The role of the International Monetary Fund in supporting climate action
Moving to a global zero-carbon economy requires trillions of dollars of investment each year. Many developing economies and emerging markets are investing public funds to support the transition. However, most of the needed financing will need to be provided by the private sector. With the cost of renewables falling sharply in recent years, private investments in the clean energy sector have surged. But in most developing economies, significant barriers to investment remain, including high public debt, high cost of capital due to political risks, lack of reliable data, shallow markets and weak legal systems.
The most important prerequisite for a successful transition is the implementation of strong macroeconomic and climate policies at home. Policy reforms should include reducing and repurposing environmentally harmful subsidies and implementing carbon pricing. Such actions provide a clear financial incentive to invest in low-carbon alternatives and increase energy efficiency. The fiscal space they provide could be used to compensate those most affected to ensure broad support for the transition and making it more just. Strengthening institutional and legal frameworks will assist in reducing the cost of capital and is critical to mobilising financial resources for the transition. In some cases, innovative financial mechanisms, including finding public-private synergies, could be leveraged to attract investments.
The IMF’s role
International financial and development institutions, including the International Monetary Fund, play a key role in supporting and financing this transition in developing countries. In the IMF’s surveillance activities, country teams provide comprehensive analysis of climate challenges and policies to address them. Capacity development to help countries address climate issues has been scaled up. In the last two years, the IMF has also been providing direct long-term, low-cost financing through a new Resilience and Sustainability Facility, in close collaboration with the World Bank and other multilateral development banks.
The goal of the RSF is to help developing countries strengthen resilience to long-term structural challenges including climate change and pandemic preparedness. Its lending operations are financed through the Resilience and Sustainability Trust, which channels resources – through voluntary contributions – from economically stronger members to those with the greatest needs. As of October 2024, 23 countries have pledged over $48 billion. On the receiving side, about two-thirds of IMF members – including all low-income countries – are eligible. RSF lending has longer maturities than traditional IMF financing and has a tiered interest rate structure, with lower interest rates for low-income countries.
A total of 20 arrangements have already been approved by the IMF Executive Board since June 2024. These arrangements are specifically focused on climate change initiatives and have benefited from a close collaboration between the IMF and development partners. The IMF and the World Bank recently announced an Enhanced Cooperation Framework to scale up climate action, with Madagascar the first country to benefit from the RSF.
As well as providing climate finance directly, the RSF helps countries catalyse climate-friendly investment through three key channels. First, it is underpinned by a traditional IMF programme that ensures solid macroeconomic fundamentals and debt sustainability. Second, it signals the authorities’ commitment to enhance climate policies. All disbursements are linked to the successful implementation of high-quality institutional and policy reforms that address climate change. Third, the IMF, World Bank and other partners provide extensive capacity development to help implement the reforms and strengthen domestic institutions. Finally, the RSF often provides impetus for discussions on catalysing additional climate finance between governments, multilateral institutions and private investors.
Supporting change globally
What types of reforms have been implemented so far? Rwanda and Senegal embedded climate considerations into public investment management. Kosovo levelled the playing field for private investment in renewable electricity generation. Jamaica and Barbados introduced incentives for energy efficiency in government buildings. Morocco eliminated subsidies on butane gas while expanding cash transfers to affected farmers. Paraguay strengthened the governance framework to reduce deforestation. Costa Rica advanced its financial supervision framework to account for climate risks.
Close collaboration among country authorities, international partners, donors and the private sector is necessary to create a conducive environment for public and private investments. This is especially important for developing countries facing decades-high debt servicing costs. Increasing the financing provided by multilateral institutions is critical, including by increasing the rechannelling of special drawing rights to the RSF to satisfy medium-term demand for the facility. In parallel, work should continue to reduce debt servicing burdens in vulnerable countries, including through debt swaps and debt buybacks with official multilateral or bilateral guarantees.
It is not going to be easy. Financing a just transition is a complex task that requires cooperation, innovation and commitment from all stakeholders. By working together, we can unlock the potential for a greener, more resilient world that benefits everyone.
