Green Paper Gold: How to Pay for a Global 'New New Deal'
There's growing support for fighting global economic stagnation and global warming simultaneously with a "green New Deal" nationally and globally. Investing to cut greenhouse gasses can create "green jobs" and provide fiscal stimulus while it is protecting the planet. But how is it going to be paid for?
Reduced energy costs can pay for part of such programs in the long run. Taxes, government borrowing, and the auction of carbon permits under new "cap-and-trade" systems can pay for part. But to raise the significant funds that are needed, we recommend an additional piece of the puzzle: Green paper gold.
In 1969, national governments gave the International Monetary Fund (IMF) the right to create Special Drawing Rights (SDRs), often referred to as "paper gold." Nobel laureate and former World Bank chief economist Joseph Stiglitz describes SDRs as "a kind of global money, issued by the IMF, which countries agree to accept and exchange for dollars or other hard currencies"
For several years, Stiglitz has 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 simultaneously counter global deflation and help countries with trade deficits to avoid ruinous devaluations and runs on their currencies.
In today's converging economic and environmental crises, why not issue "green SDRs" to help finance the global war on global warming? Surely nothing could better qualify as a "global public good" than saving the planet from ruinous climate change. And at the same time, green SDRs could provide some of the stimulus needed to move the global economy out of its deepening stagnation.
A New Trust Fund
Since many countries have reservations about the IMF, and since it's not well-suited to run environmental programs, the IMF could issue the green SDRs to a global climate protection trust fund. The appropriate overseer for such a fund might well be the United Nations Environmental Program (UNEP). Its authoritative scientific committee, the Intergovernmental Panel on Climate Change (IPCC), should certainly play a major role in setting criteria and evaluating the results.
Countries would apply to the trust fund for SDRs that can be used solely to implement their national plans to reduce greenhouse gas emissions. In order to qualify, each country would be required to meet its international commitments to reduce greenhouse gases — like those in the Kyoto Protocol and in the follow-on agreement to be negotiated at Copenhagen in 2009. This would make the green SDRs an incentive for countries to meet those commitments. Complete transparency in allocating and contracting can be a further condition for receiving SDRs.
The funds could be allocated based on countries' need for help in paying for their own climate protection costs and the importance of their efforts for meeting global climate protection targets. They could also be allocated, as Stiglitz has suggested, by "competition among countries" for the most worthwhile projects. They would help pay for energy conservation, mass transit, research, development, and investment for sustainable energy, technology transfer to low-income countries, and climate-change adaptation.
At the moment, climate protection efforts are languishing, largely as a result of the credit crunch and the fiscal crisis faced by the world's governments. In the United States, investment in clean energy and low carbon technology actually declined in 2008, according to the research group New Energy Finance. Global agreement to a green SDR program could jumpstart a reversal of that trend.
Indeed, the paradox of our economic downturn is that the world's human and material resources are being placed "out of service" at the very time they are desperately needed to fight global warming. Green SDRs would make it possible to mobilize resources that would otherwise lie dormant and use them to protect the planet.
Climate protection efforts have been largely stymied by conflict between developed and developing countries over who should bear their cost. But green SDRs could provide the basis for a "grand bargain" in which climate protection could be a win-win not only environmentally but economically.
The British government's highly respected "Stern Review on the Economics of Climate Change" estimates that climate protection should cost about one percent of global GDP for the next three to four decades. Current global GDP is about $60 trillion, so let's say roughly half a trillion a year is needed globally for climate protection. This figure correlates roughly with what the IMF's John Lipsky recently told students at Johns Hopkins University: "Global fiscal stimulus on the order of 2% of GDP is justified" to sustain global demand in the current economic downturn. Two percent of the world's $60 trillion output comes to about $1.2 trillion. Half of that would cover the projected annual cost of protecting the world's climate.
In terms of job creation, economic stimulus, and support for long-term growth — not to mention warding off climate disaster — nothing is likely to provide bigger benefits than investment in climate protection. So from every point of view, the answer to the question of how big a green SDR program should be is: big enough to provide every penny the "global green new deal" is capable of spending on climate protection.
The Group of 20, which includes the world's richest countries, Russia and large developing countries like China, Brazil, and South Africa, held a summit in Washington last month that gave world powers a chance to coordinate their responses to the burgeoning international financial crisis. A second G-20 global economic summit is planned in April. An agreement to establish green SDRs would provide them a concrete — and electrifying — result.