How to Pay for a Global Climate Deal

The G-20 summit convening in London on April 2 is preparing to
create a quarter trillion dollars of brand new stimulus money to help
poor countries battle the global recession.

World leaders plan to use a little-known form of global currency to
pay the freight, a currency known technically as "Special Drawing
Rights" (SDRs) but often referred to as "paper gold." It's a currency
that can be issued by the International Monetary Fund (IMF), and The Telegraph has reported that the U.S. government is keen on the idea.

Senior figures in the U.S. Treasury have been encouraging the Fund
to issue hundreds of billions of dollars worth [of SDRs] to prevent the
recession from turning into a global depression.

If leaders at the G-20 summit can create "paper gold" to jump-start
the global economy, they can also turn it in a green direction to
jump-start protection of the global climate.

They should put much of paper gold stimulus under discussion into an
international fund, to help developing countries pay for climate
protection. Such an action would remove the greatest stumbling block in
the way of international climate action - the lack of financing to pay
for energy conservation, technology transfer, adaptation, forest
conservation, clean energy, and research and development. It would
allow negotiators to arrive in Copenhagen for climate talks at the end
of the year with the finances in place to negotiate and sign a global
deal.

Without the financing, the chances of success in Copenhagen are
slim. Yves De Boer, the UN's climate chief, left no doubt about that in comments he made this week
criticizing EU finance ministers for putting conditions on financial
help for developing countries, contrary to promises made in Bali in
2007:

I think without clarity on finance from industrialized countries there will be no commitment from developing countries.

"Paper gold" offers a way out of this stalemate - a way to mobilize
resources without either taxing or borrowing. That's why G-20 leaders
are proposing to issue a quarter trillion dollars worth of new SDRs -
and why paper gold can play a crucial role in protecting the climate,
too.

Measures that would fight both global warming and global economic
meltdown simultaneously are being called a "Green New Deal." At the
climate talks in Poznan last December, UN Secretary-General Ban Ki-moon called
a "Global Green New Deal" the best chance for securing a climate
agreement in Copenhagen in late 2009. And in a February op-ed in the Financial Times, Ban together with Al Gore wrote,

What we need is both stimulus and long-term investments that
accomplish two objectives simultaneously with one global economic
policy response - a policy that addresses our urgent and immediate
economic and social needs and that launches a new green global economy.

World leaders convening at the G-20 have the opportunity to do just that.

The SDR Backstory

Countries normally set aside reserves, most often in gold and U.S.
Treasury bills, as insurance to protect their currencies against
speculation, runs, and other forms of economic adversity. If a
country's currency starts to plummet in value, the government can use
the reserves to buy back its own currency and stabilize it.

The mountains of U.S. Treasury bills hoarded by China and Japan, for
example, were purchased in order to protect their currencies against
the kind of runs that devastated national currencies during the
so-called Asian financial crisis of the late 1990s. Global currency
reserves amount to trillions of dollars, and they currently sit idle in
national treasuries.

In 1969, after a string of liquidity crises, the world's major
governments agreed to create SDRs to increase global liquidity. Nobel
laureate and former World Bank chief economist Joseph Stiglitz explains
that SDRs as "a kind of global money ... which countries agree to
accept and exchange for dollars or other hard currencies." If
countries are provided SDRs to add to the gold and foreign currency in
their national reserves, money can be put to use for other purposes
instead of sitting idle - for things like combating global warming.

Several years ago, Stiglitz proposed that SDRs or a new "global
greenback" along similar lines be used to supplement other reserve
currencies. They would be issued for investment in developing countries
and for "global public goods" like environmental projects, health
initiatives, and humanitarian assistance. They would have the added
benefit of checking global deflation and would help countries with
trade deficits avoid ruinous devaluations and runs on their currencies.

Until the current economic crisis, such ideas received little public
attention - indeed, few except international economists even knew SDRs
existed. But since the beginning of 2009, discussion of paper gold has
exploded. George Soros has called for "trillions of dollars" in SDRs to
be issued. And now British Prime Minister Gordon Brown has campaigned
for countries to agree to a new allocation of SDRs at the G-20 meeting
that starts on April 2, and the U.S. seems to be warming to the idea.

These world leaders are well aware of the threat of global warming
and the cost of fighting it - roughly half a trillion dollars a year,
according to the British government's Stern Review on the Economics of
Climate Change. That amounts to about 1 percent of global GDP for the
next three to four decades. So far, however, none of these leaders has
publicly discussed using paper gold to help pay for climate protection.

Green paper gold can finance climate protection

In the same way that economic stimulus measures around the world
have pumped new funds into the green measures, global leaders can
deploy "paper gold" to finance climate protection. It would surely
qualify as a "global public good," as Stiglitz put it, and at the same
time provide a needed economic stimulus.

The creation of paper gold is the international equivalent of
increasing a nation's money supply. It is what economists call
"quantitative easing," and paper gold does it on an international
scale. Former IMF chief economist Simon Johnson explains the current G-20 proposal:

The principle behind it is that everyone would get bonus dollars. The objective is to create a windfall of cash.

As in a stimulus measure applied to a national economy (for example,
America's Recovery and Reinvestment Act of 2009), if the windfall of
cash is used to generate economic activity, then the value created by
the new activity is what pays for the initial spending over time. The
global recession has put millions of people and productive resources
out of service. If they could be mobilized effectively, these vast
unused productive capacities might well be sufficient by themselves to
rebuild the global economy on a low-carbon basis before it is too late.

Some experts warn that paper gold will cause inflation, but we are
in the midst of a historic crisis of deflation, in which the IMF, the
U.S., and the great majority of economists are calling for economic
stimulus to counter deflation. Issuing paper gold is precisely such an
economic stimulus, providing at the global level what national stimulus
plans provide at the level of an individual country.

The IMF is calling
for a global stimulus of 2 percent of the world's total product to
sustain global demand in the current economic downturn - about $1.2
trillion. Less than half of that would cover the projected annual cost
of protecting the world's climate and also provide a stimulus at the
same time.

Further, if paper gold is used to stimulate work and production
through green public works using material and human resources that
would otherwise lie idle, they will create new value at least a great
as their own value, forestalling any inflationary effect. Even if
there were an inflationary effect, it would affect all countries
approximately equally, so that one of the main downsides of inflation -
exchange rate volatility - would not occur.

It is easy to agree in theory that all countries should coordinate
their economies to provide their fair share of the needed global
economic stimulus, but in practice, they often pursue their own
national interests - or those of their most politically powerful
constituencies. That's why national stimulus spending carries a risk.
The stimulus will create new spending at home - but it may primarily
benefit the economies of other nations that supply cheap exports and do
not stimulate their own economies - something called a "free rider"
problem. Paper gold, however, overcomes this because it stimulates the
global economy as a whole, and therefore benefits the global economy as
a whole.

As Tom Vosa, head of economic research at nabCapital in London explains,
"If one or two countries do fiscal packages, that's simply going to
boost the export market for countries which haven't." There's
widespread agreement among the world's biggest countries that the
current global financial and economic crises require global solutions,
and that's why paper gold is being looked at as a powerful new tool for
concerted international action.

How it can work

There is one serious problem with using SDRs for climate protection:
many believe the IMF has a poor record of environmental stewardship and
concern for the poor, and environmental and social justice advocates
cringe at the notion of expanding the IMF's reach into climate
territory.

There are two possible solutions. Countries can agree to create an
entirely new form of paper gold, such as the "global greenback"
proposed by Stiglitz, that does not involve the IMF, but such a
reinvention of the wheel is likely to be slow, contentious and
impractical. That is why in our current economic and climate emergency,
an alternative built on existing mechanisms is necessary, one that
would require the IMF to issue SDRs to a global climate protection
trust fund overseen by another institution - such as the United Nations
Environmental Program (UNEP).

The UNEP's authoritative scientific committee, the Intergovernmental
Panel on Climate Change (IPCC), could play a major role in setting
criteria and evaluating the results. Countries would apply to the trust
fund for green paper gold and be allowed to use it solely to implement
their national plans to reduce greenhouse gas emissions and honor
international climate commitments.

Complete transparency in allocating and contracting would be an
ironclad condition for receiving green paper gold. The funds would be
allocated based on countries' need in paying for their own climate
protection costs and the importance of their efforts to global climate
protection targets. The funds could also be allocated, as Stiglitz has
suggested, by competition among countries for the most worthwhile
projects.

International climate protection efforts have been stymied by
conflict between developed and developing countries over who should
bear the cost of mitigation and adaptation, but green paper gold can
provide the basis for a "grand bargain" in which climate protection
would be an environmental and economic win-win, with poor countries
least able to pay at the front of the queue.

If the Copenhagen climate negotiations are to succeed, they must
find a way to finance climate protection efforts. If world leaders are
serious about protecting the global economy and global climate, they
should commit to a green paper gold bargain at the April 2 conference
in London and consummate the deal at Copenhagen.