Briefings, Reports

The centrality of ministers of finance in a changing climate

Finance functions of a government

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White puzzle - magnifying glass over one missing piece representing a changing climate.
White puzzle with magnifying glass over one missing piece Finance ministries are the missing piece of the puzzle in a changing climate. Image by Sezeryadigar via Unsplash.

The COVID crisis has reminded us of the power and responsibility of finance ministries. Ultimately, those who are responsible for the government’s central finance functions are central to both current and future crisis response, including from a changing climate.

As well as shaping the national economy and frequently setting the boundaries for what other ministries can do, finance ministries are influential in shaping the global financial architecture, macroeconomic norms and regulation through their positions within the networks of global economic leadership, including as shareholders of the IMF and MDBs.

As the threat of non-financial shocks grows – with climate change a key driver – finance ministries will increasingly have to assess, plan for, and respond to such shocks. However, to date, finance ministries have yet to fully internalise how climate change will reshape the tools they can deploy and the economies they will have to manage. Not only will this have implications for their mandate to protect public finances and ensure the nation’s prosperity, but ultimately will also require political leadership to mediate the impacts of climate change and the transition – leadership that can ultimately only be addressed by the Ministers of Finance themselves.

As the threat of non-financial shocks grows – with climate change a key driver – finance ministries will increasingly have to assess, plan for, and respond to such shocks.

Whilst finance ministries are recognising the threats posed by climate change and embarking on certain climate initiatives; they are yet to take decisive action. There are four main impediments to finance ministries effectively preparing themselves and the economies they oversee for the threat of climate change.

  1. A reluctance to challenge orthodoxy around economic activity being directed by the market is compounded by the failure of economic models to adequately model climate change impacts.
  2. Even where the need for action is recognised, there is reluctance for active intervention in economic activity at the scale required and over a long-term time horizon.
  3. Finance ministries are unused to handling challenges of the level of complexity and which cut across all government departments as that posed by climate change.
  4. Finance ministries do not have the specialists required to give them capacity to understand the effects of climate change and tools to reduce these risks and mitigate their impacts.

Despite these challenges, finance ministries are well-placed to act as of today. Each crisis forces innovation, and COVID has forced unorthodox responses whilst emphasising the economic impact of non-financial risks. There are four critical areas for action: public investment management, taxation policy, government budgeting and fiscal planning. Each of these areas will be impacted by climate, but at the same time have the potential to both mitigate climate change and build resilience to its impact.

There are four critical areas for action: public investment management, taxation policy, government budgeting and fiscal planning.

This report provides an overview of how climate will impact the government’s central finance functions and highlights some of the potential levers for action that are available. This is not only a call to action for finance ministries, but an initial overview of how the tools available to them need to be upgraded, and how the institutions that they have influence over and the networks that they are part of should position themselves at the centre of the climate debate and drive improved economic management as the challenges they face evolve.

Read the report in full.

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