Gigatonne gap and special drawing rights

Legal assistance paper

All reasonable efforts have been made to ensure the accuracy of this information at the time the advice was produced. However, the materials have been prepared for informational purposes only and may have been superseded by more recent developments. They do not constitute formal legal advice or create a lawyer- client relationship. To the extent permitted any liability is excluded. Those consulting the database may wish to contact LRI for clarifications and an updated analysis.

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Date produced: 10/06/2010

1. What are the key differences between the two ‘green funds’?

2. What is the functional compatibility of these proposals with the current text being negotiated under the LCA? Bearing in mind that large portions of text cannot be inserted in the text, does the current text leave the option to establish such a ‘green fund’ open? 

3. If the Soros/IMF Green Fund were to be established outside of the UNFCCC, would it be possible to link its activities with the need to fund mitigation activities under the UNFCCC, and thus count towards developed country contribution to support of mitigation in developing countries? 

The Copenhagen Accord called for the $100 billion adaptation funding to come from a wide variety of sources including “alternative finance”.  To assist developing countries with their adaptation and mitigation needs in relation to climate change, the “Green Funds” proposed by George Soros and the IMF both envisage the use of SDRs held by developed countries to create a fund of $100 billion a year by 2020. While neither proposal exists in depth in order to draw a detailed comparison, there are a number of differences which are outlined in the advice, such as whilst Soros’ fund envisages only the use of idle SDRs as a capital base, the IMF fund envisages other types of reserve assets being used as capital.

The draft LCA text does not contain any wording that prescribes in detail the funding source of the financial mechanisms it seeks to establish. As the IMF has already made clear that it would not managing the mechanism described above in paragraph 25, the IMF proposal and the Copenhagen Green Climate Fund could be institutionally – and functionally- compatible.

If the funds proposed by Soros and the IMF were established outside the UNFCCC it may be possible, in theory, to link the funding activities of developed countries with the need to fund mitigation activities under the UNFCCC, provided: (i) this link is formally established between the UNFCCC Copenhagen Green Climate Fund;  and the relevant institution by an appropriate international agreement; and (ii) the relevant institution and the relevant institution has the relevant institutional power/standing to manage such a fund in conjunction with the UNFCCC Copenhagen Green Climate Fund.

1. To assist developing countries with their adaptation and mitigation needs in relation to climate change, the “Green Funds” proposed by George Soros and the IMF both envisage the use of SDRs held by developed countries to create a fund of $100 billion a year by 2020. However, Soros’ proposal is not supported by any detailed paper or explanation of how it would work in practice. Further, the IMF proposal discussed below is contained in a “staff position note” and therefore it is not possible to provide a concrete legal analysis of the differences between Soros’ fund and that proposed by the IMF.  The following constitutes an attempt to explain what some of the key differences could be:

Soros’ Fund

In his speech on 10 December 2009 in Copenhagen, George Soros cited the donation of SDRs by the UK and France to a specially managed IMF fund as a precedent for developed countries’ donations of SDRs to aid developing countries. In this case, the UK and France actually loaned the proceeds of their SDRs to the IMF for on-lending to developing countries – a process that makes unconditioned, cost-free SDRs into conditioned loans.

It is not clear from that speech whether a similar structure is envisaged for a climate fund and who would manage it, e.g. whether it would be the IMF itself or an independent body set up under the UNFCCC. However, in the case of the lending by UK and France, the IMF assumed responsibility for the principal and interest on the SDRs (as a result of their con-version to “hard currency”) and the fact that he envisages a similar circumstance here, suggests that the SDRs would be converted in order to make grants, loans and equity financing to developing countries.

As the SDRs would be converted under this proposal, Soros envisages that the member states of the IMF could guarantee the payment of interest and repayment of the principal on the converted SDRs.

The IMF Fund

The IMF published a “Staff Position Note” on 25 March 2010 entitled “Financing the Response to Climate Change” (the “IMF Note”) . The IMF envisages SDRs providing an initial capital injection by developed countries in the form of reserve assets, which may or may not include SDRs. Therefore, whilst Soros’ fund envisages only the use of idle SDRs as a capital base, the IMF fund envisages other types of reserve assets being used as capital.

The IMF Note states that the proposed fund is actually only a method of mobilising resources and the IMF has not addressed the question of how the resources would be disbursed to developing countries. However, the IMF Note states that the resources donated to the fund could be channelled through existing climate funds or through a newly created entity which could include special climate funds managed by multilateral development banks or the Copenhagen Green Climate Fund. Therefore, the IMF does not propose to manage the fund or assume responsibility for it. To provide the creditors (developed countries) of the IMF fund with credible security, the IMF states that contributors could receive equity stakes in the fund in exchange for the contribution of reserve assets. If SDRs are the reserve assets used, contributors could agree to scale their equity stakes in the Green Fund in proportion to their IMF quota shares to reflect the fact that this was the basis for the allocation of the SDRs.  The Green Fund equity stake could be structured to have the character of reserve assets so that the transaction of “donation/stake” is an exchange of reserve assets. If a participant had liquidity needs it could then “cash in” its equity stake in the fund.

Following the establishment of its capital base, the IMF fund then envisages the issue of “highly-rated” (and therefore low cost) “green bonds” that could be sold to private investors and official holders. This would enable the fund to mobilise a multiple of its paid in capital used to leverage these investor funds. This appears to be a key difference between the IMF proposed fund and Soros’ fund, which envisages the use of SDRs directly for “on-lending” to developing countries and therefore requires the SDRs to be converted. The amount of financing that could be raised under the IMF Fund is consequently greater.

The IMF further proposes that the fund would combine the proceeds from the issuance of bonds with subsidy resources by contributing countries. The fund would then use these combined resources to provide grants for adaptation and loans for mitigation to developing countries, via specialised climate funds.

Therefore, a key difference between the two Green Funds is that the IMF Fund would not ‘on lend’ the reserve assets (SDRs or otherwise). Instead, these would sit in the balance sheet of the fund as capital. Further, if the equity stakes can be structured as reserve assets, the reserve holdings of contributing countries would not be depleted.

2. The LCA text, in its currently available form, is very broad and refers to ‘funding‘ and ‘financial mechanisms‘ (see, for instance, Chapter 1, paragraph 22 onwards) for a Copenhagen Green Climate Fund (Chapter 1, paragraph 37).

It does not contain any wording that prescribes in detail the funding source of the financial mechanisms it seeks to establish. Indeed, paragraph 24 and 25 of Chapter 1 seem to suggest that the financial mechanism is to be alimented from a wide range of yet to be defined public and private sources. Such a broad description would allow for funding from a private foundation as well as international public sources (IMF) to be used for the Copenhagen Green Climate Fund.

In Chapter 1, paragraph 32 of the LCA text, the COP is asked to establish a Financial Board for the Copenhagen Green Climate Fund under the guidance of and to be accountable to the Conference of the Parties.

As the IMF has already made clear that it would not managing the mechanism described above in paragraph 25, the IMF proposal and the Copenhagen Green Climate Fund could be institutionally – and functionally- compatible.

3. If the funds proposed by Soros and the IMF were established outside the UNFCCC it may be possible, in theory, to link the funding activities of developed countries with the need to fund mitigation activities under the UNFCCC, provided:

  •  this link is formally established between the UNFCCC Copenhagen Green Climate Fund;  and the relevant institution by an appropriate international agreement; and
  • the relevant institution and the relevant institution has the relevant institutional power/standing to manage such a fund in conjunction with the UNFCCC Copenhagen Green Climate Fund.

However, if the LCA text in relation to the Copenhagen Green Climate Fund were to be adopted by the COP, it is likely that funds made available either by the IMF or a private foundation would be fed into the Copenhagen Green Climate Fund established by the COP under the UNFCCC and administered in accordance with the governance provisions detailed in Chapter 1, paragraph 36 of the LCA text.