Rules for implementation of the Financial Transaction Tax, which are expected to be agreed upon by 11 EU Member States on the 7th or 8th of December, can open up a new and additional source of public climate finance. This would give a strong signal to developing countries that actions are taken to continue to increase public climate finance in a predictable way and thus smooth the path towards a new climate deal in Paris.
What is the link between the Financial Transaction Tax and climate action?
A tiny tax on financial transactions (FTT) is a tax of between 0.01% and 0.1% (depending on the transaction) applied to the finance sector. It could generate around €37bn/year Europe wide. An agreement on rules of its implementation, expected early this week, constitutes a prime opportunity to provide a share of the revenues generated to climate finance and sustainable development.
President Hollande has already indicated his intention to allocate a portion of the revenues from the FTT for climate finance and to address pandemics. To quote; ‘A portion of this tax will be allocated to the fight against inequality, to the battle against global warming and the major pandemics.’ Hopefully, the other countries signed up will follow suit to anchor down ambition around allocating revenues generated to climate and development action.
Why do we need innovative sources of climate finance, such as the FTT?
In order to cover the growing needs for climate finance in developing countries without diverting money from over-stretched development aid budgets, donor countries need to mobilize innovative sources of public finance such as the Financial Transaction Tax.
Even if global warming is kept to 2 degrees Celsius, the costs of adapting to climate change in the developing countries could climb as high as $500 billion per year by 2050.
In 2009, developed countries committed to provide new and additional climate finance to support climate action in developing countries. Despite this commitment, current contributions for climate finance continue to be sourced from existing aid budgets in donor countries. This comes as aid budgets suffer further stagnation, with most developed countries failing to reach their target to provide 0.7% of GNI to Overseas Development Aid (ODA), which was initially set for a 2015 deadline.
What’s the link between the decision on the FTT and the Paris climate agreement?
The Paris Agreement must stipulate donor countries to continue to scale up public climate finance, using 100 billion US dollars as a floor for support after 2020. Climate finance is still a major sticking point in the Paris negotiations. Developing countries need to be assured that public climate finance will continue to be provided in order for them to adapt to climate change and reach strong long-term climate goals and reviews.
Donor countries could find the cash by ramping up work on innovative source of climate finance, the FTT being one example. So far, the focus of developed countries including the EU, has concentrated on mobilizing private finance and blending public grants with private loans for programmes in developing countries. That is not the same as operationalizing new and alternative sources of public climate finance.
The tide needs to shift back to implementing real alternative and innovative sources of climate finance; not only is this necessary to plug the finance gap, it shows a strong commitment by the EU to ramp up action and support in developing countries.
Climate Action Network (CAN) Europe is Europe’s largest coalition working on climate and energy issues. With over 120 member organisations in more than 30 European countries – representing over 44 million citizens – CAN Europe works to prevent dangerous climate change and promote sustainable climate and energy policy in Europe.