Developing countries need $2 trillion in annual climate investments - IMF says the majority has to come from the private sector.
The International Monetary Fund (IMF) is warning that governments risk accumulating high debts if they rely on public funds to reach net-zero goals.
Climate finance will be one of the dominant topics at the International Monetary Fund and World Bank annual meetings next week in Marrakech, Morocco, and two chapters of the IMF's forthcoming Fiscal Monitor and Global Financial Stability Report (GFSR) both point to the need to pave the way for private investors to shoulder the burden.
Government finances in emerging market and developing countries are already under pressure due to the prolonged effects of COVID-19, the repercussions of Russia's war in Ukraine, drought, and natural disasters.
Crunching the numbers
Globally, $5 trillion (€4.76 trillion) is needed in annual investments by 2030 to meet net-zero emissions goals. That is equal to one-fifth of the US's GDP.
In emerging markets and developing economies only, this sum comes down to $2 trillion (€1.9 trillion).
The IMF's report estimates that the private sector will need to provide about 80% of these investments. This share rises to 90% when China is excluded, due to Beijing's ample state resources.
The Fund's Fiscal Monitor believes that relying on public spending to fund de-carbonisation investments on this scale would cause a massive, unsustainable run-up in debts, possibly to 45% to 50% of gross domestic product for a large, high-emitting emerging market.
How to bring private money into climate investments?
"We project that growth in public investment, however, will be limited, and that the private sector will therefore need to make a major contribution toward the large climate investment needs for emerging market and developing economies," the authors of the GFSR said in a blog post.
"While no single measure can fully deliver the climate goals, carbon pricing should be an integral part of any policy package," Fiscal Monitor authors said.
The IMF suggests that to address the debt increase resulting from public climate investments, nations should establish carbon pricing schemes to generate revenue and stimulate increased private investments. In countries where implementing carbon pricing is not feasible due to political reasons, such as the US, alternative measures such as emissions taxes should be put into effect.
While investment funds dedicated to environment, social and governance (ESG) investing are growing, funds dedicated to climate impact, including retiring high-emitting sources, are small. Regulators need to tighten rules for ESG labels to better align with climate objectives, the Fund said.
The IMF also recommended that countries take steps to improve their overall investment climates by strengthening macroeconomic fundamentals and deepening domestic capital markets to improve credit ratings.