Introduction
More than a decade after the Millennium Declaration and the officially agreed Millennium Development Goals (MDGs),
the world should have looked profoundly better for at least half of the women, men and children in the world living in extreme
poverty. Unfortunately, a fatal combination of the lack of political commitment, a global economic downturn and, most crucially,
climate change has endangered whatever little progress has been made to secure even the minimalist MDGs by 2015.
Recognising that climate change is not only an environmental injustice, but also a humanitarian and development emergency
of global proportions, governments have sought ways to mitigate and adapt to the impact of climate change for over a decade.
Finance, or rather the lack of it, has proven to be one of the stumbling blocks in these negotiations.
Nevertheless, the single biggest outcome of the December 2010 climate negotiations in Cancun was the creation of a new Green
Climate Fund. The Fund is to receive and distribute up to US$100 billion a year from 2020. However, an estimate from the World
Bank puts costs for adaption in the range of US$ 75-100 billion per year alone. NGOs point out that more than US$200 billion per
year in public finance, new and additional to existing development aid targets, are needed to adequately finance adaptation
and mitigation needs.1
In the midst of an economic downturn in many OECD countries, the burning question is where this money will come
from. Many see private finance as the only alternative. When fully transparent and properly regulated,2 private finance can
indeed contribute to serving this need but its final objective remains maximising profit and not the common good. From a justice
and development perspective there is an indisputable need for public money, which must be invested to serve the common
good and hence pay a significant part of the climate change bill.
Act now, introduce the Financial Transaction Tax
There is no shortage of proposals for new mechanisms that could raise new public money to pay this bill. The UN's High
Level Advisory Group on Climate Change Financing has reviewed some of these proposals in its report.3 CIDSE believes that
the scale and nature of tackling the climate change challenges calls for the adoption of a number of innovative mechanisms which
are public money, can generate adequate finance and follow the 'polluter pays' principle. CIDSE has long advocated for
the proceeds of a Financial Transaction Tax to be used for development and climate change. This paper discusses how they
should be governed and allocated; with a particular emphasis on the need for strong social and environmental safeguards.
CIDSE promotes a Financial Transaction Tax (FTT), for three main reasons:
Raising urgently needed money: The FTT is an innovative mechanism which has the potential to raise approximately
1.21% of world GDP or US$ 661.1 billion,4 if introduced at an average rate of 0.05%.5
It could generate sufficient money needed to tackle global climate and development challenges.
Stabilising financial markets: If properly designed, the FTT would have the greatest impact on those categories of
trading on financial markets that have no clear added value for the real economy. It would reduce speculation and contribute
to stabilising financial markets.
Sharing the burden, protecting the common good: The FTT comes at no extra cost for the average tax payer, who
is shouldering the cost of responses to global crises. The financial sector has hugely profited from globalisation.
Through the FTT it could contribute to tackling global challenges, share the financial burden of global crises and
contribute to assuring a safe and healthy future for people and the planet.
Introducing the Financial Transaction Tax is feasible
Studies by the International Monetary Fund6 and the European Commission7 in 2010 acknowledged the feasibility of an FTT. Political support of the FTT is also progressively growing. At the MDG Summit in September 2010, the French President
Sarkozy and the Spanish Prime Minister Zapatero publicly called for an FTT. Subsequently, presenting the G20 French Presidency's priorities, President Sarkozy once again emphasised the need for an FTT to finance development and climate change. In March 2011 the German and
Austrian Chancellors stated their intention to ask the group of countries that use the Euro currency to accept the tax.8 In various
national parliaments, most notably in the US and Canada, elected representatives have taken the initiative to introduce draft FTT
legislation. The European Parliament has consistently called upon the EU to seriously consider implementing an FTT. In March
2011, it went a step further calling for an EUFTT in the case of the G20 failing to reach an agreement on FTT implementation.9
The European Commission is currently examining an FTT as a potential new source of revenue in view of its forthcoming
(June 2011) proposal for the 2014-20 EU multiannual budgetary framework.10
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Collecting the FTT in practice: centralised or decentralised?
Centralised collection: the tax is collected at the point of settlement, either from the
electronic systems at exchanges, or from Central Counterparty Platforms (CCPs) or Central
Securities Depositories (CSDs) in the case of Over-the-Counter (OTC) transactions. While
the centralised approach would be the most effective, it would require all important
countries in a trading time zone to introduce an FTT and to force all OTC-transactions to
be settled via CCPs.
Decentralised collection: any resident of an FTT jurisdiction who orders a transaction to
be carried out at home or abroad is legally the debtor of the FTT ('personal principle').11
The tax is charged to the account of the tax debtor and transferred to the tax authorities by
the banker or broker which places the respective order to the exchange ('taxing at source').
The decentralised approach would enable single countries or a group of countries to
implement a FTT as 'pioneers' piloting a FTT that could then be systematically broadened
in scope to other countries.
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Using the Financial Transaction Tax for the well-being of people and the planet
With its feasibility acknowledged and political support for the tax increasing, CIDSE believes that the time is right to
launch a discussion on the use of FTT revenues. Given the urgent need to find the first US$100 billion for the new UN Green
Climate Fund CIDSE argues the FTT could be used to finance it. This chapter sets out which criteria must be respected by
decision-makers on how to use this money; it analyses what conditions are crucial to ensure the use of these revenues will have a
positive impact on the lives of people living in developing countries.
Overall principles of governance and decision-making
To have a positive and lasting impact on the lives of the final beneficiaries of the resources and on the overall well-being of the planet,
CIDSE believes that the following criteria must be respected in allocating finance for climate justice from FTT revenues:
Joint ownership: All country ownership, not just government ownership, is important. In other words representatives of
all stakeholders, including civil society, need to participate fully in all stages of scoping, discussing and decision-making.
Accountability: Governments need to be accountable to their citizens.This 'downward accountability' is even more important than
the 'mutual accountability' through which funders provide predictability and certainty, while recipients agree to transparent and
responsible spending.
Responsibility: Ensuring that the money is used for the intended purposes and benefits those who need it most. The best
way to ensure that is full transparency on funding decisions and disbursements and the reasons behind them, and opportunities
for civil society groups to participate in and scrutinise official processes.
Representative, multilateral, democratic governance: This requires a balance of northern and southern representatives on
the board of any institution handing FTT revenues and the inclusion of a wide range of stakeholders who should be able to
inform and challenge decisions, including through complaints mechanisms.
Empowerment: While it is important for finance to secure clear and visible results, the way these results are achieved
is equally crucial in the development process. Empowerment whereby rights are strengthened, the most vulnerable are
paid special attention to, and capacity is built are important indicators that need to be included in any resource allocation
process. For this gender and human rights perspectives need to be systematised within the allocation mechanism.
Addressing vulnerability in all its aspects: Vulnerability to climate change is not an isolated problem. It is usually
compounded by exclusion from access to decision-making on issues which are important for a community's well-being, the
lack of infrastructure to access finance, local markets, the lack of social support systems and bargaining-power. The structural
causes of exclusion and vulnerability need to be taken into account with regards to developing and implementing social and
environmental safeguards.
How to govern and allocate the money?
Equity and effectiveness are crucial to ensure the legitimacy of the governing body deciding on allocation, making
sure the financial transfer are a matter of rights, rather than a matter of charity. Climate finance derived from FTT
revenues should be governed by the UN Green Climate Fund.
Currently development money is provided either to support specified projects or to support sectoral or broader programmes.
Programmatic funding channeled via government mechanisms is growing. In 2008 US$3.2 billion approximately flowed
as general budget support.12 The remaining US$119 billion approximately flowed as sector support or to discrete projects. The
programme, or budget support approach allows the national authority to determine their own priorities, and to build their
systems by paring for staff training, institutional strengthening and salaries. Yet budget support is controversial. Donors
have mainly raised corruption concerns. Civil society groups have raised concerns about the lack of government transparency
and consultation in their use of budget support.
Supporting Country systems: Providing funds through national systems without earmarking for specific projects or
spending lines can work well under certain conditions. For climate change mitigation and adaptation, there is a strong push to
support government systems, not just projects. According to the Commission on Climate Change and Development
"adaptation covers virtually all elements of national government activity finance, planning, agriculture, water management,
health, safety, disasters, infrastructure, food security, and so on. Effective action requires coordination between these sectors,
something that will only be achieved if all areas of government dealing with adaptation are led and coordinated from
the highest political and organisational level."13
Direct access: However, developing countries and civil society have gone a step further. Since many developing countries
see climate finance as compensation payments by developed countries they are calling for direct access to new climate
finance mechanisms, as for example in the Adaptation Fund. The direct access approach emphasises that countries must
have substantial, obligatory and automatic funding available and is increasingly referred to as the right for recipients to
have 'direct access' to funding from the international level, without intermediation by international institutions.14
Irrespective of the allocation mechanism, participation and empowerment of civil society are crucial to ensure that those
facing the highest risks from climate change are able to hold those implementing climate action to account. All stakeholders
including civil society and national parliaments need to provide insights from on the ground and to perform checks
and balances on government decisions. In order to effectively perform this function, full transparency of criteria and
measurements following the 'Publish What You Fund' principles is needed. Multi-stakeholder participation can also ensure
the appropriate design and effective delivery of climate action, which is essential to meet urgent needs in developing countries.15
The Publish What You Fund principles specify that aid information should:16
- be detailed about objectives and focus areas.
- be comprehensive – covering all aid.
- be budget compatible – aid information presented in-line with recipient-country budget cycle and recipient budget classifications.
- be traceable – capturing the full 'supplychain' of aid, through re-granting/subcontracting.
- include information on conditions, terms, etc – not just financial information.
- be timely – that information is current.
- be included in medium-term forward plans – estimates of spending that allow for 3-5 year planning.
Meaningful stakeholder participation: Climate investments need to be made in virtually every sector of an economy,
covering areas such as agriculture, forest management, energy supply, transport and housing for mitigation, and, similarly
for adaptation in coastal management, agriculture, health and housing.
Each of these areas will have different stakeholders, other vulnerable groups likely to be affected, and will take place in
different natural environments.
Drawbacks in participatory processes in drawing up Poverty Reduction Strategy Papers (PRSP)17 and National Adaptation
Programmes of Action (NAPAs) show that clear international safeguards on stakeholder participation, with special
attention to ensure the participation of women and other groups particularly vulnerable to climate change impacts, are essential.
Social and environmental safeguards: it is unlikely that participatory planning and implementation alone will be sufficient
to avoid negative impacts on vulnerable communities. Additionally, social and environmental safeguards will need to be
put in place. Given the widely varying approaches to safeguards in current climate funds, it may be appealing to
rely on existing institutional safeguard procedures. Those of the International Financial Institutions (IFIs) are currently
the most comprehensive. However, the World Bank's safeguard approach does not encompass internationally binding
agreements on human and labour rights, its gender assessment component is weak and it requires Indigenous People 'consultation'
instead of Free Prior and Informed Consent (FPIC).18
The above-mentioned call for direct access to climate finance means that the challenges of the responsibility for social
and environmental due-diligence shifts to country governments that may or may not have the effective and comprehensive
procedures needed.
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SOCIAL AND ENVIRONMENTAL SAFEGUARDS19 – definition
Principles, criteria and indicators which define the necessary conditions to ensure (climate)
funding makes a positive impact on people lives as well as avoiding harm to communities.
They provide a framework for assessment of social and environmental performance using
a multi-stakeholder process; supporting the design, implementation and evaluation of the
social and environmental impacts of government-led programs. Social and environmental
safeguards thus enable consistent assessment, irrespective of funding sources.
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Some fear that developing countries will consider any international checks and balances on climate finance, beyond basic
financial accounting requirements, an attack on their sovereignty. However, in reality the situation is likely to be more nuanced, also
considering the fact that it is in the interest of developing countries that mechanisms with direct access modalities are perceived
as achieving high standards of responsible financing, ensuring that further political and financial support is directed towards
these funds instead of away from them.
Rather than taking over incomplete and unsatisfactory safeguard policies just because they are the only ones currently
available, lessons learned from the IFI safeguards experience should be used to inform a new, internationally agreed
safeguards framework for climate finance. With climate finance likely to increasingly allow for direct access of governments to
climate funding, there is an even greater need for strong social and environmental safeguards.
All climate finance must respect social and environmental safeguards which:
- are comprehensive and reflect international commitments;
- are responsive to changing investment landscapes though based on a core of fixed social and environmental protections;
- guarantee meaningful and effective consultation with communities;
- are accompanied by strong monitoring mechanisms and supervision;
- ensure there is the capacity to implement safeguards, including of communities to understand regulations and seek access to justice;
- guarantee transparency and access to information;
- require as a basic condition an effective and independent accountability mechanism and grievance system.
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Overruling safeguards in hydropower
Using climate imperatives as a justification, the World Bank is committed to increase dramatically its lending for large scale
hydropower projects, despite its own acknowledgement that hydropower 'is and remains risky and sometimes
controversial'.20 The World Commission on Dams (WCD) voiced heavy criticism of the Bank's involvement in large scale dams, but the Bank refused to sign up to the guidelines it produced. Since 2003, lending to large projects supplying over 10 megawatts
increased from US$23 million to over US$1 billion in 2008.21 The Bank argues that its new approach internalises social and
environmental concerns through a range of procedures, but civil society commentators are wary that local communities have not
been involved in decision-making, impacts on ecosystems have been downplayed, and many of the Bank's own social and environmental safeguards have been broken, but not acknowledged or repaired, on many previous occasions. For example, the Bank has supported the controversial Nam Theun 2 hydropower project in Lao PDR since 2005, but the project has been heavily criticised for the violation
of legal agreements and for breaking social and environmental agreements. An International Rivers paper reported in 2008
that rice paddy fields and other land from close to 2,000 villagers were taken by the project almost two years before, but still
hadn't been replaced. In total, the dam has displaced more than 6000 people without ensuring that their needs and those of
communities downstream were fully addressed.22
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The UN Conference of the Parties should explore different possibilities for the allocation of climate funding, agreeing
as a minimum on the floors and ceilings for country allocations.
To be effective climate finance modalities must serve to strengthen coordination across sectors in a country.
Clear international guidelines on stakeholder participation, with special attention to ensure the participation of
women and other groups particularly vulnerable to climate change impacts, are essential.
Lessons learned from existing safeguards should be used to inform a new, internationally agreed safeguards
framework for climate finance.
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Direct access to fight coastal erosion
In November 2010, Senegal's Centre de Suivi écologique (CSE) became the first organisation with 'direct access' to
adaptation funding when its proposal for US$8 million of funding to combat coastal erosion, exacerbated by climate change
and rising sea levels, was approved by the UN Adaptation Fund.23
The CSE-led project aims at protecting houses and economic infrastructures threatened by erosion, including fish
processing areas, fishing docks, tourism or cultural infrastructures, and restore lost or threatened activities. It will also
fight the salinisation of agricultural lands used to grow rice, through construction of anti-salt dikes. The project will assist local
communities of the coastal area, especially women, in handling solid wastes and fish processing. It will also sensitise and train
local people on climate change adaptation techniques in coastal areas.
The Senegalese project stands out in terms of transparency and participation of local, vulnerable people in the decision-
making. For instance, in contrast with other projects, the CSE proposal not only mentions the numbers of consultations, but
also explicitly indicates which inputs arose from which communities and associations. Furthermore, the list of all relevant
decisions taken and people involved are publicly available.
There is broad ownership of the initiative, as the CSE will implement the project in collaboration with a number of
organisations with diverse backgrounds, which will closely work with the local communities, undertaking several tasks in
the execution of the project depending on their capacities.
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Conclusions and recommendations
The Financial Transaction Tax offers a timely opportunity to increase the amount of funding to tackle climate change and fill
the Green Climate Fund. The Copenhagen pledge to deliver US$100 billion a year in climate finance by 2020, the majority of
which should flow through this fund, is likely to substantially alter the investment landscape in developing countries.
Climate investments will need to be ambitious, innovative and transform societies and economies to stabilise rapidly
increasing emissions and strengthen resilience to climate change effectively.
The UN Green Climate Fund is accepted as legitimate and is best placed to govern climate funds. Its governance will have
to be effective and equitable for climate investments to fulfil these needs. Another primary condition for climate investment
to have the transformational effect desired is when it supports country systems. Civil society has gone further, calling developing
countries for direct access to be the modality for climate finance transfers.
It is also crucial to recognise that there is a flip-side to ambitious and transformational climate investment. It has already been
well documented that climate finance has the potential to increase the burden on vulnerable communities. Impacts such as
forced relocation, land insecurity and loss of livelihoods have been associated with mitigation finance for hydropower and
biofuel plantations, but similar risks exist with adaptation finance too.
The proliferation of climate funds, as well as the increasing demands for direct access, also poses challenges to the protection
of social and environmental rights. None of the funds have established a safeguards framework that comprehensively reflects
all countries' international legal commitments, such as those on human rights, biodiversity, Indigenous People and
women's rights. A single well-financed fund governed by the UN Green Climate Fund with strong environmental and social
safeguards built in would reduce some risk of entities 'shopping around' for the least due-diligence requirements and the
resultant race to the bottom. Additionally, it will also be essential to have a coordinated approach with other funds such as those
governed by the IFIs, etc.
Overall, the aim of social and environmental safeguard policies should be that national systems and regulations
guarantee universally agreed protections for communities and their environment, and ensure that sustainable benefits result
from financial investments.
In brief:
- FTT revenues meant for climate change spending should be made available via the proposed UN Green Climate Fund.
Strengthening coordination across sectors should be an important principle of the mechanism which will allocate climate funding.
All climate investment funding must respect social and environmental safeguards.
2 See for instance the recommendation to keep Carbon Markets as simple and small as is needed
for them to serve the environmental objectives of the system in Chan M. Smaller, Simpler and
More Stable: Designing carbon markets for environmental and financial integrity, Friends of
the Earth, September 2009.
3 Report of the Secretary-General's High Level Advisory Group on Climate Change Financing,
November 2010.
4 Schulmeister S. Short-term Asset Trading, long-term Price Swings, and the Stabilizing Potential
of a Transactions Tax, Austrian Institute of Economic Research, October 2010.
5 This estimate is based on 2007 transactions data and covers trading in all markets including
stocks, bonds, currency, commodities, futures, derivatives and registered and Over-the-Counter
transactions (direct trading between two parties).
9 European Parliament resolution of 8 March 2011 on innovative financing at global and European level (2010/2105(INI)) Rapporteur Anni Podimata.
10 European Commission communication of 19 October 2010 on the EU Budget Review, COM(2010)700.
11 Schulmeister S., WIFO, October 2010.
13 Commission on Climate Change and Development, 2009, p. 26.
14 See Business as unusual. Direct Access: Giving power back to the poor? Caritas Internationalis and CIDSE, 2010. (CIDSE Resources).
15 Ibid.
17 Caritas Internationalis & CIDSE. PRSP as Theatre — backstage policy-making and the future
of the PRSP approach. September 2004. (CIDSE Resources).
18 See: Protect, Respect and Remedy – Keys for implementation and follow-up of the mandate, submission to the UN Special Representative on Business and Human Rights, CIDSE, October 2010
(CIDSE Resources).
20 Bretton Woods Project, July 2009.
21 Ibid. Though initially the CTF was also thought to have a big focus on large hydropower, no such investments have currently been made.
22 International Rivers, 2008.
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