A tiny tax on finance, a giant leap for the climate fund

One outcome from the Copenhagen climate conference was a commitment to allocate US$30 billion by 2012 (fast-start finance) and US$100 billion a year by 2020 to help vulnerable countries pursue low carbon development and adapt to climate change impacts.

Much of the financing to meet these commitments will continue to come from government budgets in the foreseeable future, but this source will not be sufficient. One innovative source of finance to help fulfil, and even exceed this commitment is the Financial Transaction Tax (FTT). The FTT is scalable, predictable and can curb dangerous financial speculation. Many labour, health, development, environmental, economic experts and global leaders believe that FTT revenues could help reduce the deficit and create jobs at home and support climate resilience and improved health for vulnerable countries.

No lesser body than the International Monetary Fund (IMF) has confirmed that FTTs are feasible, can generate substantial revenues and would not need any new institutions. They also point out that most G20 countries have already implemented some form of transaction tax, and provide suggesting for how to make them more effective.

  • The FTT is a small tax (between 0.01%– 0.05%) on trades of stocks, derivatives, currency, and other financial instruments that would raise massive revenues for urgent needs, while discouraging the type of short-term financial speculation that has little social value and exposes the economy to high risk speculation.
  • A broad-based low rate of FTT between 0.01 and 0.05% could generate revenues of nearly €200 billion at year at the EU level and US$650 billion globally.
  • Developing countries would not need to adopt these taxes as they could achieve the goals if introduced in the key financial centres or even unilaterally.
  • FTTs could generate a large part of the financial resources needed to achieve development, health, education and climate change objectives in developing countries.
  • While not preventing the financial crisis, FTTs can be used to curb the type of reckless behaviour that caused the crisis.
  • Foreign direct investment (FDI) to the south would not be affected and FTTs would encourage long-term investments by raising short-term currency speculation costs.
  • FTTs would not have a significant impact on remittances to developing countries. For instance a tax of 0.05% on a transaction of US$1,000 would be 50 cents. This would not affect the poor who are not be engaged in speculative trading.
  • Support for FTTs has come from the leaders of both France and Germany and in March the European Parliament voted in favour of introducing FTTs at the EU level. More support for FTTs is needed from all political leaders, particularly the south.

Bibliography:

International Monetary Fund, A Fair and Substantial Contribution by the Financial Sector: Final Report for the G20 June 2010.

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.

Report of the Committee of Experts to the Taskforce on International Financial Transactions and Development, Globalizing solidarity: The case for Financial Levies July 16, 2010.

The Parameters of a Financial Transaction Tax and the OECD Global Public Good Resource Gap, 2010 – 2020 (en, fr & es)

Curb Speculation, Fund Climate Solutions