Typical street scene in Santa Ana, El Salvador. (Photo: iStock)
IMF Survey: IMF Staff Outlines Climate Change Financing Idea
March 25, 2010
- A "Green Fund" could mobilize $100 billion a year by 2020, in line with Copenhagen Accord
- Idea is meant to contribute to global debate on financing issue
- Scheme could help developing countries speed up climate adaptation/mitigation efforts
A new staff paper released by the IMF suggests the creation of a “Green Fund,” with the capacity to mobilize resources of $100 billion a year by 2020, to help developing countries finance the costs of combating climate change.
Aim is to move the world toward a lower carbon growth model for economic growth (photo: Newscom) .
Combating global warming
The authors of the staff paper, economists Hugh Bredenkamp and Catherine Pattillo, suggest that creation of a multi-billion dollar Green Fund “could facilitate progress toward a binding global agreement on reducing greenhouse gas emissions and allow developing countries to begin scaling up their climate change responses without delay.”
During last year’s climate change conference in Copenhagen, leaders envisaged annual financing for developing countries (from both official and private sources) rising to around $100 billion a year by 2020 in support of strong policy actions by developing countries to mitigate and adapt to climate change and move toward a lower carbon model.
The idea, the authors make clear, is being offered as a contribution toward broader public debate on a vital global issue—the IMF is not itself planning to create, finance, or manage such a Green Fund.
Launching such a scheme would require a major political effort, but “the potential payoff is enormous,” the authors say. It could provide a unified approach to helping developing countries combat climate change, avoiding the alternative—a succession of difficult international negotiations every few years, with uncertain outcomes.
Details of the scheme
In the paper, Financing the Response to Climate Change, published on March 25, the authors provide ideas on how such a scheme could be financed.
Key features of the paper are:
• Goals. To create a mechanism for developed countries to contribute to financing developing countries’ climate change needs by mobilizing resources on a large scale from official funds that could also be used to leverage private financing.
• Equity Capital. The Green Fund would use an initial capital injection by developed countries in the form of reserve assets, which could include Special Drawing Rights (SDRs)—reserve assets created by the IMF. Contributors could agree to scale their equity stakes in proportion to their IMF quota shares, making these the “key” for burden sharing among the contributing countries.
• Bond issuance. Once its capital base is established, the Green Fund could begin issuing highly-rated (and hence, low-cost) “green bonds” that could be sold to private investors as well as official holders—including, for instance, sovereign wealth funds.
• How it would work. The Green Fund would combine the proceeds from the bonds with subsidy resources (see below) and use these combined resources to provide grants for adaptation and loans for mitigation to developing countries (on concessional terms for low-income countries).
• Delivery. Resources mobilized by the Green Fund could be channeled to developing countries through existing climate funds, or via newly created special-purpose disbursement facilities.
• Scale of the scheme. To generate financing on the scale envisaged in Copenhagen, the Fund would need to issue about $1 trillion in bonds over 30 years of operation. Its equity endowment would need to be commensurate with this, to assure green bond holders that their claims are secure. Rough calculations by the authors suggest that an equity endowment of around $120 billion could be sufficient.
• Subsidized funding. Since much of the financing would need to be provided ultimately as grants or highly-concessional loans, the Green Fund would also need to mobilize resources from contributors for subsidies. Governments would likely require new sources of fiscal revenue for this purpose, including from carbon taxes and expanded carbon-trading schemes, which may take time to put in place. In the interim, the Green Fund could cover its subsidy needs from bond proceeds, interest income on its reserve asset capital base, and/or revenues from other innovative international tax schemes.
• Big payoff. The scheme could allow developing countries to begin scaling up their adaptation and mitigation efforts sooner (perhaps years sooner) than might otherwise be possible, to the benefit of the entire world.
Comments on this article should be sent to imfsurvey@imf.org