IMF surveillance and climate change transition risks

Reforming IMF policy advice to support a just energy transition

8 November 2021 | Briefings

Photo courtesy of ActionAid USA.

A report published in August 2021 by Action Aid USA and the Bretton Woods Project, titled IMF Surveillance and Climate Change Transition Risks, found that the International Monetary Fund (IMF) has undermined global climate action by supporting fossil fuel expansion through its policy advice, locking developing countries into a reliance on dirty coal and gas that is harming their economies and the planet.

As COP26 concludes this week, the report’s key arguments are highlighted in a new briefing, Reforming Global Finance To Support A Just Energy Transition: Implications For IMF Policy Advice.

The findings presented in both the briefing and the report are grounded on an analysis of all 595 Article IV reports conducted in the IMF’s 190 member countries between the signing of the Paris Agreement in December 2015 and March this year. Article IV reports contain policy advice to countries that shapes their economies for years to come.

Download the full report here.

The report’s Executive Summary is included below.

This report is being released amidst overlapping global crises: the COVID-19 pandemic, the worsening climate crisis, and the widening inequality gap within and between countries. The IMF’s Managing Director, Kristalina Georgieva, has been among the most vocal proponents of ‘building back better’, arguing for a coordinated green recovery from the COVID-19 pandemic. Concurrently, after years of debate within the institution about whether climate change is core to the IMF’s mandate, the Fund has belatedly begun to integrate climate issues into its surveillance mandate, with the recently published Comprehensive Surveillance Review (CSR) making a strong case that both physical and transition risks from climate change potentially present macro-structural challenges.

This shift will require significant changes in the policy advice the IMF provides to member countries if the Fund is to support a just energy transition and get behind urgently required climate action efforts. This report focuses on the IMF’s approach to transition risks from climate change – that is, the reduction in the value of fossil fuels and related infrastructure or assets, because of the low-carbon transition – which can pose risks for the wider economy. Recent research has already established that the IMF’s consideration of transition risks in its surveillance work has been minimal; this report presents new findings on key areas of Fund surveillance related to transition risks, and suggests that the Fund’s approach to fossil fuels, which largely sees the imperative to reduce greenhouse gas emissions as a ‘demand side’ issue, is insufficient to address transition risks, and – more broadly – to support a just energy transition.

Beyond developing a better understanding of the transition risks posed to its member countries, this report argues that current IMF policy advice is undermining many countries’ ability to undertake a just energy transition, and that the Fund needs to better understand how this advice itself is shaping member countries’ vulnerabilities to these risks. Taken together, the report calls for the IMF to go beyond mitigating transition risks to developing new policy advice for members that is aligned with a just energy transition to a low-carbon economy.

A feminist, green and just energy transition? Implications for IMF’s policy advice in Article IV surveillance

The empirical research undertaken as part of this report explores how the IMF’s existing policy advice in its Article IV surveillance is undermining a just energy transition across many IMF member countries. It presents new findings from a review of all Article IV reports that the IMF conducted between the signing of the Paris Agreement in December 2015 and March 2021. The review found that in 105 member countries, despite the urgent need to reduce greenhouse gas emissions to meet global climate goals, the IMF’s policy advice endorsed, or directly supported, the expansion of fossil fuel infrastructure. Additionally, the Fund’s commonplace policy advice on power sector reform and removing demand-side energy subsidies may present further obstacles to a just energy transition in many IMF member countries.

In 69 countries, the Fund has either directly or indirectly advocated for the privatisation of state-owned energy or electricity utilities, which is compounded by the more ubiquitous advice to slash public spending in many member countries. Among other considerations, privatisation can lead to a more fragmented energy sector and make it difficult for states to retire fossil fuel-based sources of energy without incurring large compensation claims from foreign investors. The IMF is also increasingly positioning energy pricing reforms as a necessary first step in decarbonising national economies. Our research indicates that while the Fund advocated for fossil fuel subsidy removal or reform in 71 countries, these policies largely targeted consumer subsidies rather than affecting the economics of fossil fuel production. This focus on demand side measures is insufficient to achieve a just energy transition. In cases where there are few alternatives to fossil-based power or transport, including in most emerging or developing economies, such policies are likely to have little impact on reducing greenhouse gas emissions at scale unless accompanied by investment in clean energy alternatives. This effectively results in a form of ‘green’ structural adjustment.

The review also provides case studies of IMF advice in Mozambique and Indonesia, with a focus on IMF policy advice related to coal mining and the power sector. It shows that in these cases IMF advice has entrenched fossil fuel dependency and opened the door to increased investment in coal. This has left both countries highly exposed to the transition risks associated with coal. The trajectory of this advice raises the question of how the Fund will meaningfully integrate transition risks into its surveillance guidance for these and other member states going forward.

Overall, these findings illustrate the extent to which the Fund will have to substantially modify its policy advice in order to support a just energy transition, and illuminates some of the contradictions of its policy prescriptions in recent decades. This is particularly the case in emerging and developing economies, where countries will need increased fiscal space to undertake national climate plans and achieve the Sustainable Development Goals and thus avoid the worst impacts of climate change. This presents a direct challenge to the IMF’s policy orthodoxy, which tends to be centred on ensuring reduced public spending and increasing export revenues, often through carbon-intensive sources.

This report calls for the IMF’s policy advice on climate change transition risks to be aligned with ActionAid’s principles for a just energy transition, which requires that policy frameworks work to address, rather than exacerbate, inequalities; transform energy systems to work for people, nature, and the planet; and ensure inclusivity and participation.


The IMF plays a critical role in shaping policies that governments adopt to achieve macroeconomic stability. The newly adopted IMF Comprehensive Surveillance Review (CSR) takes steps to increase attention on climate, but the Fund is only at the beginning of developing its approach to addressing transition risks. As the IMF begins the process of developing detailed guidance for staff that will help them to implement the CSR from early 2022, we recommend the following – based on the analysis in this report as well as proposals across a range of related academic and civil society reports – to help ensure a feminist, green and just energy transition.

  • The IMF should, at a minimum, adopt a ‘do no harm’ approach and commit to ensuring, via ex-ante assessments, that IMF policy recommendations do not actively exacerbate inequalities or undermine countries’ ability to meet their human rights obligations, or achieve the Sustainable Development Goals and their Nationally Determined Contributions under the Paris Climate Agreement.
  • The IMF must develop clear guidance for staff on how to assess transition risks in Article IV surveillance, based on the principle of ‘do no harm’, including the risks posed by the Fund’s own advice on, inter alia, fiscal consolidation and support for carbon-intensive energy and exports.
  • The IMF should shift its focus to eliminating fossil fuel producer subsidies and expanding investment for renewable energy and other green alternatives, rather than focusing primarily on eliminating or reducing consumer subsidies, while ensuring these efforts remain firmly embedded in countries’ national just transition dialogues.
  • The IMF should re-evaluate its advice on privatisation, particularly given the risks of compensation claims for stranded fossil fuel assets by private investors, and instead support governments to strengthen public institutions and public services, so that they can effectively respond to climate change. The IMF needs to fundamentally reassess the role of public services in light of both COVID-19 and the climate crisis – and to recognise the limitations of private sector responses. As part of this re-think, the Fund should create an institutional view on sustainable industrial policy that empowers IMF operations to support effective and coordinated strategies for sectoral and economic transformation.
  • The IMF can help countries to better judge the costs of transitioning to a low-carbon future. For low- and middle-income countries, this should be part of a wider discussion about mobilising greater resources from wealthy countries to fund a ‘just energy transition.’ Promoting renewable energy alternatives and assisting countries in lowering the costs of those alternatives will be an essential part of any transition. This is particularly the case in emerging and developing economies where governments already face rising costs of capital – or lack market access altogether – and where efforts to ‘de-risk’ green investments for the private sector may lead to the state taking on substantial fiscal liabilities. An essential pillar of this process will also be supporting countries to strengthen labour market institutions and achieving universal social protection, including social protection floors, to enable a just transition.
  • Given the current context, the Fund’s climate work should not be siloed. Climate efforts need to be considered alongside more significant debt cancellation efforts; investing in gender-responsive public services; increasing fiscal and policy space for countries to respond to the COVID-19 pandemic; abandoning austerity; and improving the quality and quantity of climate finance. The IMF should solicit input from UN institutions and preeminent experts in the field in developing guidance, as the IMF has limited expertise on climate change at present.
  • The IMF should improve national level consultation on Article IVs, including with civil society organisations, women’s rights groups, trade unions, climate groups and indigenous peoples’ organisations, in an effort to integrate social dialogue into surveillance and the design of lending programmes.