Ongoing conflict in the Middle East has prompted a renewed focus on energy security, leading many countries to seek domestic sources of supply. At the same time, the declining cost of renewables and batteries often makes clean energy the most economical choice. Together, these factors promise to accelerate a global shift away from fossil fuels, presenting economic management challenges and opportunities for country authorities.
The IMF is well-positioned to use existing tools and processes to assess transition scenarios and potential impacts on a country’s balance of payments, fiscal accounts, and domestic and financial stability. Where energy transition is deemed macro-critical, the IMF should prioritize its coverage in bilateral surveillance and provide member countries with much-needed analytical support and policy advice, working with partner institutions. Failing to do so would increase the macroeconomic and financial risks associated with a disorderly transition.
As the IMF nears completion of the 2026 Comprehensive Surveillance Review, a key question will be the degree to which climate-related considerations – encompassing climate adaptation, mitigation, and transition management – are deemed macro-critical and how they are covered in bilateral surveillance.
While there is general agreement on the need to cover adaptation in response to climate change, notably for the most vulnerable countries, coverage of mitigation and transition pathways to lower emissions has been more contentious.
Yet as a forward-looking institution, the Fund should be equipped to provide analytical support and candid policy advice to IMF members on the macroeconomic and financial implications of the accelerating the energy transition.
The energy transition will impact various aspects of the macroeconomic outlook in most, if not all, countries:
Balance of payments: The energy transition will impact trade flows for fossil fuel exporters and importers, producers of clean tech and their supply chains, as well as international investment flows.
Fiscal accounts and debt sustainability: Energy transition will have fiscal impacts on nearly all countries, depending on the structure of the economy and policy choices related to subsidization and taxation of both fossil fuels and clean technology.
Monetary policy: Both the policies to promote energy transition and the transition itself can affect prices and output, while the transition to renewable technologies and other domestic sources of energy has the potential to reduce an economy’s exposure to volatile fossil fuel prices.
Financial stability: Absent adequate preparation, financial stability risks stemming from the transition to a lower-carbon economy could include the possible revaluations of financial firms’ assets and liabilities, described as a so-called “Climate Minsky Moment”.
Strengthening IMF bilateral surveillance to better incorporate the macro-critical aspects of energy transition considerations does not require a radical departure from current IMF practice. In fact, many Article IV reports already cover certain macro-critical impacts of energy and other sectoral transitions utilizing in-house models. However, coverage appears to depend, in part, on the authorities’ willingness to engage on climate policy as well as an assessment of actual risks.
A more systematic and standardized approach to assessing transition scenarios, commodity volumes, and price assumptions would improve the country-specific management of associated macroeconomic and financial stability risks. Building on existing tools, the Fund can quantify the impact of transition scenarios, advance the assessment of macro-criticality, and provide much-needed country-specific policy advice.
In an interconnected world, where risks transmit through supply chains and financial systems from one country and region to another, this advice will better equip country authorities for an orderly transition, thereby reducing the risk that countries most vulnerable to transition risks might also be the least prepared.
