SDRs to Jump-Start a Green Fund: One Way to Make This Work

As Nancy Birdsall wrote in a recent blog posting, an IMF Staff Position Note issued on March 25 offers valuable ideas for leveraging IMF Special Drawing Rights (SDRs, an international reserve asset and the IMF unit of account) to begin raising the hundreds of billions of dollars needed to respond to the looming challenge of runaway climate change.Here is the basic idea:

• Developed countries (and developing countries, if they wish) contribute their 2009 SDR allocations to capitalize a $120 billion Green Fund.
• Using these SDRs as an initial capital base, the Green Fund issues Green Bonds, which could raise $40 billion dollars per year by 2020. Financing for climate projects—emissions reductions and adaptation—would come from these bonds and from future subsidies to the fund from developed countries, in the range of $60 billion per year by 2020.
• The Green Fund would be disbursed through existing climate funds at the multilateral development banks (MDBs) and new funds agreed at Copenhagen. It would finance adaptation (grants) and emissions reduction (loans, with more concessional terms for poorer borrowers) in developing countries.

What is the big idea, what are its limitations?The big idea of the Green Fund is that the 2009 SDRs are a resource for climate finance that developed countries can make available now, without budgeting new commitments in the current tough fiscal environment.The limitation of the proposal is that it only capitalizes the Green Fund, and does not address the need for developed countries to provide regular subsidies ($10 billion per year now, $60 billion per year by 2020). Subsidies are needed because the Green Fund would have a substantial grant and concessional window. Raising contributions may become easier once the economic outlook improves and unemployment is down. But perhaps not: recovery would certainly be followed by austerity programs in developed countries. Still, the authors of the IMF Staff Position Note are right that capitalizing a Green Fund to the tune of $120 billion would at least create a substantial pre-commitment.Although the proposal reportedly faced considerable opposition at an informal meeting of the IMF board last month, it is one of the few fresh ideas out there for quickly raising sums for climate action at the scale we need. As Nancy argues, the initial response of IMF members is not reason to take this idea off the table! Rather, now is the time to step up debate on the idea, and start thinking about how to make it work.Historical Emissions, Not IMF Quota, As Basis for Green Fund ContributionsA core idea of the staff note is to propose that IMF quotas should be used as the key in allocating how much each country should contribute. This could offer a quick solution to a problem that has remained intractable, and which Copenhagen has done nothing to resolve.However, IMF quotas are not proportional to current or cumulative historical emissions. They are proportional to GDP, which is of course correlated with emissions, but also, for instance, to openness of the economy – and it makes no sense to ask that more open economies fund a larger share of the climate bill. The chart below casts a glance at how, for the large developed-country emitters that would provide most of the capital, IMF quota shares relate to emission shares. Clearly, everyone in the upper right quadrant might have reason to feel they are paying more than their share – everyone in the lower left quadrant would get a ‘sweetheart deal’…To avoid this, it would make sense to tweak the formula. For instance, one could ask developed countries to contribute to the Green Fund’s capital according to their share in cumulative emissions. (Replenishments could then be based on shares in current emissions flows – with a heavy discount for less-wealthy countries.) The catch is that, while for most countries, SDR allocations more than cover this investment, this is not the case for the United States and most transition economies. (See Table 1.)This will make fundraising somewhat harder. But the shortfall if all others pay their shares would be only about $14 billion out of a $120 billion volume. Could this be made up by voluntary contributions from large emerging market-economies? What might induce them to do that? How about higher vote shares in the decisions about the use of the new fund?

Table 1. Allocating capital investment by cumulative emissions (top 10 developed-country emitters)
	Share of cumulative Annex-1 emissions (%)	Required capital contribution for 120bn fund (bn 2009 US$)	2009 SDR allocation (bn 2009 US$)	Capital investment required beyond SDR (bn 2009 US$)
United States	39.3%	47.1	44.2	2.9
Russia	11.1%	13.3	6.2	7.1
Germany	9.2%	11.1	15.3	..
United Kingdom	7.1%	8.6	11.3	..
Japan	5.3%	6.4	16.4	..
France	3.6%	4.3	11.3	..
Ukraine	3.0%	3.6	1.4	2.1
Canada	3.0%	3.6	6.7	..
Poland	2.6%	3.1	1.8	1.3
Italy	2.2%	2.7	8.3	..