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In a major departure from the IMF’s traditional focus on narrowly defined economic problems, IMF managing director Christine Lagarde warned today that the world faces “a triple crisis—an economic crisis, an environmental crisis and, increasing, a social crisis.”
She said that these challenges could not be addressed in isolation, and she announced IMF research and analytical support for countries undertaking policy changes to address these problems, especially the use of fiscal tools—carbon pricing and elimination of fossil fuel subsidies—to reduce emissions of heat-trapping gases.
“The global economy is still rocked by turmoil, with uncertain prospects for growth and jobs. The planet is warming rapidly, with unknown and possibly dire consequences down the line. Across too many societies, the gap between the haves and have-nots is getting wider and strains are getting fiercer,” Lagarde said in a speech hosted by the Center for Global Development.
“Although distinct, these different threats feed off each other in an intricate interplay. We cannot address each in isolation. We need to generate a virtuous and avoid a vicious circle,” she said.
“Climate change is clearly one of the great challenges of our time, one of the great tests of our generation,” she added. “For the world’s poorest and most vulnerable people, climate change is not some distant possibility. It is a present reality.”
Though these ideas are far from new, hearing them articulated so clearly by the head of the IMF is startling—and for me very welcome.
Much of the climate policy debate has focused on how to use pricing mechanisms—carbon taxes or cap-and-trade schemes—to create incentives for rapid cuts in emissions of CO2 and other greenhouse gases. Until now the IMF has been largely silent on the issue, despite the clear links to tax policy and fiscal balance issues at the heart of its mandate.
The specific actions that Lagarde announced—policy advice on carbon pricing and research on better measures of economic well-being—are solidly within the IMF’s remit.
Lagarde, who said she would be attending the Rio+20 Earth Summit in Brazil later this month, announced that the IMF would provide research and analytic support in three areas crucial to progress in sustainable development: carbon pricing, reductions in fossil fuel subsidies, and green national accounting, that is, development of new measures of economic progress that take into account environmental costs and benefits not included in Gross Domestic Product (GDP).
“Getting the prices right means using fiscal policy to make sure that the harm we do is reflected in the prices we pay. I am thinking about environmental taxes or emissions trading systems under which governments issue—and preferably sell—pollution rights,” she said. “It is basically a variation of the old mantra: you break it, you buy it.”
“This kind of environmentally-sensitive fiscal policy has two distinct advantages,” she said.
“First, it is the best and most comprehensive route to reducing environmental damage…Second, in these difficult budgetary times, countries need revenue and these kinds of tax or tax-like instruments can deliver.”
In the United States, for example, a carbon tax of $25 per ton would translate into an additional 22 cents per gallon of gas and could bring in about 1 percent of GDP, or more than $1 trillion over a decade, she said.
Perhaps conscious that some would question the IMF’s increased attention to environmental and social issues, Lagarde was careful to frame these activities within the fund’s traditional responsibilities for helping to ensure global economic stability and growth, adding that she was not attempting to turn the IMF into an environmental or labor organization.
CGD president Nancy Birdsall, who hosted the speech and led a discussion with the audience, warmly welcomed Lagarde’s remarks and the announcement of IMF analytical and research support for policies to address climate change and other environmental and social issues.
“What you have said is very important,” Birdsall said. “And it’s important that you, as the head of the IMF, have said it.”
Birdsall added that stepped-up the IMF participation in development and use of new measures of economic well-being, an area where the OECD has already done significant work, could have far-reaching effects in improving policy in ways that would especially benefit poor people in developing countries.
Michael Elliott, president and CEO of ONE, the anti-poverty advocacy group, also welcomed the attention to sustainable development, particularly given the demands of the crisis in Europe.
"With all the demands on her time – and the stresses on the global economy – it's wonderfully encouraging that Mme. Lagarde should signal the importance of sustainable development. All those of us who care about development should be cheered to know that under Christine Lagarde's leadership the IMF is a real partner."
CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.