International Monetary Fund (IMF) Reaches Out on Climate Finance
Last week the International Monetary Fund reached out on the issue of raising the $100bn per annum by 2020 needed to address climate change (both adaptation and mitigation) which was mooted in the Copenhagen Accord, through the publication of a staff position note ‘Financing the Response to Climate Change’.
The proposal, discussed and rejected by the Executive Board, floats the idea of a ‘Green Fund’ through a ‘unified resource mobilisation framework” and agreed capacity and contribution mechanisms.
The idea is for developed countries to contribute the equivalent of equity, possibly including the provision of Special Drawing Rights (SDRs) – the reserve currency of the IMF for e.g. economic stabilisation activities in order to further mobilise resources through green bond issuance. Burden-sharing would be defined by existing IMF contribution quotas, with much investment coming in the form of grants.
It goes on to propose channelling investment through existing or proposed funds – and goes to some pain to emphasise that the paper is meant as a means to put ideas forward only – for the purposes of the discussions now underway as a result of Copenhagen and the formation of the United Nations High Level Advisory Group on Climate Change Financing – not to be taken to mean an ambition for the IMF to create, finance, or manage any such green fund.
Interestingly, the report assumes that climate adaptation investment must consist of grants and subsidies rather than loans, in the assumption that no return will be forthcoming. This view is in contrast to that evident in the work of others including a global risk network paper lauched in the lead-up to the World Economic Forum (WEF) in Davos in Janaury this year, which I discuss here.
The cornerstone of the mechanics of fund inception as proposed by the paper is the commitment by contributors of the $176bn of new Special Drawing Rights issued in 2009 – thus configured as a reserve asset transfer, rather than having ‘up-front’ budgetary implications. The report recognises that the scale and immediacy of the funding requirement makes the task difficult for the substantial pledges required to be forthcoming, so this fund asset reserve as the basis represents an elegant solution to a substantial part of the problem. It estimates an initial equity endowment requirement of $120bn – which contributors would need to be able to encash.
There is discussion, however, of the potential requirement for constitutional reasons of any given Government to buy those SDRs from the national Central Bank in order to commit them – thus not necessarily dispelling the national budgetary accounting problems. More thoughts on the constitutional and national accounting implications for Australia would be welcome.
The green fund would then issue $1 trillion in SDR asset-backed bonds over 30 years, as well as gather grant contributions.
In that the SDRs act as equity capital reserves, and are not on-leant, the proposal differs most from other such proposals. Among a number of critiques the paper identifies, this aspect and relatively low exposure to default is reassuring and novel.
For now, the paper will remain an academic curiousity. It recognises the political bravery and challenges involved in enacting such a proposal. With luck, however, it will spur others on to imagine and achieve what is required.