How to finance a climate change fund

Money for a vital 'green fund' in the developing world could come from a loan of IMF special drawing rights

George Soros
guardian.co.uk, Thursday 10 December 2009 13.00 GMT
It is now generally agreed that the developed countries will have to make a substantial financial contribution to enable the developing world to deal with climate change. Funds are needed to invest in new low-carbon energy sources, reforestation and protection of rainforests, land-use changes, and adaptation and mitigation. But there is no similar agreement on where the money will come from.
The developed countries are reluctant to make additional financial commitments. They have just experienced a significant jump in their national debts, and they still need to stimulate their domestic economies. This colours their attitudes. It looks like they will be able to cobble together a "fast-start" fund of $10bn a year for the next few years, but more does not fit into their national budgets. This is unlikely to satisfy the developing countries.
I believe that this amount could be at least doubled and assured for a longer time span. Developed countries' governments are labouring under the misapprehension that funding must come from their national budgets. But that is not the case. They have the money already. It is lying idle in their reserve accounts at the International Monetary Fund (IMF). Spending it would not add to any country's fiscal deficit. All they need to do is to tap into it.
In September 2009, the IMF distributed to its members $283bn worth of special drawing rights (SDRs), arcane financial instruments that essentially constitute additional foreign exchange. They can be used only by converting them into one of four currencies, at which point they begin to carry interest at those currencies' combined treasury bill rate. At present, the interest rate is less than 0.5%.
Of the $283bn worth of recently distributed SDRs, more than $150bn went to the 15 largest developed economies. These SDRs will sit largely untouched in the reserve accounts of these countries, which don't really need any additional reserves.
I propose that the developed countries – in addition to establishing a fast-start fund of $10bn a year – band together and lend $100bn worth of these SDRs for 25 years to a special green fund serving the developing world. The fund would jump-start forestry, land use, and agricultural projects – areas that offer the greatest scope for reducing or mitigating carbon emissions, and that could produce substantial returns from carbon markets.
The returns such projects could generate go beyond addressing carbon emissions. Returns from land-use projects, for example, could also include the potential to create more sustainable rural livelihoods, enable higher and more resilient agricultural yields, and generate rural employment.
This is a simple and practical idea, and there is a precedent for it. The UK and France each recently lent $2bn worth of SDRs to a special fund at the IMF to support concessionary lending to the poorest countries. At that point, the IMF assumed responsibility for the principal and interest on the SDRs. The same could be done in this case.
I further propose that member countries agree to use the IMF's gold reserves to guarantee the interest payments and repayment of the principal. The IMF owns a lot of gold – more than 100m ounces – and it is on the books at historical cost. Thus, at current market prices, it is worth more than $100bn over its book value. It has already been designated to be used for the benefit of the least developed countries. The proposed green fund would meet this requirement.
This means that the developed countries that lend the SDRs would incur no interest expense and no responsibility for repayment. There are some serious technical problems involved in offsetting the interest income against the interest expense, particularly in the United States, but the net effect would be a wash. These technical difficulties stood in the way of previous attempts to put the SDRs to practical use, but they do not apply to the proposed green fund.
There are three powerful arguments in favour of this proposal. First, the green fund could be self-financing or even profitable; very little of the IMF's gold, if any, would actually be used.
Second, the projects will earn a return only if developed countries co-operate in setting up the right type of carbon markets. Establishing a green fund would be an implicit pledge to do so by putting the gold reserves of the IMF at risk.
Finally, this money would be available now, jump-starting carbon-saving projects.
For all these reasons, the developing countries ought to embrace my proposal. The key point is that it is possible to increase substantially the amount available to fight global warming in the developing world by using the existing allocations of SDRs, with interest payments on them guaranteed by the IMF's gold reserves.
All that is lacking is the political will. The mere fact that tapping SDRs requires congressional approval in the US ensures that nothing will happen without public pressure – including pressure from the developing countries. Yet it could make the difference between success and failure in Copenhagen.
• Copyright: Project Syndicate, 2009.