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SDRs to Jump-Start a Green Fund: One Way to Make This Work
April 2, 2010
As Nancy Birdsall wrote in a recent blog posting, an IMF Staff Position Note issued on March 25 offers valuable ideas for leveraging IMF Special Drawing Rights (SDRs, an international reserve asset and the IMF unit of account) to begin raising the hundreds of billions of dollars needed to respond to the looming challenge of runaway climate change.
Here is the basic idea:
- Developed countries (and developing countries, if they wish) contribute their 2009 SDR allocations to capitalize a $120 billion Green Fund.
- Using these SDRs as an initial capital base, the Green Fund issues Green Bonds, which could raise $40 billion dollars per year by 2020. Financing for climate projects—emissions reductions and adaptation—would come from these bonds and from future subsidies to the fund from developed countries, in the range of $60 billion per year by 2020.
- The Green Fund would be disbursed through existing climate funds at the multilateral development banks (MDBs) and new funds agreed at Copenhagen. It would finance adaptation (grants) and emissions reduction (loans, with more concessional terms for poorer borrowers) in developing countries.
What is the big idea, what are its limitations?
The big idea of the Green Fund is that the 2009 SDRs are a resource for climate finance that developed countries can make available now, without budgeting new commitments in the current tough fiscal environment.
The limitation of the proposal is that it only capitalizes the Green Fund, and does not address the need for developed countries to provide regular subsidies ($10 billion per year now, $60 billion per year by 2020). Subsidies are needed because the Green Fund would have a substantial grant and concessional window. Raising contributions may become easier once the economic outlook improves and unemployment is down. But perhaps not: recovery would certainly be followed by austerity programs in developed countries. Still, the authors of the IMF Staff Position Note are right that capitalizing a Green Fund to the tune of $120 billion would at least create a substantial pre-commitment.
Although the proposal reportedly faced considerable opposition at an informal meeting of the IMF board last month, it is one of the few fresh ideas out there for quickly raising sums for climate action at the scale we need. As Nancy argues, the initial response of IMF members is not reason to take this idea off the table! Rather, now is the time to step up debate on the idea, and start thinking about how to make it work.
Historical Emissions, Not IMF Quota, As Basis for Green Fund Contributions
A core idea of the staff note is to propose that IMF quotas should be used as the key in allocating how much each country should contribute. This could offer a quick solution to a problem that has remained intractable, and which Copenhagen has done nothing to resolve.
However, IMF quotas are not proportional to current or cumulative historical emissions. They are proportional to GDP, which is of course correlated with emissions, but also, for instance, to openness of the economy – and it makes no sense to ask that more open economies fund a larger share of the climate bill. The chart below casts a glance at how, for the large developed-country emitters that would provide most of the capital, IMF quota shares relate to emission shares. Clearly, everyone in the upper right quadrant might have reason to feel they are paying more than their share – everyone in the lower left quadrant would get a ‘sweetheart deal’…
To avoid this, it would make sense to tweak the formula. For instance, one could ask developed countries to contribute to the Green Fund’s capital according to their share in cumulative emissions. (Replenishments could then be based on shares in current emissions flows – with a heavy discount for less-wealthy countries.) The catch is that, while for most countries, SDR allocations more than cover this investment, this is not the case for the United States and most transition economies. (See Table 1.)
This will make fundraising somewhat harder. But the shortfall if all others pay their shares would be only about $14 billion out of a $120 billion volume. Could this be made up by voluntary contributions from large emerging market-economies? What might induce them to do that? How about higher vote shares in the decisions about the use of the new fund?
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Table 1. Allocating capital investment by cumulative emissions (top 10 developed-country emitters) |
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Share of cumulative Annex-1 emissions (%) |
Required capital contribution for 120bn fund (bn 2009 US$) |
2009 SDR allocation (bn 2009 US$) |
Capital investment required beyond SDR (bn 2009 US$) |
|
| United States |
39.3% |
47.1 |
44.2 |
2.9 |
| Russia |
11.1% |
13.3 |
6.2 |
7.1 |
| Germany |
9.2% |
11.1 |
15.3 |
.. |
| United Kingdom |
7.1% |
8.6 |
11.3 |
.. |
| Japan |
5.3% |
6.4 |
16.4 |
.. |
| France |
3.6% |
4.3 |
11.3 |
.. |
| Ukraine |
3.0% |
3.6 |
1.4 |
2.1 |
| Canada |
3.0% |
3.6 |
6.7 |
.. |
| Poland |
2.6% |
3.1 |
1.8 |
1.3 |
| Italy |
2.2% |
2.7 |
8.3 |
.. |
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One Response to “SDRs to Jump-Start a Green Fund: One Way to Make This Work”
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April 3rd, 2010 at 12:08 am
One way world governments, companies and publics may be encouraged to contribute to a Green Fund and buy Green bonds is to make greening the entire 3rd World tropics a highly profitable activity. At present the Carbon Credit scheme and still-expensive and non-commercial green technologies have little effect versus an estimated 19 billion tons of greenhouse gases emitted by world industries each year. However new tropics-wide farms and forests (agribusinesses) can absorb millions of tons of such gases every second while generating trillion-dollar profits for Green Fund contributors. For instance, an ethanol distillery with sweet sorghum plantation and contract-growing for small farms costs just $15 million yet profits at 80% of sales! Other agribusinesses can deliver above market dividends and interest: hundred-hectare managed forests, forest ranches, multi-crop farms, reforested mini-dam hydropower chains, mangrove aquaculture of shrimps and crabs, forest resorts (coastal, upland, waterways), etc. Once initial Green Fund agribusiness models show good profit, 3rd World employees in their billions will develop the desire to replicate them all. The $120 billion Green Fund plus 3rd World funding laws should then grant enterprise loans to thousand-employee groups that set up agribusiness and related joint ventures with 1st World suppliers of farm machinery and processing equipment. Joint ventures triple local capital and jack up tax incomes. They also create massive markets for 1st World production. Such benefits should give rise to new financing laws from world governments, plus trillion-dollar corporate investments that perpetuate the green industries, thereby creating millions of jobs each year for 3rd World poor, for all eternity. ’Green profitability’ as world culture should also hasten development of currently non-commercial ‘carbon-killing’ technologies that help end global warming and freshen up the air we breathe.