IMF: Global debt escalation, diminished growth impeding Climate Change mitigation efforts

The October 2023 IMF Fiscal Monitor underscores a troubling trajectory in which nations worldwide grapple with surging debt-to-GDP ratios, exacerbated by rising interest rates and muted growth prospects. The prognosis reveals an annual increase of one percentage point in debt-to-GDP ratios for the 2023-2028 period, exceeding pre-pandemic projections. These fiscal headwinds, in the shadow of climate change urgency, pose a formidable challenge.

As several economies intensify efforts to combat emissions, the reliance on spending-intensive measures, including boosted public investment and renewable energy subsidies, is notable. These emission-reduction policies are laudable, yet they often entail substantial fiscal burdens. Policymakers face a pivotal dilemma, contemplating the intersection of fiscal prudence, environmental targets, and global warming consequences.

The use of carbon pricing emerges as a crucial balancing act. This cost-effective tool promises emission reduction alongside revenue generation to mitigate the debt burden. However, carbon pricing is often met with resistance, morphing the challenge into a complex trilemma, interweaving climate goals, fiscal sustainability, and political feasibility.

Amid these challenges, emerging markets and developing economies face a distinct conundrum as they wrestle with fiscal constraints while endeavoring to address climate change. These nations grapple with the imperative to align their growth and development aspirations with climate adaptation and Sustainable Development Goals. Furthermore, limited access to low-carbon technologies compounds their difficulties, despite the potential to realize substantial emissions reductions by 2030 through existing technology. Fossil fuel-producing countries also confront uncertainty as the world advances toward net zero emissions, with significant repercussions for their finances and economic diversification.

Source: Norvanreports