The Challenge for Rio+20: Funding

The June 2012 United Nations Conference on Sustainable Development marks the 20th anniversary of the Rio Earth Summit, widely credited with launching sustainable development as a global policy agenda. Since its inception, this agenda has evolved into concerted actions and agreements to combat global warming, deforestation, biodiversity loss, environmental degradation, and poverty. The conference, Rio+20, continues this work by focusing on the themes of greening the world economy while at the same time eradicating poverty.

But any lasting progress or initiatives launched at Rio+20 could falter over a familiar stumbling block: how will recommendations for action be financed? Rather than focus on already-established priorities, Rio+20 should instead tackle the challenge of funding the transition to a sustainable world economy. Without urgent attention to this issue, global sustainable development will remain an elusive goal, and the long legacy of the first Rio conference will be diminished.

New Financing Needed

Conventional sources of development assistance and environmental funding are failing to keep up with the rising global bill for fighting climate change, biodiversity loss, and poverty. As a result, funding gaps on the scale of hundreds of billions of dollars hamper progress on sustainable development goals (see “Global Funding Gaps” above). Overcoming these gaps requires new sources of financing for environmental and development projects. Three options have been proposed: international funds, global markets for carbon and environmental services, and revenues from global trade and financial transactions.

International Funds

Existing funds for environmental and development projects have translated to limited success. Consider the case of the Global Environmental Facility (GEF), a major player since 1991. The GEF reports that it has elicited $10 billion from direct donor contributions—supplemented by more than $47 billion in co-financing from additional supplementary aid—for more than 2,900 projects in 165 developing economies. Despite this success, the GEF is severely restricted in its capacity to fund new initiatives. Since 1994, its total budget allocation has declined in real terms, while its range of environmental and climate projects continues to expand.

"Given the difficulties of setting up international funds or markets for carbon and ecosystem services, sustainable development initiatives should consider the alternative option of raising revenues from global trade and financial transactions."

A new initiative is the Adaptation Fund, which finances adaptation investments in developing countries that are parties to the Kyoto Protocol on climate change. The fund is financed with 2 percent of the Certified Emission Reduction (CER) credits issued for projects of the Clean Development Mechanism (CDM), among other sources. The CDM allows industrialized countries to invest in emissions reductions wherever it is cheapest globally, and often they purchase the CER credits earned by carbon-reducing investment projects in developing countries. Currently, the Adaptation Fund has raised just $286 million. Yet to adapt to climate change, developing countries will need $70 billion to $100 billion a year in additional assistance from 2010 to 2050.

Global Environmental Markets

International payment for ecosystem services has emerged as a possible new source of financing for conservation of global ecosystems. In this type of scheme, the beneficiaries of ecosystem services, such as reduced runoff and cleaner water, raise and distribute funds to those who conserve the environments that provide these valuable services.

The only operating international payment system for ecosystem services is the nascent United Nations mechanism established in 2008 to reduce emissions from deforestation and forest degradation (REDD+). It now has $120 million in funds, a sum that falls far short of the amount needed to make much of an impact. Financing REDD+ through carbon markets could earn developing countries an additional $2.2 billion to $13.5 billion annually. Yet a 50 percent decline in global deforestation through REDD+, for example, would reduce global greenhouse gas emissions by 3–6 percent annually but cost $17.2 billion to $28 billion per year. Bilateral initiatives, such as the Amazon Fund ($57.5 million), the Congo Basin Forest Fund ($165 million), and Norway’s International Climate and Forest Initiative ($517 million), can only partially offset this financing shortfall. And the mechanism faces other obstacles: negotiations to expand global funding of REDD+ have stalled over concerns about verification of deforestation rates and carbon emissions, losses in timber and agricultural revenues, and corruption, fraud, and misgovernance.

A global cap-and-trade system for greenhouse emissions or a global carbon tax could also raise substantial funds. A carbon tax is more efficient and easier to administer globally. The tax could be equalized across different regions and industries, set low initially, and rising steadily over time to reflect increasing damages from global warming. Estimated revenues from such a scheme could range from $318 billion to $980 billion by 2015 (in 2005 prices) and $527 billion to $1,763 billion by 2030. But political realities, especially in the United States, have essentially ruled out the feasibility of implementing a global carbon tax or cap-and-trade system.

Revenues from Global Trade and Finance

Given the practical limitations and political difficulties of setting up international funds or markets for carbon and ecosystem services, sustainable development initiatives should consider the alternative option of raising revenues from global trade and financial transactions.

International finance facilities mobilize resources from international capital markets by issuing long-term bonds that are repaid by donor countries over 20 to 30 years. Unlike other global financing mechanisms, a handful of donor countries can start an international finance facility without a large international agreement, and existing aid institutions, such as the World Bank, can implement it. The amounts raised through bonds, however, are mostly likely to be in the tens, rather than hundreds, of billions of dollars. As a result, an international finance facility is probably best suited for specific health or infrastructure investments, such as immunization, clean energy, and improved sanitation. One such program, the International Finance Facility for Immunization, has raised $3.6 billion through bonds since it launched in 2006, using these funds for immunization programs and vaccine purchases in a total of 70 developing countries.

Revenues also could come from sovereign wealth funds. Such funds are routinely created by countries, by setting aside for investment purposes a proportion of their foreign exchange reserves accumulated from buying and selling goods and services in world markets. Today, sovereign wealth funds hold $4.3 trillion in global foreign exchange reserves, including $3.5 trillion in developing countries. In its Least Developed Countries Report 2011, the United Nations Conference on Trade and Development proposes that developing economies invest 1 percent of their funds in regional development banks, which could in turn facilitate a wide range of sustainable development initiatives. And in a report to the G20, Bill Gates suggests that allocating 1 percent of sovereign wealth funds in G20 countries would raise at least $40 billion annually for global investments in the environment and development. But to be effective, such a mechanism would require international agreement on the transfer and disbursement of the funds.

A third option is a tax collected on the sale of specific financial assets, such as stocks, bonds, or futures. A very small financial transaction tax would have a negligible impact on liquidity or overall financial transactions but could raise substantial funds on a global scale. For example, Gates proposes that a small tax of 0.1 percent on equities and 0.02 percent on bonds could bring in about $48 billion from G20 member states. The European Union proposed that rich countries consider collectively adopting a financial transaction tax at the G20 summit in Cannes, France, in November 2011. Although favorably received by many G20 countries, the proposal failed to receive full backing due to opposition from the United States, the United Kingdom, and Canada, who worried about its added burden to their banks. In January 2012, France announced the implementation of a new 0.1 percent tax that would come into force in August, regardless of whether the European Union agrees to impose a similar tax.

A variant on the financial transaction tax is a currency transaction tax, or Tobin tax, named after the economist James Tobin, who first proposed it in the 1970s. This tax is applied to foreign currency exchange transactions, which today total around $800 trillion annually. Thus, a currency exchange transaction of only 0.05 percent could raise $400 billion in revenues for aid to poor economies, climate change mitigation, and ecosystem conservation.

Taxes also could be imposed on the arms trade, tobacco products, airline travel, and aviation or shipping fuel to fund global environmental and development initiatives. For example, a 10 percent tax on global arms exports could raise up to $5 billion annually. Additional tobacco sales taxes in G20 and other European Union countries could generate $10.8 billion, global aviation fuel taxes an extra $27 billion, and shipping fuel taxes $37 billion, according to Gates.

Any of these additional taxes would require an international agreement, which could be difficult to negotiate successfully. And taxes on particular products are difficult to implement politically and would create problems of smuggling, especially for tobacco products, small arms, and light weapons. Airline travel, transport fuel, and tobacco products already are taxed substantially by some governments.

Too often, international talks on global environmental and development issues have focused on priorities for action, leaving the difficult task of financing global initiatives to be resolved through subsequent negotiations. It is time for the world to stop delaying. If Rio+20 became the venue for negotiations on new financing mechanisms for environment and development funding, it would signal that the international community is no longer just talking about finding solutions to pressing global issues—but is taking serious steps to overcome them.

Further Reading

Barbier, Edward B. 2011. The Policy Challenges for Green Economy and Sustainable Economic Development. Natural Resources Forum 35(3): 233–45.

Barbier, Edward B. 2012. Tax “Societal Ills” to Save the Planet. Nature 483: 30.

Clémençon, Raymond. 2012. From Rio 1992 to Rio 2012 and Beyond: Taking Stock and Moving Forward in the Search for Sustainable Development. Journal of Environment and Development 21(1): 5–14.

Gates, Bill. 2011. Innovation with Impact: Financing 21st Century Development. A Report by Bill Gates to G20 Leaders, Cannes Summit. http://www.thegatesnotes.com/Topics/Development/G20-Report-Innovation-with-Impact.

Pearce, David. 2007. Do We Really Care about Biodiversity? Environmental and Resource Economics 37(1): 313–33.

United Nations Conference on Trade and Development. 2011. The Least Developed Countries Report 2011: The Potential Role of South-South Cooperation for Inclusive and Sustainable Development. New York.