IMF Staff Outlines Climate Change Financing Idea

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...