Using Special Drawing Rights for Climate Finance
Climate change represents a significant obstacle to ending poverty and one of the gravest equity challenges of our time. While the richest countries in the world have been responsible for a disproportionate amount of global carbon emissions which cause global warming, it is the poorest countries in the world that are hit first and worst by climate change.
Climate change has already had disastrous effects on the world’s poorest communities. Extreme weather events, sea-level rise, drought, disruption of water and food supplies, and negative impacts on health threaten existing poverty alleviation strategies and mean that more people must further struggle to make ends meet.
In order to help developing countries adapt to the impacts of climate change, developed countries will need to contribute at least U.S. $100 billion in public finance per year. Because adaptation finance should be understood as compensation for damages done by rich countries (rather than as aid), climate finance must be provided in the form of grants. It should not be tied to any economic policy conditionality, and must be additional to existing Official Developed Assistance targets.
However, supporting developing countries to adapt to the impacts of climate change is only one part of the climate solution. Developed countries also need to substantially cut their own greenhouse gas emissions and transfer significant sums – similarly estimated at roughly U.S. $100 billion in public resources per year -- to help developing countries to lower their emissions and transition to clean-energy economies.
Developed countries will need to agree to a combination of mechanisms to generate the resources needed for adaptation and mitigation. Such mechanisms could include a financial transaction tax, the redirection of fossil-fuel subsidies in developed countries, and new levies in the aviation and shipping industries.
At the December 2009 climate change conference in Copenhagen, philanthropist George Soros helped draw attention to another means to generate resources for climate change: the use of Special Drawing Rights (SDRs), which are “reserve assets” created by the International Monetary Fund (IMF). Soros suggested that an immediate infusion of SDRs could create a U.S. $100 billion “fast-start green fund” for climate finance that could be part of the answer to developing countries’ adaptation and mitigation needs.
At the World Economic Forum in January 2010, IMF Managing Director Dominique Strauss-Kahn echoed Soros’s words, marking the first time the IMF has favorably acknowledged the possibility of using SDRs as a finance instrument. Strauss-Kahn was vague in his proposals and said the IMF will issue a paper sometime soon to elaborate. Though Strauss-Kahn seemed to suggest that the IMF could control the “fast-start green fund,” it seems unlikely that an institution with no climate credentials would be entrusted with that role.
Strauss-Kahn’s speech does open up space for serious, practical consideration of how SDRs could be used for climate finance. In this brief, ActionAid explores how SDRs can be used to contribute to the adaptation and mitigation needs of developing countries. The brief examines what special drawing rights are and how they have recently been used. It then puts forward a proposal for how SDRs could be used for climate finance, and discusses some broader implications of using SDRs for the global economy.
