The IMF’s 2023 Climate Resolutions—A Modest Idea for a Quick Win on Methane

Another spring and summer season of international meetings follows yet another dire warning on climate, with action again lagging pledges. We need a “spring cleaning” of global ambition to focus on practical goals that can be achieved this year. Each institution—multilateral and national, public and private—should play its part. And just as at this time of year we are each urged to clear out one drawer at a time, not aim to declutter the whole house at once as this seems too daunting, the IMF should be looking for manageable steps it can take to help tackle the global problem of climate change that otherwise seems intractable. One attractive priority for 2023 is to translate the IMF’s excellent technical advice on mitigating methane emissions into policies governing its interactions with its member countries.

The IMF should take three quick steps— all well within its areas of expertise and responsibility—to nudge countries to stem methane emissions:

• Engage in a major push to provide technical support to countries wanting to discourage, through tax policy, the wasteful venting and flaring of methane; the IMF has made specific proposals, now it must proselytize.
• Call attention to the importance of urgently adapting the policies of every oil- and gas-producing country—especially the largest emitters—through their annual economic consultations.
• Give financial support to countries willing to take the tax and regulatory measures needed to reduce methane emissions.

These steps would build on the extensive technical analysis that the IMF has already developed, exploit its unique position in providing economic advice to all countries in the world, and make the most of its new Resilience and Sustainability Facility (RSF) that extends loans to countries most vulnerable to climate change.

Why the focus on methane?

The world is careering toward higher temperatures, ever more volatile weather, and greater macroeconomic disruption that will adversely affect everyone but especially those most vulnerable—both people and countries. Yet the country commitments to mitigate these trends are inadequate, and what has been committed is inadequately monitored and enforced. The need for urgent action is clear.

Cutting methane emissions is the fastest way to lessen the rate of global warming. This is so even if progress is made on the much-publicized pledges to reduce to “net zero” the release of carbon dioxide and other greenhouse gas (GHG) emissions into the atmosphere. For good reason, some 150 countries have now endorsed the Global Methane Pledge launched at the Glasgow COP26 in November 2021 that aims to reduce methane emissions by 30 percent by 2030—an achievement that could shave some 0.2 degrees Celsius from the projected increase in global warming. Such a contribution would be very significant since it could help prevent the global temperature rise above historic levels—now some 1.1 degrees—from exceeding the 1.5 degrees that is considered the limit to prevent potentially uncontrollable damage to lives and livelihoods. Moreover, the quickest way to achieve the reduction in methane emissions is in the fossil fuel sector that accounts for about a third of methane emissions from human activity, and the way to do so is clear.

In a CGD blog in 2022, Kathryn McPhail and I set out a plan of action that could yield swift results by focusing on methane emissions in the oil and gas sector. The plan requires action by oil-and gas- producing countries to implement IMF advice to levy fees on emissions from the wasteful flaring and venting of natural gas. Technical advice on the regulatory framework is also needed from donors as well as steps to ensure public availability of satellite monitoring data, but—unlike many other mitigation projects—neither new technology nor official financing is required. Moreover, reducing methane emissions has both global and local benefits. Countries get direct and immediate local benefits, such as use of wasted gas for energy access or financial proceeds from gas exports, as well as improved health outcomes. Consequently, the political economy of gas flaring and venting reduction may make it easier to implement than other carbon reduction initiatives. 

What is holding up action?

Little has happened in the past year though the IMF has stepped up by increasing its own capacity, extending its innovative technical work and engaging with others. Meanwhile, the urgency to tackle methane emissions has only grown as emissions continue to increase, including from the global energy sector. And unlike many other crucial initiatives that involve politically difficult trade-offs and long lead times, the current inaction makes absolutely no sense:

• Why, at a time of global energy shortage and supply dislocation made worse by war in Europe, does the world tolerate the waste of 7 percent of global gas production, worth billions of dollars, through unnecessary gas flaring and venting?
• Why, when the goal to slow global warming is failing—with potentially catastrophic consequences—does the world allow the unnecessary emission of methane from oil and gas production that is 80 times as damaging for the atmosphere as carbon dioxide?
• Why, when the goals for global health and food security are under threat, does the world allow the toxic emission of methane and pollutants that are lethal for human health and damaging for agriculture?

The answer lies in policy inertia, and a misalignment of incentives for oil and gas companies that regulatory and fiscal policy can address.

What can the IMF do?

IMF can play a leadership role in instigating change in the following ways:

• The innovative technical advice IMF staff have developed should be proactively offered to all oil- and gas-producing IMF member countries, including the more than 60 countries whose production is significant for the global or local economy. While advocating methane fees as a promising and practical solution to lower emissions, especially if they build off existing business taxes common to extractive industries, IMF staff propose a novel way to overcome the difficulty of levying penalties on emitting companies in the absence of independent measurement of emissions. Given challenges in monitoring emissions, “fees might be levied based on default emission rates with rebates for firms that can show that their own emissions are less than the default.” The default rates could be based, for example, on worst-performing firms to ensure that all firms have incentives to cut their emissions below the default rate. The proposal puts the onus of measurement and verification on the operators instead of the regulators. Operators have the best information on the operational performance of their assets, and the IMF framework guides them to provide objective and transparent reporting. Operators then have incentive to reduce routine gas flaring and venting operations, as these would erode their commercial returns. In addition, the repurposing of waste gas for local use may now become more commercially attractive if fees (based on default emissions rates) are set at the right level.
• The IMF should ensure with immediate effect that it urges, in its regular Article IV consultation with each oil- and gas- producing country, this innovative fiscal policy advice to reduce methane emissions. Since the IMF conducts usually annual consultations with all countries, including the largest methane emitters (several of whom are G20 members), the process for raising this issue is already in place, and the authorities’ response to staff advice can be reported. Moreover, the sharing of authorities’ views and experience may facilitate peer-to-peer contact on best practice.
• Introduction of this fiscal measure should constitute one of the reform measures that would justify access to loans from the IMF’s new RSF, for which all developing country oil- and gas-producers are eligible. Several may apply for financing over the next year. On average each RSF program so far approved has 12 reform measures as conditions, and a reform to introduce methane fees would be a substantive measure, benefiting the country’s resilience, while also contributing to the global good. 

The IMF can and should do more to play a leading role this year to nudge others into action. That would be a worthwhile and manageable “spring cleaning” task for 2023, of benefit to all.

Many thanks to Kathryn McPhail and Mark Plant for helpful comments.