Family Silver for Climate Action
The overarching theme for COP 29 in Baku was climate finance. Over the year since COP 28, nations deliberated on strategies to enhance the flow of money needed to address climate change. Yet, the outcome was inconclusive, almost a whimper. Developed nations offered only $300 billion, far short of the $1.3 trillion demanded by the developing countries. Too little, too late.
Estimates suggest that climate change could wipe out approximately 18% of global GDP annually. Are we being penny wise, pound foolish? Especially, when we have some “family silver” that could be deployed to mitigate this crisis.
In many families, great-grandfathers worked hard to accumulate wealth for future generations — a safety net for rainy days, often referred to as “family silver.” However, strict rules governed its use: it was not to be touched unless in dire straits. This system helped families navigate life’s uncertainties.
Unbeknownst to many, the International Monetary Fund (IMF) also has its version of family silver — Special Drawing Rights (SDRs). These reserve assets, created by the IMF and allocated to member countries, act as a financial buffer for liquidity needs. While SDRs are not cash, they represent ‘rights’ that can be exchanged for cash with any other member nations. Unlike finite family silver passed down family generations, the IMF can create SDRs at will through general allocations.
Illustration by Sona Mehta
To date, the IMF has distributed SDRs five times, totaling 650 billion SDRs. The most recent allocation was made during the COVID-19 pandemic in 2022, helping countries address financial stress caused by the crisis. This timely intervention enabled many poor nations to support their citizens.
Today, the world faces another existential threat: climate change. Heatwaves, floods, droughts, storms, and rising sea levels are shrinking habitable land, destroying infrastructure, threatening food security and endangering human health. Yet, nations claim they lack the funds to act decisively against this scrouge.
Every country has reserves of SDRs. For instance, the United States holds approximately 127,969 million SDRs, Germany has 40,568 million, India holds 13,705 million, Kenya and Ghana possess 261 million and 2 million respectively. Globally, these reserves amount to over 650 billion SDRs — equivalent to roughly US $950 billion based on current exchange rates. Despite this substantial pool, almost no country has used SDRs for climate change. In fact, IMF itself lacks a mandate to allocate SDRs specifically for climate change.
There are numerous ways IMF could deploy SDRs to combat climate change:
New Allocations: The IMF could issue fresh SDR allocations specifically for addressing climate challenges.
Rechannelling Reserves: Wealthy nations could redirect their unused SDR reserves to developing countries for climate projects. Given that developed nations are historically responsible for most greenhouse gas emissions, this would align with principles of equity.
Global Investment Fund: Nations could pool their SDRs into a global fund managed by institutions like the World Bank or independent entities. This fund could provide first-loss guarantees or other financial mechanisms to encourage private investments in clean energy and carbon removal projects.
However, any decision regarding SDR allocation or use requires approval from IMF member countries specifically an 85% majority votes. This effectively places control for allocating SDRs in the hands of wealthy nations.
Climate experts emphasize that controlling global warming requires removing excess carbon dioxide from the atmosphere. Even achieving net-zero emissions by 2050, which itself is a monumental task, will not suffice to control global warming due to climate inertia. Carbon dioxide will remain in the atmosphere for thousands of years, continuing to warm the planet long after emissions cease.
Fortunately, we know of ways and technologies that can help remove excess carbon dioxide from the atmosphere through nature-based solutions like afforestation, reforestation, enhanced weathering, ocean fertilization or technology-based projects like direct air capture.
The challenge lies in financing these projects. Private companies and banks hesitate due to unclear business cases. Nations are reluctant because benefits accrue globally rather than locally. Equitable investment thus becomes essential — each nation contributing in proportion to its historical responsibility for emissions.
The IMF quotas represent each country’s economic power within the world economy — a metric historically tied to fossil fuel usage and carbon emissions. They also represent each member country’s voting rights, share in IMF resources and access to financing. Thus, a proportionate SDR allocation based on these quotas offers a reasonable starting point for assigning responsibility for accumulated atmospheric carbon dioxide.
A practical solution would involve moving a motion within the IMF to issue a fresh round of SDR allocations and establish a global investment fund backed by these resources. Key features of this fund could include:
Independent Governance: Managed by professionals free of any political influence.
Merit-Based Investments: Focused on viable carbon removal projects worldwide.
Equitable Contributions: Nations contributing according to their historical emissions responsibility.
Global Benefits: Projects selected based on their potential to reduce atmospheric carbon dioxide — a universal good benefiting all nations equally.
By targeting carbon removal projects specifically, this fund would address a shared global challenge while ensuring fairness in contributions and benefits.
The world stands at a crossroad where collective inertia threatens our future. The "family silver" held as SDRs offers an untapped resource that could catalyze meaningful climate action. However, unlocking this potential depends on wealthy nations’ willingness to act decisively within the IMF framework. It is time for all countries to recognize their shared responsibility and use this resource equitably — for the sake of humanity’s survival and prosperity.
About the Author:
Rajan Mehta is a 2022 Harvard ALI Fellow and the founder of Climate Action Labs. He is also the author of Backstage Climate, a book that explores the science and politics of climate change.