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The IMF Needs to Mitigate Climate Transition Risk

The potential of countries' climate policies to damage other countries' economies has not received as much attention as it deserves. Without proper international coordination, well-intended measures in major economies could further widen the income and welfare gap between rich and poor countries.

BEIJING – The latest scientific assessment by the Intergovernmental Panel on Climate Change makes it abundantly clear that the costs of inaction on global warming are rising rapidly and will disproportionately fall on poorer countries that bear no responsibility for causing the problem. But what is often overlooked is that climate action itself may also have unintended negative effects in the developing world.

Scholars and central bankers usually refer to two types of climate-related financial risk: “physical risks” and “transition risks.” Whereas physical risk is a result of increases in emissions concentration, transition risks can emerge from technological shocks and from the introduction of climate policies and regulations in key economies.

Between 1850 and 1990, the United States and Europe accounted for 75% of cumulative carbon dioxide emissions. Today, they contribute about 50%, whereas China, India, and other emerging economies account for a growing share. Given this history, the US and Europe must act boldly to address the climate problem, charting a path for the world’s fast-growing emitters to follow.

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