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Business News/ Opinion / Online-views/  Climate change and other wishes

Climate change and other wishes

Combating climate change calls for a financing mechanism that does not have to come from nation states

Photo: BloombergPremium
Photo: Bloomberg

Going into 2016, there are four policy wishes uppermost on my mind.

My first wish is that the platform for discussion of climate change issues be shifted from country-level meetings of the kind just concluded in Paris, to the International Monetary Fund (IMF).

What’s that again?

Yes, I do mean the IMF.

Whatever the nuts and bolts of the agreement hammered out in Paris, there is no denying that the narrative going out remained the same as the narrative going in. The developed world, in a state of shock that the threat of extreme climate events is actually coming to pass, has easily thrown a veil of blame onto emerging nations such as India and China, but more particularly India.

The developed world is cast as the victim, and India a major, if not the only, climate change perpetrator.

Finance holds the key to the mitigation of emissions leading to climate change. In a meeting of nation states like that in Paris, any commitments to sharing the burden of financing mitigation can come only from the tax resources of the participating nations.

The political difficulty of committing national tax resources to some vague global objective over a time horizon going well beyond the electoral cycle of the government in power at the time of commitment, can well be imagined. It immediately opens up a flank from which the political opposition in those countries can get their act together, and attack the government in power for squandering the resources gathered from honest domestic taxpayers without having ensured burden sharing across the globe.

And India would feature as a villain in that domestic political battle, no question about it. India would be portrayed as a country with citizens who stage the most lavish wedding celebrations in today’s world, in grand European and island locales, while a contribution is sought from the median taxpayer in a developed country, who might be a long-haul truck driver working round the clock to earn enough post-tax for the heating and food bills of his family.

What is needed is a finance collection mechanism that does not have to come from national exchequers. One such possibility is the Tobin tax on international financial flows, an idea suggested more than 40 years ago by James Tobin, a great economist who taught for many years at Yale University. Initially, it was proposed as a means by which to mitigate currency volatility, soon after the end of the Bretton Woods fixed exchange rate regime in 1971.

Today, it can be a possible vehicle through which to collect revenue for funding mitigation of climate change. Even levied at a very minute percentage of 0.01% or lower, on global currency exchange transactions which amount to several trillion dollars every day, enough would be collected to make a substantial contribution towards funding renewable energy across the developing world.

A tax of this nature on cross-border capital flows falls within the jurisdiction of the IMF. It would of course need consent and ratification by member countries of the IMF, but the change in platform would enable a financing source that does not reach into national exchequers.

The incidence of the tax would fall on owners of mobile financial capital, the greatest beneficiaries of globalization over the last 30 years. Globalized capital flows, along with globalized flows of highly skilled labour, have been the principal sources of the rising (within country) inequality documented in the classic work by Thomas Piketty.

Quantitative easing and super-low interest rates—the principal stimulus attempted since the global crash of 2008, first in the US and now in the euro zone—was possible because capital was free to roam the world in search of higher returns. Emerging markets provided good host destinations post-2008. India became a particularly happy hunting ground, offering high nominal interest rates in conjunction with relatively stable exchange rates.

The Tobin tax has been periodically dusted off and discussed within the IMF and other clubs such as G20, most frequently after 2008, but not in connection with climate change. There is even an agreement currently in place within a subset of euro zone members, which was scheduled for unilateral implementation starting 1 January in stages, but it seems to have been shelved.

Discussions on the Tobin tax always snag on the possibility of rogue finance centres opting out of the tax. Easily solved, if all other countries refuse to process transactions whose origin or destination is those centres. The leadership issue at the IMF is key. If Christine Lagarde at the end of her term in 2016 is succeeded by a national of the developing world, as seems probable, the stage will be set for a serious discussion on building up a fund to mitigate climate change through a Tobin tax. Key members of the US establishment may well support the idea, since the tax will incidentally also serve the volatility-curbing purpose for which it was originally proposed. Janet Yellen, chair of the Federal Reserve Board in the US, would presumably support a tax advanced by her thesis guide at Yale.

The difficult operational issues are who will control the fund, and how it will take decisions on disbursement. The controlling committee would have to be constituted by the IMF, with representation from the BRICS bank and other such financial intermediaries in the developing world. The disbursement of funds would have to be decided in response to applications for support. In keeping with the sourcing of the fund, which is not country-based, the applications could be kept project-specific and not country-specific. So, for example, a project might apply for funding the purchase of a large number of solar panels. The payment would be made directly to the supplier, in whichever country, with appropriate quality and other regulatory safeguards against cost inflation, and collusion between buyer and supplier. Direct payment to the supplier would reduce opportunities for kickbacks.

My second wish is that in the hail of international disapprobation surrounding India and climate change, we should not mistakenly imagine that giving in on another international demand will somehow compensate. I refer to the move suggested in an Indian position paper emanating from the commerce ministry, though not the ministry of human resource development, to make a commitment to include higher education in the General Agreement on Trade in Services (GATS). I cannot see a single benefit accruing to India from making such a blanket commitment. Within the WTO framework, a commitment, as distinct from an offer, is a serious matter because it is not reversible. Education is classically a non-tradable, and there is no reason whatever to include it within any framework for free or fair trade. The major developed countries of the world are not signatories. Why then should India advance itself, other than to signal that it is global and reformist in outlook?

A contributory reason towards why these kinds of international commitments are entertained is because in our present set-up, signing on to international agreements is strangely not subject to parliamentary scrutiny and, therefore, does not have to navigate the obstacle course that Parliament has become.

That then leads me to my third wish. Surely something should be done in 2016 to reform Parliament. Against the background of the massive exercise of conducting general elections, with all the painstaking work and taxpayer money going into it, for it to play out in the form of non-transaction of parliamentary business is tragic to say the least. A reform measure that an economist might suggest is that the pay of parliamentarians be pro-rated to the number of hours actually spent transacting business in Parliament, as a percent of the total hours possible in any session.

Finally, my fourth wish is that mitigation be seen as an issue of immediate benefit to us, the mitigating country, as much or more than the larger climate change objective. I have written often about the need to change paddy cultivation techniques to the System of Rice Intensification (SRI). Here is a technique that halves the water needed. Right there is the immediate benefit we need in India, where paddy cultivation is the biggest consumer of water, and where water scarcity is a frightening spectre hovering over us all. The switch is good for ourselves, forget the world. As a bonus, there are mitigation and adaptation benefits. Flooded paddy fields emit methane (although they are not the biggest source of such emissions) and SRI cultivated fields are more resilient to climate and weather vagaries. And the best part is that there is no initial capital cost of conversion. The technique substitutes the higher labour input needed for planting and weeding for the reduction in water, seed and pesticide cost. Labour can be paid for through MNREGA. We even have states like Tripura, which can provide extension advice to paddy cultivators in other states. What are we waiting for?

Indira Rajaraman is an economist.

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Published: 08 Jan 2016, 12:14 AM IST
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