Climate change cost to raise countries’ debt by up to 50% of GDP: IMF

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The International Monetary Fund (IMF) on Monday warned that countries will see their debt increasing by 45 to 50 per cent of the GDP by 2050, burdened by their targets to reduce emissions.

It asked countries to reduce their debt through carbon pricing.

“Climate action presents policymakers with difficult trade-offs. Relying mostly on spending measures and scaling them up to deliver on climate ambitions will become increasingly costly, possibly raising debt by 45 to 50 per cent of gross domestic product by midcentury,” IMF said in its latest study released on Monday.

It forecasted that public debt in advanced economies would rise by 10 to 15 per cent of GDP by 2050 without additional revenue or spending measures.

According to the International Energy Agency, to reach net zero emissions by 2050, annual clean energy investment worldwide will need to more than triple by 2030 to around $4 trillion.

It further warned that high debt, rising interest rates, and weaker growth prospects will further make public finances harder to balance.

“Prolonging ‘business-as-usual’ leaves the world vulnerable to warming. Countries have the option to generate revenue to decrease their debt burden through carbon pricing, but relying on carbon pricing alone may cross a political red line,” it said, adding that countries need to manage the climate transition calls for a fiscal balancing act with the right mix of policies.

However, it noted that carbon pricing alone is not sufficient and should be complemented by other mitigation instruments to address market failures and promote innovation and deployment of low-carbon technologies.

IMF also called for an international carbon price floor, differentiated across countries at different levels of economic development.

It warned that postponing carbon pricing would be costly, adding 0.8 per cent to 2 per cent of GDP to public debt for each year of delay.

“Governments thus face a policy trilemma between achieving climate goals, fiscal sustainability, and political feasibility. In other words, pursuing any two of these objectives comes at the cost of partially sacrificing the third,” it added.

IMF asked the private sector to come forward to fulfil the bulk of the climate financing needs.