Green Paper Gold

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.

How Big?

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.