Writing from the UN climate conference in Copenhagen, against a backlog of blogging and research write-up:
A couple people (thanks to Adam Henne) have asked my thoughts on George Soros’s proposal to fund climate change adaptation based on re-working the rules for Special Drawing Rights reserves. The idea seems to be simple enough and, to be honest, not that ground-breaking. Significant funds are kept in reserve, backed by gold to be used for liquidity purposes. Soros wants that money to be invested in adaptation, on the basis of a fund that would generate $10 billion a year. How that surplus would be generated seems to be the main outstanding question. But more generally, we can see in broad scope some of the reasons why anthropologists might pay attention to these things.
There’s been some confusion about the currency at stake here, which bears some explaining in order to understand the significance of climate finance. Especially American observers were a bit freaked out when the New York Times described SDRs as “a “virtual currency” with a value set by a basket of real currencies.” SDRs are an multilateral finance currency which forms the basis of development aid and other multilateral commitments; they refer (if I understand correctly) to potential claims on held cash reserves. For instance, the very low interest loans made available to least developing countries by the multilateral banks are drawn in SDRs – when I paid attention to such things circa 2005 these loans were often reported in ‘dollar equivalents’ with a dollar being worth about 2/3 an SDR, if I remember correctly.
But the point to be made is that in fact lots of currencies like this exist. The comment on the NY Times article by SteveG is correct, but frankly belated: “CDOs and flash trading aside, the era of “nexus economics” is upon us, i.e., a time of rapid changes in economic structures, transactions, and individual behaviors wrought by a highly connected world.” One wonders if all currencies aren’t virtual, with paper cash being simply secondary to electronic, calculated values. Carbon credits themselves are another kind of currency, and some people wonder whether a global carbon market will in fact establish a global currency based on atmospheric exchange.
Think about it: put carbon into the atmosphere in one place on Earth and accrue an obligation (e.g. buy a carbon credit on the market) – or take carbon out of the atmosphere somewhere else on Earth and establish a credit (i.e. an actual financial instrument that can be exchanged for other currencies). These are the sorts of practices I have tried to capture with the admittedly academic phrase ‘the relational ontology of atmosphere’. It’s because ‘carbon’ and ‘the atmosphere’ are simultaneously abstract, equivalent and global that it’s possible to imagine human relations on this order, always translated in practice in terms of what one can ‘do’ with a particular currency. Carbon emissions, like labor in Marxist theory, are a fact of economic activity, so an integrated carbon market could hypothetically trace alongside markets based on national currencies (again, this is nothing new; it’s the scale and scope of carbon markets that make the idea provocative).
It would be great for Caroline McLoughlin to weigh in on this, if she’s reading. By the way, as I type near the Forum in Copenhagen I can here the police cannons, helicopters and general mobilization around protests apparently along the river and toward the city center.
On the one hand, carbon currency is already in operation, and traders routinely talk about carbon credits as currencies. On the other hand, the global scope of such a system is basically hypothetical, with global carbon markets a long way off. A report yesterday here in Copenhagen, where I’ve been talking to people about these things, argued that establishing and unifying regional carbon markets might result in a global market perhaps by 2024. (PointCarbon estimates the volume of carbon trading in 2020 will be about 3$ trillion; the head of Derivatives and Structured Finance at the World Bank confirmed yesterday to me that they use this estimate in their work. Global trading is >20 $ trillion, so perhaps 10-15% in 2020?) The more fundamental issue is that if climate change is to be dealt with seriously then the volume of new credits will have to approach zero in the last half of the century, at the same time that traders are increasingly invested in a large market. Michael Wara at Stanford has already noted that offsets have created a significant political lobby for products that do little to help reduce emissions. The idea of a unified global carbon currency would be in conflict with the basic need to decarbonize the economy.
Concerning Soros’s proposal, four things seem apparent. First, Soros is asking the SDR currency hosts to reduce their liquidity reserve. This is money administered by the IMF (and development banks) in times of need when countries don’t have enough cash to meet their short-term obligations. When Soros says we need innovative financial mechanisms, he’s actually asking for a higher-risk financial position that would reduce the IMF’s ability to respond to these needs (unless he suggests some provision to take money out of the fund in a crisis, but I haven’t heard anything about this). I suppose it would take liquidity out of national reserves for the currencies that make up SDRs, namely the Dollar, Euro, Yen and Pound.
Second, while it’s not exactly clear, to generate the proposed $10 billion a year the money would be invested for a decent rate of return. How the $10 billion annual return is used for adaptation doesn’t matter very much; how the $100 billion is invested to achieve a 10% the return is what counts at this stage. I suppose that’s where Soros comes in – put baldly (if speculatively), George wants access to that money, and climate change seems like moral reason enough to ask for it. One suspects he would be using the money for something and it would be good to know what (especially if it’s being leveraged). But does this mean George Soros is facing investment flow problems? It seems there’s lots of unanswered questions here.
Third, the publicly-announced ‘idea’ for this fund is not a new idea the stodgy banker-types don’t want to hear because they can’ t think outside the box. He announced it this way to stimulate some level of public interest in releasing the money.
Finally, in terms of the proposal, all the real work remains in figuring out how to do adaptation. The idea simply puts up returns on the investment to be used for climate adaptation, which so far is both relatively vague on how it would be spent and subject to the normal caveats about development-type interventions. The rule of thumb among consultants who evaluate development projects is that a project with 10% lasting effect is about the most one can hope for (this was for livelihood rural development work in Southeast Asia). Of course, it spells disaster if adaptation interventions are only 10% successful. Much more work needs to be done on the operational problems for spending adaptation money smartly, and the whole wealth of criticism – technical and otherwise – of development needs to be invoked here.