by David Lansley, World Vision
Money is central to meeting the climate challenge. The centrepiece of global funding for climate change mitigation and adaptation is the Green Climate Fund (GCF). It is intended that, by 2020, the GCF will have the major share of the $US100 billion agreed to at COP16 last year. This may well not be enough, but ensuring any money gets into the GCF’s coffers (or even getting the GCF up and running) is a key issue at Durban. A realistic survey of the global economy now and in coming years indicates that sufficient and reliable climate funding will have to come from a mix of sources, and that new sources outside traditional national budget revenues will need to play a significant part.
Different This Time
Why can’t we rely on rich country governments to provide the necessary funds? One reason is the nature of the problem itself. As American political scientists Robert Keohane and Karl Raustiala have noted: ‘Since maintenance of a stable climate is a public good, both theory and history suggest it will be undersupplied.’ So even if countries commit to provide funding, it may not eventuate.
Failure to deliver on funding pledges is not new, but it is a particularly acute problem at the moment. The marked deterioration in the budgetary position of many developed countries has increased the risk that promised finance will be slow to appear, or may not be delivered at all.
Estimates by the OECD of the general government financial position for the 15 largest Development Assistance Committee (DAC) countries show only three are in surplus; five countries have deficits over 6% of GDP. Two of the most financially stressed countries in Europe, Ireland and Iceland, have made big cuts in their net official development assistance (ODA) compared to pre-financial crisis levels. So it is going to be hard for a range of developed countries to find substantial extra finance from their budgets beyond the Fast Start period.
A second problem is the long term structural forces complicating the fiscal outlook. In the past it might have been expected that, after a couple of years, the economic pendulum would swing back towards reasonable economic growth, and the current budgetary pressures would ease considerably. But a return to growth is unlikely to solve the problem this time. The reason is debt. It is well known that the debt levels of some of the major western economies are high. Recent work by economists at the Bank for International Settlements put this into sharper perspective. They found that government debt over about 85% of GDP becomes a drain on economic growth. In 2010, 6 of the 15 largest DAC ODA donor countries were over the 85% threshold, as were another four European DAC members. On top of this, some major developed countries have extremely large unfunded pension and health care liabilities. The combination of high debt levels, large unfunded liabilities, and in some countries rapidly aging populations, will place considerable pressure on public finances for years to come.
In short, then, national budgets cannot be counted on as a reliable source for the full amount of climate finance needed to avoid - and adapt to - dangerous climate change. We need to find new sources of finance that are capable of generating substantial revenue on a sustained basis, and are separate from the budgets of individual countries.
Fortunately, there are several good options. The two most commonly discussed are a tax on the fuel used by international shipping and aviation, commonly referred to as bunkers, and a tax on financial transactions. Unlike a financial transactions tax, bunkers are on the table at Durban.
Putting a carbon price on shipping bunkers is particularly attractive for a number of reasons. Research commissioned by Oxfam and the WWF concluded that a carbon price of $US25 a tonne would raise $US25 billion by 2020, or 25% of the $US100 billion. Not all the $25 billion would be available for the GCF, as developing countries would need to be compensated for higher import prices. But even 60% of $US25 billion is a significant contribution. A carbon price on bunkers has the added advantage of reducing the significant carbon emissions and other pollution from international transport, particularly shipping. The Oxfam/WWF research estimated that international shipping accounts for around 3% of global emissions, about the same as Germany. There is also the advantage that existing international institutions – the International Maritime Organisation and the International Civil Aviation Authority – are capable of monitoring and collecting the revenue. Revenue from bunkers meets the goal of being new and additional to ODA.
The way ahead
The clear implication is that funding to pay for global climate change mitigation and adaptation will need to be from a portfolio of sources. Research commissioned by World Vision Australia, the Australian Conservation Foundation, and the Climate Institute provides an example of what this might look like in practice. Based on a 2020 contribution of 2.4% of the $100 billion goal ($US2.4 billion), Australia could meet its international climate finance obligation through some mix of:
• a share of government revenue from carbon pricing ($US0.1 to 0.8 billion)
• a currency transaction tax ($US1billion)
• a carbon levy on shipping and aviation bunker fuels ($US0.2 to 0.5 billion)
• direct budget contributions from reductions in fossil fuel levies ($US3 billion plus), a share of resources taxes, and a small share of the existing aid budget, reflecting the overlap between existing aid and climate adaptation programming.
On top of this, there would be private sector contributions via capital flows and carbon market finance.
Because of the size of the task and the unusual fiscal position of many developed economies, adequate climate funding will need new sources of revenue.
Both a carbon price on bunkers and a tax on financial transactions (foreign exchange or more broadly defined) needs an international agreement to make them effective, and bunkers negotiations at Durban are moving slowly, not least because they have been linked with agriculture. But both the potential of some new sources to generate significant revenue, and the serious limits on developed countries to finance all the necessary climate funding internally, mean that innovative finance will inevitably play a significant role in the future.
Why can’t we rely on rich country governments to provide the necessary funds? One reason is the nature of the problem itself. As American political scientists Robert Keohane and Karl Raustiala have noted: ‘Since maintenance of a stable climate is a public good, both theory and history suggest it will be undersupplied.’ So even if countries commit to provide funding, it may not eventuate.Failure to deliver on funding pledges is not new, but it is a particularly acute problem at the moment. The marked deterioration in the budgetary position of many developed countries has increased the risk that promised finance will be slow to appear, or may not be delivered at all.
Estimates by the OECD of the general government financial position for the 15 largest Development Assistance Committee (DAC) countries show only three are in surplus; five countries have deficits over 6% of GDP. Two of the most financially stressed countries in Europe, Ireland and Iceland, have made big cuts in their net official development assistance (ODA) compared to pre-financial crisis levels. So it is going to be hard for a range of developed countries to find substantial extra finance from their budgets beyond the Fast Start period.
A second problem is the long term structural forces complicating the fiscal outlook. In the past it might have been expected that, after a couple of years, the economic pendulum would swing back towards reasonable economic growth, and the current budgetary pressures would ease considerably. But a return to growth is unlikely to solve the problem this time. The reason is debt. It is well known that the debt levels of some of the major western economies are high. Recent work by economists at the Bank for International Settlements put this into sharper perspective. They found that government debt over about 85% of GDP becomes a drain on economic growth. In 2010, 6 of the 15 largest DAC ODA donor countries were over the 85% threshold, as were another four European DAC members. On top of this, some major developed countries have extremely large unfunded pension and health care liabilities. The combination of high debt levels, large unfunded liabilities, and in some countries rapidly aging populations, will place considerable pressure on public finances for years to come.
In short, then, national budgets cannot be counted on as a reliable source for the full amount of climate finance needed to avoid - and adapt to - dangerous climate change. We need to find new sources of finance that are capable of generating substantial revenue on a sustained basis, and are separate from the budgets of individual countries.
Fortunately, there are several good options. The two most commonly discussed are a tax on the fuel used by international shipping and aviation, commonly referred to as bunkers, and a tax on financial transactions. Unlike a financial transactions tax, bunkers are on the table at Durban.
Putting a carbon price on shipping bunkers is particularly attractive for a number of reasons. Research commissioned by Oxfam and the WWF concluded that a carbon price of $US25 a tonne would raise $US25 billion by 2020, or 25% of the $US100 billion. Not all the $25 billion would be available for the GCF, as developing countries would need to be compensated for higher import prices. But even 60% of $US25 billion is a significant contribution. A carbon price on bunkers has the added advantage of reducing the significant carbon emissions and other pollution from international transport, particularly shipping. The Oxfam/WWF research estimated that international shipping accounts for around 3% of global emissions, about the same as Germany. There is also the advantage that existing international institutions – the International Maritime Organisation and the International Civil Aviation Authority – are capable of monitoring and collecting the revenue. Revenue from bunkers meets the goal of being new and additional to ODA.
The way ahead
The clear implication is that funding to pay for global climate change mitigation and adaptation will need to be from a portfolio of sources. Research commissioned by World Vision Australia, the Australian Conservation Foundation, and the Climate Institute provides an example of what this might look like in practice. Based on a 2020 contribution of 2.4% of the $100 billion goal ($US2.4 billion), Australia could meet its international climate finance obligation through some mix of:
• a share of government revenue from carbon pricing ($US0.1 to 0.8 billion)
• a currency transaction tax ($US1billion)
• a carbon levy on shipping and aviation bunker fuels ($US0.2 to 0.5 billion)
• direct budget contributions from reductions in fossil fuel levies ($US3 billion plus), a share of resources taxes, and a small share of the existing aid budget, reflecting the overlap between existing aid and climate adaptation programming.
On top of this, there would be private sector contributions via capital flows and carbon market finance.
Because of the size of the task and the unusual fiscal position of many developed economies, adequate climate funding will need new sources of revenue.
Both a carbon price on bunkers and a tax on financial transactions (foreign exchange or more broadly defined) needs an international agreement to make them effective, and bunkers negotiations at Durban are moving slowly, not least because they have been linked with agriculture. But both the potential of some new sources to generate significant revenue, and the serious limits on developed countries to finance all the necessary climate funding internally, mean that innovative finance will inevitably play a significant role in the future.
Courtesy of the Stakeholder Forum
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