Financing the Future

A Dispatch from Copenhagen

More than 100 heads of state are just days away from gathering in Copenhagen at the U.N. climate change negotiations, yet the outlines of an agreement are still being defined. Negotiations are moving forward on many fronts: setting targets and timelines for emission reductions; bringing major developing countries such as China, India, and Brazil into agreements to reduce the intensity of their emissions; and establishing an architecture for the next phase of a global agreement. But one issue could emerge as a major opportunity for the United States to show leadership and create new space for needed solutions: identifying and committing resources to finance a global transition to a low-carbon economy.

Finance may very well hold the key to restoring American moral and strategic leadership in the global warming debate. This issue presents challenges to President Obama and his negotiators as they must navigate between rejoining the community of nations in climate talks and building the consensus needed in Congress to support any agreement on U.S. emissions reductions. But in Copenhagen a path forward is emerging for, if not a Marshall Plan for global warming, at least the beginnings of a serious investment program to build a better future. If the president seizes this opening, it is possible that he could finally recapture the initiative in the negotiations and the imagination of the American people.

Conventional wisdom says that a program to invest in developing countries should be a nonstarter for domestic U.S. politics during hard economic times. But creative strategies to capitalize a fund for financing clean energy and adaptation can ensure that these investments do not detract from domestic priorities, and help create new global markets for clean technology. And a meaningful commitment for clean-energy finance may also be the simplest way for the U.S. government to honor international obligations.

Here are the contours of a potential agreement on finance. First, resource levels must be on a meaningful scale to meet the challenge at hand. Second, the administration must identify a clear source of funding to ensure that real investments are made. Third, governments must reach agreement on institutions for overseeing the disposition of the funds. And lastly, the international community must establish effective and inclusive governance of any development fund.

The scale of investment

There is a wide gulf in negotiations between the resources that developed countries have put on the table, and developing countries’ needs and expectations. The United States, Europe, and Japan have discussed making a combined commitment of about $10 billion a year over the next three years in climate-related development assistance. This is significant money, but it is being offered against a backdrop of an estimated $300 billion of real costs that will be needed annually by 2020 to reduce carbon emissions and adapt to the impacts of global warming, according to U.N. Climate Chief Yvo de Boor. The response of the G-77 group of developing nations has included a call by Sudanese Ambassador Lumumba Di-Aping for total investments from developed countries of 1 percent of their GDP, or $400 to $500 billion a year.

Closing this gap is of course daunting, but there is a solution. Industrialized nations face constrained budgets and tough economic choices at home over the very short term, which makes substantial new commitments to the developing world a heavy political lift. Yet substantial new investments are indeed going to be needed over the long term. The solution then may be to look to a mid-term time horizon, and for developed nations to lay out a pathway for ramping up their commitment to global public investment in climate solutions over time.

The G-77, for their part, may be able to accept a substantial down payment by 2015, if that clearly puts them on a path to higher investment levels by 2020. A commitment of $25 to $50 billion a year from developed countries by 2015, for example, may be achievable in negotiations today. This falls short of the developing world’s long-term needs, but it could form the foundation of a shared commitment if it is accompanied by a structure that provides greater transparency, certainty, and better stewardship of resources by these countries.

Sources of funding

The United States could reliably offer a number of funding sources to achieve investment at these levels. A first source of funding is the commitments that have already been proposed in House and Senate legislation. The current climate bills designate 7 percent of total carbon price allocations for global development needs 5 percent for forests and land use, and 1 percent each for adaptation and clean technology deployment. These allocations would likely be worth about $5 billion annually. If that supported 20 percent of an international commitment, this could leverage $25 billion in public investment in sustainable international development. This is a significant first installment to put on the table. 

A number of other innovative sources of funds have been introduced in the discussion in recent days. George Soros, for example, has put forward a proposal to use donor nations’ “Special Drawing Rights” or claims on the international reserve assets held by the International Monetary Fund to generate new investment funds quickly while not adding to national budget deficits.Incidentally, this is the same mechanism that was used to create new money internationally to save the banking system.Soros has estimated that the major economies could produce $100 billion in total funds to support sustainable development. Other suggestions in recent days have included revenue from regulation of “bunker fuels” in international aviation and shipping that could generate an additional $25 to $37 billion a year, and a tax on financial transactions that could generate an additional $60 to $100 billion a year in new revenue.

There is a further resource that should be accessed immediately to fund both the transition to clean energy and global warming adaptation: fossil fuel subsidies. President Obama and the other G-20 countries committed in Pittsburgh this September to end subsidies for polluting fossil fuels. If these investments were redirected toward a fund for global clean-energy deployment and adaptation, it could be worth at least $57 billion annually according to a 2004 estimate by Jonathan Pershing, now a lead climate negotiator for the United States.

Institutions and governance

It will be vitally important that these resources are administered in a way that builds developing countries’ long-term engagement as partners, reduces economic and climate vulnerability, and accelerates the macroeconomic shift to a low-carbon economy. The end goal of climate solutions must be to de-link economic growth from the production of carbon. Poverty reduction and broadening economic access should be aggressively advanced, but through investment in clean, low-carbon energy and infrastructure. The institution that administers such a global fund should be a partner in ending the harm to the climate that is caused today by polluting fossil fuel energy. Any institution managing these resources should advance climate solutions across their entire portfolio of investments.

The governance of such a fund should also centrally include the voices of developing countries, and offer transparency, accountability, and direct participation. This is essential for trust and for bringing the two sides closer together in seeking agreement. It will also be helpful to enlist the partnership of developing countries in the management of the fund while moving toward a longer-term solution by 2020.

Every year beyond 2010 that we delay a major assault on global warming, we add another $500 billion per year in costs, according to the International Energy Agency. Action on climate change is good global stewardship, smart policy, and a sound investment strategy. At a moment when reaching an international consensus on institutions and targets poses such great challenges, finding a path forward on finance may become one of the biggest breakthroughs in the current negotiations and one of the most significant drivers of near-term solutions to climate change.