The money's there

There is a climate deal to be done after the Copenhagen debacle: issue sovereign debt for green investment. From
Simon Zadek
17 December 2009

Contrary to rumor, money does not make the world go around – but making the maths work does help.

Money, at least on the surface, is the blunting edge of the deal. Estimates vary but there is a convergent focus on total incremental costs rising to about US$100-140 billion per year by 2020. Depending on how one draws the line between here and then, the total bill on this basis that is not going to be paid for by private commercial money might be of the order of US$1 trillion. of the course the number could be smaller, especially since China led the way in accepting that it is not going to receive international support for its own incremental costs. Some political leaders have talked about far less: US$10 billion a year from 2010-12 (fast start), US$25 billion a year from 2013-2015, and more or less US$50 billion a year from 2016-2020, or about US$300 billion over this period.

Whilst these are not trivial sums (official development assistance is roughly US$150 billion a year), this round number requires some context. US Treasury Secretary Tim Geithner, estimates, based on IMF predictions, that global lost output as a result of the recession could be in the order of US$3-4 trillion in just one year.

Revealing also is the financing costs of such a sum, around US$5-20 billion a year on average over the period (depending on which number one takes if financed through low-cost sovereign debt. Such a modest sum would be shared between all rich (OECD+) countries whose combined national incomes are running at about US$60 trillion annually.

Put differently, the cost of sustaining our global community as we know and love it is 15-50% of the US$40 billion or so we spend annually on dog and cat food.

On the specific suggestion of sovereign debt as a possible policy pathway, front loading funding for global action through sovereign debt is not a new approach. The International Finance Facility for Immunisation was launched in 2006 through the initiative of the UK Government and supported by France, Italy, Spain, Sweden, Norway and South Africa. It raises finance by issuing bonds in the capital markets and so converts long-term government pledges to support global health goals into immediately available cash resources for the Global Alliance for Vaccines Initiative (GAVI).

Three objections are usually raised against debt-financed approaches, that: (a) the developed world have no appetite because of the debt burden they have already taken on in seeking to spend themselves out of the recession, (b) the low annual numbers are deceptive because the principal still has to be repaid by tomorrow’s tax payers, and, (c) a focus on government-raised funds will place too much power in the hands of inefficient governments in determining the allocation of funds.

These arguments are weak or simply beside the point. On (a), the opposite is in fact true, that the extraordinary levels of debt incurred by developed country governments in the last 18 months makes the amounts we are discussing quite trivial in economic or indeed political terms. On (b), we can and must assume that carbon markets will become more robust over time and generate more revenues, further augmented by the additional taxes coming from successful low carbon growth. In essence, the money is in fact an investment in creating that future, and should not be treated like a deadweight cost funded by debt. The third argument is simply beside the point, not because it is irrelevant (it isn’t), but because we would need to deal with this issue irrespective of where the money came from.

Do the maths, and it is clear that the money can be found, cheaply, now. It is not a ‘pay-off’, but an investment in our future, or if you must the cost of staying on the rails. Sovereign debt is the most cost-efficient way to ensure predictability of needed funds, and can be the source of last resort once any other sources have been exhausted.

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