"Financing the Fight against Climate Change"

Climate talks are stalled. Developing countries want help paying for policies to reduce greenhouse emissions, but the amount they are asking for is more than developed countries are likely to agree to. Is there any way to end the impasse?:

Only Private Sector Can Meet Finance Demands of Developing Countries, by Robert Stavins: Things are getting hot here in Copenhagen. ... This afternoon, the main session of the talks was suspended, following protests led by African countries, which accused the industrialized countries of trying to wreck the existing Kyoto Protocol.  At the heart of the controversy is the “finance question,” as it’s called here, with the developing countries asking for more than $100 billion to $200 billion annually to pay for their carbon mitigation and climate change adaptation through 2050! ...

I maintain that it is inconceivable that the governments of the industrialized world, including the United States, will come up with sufficient foreign aid to satisfy the demands for financial transfers being made by the developing countries in Copenhagen.  However, governments can — through the right domestic and international policy arrangements — provide key incentives for the private sector to provide the needed finance through foreign direct investments.

For example, if the cap-and-trade systems which are emerging throughout the industrialized world as the favored domestic approach to reducing CO2 and other greenhouse gas emissions are linked together through the existing, common emission-reduction-credit system, namely the Clean Development Mechanism (CDM), then powerful incentives can be created for carbon-friendly private investment in the developing world.

Clearly the CDM, as it currently stands, cannot live up to this promise, but with appropriate reforms there is significant potential.  ... Such private finance stands a much greater chance than government aid of being efficiently employed, that is, targeted to reducing emissions, rather than spent by poor nations on other (possibly meritorious) purposes.  So, all in all, the job can be done, and governments have an important role, but as facilitators, not providers, of finance.  This should be the focus of the discussion here in Copenhagen.

George Soros has an idea for "a special green fund serving the developing world":

Financing the Fight against Climate Change, by George Soros, Commentary, Project Syndicate: It is now generally agreed that the developed countries will have to make a substantial financial contribution to enable the developing world to deal with climate change. ...

The developed countries are reluctant to make additional financial commitments. They have just experienced a significant jump in their national debts... It looks like they will be able to cobble together a “fast-start” fund of $10 billion a year for the next few years... This is unlikely to satisfy the developing countries.

I believe that this amount could be at least doubled and assured for a longer time span. Developed countries’ governments are laboring under the misapprehension that funding must come from their national budgets. But that is not the case. They have the money already. It is lying idle in their reserve accounts at the International Monetary Fund. Spending it would not add to any country’s fiscal deficit. ...

In September 2009, the IMF distributed to its members $283 billion worth of Special Drawing Rights... Of the $283 billion..., more than $150 billion went to the 15 largest developed economies. These SDRs will sit largely untouched in the reserve accounts of these countries, which don't really need any additional reserves.

I propose that the developed countries – in addition to establishing a fast-start fund of $10 billion a year – band together and lend $100 billion dollars worth of these SDRs for 25 years to a special green fund serving the developing world. ... I further propose that member countries agree to use the IMF's gold reserves to guarantee the interest payments and repayment of the principal. The IMF owns a lot of gold – more than 100 million ounces – and it is on the books at historical cost. ...

This means that the developed countries that lend the SDRs would incur no interest expense and no responsibility for repayment. ... [D]eveloping countries ought to embrace my proposal. ... All that is lacking is the political will. The mere fact that tapping SDRs requires Congressional approval in the US ensures that nothing will happen without public pressure – including pressure from the developing countries. Yet it could make the difference between success and failure in Copenhagen.

I'll be surprised if this finds political support.

The financial crisis shows how difficult it is to move politicians to action before they can see a problem clearly. Economists can warn about delays in the recovery of employment far in advance and call for policy to offset it, but until the delayed recovery can be seen clearly in the employment data, political action is extremely unlikely. Unfortunately, by that time, it's generally too late to be of much to help. I expect climate change legislation will be the same. Nothing of real significance will happen until the the problem is undeniable, until the costs are large, clear, and evident, but by the time hockey stick hits politicians over the head, it may be too late.

[See also The US is on Board from Hillary Clinton.]