Taxing Financial Speculation, Raising Funds for Critical Needs
February 14, 2011 · By Paul R. Epstein and Janet Redman
Levying a tiny tax on financial transactions could help build a healthier and more stable future.
Political discontent simmered for decades in Egypt, but soaring food prices helped push public frustration past the boiling point. As the political drama there continues to unfold, it’s critical to address the complex financial and environmental dynamics that have driven global food prices to record levels.
Rising oil prices and the shift from food crops to biofuels are part of the problem. But two other factors deserve increased attention -- climate change and financial speculation.
Extreme weather events -- like the heat wave that sparked fires across Russia’s breadbasket last summer -- are tightening supplies. The impacts of severe weather in one area on distant nations (witness the food riots in Mozambique last summer as Russia cooked) emphasize the limits of adaptation. And changing weather patterns, with more droughts, floods, severe hurricanes, and winter weather anomalies, are predicted to increase in a warming world.
Lester Brown, president of the Earth Policy Institute, warns that for each degree of temperature increase, crop yields are anticipated to drop by 10 percent. He notes that, with climate change and altered weather patterns, come growing water scarcity, desertification of once-arable land, and the inundation of globally important farmland -- such as the Mekong and Red River deltas, which produce most of Vietnam’s rice.
Experts also blame an explosion of speculation in food commodity markets for food price volatility. The original purpose of these markets was to help farmers and food processors lock in predictable prices so they could make smart business decisions. The financial speculators that now dominate the markets don’t intend to buy or sell grain or meat. Their interest lies in capitalizing on food shortages and price volatility. Thanks in part to deregulation, the speed of this global gambling can lead to boom and bust cycles that are detached from the actual value of food.
The G20 finance ministers, who will meet this week in Paris, have an opportunity to take bold steps toward tackling both of these underlying causes of the food price crisis. French president Nicolas Sarkozy, currently the G20 chair, is pushing for an international agreement to adopt taxes on financial speculation that could generate massive revenues for urgent needs, including climate programs in developing countries.
Here's how this would work. A tiny levy would be charged on each financial trade, including every sale of stocks, bonds, foreign currency, credit default swaps, commodity futures, or other derivatives. Because trillions of dollars worth of transactions occur every day, even a small tax of 0.05 percent could raise more than $600 billion annually.
Directing a portion of this revenue to programs to combat climate change and support global health programs would dwarf current public contributions. Speaking at the World Economic Forum in Davos, financier and philanthropist George Soros backed the idea of using some of the revenues from such a financial transactions tax (which supporters often refer to as an FTT) to fight climate change.
German Chancellor Angela Merkel is another strong proponent and is exploring the possibility of moving ahead with a “coalition of the willing” rather than waiting for all G20 countries to get on board.
Other financiers and governments would do well to follow the path of enlightened self-interest. The UK showed how shifting funds from finance to industry could be good for business when it took actions in the early 1990s to reduce high interest rates that were stagnating money in bank savings. Soon after, its economy took off.
In a recent study, the International Monetary Fund found that taxes on financial speculation are not only technically feasible but that most G20 countries (and many others) have already implemented some form of an FTT. For example, the London Stock Exchange has long levied a 0.5 percent stamp tax on all stock trades.
Though the Obama administration hasn't yet endorsed the idea of taxing financial speculation, there is support in the U.S. Congress. In the last session, members introduced several bills to create various types of financial transactions taxes. Rep. Pete Stark (D-CA) is poised to re-introduce legislation that would put a levy on foreign currency transactions to generate revenue for deficit reduction and for global public goods, like the clean energy transformation.
As the G20 meets, advocates in 20 nations around the world, including the United States, will carry out a variety of actions to send a message to G20 leaders to support levying a FTT.
No one regulatory mechanism will solve all of the problems of food insecurity, climate change, and financial instability. But, with national budgets strapped and the financial sector benefitting handsomely from the global economy, it becomes even more important for speculators to do their fair share. A tax on financial speculation could be the first of many innovative mechanisms to link the economy with the environment and help build a healthier, more stable, and more secure future.