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Sustainable Energy and Economy Network » Article / Commentary

Financial Transaction Taxes: A win-win for the climate and the economy

February 7, 2011 · · Originally published in UN-NGLS Roundup

In the face of enormous need, civil society calls on leaders to use innovative financing tools in the fight against climate change.

At the UN climate talks in Cancun, developing countries secured a new Global Climate Fund to channel money for adaption and the transition to low-carbon economies. But while developed countries committed to mobilizing climate finance, they did not cite specific sources. And because existing pledges to reduce greenhouse gas emissions fall short of what the science demands for climate security,[i] the costs of adaptation and mitigation in developing countries will far outpace the $100 billion per year enshrined in the Cancun agreement.[ii]

The scale and immediacy of the need for climate finance in developing countries highlights the importance of the work of the UN High Level Advisory Group on Climate Finance (AGF) and why innovative mechanisms with the potential to generate significant revenue and promote economic stability – like a financial transaction tax - must be enlisted to fight against climate change.

A financial transaction tax (FTT) is a tiny levy on trades using financial instruments like stocks, bonds, foreign currency exchanges, credit default swaps, commodity futures, or any other derivative. Because trillions of dollars worth of transactions happen every day, even a small tax of 0.05% could raise more than $600 billion annually.[iii] A tax on only foreign currency trades among the four most heavily traded currencies (the dollar, euro, yen and pound) could generate as much as $33 billion each year.[iv] Directing even a fraction of this revenue to climate change would dwarf current public contributions.

As well as raising significant resources for vital projects, an FTT could help rein in casino-style high frequency trading and short-term speculation. This would give an advantage to long-term, productive investment – the kind needed to move to clean, renewable energy and energy efficiency. Indeed, an FTT is an equitable way for the financial sector to make up for causing a crisis that squeezed government spending around the world, including spending for climate programs.

As the members of the AGF have noted in their final study, the implementation of a FTT is not a question of feasibility. A recent technical paper from the International Monetary Fund has pointed out that most G20 countries have already implemented some form of transaction tax,[v] without regional or global coordination.

The greatest hurdle to an internationally coordinated FTT has been political will. But this could be changing. What the AGF report fails to note is an increased interest in a regional tax scheme in Europe, leadership by France to take up the proposal for an FTT in the G20 in 2011, and a rapidly growing global civil society campaign in support of such taxes.

The AGF process could have been stronger if civil society had been given reasonable opportunity to participate, including representation in the advisory group, sufficient time to organize interventions, and access to working papers, AGF members, and the contributions of all parties consulted in a timely manner.

Identifying and analyzing the full range of possible sources for innovative climate finance will be increasingly important over the next year as design of the Global Climate Fund moves forward.

In the future, governments and institutions like the UN would do well to work more closely with global civil society to share research to overcome coordination issues, review revenue estimates, and further explore the equity implications of a financial transactions tax.

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[i] The UNEP found that the mitigation pledges tabled by developed and developing countries in Copenhagen imply a temperature increase of between 2.5 to 5° C before the end of the century, far above the 1.5 to 2° C threshold scientists say we must stay below in order to avoid a climate tipping point.http://www.unep.org/publications/ebooks/emissionsgapreport/pdfs/EMISSIONS_GAP_TECHNICAL_SUMMARY.pdf

[ii] The 2009 World Economic and Social Survey estimates that developing countries will need between $500 and $600 billion every year to for climate change adaption and mitigation if we are to stay below 2° C. At higher temperatures, climate impacts will increase and the cost of adaptation will rise.http://www.un.org/News/briefings/docs//2009/090901_DESA.doc.htm

[iii] The Austrian Institute for Economic Research estimates that a mid-range tax rate of 0.05% on financial transactions would raise annual revenues of approximately US$650 billion. http://www.halifaxinitiative.org/content/policy-brief-ftt-idea-whose-time-has-come-april-2010

[iv] Schmidt, Rodney, North-South Institute, Canada, “The Currency Transaction Tax: Rate and Revenue Estimates,” 2008. http://www.stampoutpoverty.org/?lid=10738

[v] International Monetary Fund, “Taxing Financial Transactions: Issues and Evidence,” Chapter 8 of Financial Sector Taxation: The IMF's Report to the G-20 and Background Material, September 2010. http://www.imf.org/external/np/seminars/eng/2010/paris/pdf/090110.pdf