 respectively, are forced to decide between immediate cuts to politically sensitive areas of public spending (e.g., education and health) versus investing in policies that only have a pay-off in the medium- to long- run (climate).
Argentina
In Argentina, the Fund promoted fossil fuel subsidy cuts on the one hand while also endorsing private sector investment incentives in shale oil and gas reserves on the other.
Pakistan
In Pakistan, higher taxes on renewable energy technology came at the same time of eliminating energy subsidies.
Senegal and Cameroon
South Africa
What do we mean by 'greenwashing austerity' or 'green fiscal consolidation'?
One of the IMF’s most frequent policy prescriptions is the elimination of energy and fuel subsidies. The Fund has been a long-standing champion of carbon pricing as the most efficient climate ‘solution’ (also see dedicated section below) and has identified cutting fossil fuel subsidies as a major source of both climate action and government savings – thus calling them “dual purpose reforms”. Analysis of 51 ongoing IMF programmes (mid-2024) highlighted that the Fund recommended price increases or subsidy cuts to electricity, gas or fuel in 36 of them, including in 75% of the RST programmes in the sample, while only four analysed inequality impacts.
Eliminating subsidies to the fossil industry is aligned with demands from large parts of the climate movement as well. However, in countries where non-fossil energy sources have not been developed, carbon pricing and the elimination of fuel subsidies simply put the burden of adjustment on (poor) consumers and small business owners, who spend a relatively larger share of their incomes on basic necessities like energy. For example, in Egypt IMF-supported elimination of energy subsidies represented 35.7% of the expenditure increase for the poorest households, vs. 21.5% for the top decile. Where there are no ‘green’ energy alternatives available, such reforms actually do little to reduce emissions, and their rationale is often more fiscal than climate related. Simply adjusting fossil energy prices is also no guarantee that more financing will flow into renewable energy, so without accompanying fuel subsidy reform with a concerted push for renewable development, including concessional and grants finance, developing countries may just be stuck with high fuel prices. In Egypt, (fossil) energy-intensive sectors seem to have expanded rather than shrunk since the subsidy elimination and have attracted most FDI.
These reforms tend to be consumer-focused, liberalising energy tariffs and privatising public utility companies, rather than targeting state subsidies for fossil-intensive industries and fuel producers or developing green corporate taxes on polluting industries. Other reforms that follow a similar logic and impact, such as liberalizing water markets, do not even bring any discernible climate benefit – there is no ‘greener’ alternative to water, and the potential human rights impacts are severe.
What is the IMF doing to mitigate the effects of green austerity?
Having realised the distributional impacts of austerity measures like eliminating fuel subsidies without alternatives, and the threat of social unrest they carry – which have led to widespread protests in IMF-programme countries such as Tunisia and Ecuador – the Fund now includes ‘mitigation’ measures, such as targeted transfer programmes to the ‘most vulnerable’ and ‘social spending floors’. For example, of the 36 countries where the IMF called for cutting energy subsidies in 2024, 32 contained (non-binding) targets on social expenditure and 25 mentioned compensatory measures for higher energy prices. However, Oxfam’s analysis of 39 IMF pandemic programmes showed these social spending floors to be ineffective and grossly insufficient, building on a well-established literature on the bureaucratic complexity, targeting errors and social stigma associated with poverty-targeted social protection programmes. Investment in such compensation schemes takes time and infrastructure, leading to issues of sequencing the IMF rarely addresses – often, savings from energy subsidy cuts are meant to be channelled into compensatory transfer programmes, but those programmes, their databases and distribution channels need to be established first, leading to a considerable lag while the widespread impacts from cuts are already felt. Inequality and gender impact assessments of proposed reforms are also a rarity – 2 out of the 36 programme countries looked at distributional impacts and none at gender. Not only does this impact inequality and poverty indicators, but the ensuing social unrest can also threaten to undermine long-term public support for climate action in general.
Carbon Pricing
What’s wrong with the IMF’s promotion of carbon pricing?
From the inception of the Paris Agreement in 2015, then-Managing Director Christine Lagarde suggested “carbon pricing should be the centerpiece of climate mitigation efforts”. Various civil society groups also view carbon taxes as a useful option in a broader arsenal of policy tools – however, they become problematic when all climate policy is viewed through a pricing lens. Indeed, expert groups like the Task Force on Climate, Development and the IMF at Boston University (BU Task Force) have criticised that the IMF’s analysis has been “adopting a ‘one-size-fits-all’ approach of carbon pricing as a panacea for climate action”. At the heart of the Fund’s approach is the idea of an internationally coordinated carbon price floor (ICPF) while taxing carbon at different levels according to each country’s stage of development. This is supposed to set incentives to decrease pollution through market-based price signals that depress fossil fuel consumption and raise government revenue through taxes at the same time – a win-win at least on paper.
In practice, carbon pricing tends to suffer from limited coverage, too-low prices, a lack of widespread political buy-in, and problematic distributional implications. The regime proposed by the IMF, even with differentiated price floors, has adverse distributional impacts by placing additional burdens of emissions reductions fully on developing economies – especially current ‘large emitters’ like India and China, who have little incentive to participate, more so in the face of the climate debt of historically largest emitters in the Global North. The strong negative reactions to and subsequent studies on the EU’s 2023 Carbon Border Adjustment Mechanism (CBAM), which levies a tariff on imports to equalise the difference between the EU carbon price and the carbon price in the country of origin have also demonstrated how pricing mechanisms impact Global South countries in practice.
Carbon taxes also face a time-lag, just as with energy subsidy elimination. It takes time until they are set up and start bringing in revenue and shifts in production patterns; if fiscal consolidation is pursued in the meantime, the harmful effects of that are not offset. Given the Fund’s broad support for austerity measures described above, many civil society groups fear that the ICPF will lead to complacency and distraction from more immediate forms of climate finance and more practical policy measures. In particular, as the BU Task Force highlights, the IMF expects this carbon pricing-led approach to generate enough revenue to meet a substantial portion of the global climate investment needs (although research already indicates it will not be sufficient), therefore discounting the imperative for – and its own potential role in – massive international resource mobilisation. The Fund also tends to disregard the value of non-pricing policies (e.g. emission and efficiency standards, technology mandates, fuel efficiency regulators, permits and quotas, subsidies for clean tech R&D etc.), which many developing countries are already pursuing instead.
Since countries like China and India are unlikely to come to the IMF for loans, nor are advanced economies in the Global North, the countries where a carbon price ‘shock therapy’ could actually be enforced – e.g. through loan conditionalities – are once more those vulnerable to climate events and saddled with high external debt post-pandemic, subjecting their economies to potentially chaotic structural transformation.
Private Finance First
What’s the problem with IMF-World Bank collaboration on climate?
Given the IMF’s limited climate expertise, its foray into this issue has led to a strengthening of its collaboration with the World Bank, which the Fund views as the expert organisation on the matter. However, the World Bank is the foremost international institution promoting a private-finance-first approach, explicitly centring the interests and needs of private capital and using public IFI funds to de-risk their investments – moving on from the “Washington Consensus” of former times to a “Wall Street (Climate) consensus”. Particularly influential are the WB’s Country Climate Development Reports (CCDRs), which provide an important analytical backdrop for the IMF’s own country analyses and loan programmes under the RST. This is especially the case for sectoral policies (e.g. for energy, water, transportation), where the IMF admits to heavily relying on the Bank – such as when it comes to the energy transition, focused on liberalising energy sectors although the IMF’s own research suggests that energy-sector privatisation leads to higher emissions. All five initial RST programmes (Bangladesh, Rwanda, Barbados, Costa Rica and Jamaica) have also promoted the increased use of public-private partnerships (PPP) for renewable energy development, despite previous IMF research warning of the hidden costs of such arrangements.
What’s wrong with 'catalysing private finance'?
With a market-focused approach, policy space for green transition policies is constrained due to the need to implement export- and investor-friendly policies. The IMF’s 2023 flagship reports Fiscal Monitor and Global Financial Stability Report suggested that given the limited capacity to ramp-up public investment, developing countries should introduce financial policies that would mobilize private capital, including by public-private risk sharing, blended capital and other innovative financial instruments. The RST is supposed to take on a ‘catalytic’ role to crowd-in more private climate finance, while the Fund admits at the same time that few developing countries have investment-ready pipelines. Evidence on the World Bank’s ‘private finance first’ approach indicates it is simply not working to mobilise the necessary quantity and quality of finance, beyond its questionable equity and climate justice implications (see here, here and here).
What’s the alternative?
Instead of catering to the needs of private investors, the IMF could play a catalytic role by encouraging financial regulation that would align capital allocation with green transition objectives, something it has been unwilling to do. Expert groups like the Network for Greening the Financial System have developed a host of possible measures that central banks and financial regulators could pursue, such as dual interest rates, mandatory disclosure, negative and positive screening in collateral frameworks, and tilting asset purchases based on climate criteria.
The IMF should endorse such efforts and pivot from its market focus towards supporting countries in building much more robust green macro financial policy regimes, helping develop public taxonomies and new public credit policy coordination agencies that prioritise “coordination between fiscal, monetary, prudential, and industrial policy spheres, and the subordination of credit and monetary policy to support the needs of green industrial policy” – rather than vice versa.
Debt Sustainability Vs. Sustainability Of Life
How are climate change and sovereign debt connected?
In the aftermath of Covid-19, tightening monetary policy in advanced economies, and the intensification of the climate emergency, many Global South countries are facing impossibly high debt levels, high cost of finance, and high risk of debt distress or default in case of catastrophic climate events – squeezing their fiscal space for climate action. Loss and damage have cost the most climate vulnerable countries upwards of 20% of GDP, some 61 are in or close to debt distress, while the World Bank estimates that developing countries spent $443.5bn on external debt servicing in 2022 alone. When climate risks accumulate or disasters wipe out a large part of a country’s productive capacity, the resulting capital flight, falling exchange rates and rising cost of capital further entrench the economic crisis and vulnerability at exactly the time when resources need to be mobilised and external debt needs to be serviced. Thus, vulnerable countries face an escalating climate-debt vicious cycle, where climate risks aggravate their debt problems, and high debt make dealing with climate risks even more difficult.
Spotlight: Debt numbers
Public and publicly guaranteed debt of emerging markets and developing economies (EMDEs) has more than doubled since the 2008 global financial crisis, from $1.3 trillion in 2008 to $3.6 trillion in 2021, with 61 countries in or near debt distress today.
In 2023, on average 38% of government revenue was absorbed by debt servicing, rising to 54% in Africa.
According to the UN, 3.3 billion people – almost half of humanity – now live in countries that spend more on debt interest payments than on education or health.
In 2020, climate finance from international public sources was three quarters loan-based (72%), as well as 91% of climate finance from multilateral development banks (MDBs), of which in turn 75% was non-concessional.
What about Special Drawing Rights (SDRs)?
In 2021, the IMF issued the equivalent of $650 billion in SDRs – debt free liquidity that was widely used to fight the pandemic. But these SDRs were allocated based on the Fund’s quota structure, so low-income countries received very little, while large ‘advanced economies’ with the highest quotas received the most SDRs without needing or using them, leading to calls for them to donate or re-channel the SDRs they didn’t need to Global South countries instead. Thus, the RST was set up as a facility for richer countries to re-channel their unused SDRs. Many argued that SDRs should go to multi-lateral development banks directly to amplify their lending, while others (including large parts of civil society) made the case for reconceptualising SDRs altogether as a tool for development and climate finance. In any case, there was no reason that rechannelled SDRs would have to take the form of loans or carry conditionalities – yet, the Fund took the opportunity of controlling this potential source of concessional finance to essentially become the designer and arbiter of countries’ climate policies and add further to their debt burdens. Moreover, the issuance and allocation of SDRs could be reformed altogether to be more regular, predictable, and equitable.
How do debt and the IMF entrench fossil fuels?
The issue is not just that countries have debt, but the conditioning of climate action that it implies – even with low interest rates, debt essentially requires the prioritisation of projects that can create enough surplus revenue and foreign reserves for interest servicing, which many essential climate strategies, and especially those for vulnerable people, do not fulfil. Debt also creates pressure to continue fossil fuel extraction to generate the reserves for repayment for dollar-denominated external debt – Chad was denied debt relief under the G20 Common Framework when rising fuel prices made its oil-based debt repayable again, and similar dynamics are impacting Suriname, Ecuador, and Argentina. Compounded by over-optimistic fossil revenue projections, unrealistic loans are extended including by the IMF, while capital-intensive fossil industries require further investment (through debt) to achieve those projections – trapping countries in fossil extraction. For several years after the signing of the Paris Agreement in 2015, the IMF’s Article IV policy advice in 105 member countries endorsed, or directly supported, the expansion of fossil fuel infrastructure. In 11 out of 21 fossil fuel producer countries with a loan programme in 2024, continued extraction remained part of the analysis mostly for debt repayment reasons, examining neither the transition risks of keeping up fossil fuel production, nor the prospect of debt cancellation to ease the pressure.
In a context of unfulfilled climate and ODA finance from the Global North together with the entrenched financial subordination of developing countries, not only is the green transition of those countries constrained by the need to implement export-generating, debt-repaying, investor-friendly policies, but those dynamics are likely to reinforce that very subordination further.
What does debt sustainability analysis (DSA) have to do with it?
The IMF is the central global institution assessing countries’ debt sustainability and thus acts as a gatekeeper of their prospects for borrowing or debt restructuring. These debt sustainability analyses (DSAs) provide a risk analysis of a country going into debt distress or default and are deemed ‘sustainable’ if a country can deal with its debt without having to restructure it. These DSAs have a history of over-optimism, not recommending debt restructuring early enough, and until recently did not include any climate considerations (e.g. factoring countries’ spending needs on climate and the SDGs into whether their debt projection was sustainable). The DSA for market-access countries (MACs, or middle-income, MICs) was reformed in 2021 to include two climate modules, while the same reform was put in motion for low-income countries (LICs) in 2024. However, even the new climate modules have limitations in their methodology and assumptions, and a 2024 supplementary guidance note on LICs again makes the case for de-risking the private sector into closing the ‘financing gap’.
Thus, it is important that DSAs consider a wider range of physical and transition risk scenarios in its modelling efforts and ensure that the economic consequences of climate change are more accurately reflected, including e.g. long-term cross-boundary spillovers, compound risk scenarios and path dependence. This should also include the costs and benefits of transitioning and an evidence-based assessment of the role of publics vs private finance in these scenarios – identifying grants and concessional finance needed for climate investments, introducing realism and risks regarding private finance mobilisation, and tailoring scenarios to country characteristics. Lastly, they should contain a more realistic discussion of policy trade-offs between critical public investment in climate action vs. economic development, and identify pathways for investment-led, climate-resilient growth paths rather than “automatically triggering fiscal consolidation as the sole option”.
This enhanced DSA could provide an important basis to advocate for a global debt restructuring initiative for those countries where climate action is severely hampered by their debt burden, and the Fund could make its lending conditional on private creditor participation in this restructuring.