The Russian presidency of the Group of Twenty (G20) has green growth, financing for investment and development for all among its priorities. The question at issue is whether the G20 can advance these three priorities by tackling the complex issue of financing environmental global “public goods,” in particular climate change.
The earth’s atmosphere is a public good — a reservoir for carbon emissions. Use of a public good by one individual does not reduce access by others; no one can be excluded from its exploitation. There is a critical distinction between public and private goods. The marketplace is the most efficient way of producing and distributing goods and services. But markets depend on public goods that they themselves cannot provide. National public goods — property rights, the financial system and personal safety, for example — are provided by modified market mechanisms. National governments raise taxes to provide these public goods. With respect to the earth’s atmosphere, there is no global government to modify the free market system. The result is excessive use. We have a classic “free rider” problem: people continue to use the atmosphere without paying for it, leading to a “tragedy of the commons.” Acting in their own selfish interest, people over-consume, degrading the resource to everyone’s disadvantage.
International climate change negotiations are largely about money. Billions of dollars are needed to reduce future carbon emissions and facilitate adaptation to global warming. While there are extensive negotiations to allocate future greenhouse gas emission “budgets” among countries, equally contentious debates focus on which countries are going to pay how much, and to whom. In 2007, the Secretariat of the United Nations Framework Convention on Climate Change (UNFCCC) analyzed the costs of confronting the challenge. Article 11 of the UNFCCC provides the core framework. It calls for “pre-determined standards and procedures set by the Conference of the Parties through which funding is mobilised and disbursed.”
The developing countries make the indisputable point that the bulk of the existing stock of emissions was caused by developed countries, who now insist that developing countries cannot use the same high-emission road to progress. Developing countries’ wilfully unbending position is that it is the responsibility of developed countries to transfer the money needed to address climate change. They interpret as a pledge Hillary Clinton’s 2009 Copenhagen announcement committing to mobilize US$100 billion per year in climate financing for developing countries by 2020.[1] They should read the fine print. What Clinton actually said was:
And today I’d like to announce that, in the context of a strong accord in which all major economies stand behind meaningful mitigation actions and provide full transparency as to their implementation, the United States is prepared to work with other countries toward a goal of jointly mobilizing $100 billion a year by 2020 to address the climate change needs of developing countries. We expect this funding will come from a wide variety of sources, public and private, bilateral and multilateral, including alternative sources of finance.[2]
First, Clinton set as a precondition that there be “strong accord in which all major economies stand behind meaningful mitigation actions” — this means that all countries accept binding commitments to reduce emissions, not just developed countries. The US position has not changed since the Byrd-Hagel 1997 sense of the Senate resolution, which passed 95 to 0:
(1) the United States should not be a signatory to any protocol to, or other agreement regarding, the United Nations Framework Convention on Climate Change of 1992, at negotiations in Kyoto in December 1997, or thereafter, which would mandate new commitments to limit or reduce greenhouse gas emissions for the Annex I Parties, unless the protocol or other agreement also mandates new specific scheduled commitments to limit or reduce greenhouse gas emissions for Developing Country Parties within the same compliance period.
Second, Clinton did not pledge any government funding at Copenhagen. Funding will come from an unspecified “variety of sources, public and private, bilateral and multilateral, including alternative sources of finance.” Developing countries, non-governmental organizations and most of the media have ignored Clinton’s “expectation.” She did not promise anything; she provided no details on relative shares and no indication of the meaning of “alternative sources of finance.” The record to date to mobilize funding is disappointing, but not unexpected.
There is a long history of proposals for “innovative funding” for global public goods. Economists have long argued in favour of taxing carbon or establishing “cap and trade” schemes (a market for trading permits) that would minimize the costs to the economy of reducing emissions. With a few exceptions, carbon taxes are politically infeasible. Earmarked taxes on foreign exchange or financial transactions, bunker fuel and airline tickets have been proposed. The difficulty is that there are many other competitors who claim the proceeds. For example, a group of countries, led by France, have implemented an “airline solidarity tax” already earmarked for global health. The proceeds go to UNITAID’s International Drug Purchase Facility for AIDS, tuberculosis and malaria.
The current fashion is to focus on “leverage” in a public-private partnership. Can limited government funding be a catalyst for encouraging standards and private funding for “green climate bonds”? The idea is that governments, the World Bank or the International Monetary Fund (IMF) would provide seed capital to underwrite a bond issue. Governments could provide tax incentives. However, it seems unlikely that a green bond market will develop at a large enough scale in time to provide a sufficient solution. It is time to consider something completely different.
The most promising approach in this dismal picture may be an innovative interpretation of the rules of the IMF by the G20. Special Drawing Rights (SDRs) are an international reserve asset created by the IMF. SDRs are a potential claim on the currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for their SDRs from other members. Under the IMF’s Articles of Agreement, SDRs are allocated to member countries in proportion to their “quotas” (shares), providing members with a costless international reserve asset on which interest on the initial allocation is neither earned nor paid. Interest is earned if SDR holdings rise above a member's allocation (interest is earned on the excess). Conversely, interest is paid on the shortfall.
There is considerable skepticism that the IMF would ever spontaneously propose using SDRs for financing climate change or other global public goods. The G20 could lead the way and promote the use of SDRs for this purpose, and encourage the IMF take this approach. If the members holding 85 percent of the IMF’s shares agree, then an allocation designated for climate funds could be agreed on to be consistent with a long-term global need to supplement existing reserve assets. The G20 countries account for over 75 percent of the voting shares, and, if they could reach agreement amongst themselves, would have little difficulty marshalling the necessary support.
SDRs could be “invested” as equity stakes in a climate fund, with an arrangement among shareholders to encash equity stakes[3] if they encountered liquidity needs. Then they could be deemed to be an exchange of reserve assets without an upfront budgetary cost for the contributors. G20 promotion of the innovative application of SDRs may be the least implausible of all the improbable methods to kick-start the financing for climate change.
[2] Hillary Clinton (2009), “Remarks at the United Nations Framework Convention on Climate Change,” Copenhagen, Denmark, December 17, Available at: www.state.gov/secretary/rm/2009a/12/133734.htm.
[3] Hugh Bredenkamp and Catherine Patillo (2010), “Financing the Response to Climate Change,” IMF Staff Position Note, March 25.