It is now generally agreed that 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 rain forests, 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 colors their attitudes. It looks like they will be able to cobble together a “fast-start” fund of US$10 billion 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 laboring 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 IMF. Spending it would not add to any country’s fiscal deficit. All they need to do is to tap into it.
In September, the IMF distributed to its members US$283 billion in Special Drawing Rights (SDRs), an arcane financial instrument but one that essentially constitutes 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 percent.
Of the US$283 billion in recently distributed SDRs, more than US$150 billion 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 US$10 billion a year — band together and lend US$100 billion 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 US$2 billion in 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 100 million ounces — and it is on the books at historical cost. Thus, at current market prices, it is worth more than US$100 billion 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.