Financing the response to climate change: special drawing rights (SDRs) for climate finance

Civil society event at the World Bank spring meetings 2010, 22 April

23 April 2010 | Minutes


  • Jorge Gastelumendi, The Nature Conservancy – chairing
  • Ilana Solomon, Action Aid
  • Mark Weisbrot, Center for Economic Policy Research
  • Katherine, IMF

Jorge Gastelumendi, introduction – SDRs could be traded freely/voluntarily to provide liquidity to sellers of SDRs. Based on basket of four currencies: the US Dollar, UK pound, Chinese Yen, and the Euro. The piece to focus on is to connect SDRs with the urgent need for climate finance.

Katherine (IMF)

  • The growth in developing countries in particular is going to require long term investment for climate change adaptation/mitigation. It’s essential that dependable financing be available on dependable terms. Existing way of doing things ‘pledging conferences’ are not up to the task.
  • Green Fund proposal: A coordination, commitment and burden sharing mechanism

Need something that can raise large amounts of resources, commensurate with Copenhagen Accord.

  • Any proposal needs to have a component of leveraging from private sources to channel resources to developing countries via specialised climate funds.
  • A bridge to large scale carbon-based financing in the medium term.

What kind of money is needed? Half needed for adaptation (grants) half for mitigation (of which 40 per cent loans to LICs with assumed grant element of 50 per cent) Therefore for every dollar of loan there would need to be 60 cents of subsidy resourcing.

Developed countries would endow the Green Fund with equity in the form of reserve asset swap. They would receive dividends and pay interest on their SDRs. There are different options for finding the finance for the subsidy funds – these include the interest flows on the SDRs, and potentially innovative sources of finance such as shipping and aviation.

The Green Fund is an idea – many variants are possible. Key elements are scale (leverage); burden sharing and long-term commitment mechanism; capacity to disburse quickly.Implementation is up to the international community. Creation and management of the Green Fund is not for the IMF, but to provide technical assistance.

The proposal is not to create new SDRs. 2009 saw a large new allocation, so that there are a number of developed countries now with stable positions who could consider whether they have reserves they could use in this way. One idea is that the Green Fund equity would be structured in such a way that it could still be counted as a reserve asset. It would have to therefore be liquid and cash-able. This is a feature that the IMF hopes would make it more appealing.

If the central bank is holding the reserves, forgoing the dividends and paying the interest then this will affect the central bank. It may then affect the government by making lower payments to the government, for those countries where the treasury holds the reserves assets, there will be immediate fiscal impacts.

Ilana Solomon, ActionAid

The Copenhagen Accord has not pledged enough. Cost of adaptation alone could be up to $100 a year. That needs to be delivered with public grant financing. In the US, climate appropriations and legislation is not going to come near to meeting it’s share of the global goal.
ActionAid’s reaction to the IMF staff paper was to welcome the proposal and see it as a positive and timely contribution. The proposal to use SDRs to underwrite climate finance is a useful new way for using SDRs.

ActionAid welcomed that the paper states that adaptation finance needs to be paid as grants not loans.However they would have liked to see the IMF state that a Green Fund would need to be housed by the UNFCCC. It’s also worrying that the sources of finance for the subsidy element haven’t been clarified. There are still many options open including innovative finance, which means the fund could end up appropriate only for mitigation (through loans) and not adaptation.

There could be a general allocation of SDRs, transfer that to cash to a fund managed by the UNFCCC to disburse. The interest charge would be about $500 million which would be the responsibility of developed countries to pay.

How can you manage a movement to the UNFCCC to manage such a large amount of money when it’s disbursed much smaller amounts of finance so far? The money will most likely need to be disbursed through a new fund, such as the one referred to in the UNFCCC LCA text which would be fully accountable to and under the authority of the UNFCCC.

Mark Weisbrot, Center for Economic Policy Research

  • Climate finance is a small part of the problem; the greater problem is the lack of commitment from developed countries to reduce their emissions.
  • The proposed amounts of climate finance are a small commitment on the part of the rich countries.
  • IMF created $273 billion in 2009. The world has seen the IMF as something of a world central bank.

The idea of the IMF creating SDRs – the SDRs went according to quota. Now we could create SDRs that go to countries that do need them for mitigating and adapting to climate change.

  • We are in an environment of very low inflation. The median inflation rate in the advanced economies is projected at 1.6 percent 2010 and 1.7 per cent for 2011. In developing countries the median was 8.5 percent from 1992-2001; it’s projected at 4.9 per cent for this year, and 4.6 per cent for 2011. If you look at the World Economic Outlook, there are more concerns from the IMF about deflation than about inflation.
  • The creation of reserves would be a good thing because developing countries need reserves for precautionary purposes. Developing countries should not have to borrow for these reserves but other than that the proposal is a step forward.
  • If we do need $200 billion a year that would still be an amount the IMF should be able to create without danger to world economies.


Comments from the IMF: The proposal starts with the existing SDR availability is in order to make the proposal realistic to governments. If you do a new SDR allocation which is made available for developing countries, the developed countries would have a greater cost.

Where is the opposition coming from? There is an opposition to using the SDRs for anything other than for building up reserves. It is a matter of interpretation of the IMF articles of agreement. The climate crisis is already however having a drain on reserves, for instance in Bangladesh.
It would not need to go to congress. The amount that was issued last year fell below the threshold that requires congressional approval. There is a cost incurred however as noted above.

Differences between the Soros proposal and the IMF staff paper? In the IMF paper the SDRs structured as equity are still able to be scored as reserves. The question of whether SDRs are being used as intended should then be avoided.

The role of innovative sources? The paper was the result of interdepartmental working with employees from fiscal affairs who are the experts on these tax proposals. Fiscal affairs colleagues feel that revenue raising from carbon taxes make sense.

The success of the Global Environment Facility as a channel for climate finance? GEF works through 10 implementing facilities. The bottlenecks of accessing funds have often been the multilateral implementing agencies. The idea of direct access is therefore a good option to avoid these bottlenecks. This is something that the GEF is considering establishing.